UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1997
THE MORGAN GROUP, INC.
2746 Old U.S. 20 West
Elkhart, Indiana 46514
(219) 295-2200
Commission File Number 1-13586
Delaware 22-2902315
(State of Incorporation) (I.R.S. Employer Identification Number)
Securities Registered Pursuant to Section 12(b) of the Act:
American Stock Exchange
Class A Common Stock, without par value
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 25, 1998 was $9,834,999. The number of shares of the Registrant's
Class A Common Stock $.015 par value and Class B Common Stock $.015 par value,
outstanding as of March 25 1998, was 1,434,810 shares, and 1,200,000 shares,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders are
incorporated into Part III of this report.
Exhibit Index on Pages ________
Page 1 of Pages
<PAGE>
Part I
Item 1. BUSINESS
Overview
The Morgan Group, Inc. ("the Company") is the nation's largest publicly
owned service company in managing the delivery of manufactured homes, trucks,
specialized vehicles, and trailers in the United States, and through its wholly
owned subsidiary, Morgan Drive Away, Inc. ("Morgan") has been operating since
1936. The Company provides outsourcing transportation services through a
national network of approximately 1,560 independent owner operators and
approximately 1,350 other drivers. The Company dispatches its drivers from 123
locations in 35 states. The Company's largest customers include Fleetwood
Enterprises, Inc., Oakwood Homes Corporation, Champion Enterprises, Inc.,
Winnebago Industries, Inc., Clayton Homes, Inc., Cavalier Homes, Inc., Schult
Homes Corporation, Four Seasons Housing, Inc., Palm Harbor Homes, Inc., and
United Parcel Service. The Company's services also include providing certain
insurance and financing services to its owner operators.
As further described below, the Company's strategy is to grow through
expansion in the niche businesses already being serviced with heavy emphasis on
outsourcing, along with pursuing acquisitions of niche transportation carriers
who are servicing their customer base with unique service and/or equipment. In
addition, the Company will look to expand insurance product offerings to drivers
through its subsidiary Interstate Indemnity Company ("Interstate") and to
broaden its financing activities through Morgan Finance, Inc. ("Finance").
Morgan, the Company's principal subsidiary, was founded in 1936 in
Elkhart, Indiana and incorporated in 1942. The Morgan Group, Inc. is a Delaware
corporation formed by Lynch Corporation to acquire Morgan and Interstate. In
1994, the Company formed Finance for the purpose of offering financing to owner
operators. In 1995, the Company acquired the assets of Transfer Drivers, Inc.
("TDI"), a Northern Indiana-based outsourcing company. TDI is a market leader in
the fragmented truck delivery business focusing on relocation of consumer and
commercial vehicles for customers, including United Parcel Service, Ryder
System, Inc., Automotive Rentals, Inc., Budget One-Way Rental, and Grumman Corp.
In December 1996, the Company acquired the assets of Transit Homes of
America, Inc. ("Transit"), a national outsourcing company located in Boise,
Idaho. Transit, with 1997 operating revenues of $21.2 million, provides
outsourcing transportation services to Fleetwood Enterprises, Inc., Champion
Enterprises, Inc., Palm Harbor, and Cavalier Homes, Inc.
The Company decided in the fourth quarter of 1996 to discontinue the
"truckaway" operation of the Specialized Transport Group. Truckaway was a line
of business that transported van conversions, tent campers, and other automotive
products on company-owned equipment. The Company, in the fourth quarter of 1996,
recorded a special charge of $2,675,000 ($1,605,000 after tax) comprised
principally of the anticipated loss on the sale of the company-owned equipment,
projected losses through April 30, 1997, and write-downs of accounts receivable
and other assets. The equipment was principally sold by May 1997.
The Company's principal office is located at 2746 Old U.S. 20 West,
Elkhart, Indiana 46514; the telephone number is (219) 295-2200.
<PAGE>
Industry Information
Manufactured Housing.
The largest portion of the Company's operating revenues are derived
from transportation of manufactured housing, primarily new manufactured homes.
Unit shipments by the manufactured housing industry (considering double-wide
homes as two shipments) in the U.S. increased by approximately 6% to 558,000 in
1997 from 553,000 in 1996, after 9% and 12% increases in 1996 and 1995,
respectively, according to data from the Manufactured Housing Institute ("MHI").
A manufactured home is an affordable housing alternative. The Company believes
the manufactured housing industry production should continue to grow along with
the general economy, especially while employment statistics and consumer
confidence remain strong. The Company believes that the principal economic
consideration of the typical manufactured home buyer is the monthly payment
required to purchase a manufactured home and that purchasers are generally less
affected by incremental increases in interest rates than those purchasers of
site built homes. There is no assurance, however, that manufactured housing
production will continue to increase.
Recreational Vehicles.
Recreational Vehicles (defined as travel trailers, motor homes, tent
campers, truck and van conversions) ("RV's") declined 4% in 1997 to 363,000 from
376,000 shipments in 1996 after declines of 1% in 1996, and 11% in 1995. This
data is obtained from the Recreational Vehicle Industry Association ("RVIA").
RV's are discretionary purchases, sales of which are cyclical. Consumer interest
rates remain relatively low which make RV's easier for purchasers to finance.
There is no assurance, however, that the current economic environment will
continue to support RV production.
Company Services
Based on industry shipment data available from the MHI and RVIA, and
the Company's knowledge of the industry and its principal competitors, the
Company is the largest publicly owned transporter of manufactured homes and
provider of outsourcing services to the motor home and commercial vehicle
markets in the United States. In addition to new manufactured housing and motor
homes, the Company transports used manufactured homes, commercial vehicles,
rental trucks, office trailers, new and used semi-trailers and other
miscellaneous commodities. The Company provides its specialized transportation
services as follows:
<PAGE>
Manufactured Housing Group. The Manufactured Housing Group
("Manufactured Housing"), which includes Transit Homes acquired in
1996, provides specialized transportation to companies which
produce new manufactured homes, modular homes, and office
trailers. In addition, Manufactured Housing transports used
manufactured homes and offices for individuals, businesses, and
the U.S. Government. Manufactured Housing ships products through
approximately 1,250 independent owner operators who drive
specially modified semi-tractors, referred to as "toters," used in
manufactured housing transportation to reduce combined vehicle
length. Makers of manufactured housing generally ship their
products no more than a few hundred miles from their production
facilities. Therefore, to serve the regional structure of this
industry, the Company positions its dispatch offices close to the
production facilities it is serving. Approximately 19 of the
Company's dispatch offices are located in such a manner to serve
the needs of a single manufactured housing producer. Most
manufactured housing units, when transported by a toter require a
special permit prescribing the time and manner of transport for
over-dimensional loads. See "Business-Regulation." The Company
obtains for its owner operators the permits required for each
shipment from each state through which the shipment will pass. In
1997, Manufactured Housing delivered approximately 179,000 units.
Driver Outsourcing Group. The Driver Outsourcing Group
("Outsourcing"), which includes TDI acquired in May 1995, engages
the services of approximately 1,350 drivers which are outsourced
to customers to drive commercial and recreational vehicles. In
1997, Outsourcing delivered approximately 46,000 units through the
use of these drivers.
Specialized Transport Group. In 1997, the Specialized Transport
Group ("Specialized Transport") moved a variety of specialized
vehicles, including semi-trailers, military vehicles, travel
trailers and other commodities by utilizing specialized equipment.
A decision was made in 1996 to discontinue the truckaway sector of
Specialized Transport, which moved van conversions, automobiles,
and tent campers by utilizing company-owned trailers. In 1997,
Specialized Transport delivered approximately 34,000 units.
Other Services. Other services provided include permit ordering
services principally for manufactured housing customers and, to a
lessor degree, installation services related to the set up of
manufactured homes. The Company also currently provides physical
damage insurance to the owners of equipment under lease to the
Company through a captive insurance subsidiary. In addition, the
Company provides financing and certain guarantees of equipment
loans through its finance subsidiary.
<PAGE>
Selected Operating Information
The following tables set forth operating information with respect to
the aforementioned Company services for each of the five years ended December
31, 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Manufactured Housing Group:
<S> <C> <C> <C> <C> <C>
Shipments 95,184 121,604 135,750 144,601 178,533
Operating revenues (in thousands) $39,930 $53,520 $63,353 $72,616 $93,092
Driver Outsourcing:
Shipments 30,978 32,060 49,885 58,368 45,857
Operating revenues (in thousands) $13,416 $15,197 $19,842 $23,090 $20,163
Specialized Transport:
Shipments 38,618 41,934 44,406 41,255 34,457
Operating revenues (in thousands) $25,835 $28,246 $29,494 $26,169 $19,173
Other service revenues $3,612 $4,917 $9,614 $10,333 $13,726
------ ------ ------ ------- -------
Total operating revenues (in thousands) $82,793 $101,880 $122,303 $132,208 $146,154
======= ======== ======== ======== ========
</TABLE>
Industry Participation. The following tables set forth participation in the two
principal markets the Company operates in where industry information is
available:
<TABLE>
<CAPTION>
Manufactured Homes 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Industry production (1) 374,126 451,646 505,819 553,133 558,435
Shipments 76,188 98,181 114,890 121,136 154,389
Shares of units shipped 20.4% 21.7% 22.7% 21.9% 27.6%
Recreational Vehicles
Industry production (2) 406,300 426,100 380,300 376,400 362,700
Units moved (3) 71,792 67,502 64,303 57,703 39,102
Shares of units shipped (3) 17.7% 15.8% 16.9% 15.3% 10.8%
</TABLE>
(1) Based on reports of Manufactured Housing Institute ("MHI"). To
calculate shares of homes shipped, the company assumes two unit
shipments for each multi-section home.
(2) Based on reports of Recreational Vehicle Industry Association ("RVIA"),
excluding van campers, truck campers, pick-up truck conversions, and
sport utility vehicle conversion. RVIA began reporting truck and sport
utility vehicle conversions in their industry shipment data in 1994.
(3) Shares of units shipped calculation includes travel trailers, two types
of motor homes, van conversions, and tent campers and truck conversions
in 1994 - 1997. The Company's shares of units shipped are based on
units moved compared to industry production rather than shipments
because certain RV shipments include more than one unit per shipment.
<PAGE>
Growth Strategy
The Company's strategy is to focus on the profitable core
transportation services (Manufactured Housing and Outsourcing) so that operating
revenues and profitability can grow in its area of dominant market position. The
Company will also look for opportunities to capitalize and/or grow its market in
manufactured housing and outsourcing through acquisitions if suitable
opportunities arise. To enhance its profitability, the Company is continuing the
process of reconstructing its organization to reduce centralized overhead and
redundant field expense.
Manufactured Housing Growth. The Company believes it can take better
advantage of its position in the manufactured housing industry and its
relationship with manufacturers, retailers, and independent owner
operators, by expanding the service it offers within its specialized
business. The Company proposes to pursue opportunities to offer new
services, which may include financial, insurance, and to a lessor
degree, manufactured housing set up services. The Company will also
consider acquisition opportunities. The Company may also pursue the
purchase of certain manufacturers' private transport fleets. In such a
case, the Company would typically purchase the customer's tractors,
sell the equipment to interested drivers, and then engage these drivers
as independent owner operators.
Outsourcing. The Company believes it can capitalize on the growing
trend in the outsourcing of specialized vehicle transportation and
delivery by manufacturers. It is estimated that approximately 750,000
vehicles are delivered each year through driveaway services, a delivery
market estimated at $500 million or more. The number of vehicles to be
outsourced is expected to increase substantially as companies calculate
the cost benefits of not maintaining their own driver corps, paying
salaries and benefits, running dispatch points, and maintaining an
equipment base. Unlike companies with drivers on their payroll,
Morgan's drivers are paid only when deliveries are made. Morgan's
growth strategy within this market is to expand its market position in
this highly fragmented delivery transportation market. The future
growth rate of the Company's outsourcing business is dependent upon
continuing to add major vehicle customers and expanding the Company's
driver force.
Reconstruct for Margin Improvement. In the fourth quarter of 1996, the
Company made a decision to exit the Truckaway operation which
transported van conversions, tent campers, and other automotive
products utilizing company-owned equipment. This decision was in line
with the Company's growth strategy to focus on profitable operations
where the Company has a market position. The Company is continuing the
process of reconstructing its organization to reduce centralized
overhead and redundant field expense. It will continue to scrutinize
every facet of operations as the Company searches for ways to run the
business with greater efficiency, both to enhance management processes
and customer relationships, and to reduce or eliminate costs wherever
possible.
Acquisitions. The Company is considering acquisition opportunities
within the manufactured housing and outsourcing lines of business.
Thus, the Company may consider acquiring regional or national firms
which service the manufactured housing and/or the outsourcing industry.
The Company is continuously reviewing potential acquisitions and is
engaged in negotiations from time to time. There can be no assurance
that any future acquisitions will be effected, or, if effected, can be
successfully integrated with the Company's business.
Expansion of Related Services. The Company believes it can take better
advantage of its position in the manufactured housing and motor home
industries, and its relationships with manufacturers, retailers, and
independent owner operators, by expanding the services it offers within
its specialized business. The Company proposes to pursue opportunities
to offer new financial, insurance or other services.
The Company is currently offering financing opportunities to selected
existing and new owner operators, through Morgan Finance, a financial
subsidiary created in 1994 to support these activities. In 1995, Morgan
formed an alliance with a financial institution which is providing
financing to Morgan owner operators for tractor purchases. These
equipment financing programs are expected to solidify the Company's
relationships with independent owner operators, increase its fleet, and
further expand the Company's transportation capacity. The Company also
offers insurance services to independent owner operators.
The Company may begin offering new insurance products as a managing
general agent. The Company's insurance subsidiary may determine to
accept a limited portion of the underwriting risk, retaining an
appropriate proportion of the premiums.
The Company will carefully consider the feasibility of these and
similar opportunities over the next year. If the Company is successful in
offering new services such as these, it expects to enhance and diversify its
operating revenues and may reduce its vulnerability to broad production cycles
in the industries it serves. The Company cannot give any assurance that new
services, if any, will be profitable and such new services may result in
operating losses.
Forward-Looking Discussion
In 1998, the Company could benefit from better pricing, reduction of
overhead through corporate restructuring, elimination of redundant field
expense, and improvement of its safety record. Business expansion, including
possible acquisitions, could augment operating revenue gains. While the Company
remains optimistic over the long term, near term results could be affected by a
number of internal and external economic conditions.
This report contains a number of forward-looking statements, including
those contained in the preceding paragraph and the discussion of growth strategy
above. From time to time, the Company may make other oral or written
forward-looking statements regarding its anticipated sales, costs, expenses,
earnings and matters affecting its condition and operations. Such
forward-looking statements are subject to a number of material factors which
could cause the statements or projections contained therein to be materially
inaccurate. Such factors include, without limitation, the following:
Dependence on Manufactured Housing. Shipments of manufactured
housing have historically accounted for a substantial majority of
the Company's operating revenues. Therefore, the Company's
prospects are substantially dependent upon this industry which is
subject to broad production cycles. Shipments by the manufactured
housing industry could decline in the future relative to
historical levels which could have adverse impact on the
Company's operating revenues.
Costs of Accident Claims and Insurance. Traffic accidents occur
in the ordinary course of the Company's business. Claims arising
from such accidents can be significant. Although the Company
maintains liability and cargo insurance, the number and severity
of the accidents involving the Company's owner operators and
drivers can have significant adverse effect on the profitability
of the Company through premium increases and amounts of loss
retained by the Company below deductible limits or above its
total coverage. There can be no assurance that the Company can
continue to maintain its present insurance coverage on acceptable
terms nor that the cost of such coverage will not increase
significantly.
Customer Contracts and Concentration. Historically, a majority of
the Company's operating revenues have been derived under
contracts with customers. Such contracts generally have one, two,
or three year terms. There is no assurance that customers will
agree to renew their contracts on acceptable terms or on terms as
favorable as these currently in force. The Company's top ten
customers have historically accounted for a majority of the
Company's operating revenues. The loss of one or more of these
significant customers could adversely affect the Company's
results of operations.
Competition for Qualified Drivers. Recruitment and retention of
qualified drivers and owner operators is highly competitive. The
Company's contracts with owner operators are terminable by either
party on ten days' notice. There is no assurance that the
Company's drivers will continue to maintain their contracts in
force or that the Company will be able to recruit a sufficient
number of new drivers on terms similar to those presently in
force. The Company may not be able to engage a sufficient number
of new drivers to meet customer shipment demands from time to
time, resulting in loss of operating revenues that might
otherwise be available to the Company.
Independent Contractors, Labor Matters. From time to time, tax
authorities have sought to assert that independent contractors in
the transportation service industry are employees, rather than
independent contractors. Under existing interpretations of federal
and state tax laws, the Company maintains that its independent
contractors are not employees. There can be no assurance that tax
authorities will not challenge this position, or that such tax
laws or interpretations thereof will not change. If the
independent contractors were determined to be employees, such
determination could materially increase the Company's tax and
workers' compensation exposure.
Risks of Acquisitions. The Company has sought and will continue
to seek favorable acquisition opportunities. Its strategic plans
may also include the initiation of new services or products,
either directly or through acquisition, within its existing
business lines or which complement its business. There is no
assurance that the Company will be able to identify favorable
acquisition opportunities in the future. There is no assurance
that the Company's future acquisitions will be successfully
integrated into its operations or that they will prove to be
profitable for the Company. Similarly, there is no assurance that
any new products or services, individually or in the aggregate,
could materially change the Company's results of operations,
financial condition and capital requirements. Such changes could
have a material adverse effect on the Company.
Seasonality and General Economic Conditions. The Company's
operations have historically been seasonal, with generally higher
operating revenues generated in the second and third quarters than
in the first and fourth quarters. A smaller percentage of the
Company's operating revenues are generated in the winter months in
areas where weather conditions limit highway use. The seasonality
of the Company's business may cause a significant variation in its
quarterly operating results. Additionally, the Company's
operations are affected by fluctuations in interest rates and the
availability of credit to purchasers of manufactured homes and
motor homes, general economic conditions, and the availability and
price of motor fuels.
Customers and Marketing
The Company's customers requiring transportation of new manufactured
homes, motor homes, commercial vehicles, and specialized vehicles are located in
various parts of the United States. The Company's largest manufactured housing
customers include Fleetwood Enterprises, Inc., Oakwood Homes Corporation,
Champion Enterprises, Inc., Clayton Homes, Inc., Cavalier Homes, Inc., Schult
Homes Corporation, Four Seasons Housing, Inc., and Palm Harbor. The Company's
largest outsourcing customers include Winnebago Industries, Inc., United Parcel
Service, Ryder System, Inc., Automotive Rentals, Inc., and Fleetwood
Enterprises, Inc. Specialized Transport customers include Utility Trailer Mfg.
Co., United Parcel Service, Thor Industries, Inc., Great Dane, and Xtra Lease,
Inc. While most manufacturers rely solely on carriers such as the Company, other
manufacturers operate their own equipment and may employ outside carriers on a
limited basis.
A substantial portion of the Company's operating revenues are generated
under one, two, or three year contracts with producers of manufactured homes,
motor homes, and other products. In these contracts, the manufacturers agree
that a specific percentage (up to 100%) of their transportation service
requirements from a particular location will be performed by the Company on the
basis of a prescribed rate schedule, subject to certain adjustments to
accommodate increases in the Company's transportation costs. Operating revenues
generated under customer contracts in 1995, 1996, and 1997 were 58%, 62%, 68% of
total operating revenues, respectively.
The Company's ten largest customers all have been served for at least
three years and accounted for approximately 59%, 59%, and 66% of its operating
revenues in 1995, 1996, and 1997, respectively. Operating revenues under
contract with Fleetwood Enterprises, Inc. ("Fleetwood"), accounted for 24%, 20%,
and 21% of operating revenues in 1995, 1996, and 1997, respectively. Operating
revenues with Oakwood Homes Corporation ("Oakwood") accounted for 9%, 11%, and
16% of operating revenues in 1995, 1996, and 1997, respectively. The Fleetwood
motor home contracts are re-negotiated on a regional basis when they expire and
the Fleetwood and Oakwood manufactured housing contracts are continuous until
canceled. The Company has been servicing Oakwood for nine years and Fleetwood
for over 25 years.
The Company markets and sells its services through 13 regional offices
and 123 locations in 35 states, concentrated where manufactured housing and
motor home production facilities are located. Marketing support personnel are
located both at the Company's Elkhart, Indiana headquarters and at regional
offices. Dispatch offices are supervised by regional offices.
The Company has 26 dispatch offices devoted primarily to a single
customer facility. This allows the dispatching agent and local personnel to
focus on the needs of each individual customer while remaining supported by the
Company's nationwide operating structure. Sales personnel at regional offices
and at the corporate headquarters meet periodically with manufacturers to review
production schedules, requirements and maintain contact with customers' shipping
personnel. Senior management maintains personal contact with corporate officers
of the Company's largest customers. Regional and terminal personnel also develop
relationships with manufactured home park owners, retailers, military
installation officials and others to promote the Company's shipments of used
manufactured homes. The Company also participates in industry trade shows
throughout the country and advertises in trade magazines, newspapers, and
telephone directories.
Independent Owner Operators
The shipment of product by both Manufactured Housing and Specialized
Transport is conducted by contracting for the use of the equipment of
independent owner operators.
Owner operators are independent contractors who own toters, tractors or
pick-up trucks which they contract to, and operate for, the Company on a
long-term basis. Independent owner operators are not generally approved to
transport commodities on their own in interstate or intrastate commerce. The
Company, however, possesses such approvals and/or authorities (see
"Business-Regulation"), and provides marketing, insurance, communication,
administrative, and other support required for such transportation.
The Company attracts owner operators mainly through driver recruiters,
trade magazines, referrals, and truck stop brochures. The Company has in the
past been able to attract new owner operators primarily because of its
competitive compensation structure, its ability to provide loads and its
reputation in the industry. Recruitment and retention of qualified drivers is
highly competitive and there can be no assurance that the Company will be able
to attract a sufficient number of qualified owner operators in the future.
The contract between the Company and each owner operator can be
canceled upon ten day's notice by either party. The average length of service of
the Company's current owner operators is approximately 2.5 years, compared to
3.2 years in 1996. At December 31, 1997, 1,560 owner operators were under
contract to the Company, including 1,250 operating toters, 132 operating
semi-tractors, and 178 operating pick-up trucks.
In Manufactured Housing, independent owner operators utilizing toter
equipment tend to exclusively transport manufactured housing, modular
structures, or office trailers. Once modified from a semi-tractor, a toter has
limited applications for hauling general freight. Toter drivers are, therefore,
unlikely to be engaged by transport firms that do not specialize in manufactured
housing. This gives the Company an advantage in retaining toter independent
owner operators. The average tenure with the Company of its toter independent
owner operators is 2.8 years, compared to 3.3 years in 1996. The change in
tenure is due in part to the addition of drivers from the Transit Acquisition.
In Specialized Transport, Morgan is competing with national carriers
for the recruitment and retention of independent owner operators who own
tractors. The average length of service of the Company's tractor owner operators
is approximately 1.8 years, compared to 2.7 years in 1996. The average length of
service among the Pickup owner operators is 2.9 years, compared to 3.0 years in
1996.
The change in the tenure of owner operators is due, in part, to the
discontinuance of the truckaway operation and was offset by the effective
recruiting efforts by the Company.
Independent owner operators are generally compensated for each trip on
a per mile basis. Owner operators are responsible for operating expenses,
including fuel, maintenance, lodging, meals, and certain insurance coverages.
The Company provides required permits, cargo and liability insurance (coverage
while transporting goods for the Company), and communications, sales and
administrative services. Independent owner operators, except for owners of
certain pick-up trucks, are required to possess a commercial drivers license and
to meet and maintain compliance with requirements of the U.S. Department of
Transportation and standards established by the Company.
From time to time, tax authorities have sought to assert that
independent owner operators in the trucking industry are employees, rather than
independent contractors. No such tax claims have been successfully made with
respect to owner operators of the Company. Under existing industry practice and
interpretations of federal and state tax laws, as well as the Company's current
method of operation, the Company believes that its owner operators are not
employees. Whether an owner operator is an independent contractor or employee
is, however, generally a fact-sensitive determination and the laws and their
interpretations can vary from state to state. There can be no assurance that tax
authorities will not successfully challenge this position, or that such tax laws
or interpretations thereof will not change. If the owner operators were
determined to be employees, such determination could materially increase the
Company's employment tax and workers' compensation exposure.
Outsourcing
The Company utilizes both independent contractors and employees in its
outsourcing operations. The Company outsources its over 1,350 drivers on a
trip-by-trip basis for delivery to retailers and rental truck agencies,
commercial and recreational vehicles such as motor homes, buses, tractors,
rental trucks, and commercial vans. These individuals are recruited through
driver recruiters, trade magazines, brochures, and referrals. Prospective
drivers are required to possess at least a chauffeur's license and are
encouraged to obtain a commercial driver's license. They must also meet and
maintain compliance with requirements of the U.S. Department of Transportation
and standards established by the Company. Outsourcing drivers are utilized as
needed, depending on the Company's transportation volume and driver
availability. Outsourcing drivers are paid on a per mile basis. The driver is
responsible for most operating expenses, including fuel, return travel, lodging,
and meals. The Company provides licenses, cargo and liability insurance,
communications, sales, and administrative services.
Agents and Employees
The Company has 140 terminal managers and assistant terminal managers
who are involved directly with the management of equipment and drivers. Of these
140 staff, approximately 120 are full-time employees and the remainder are
independent contractors who earn commissions. The terminal personnel are
responsible for the Company's terminal operations including safety, customer
relations, equipment assignment, invoicing, and other matters. Because terminal
personnel develop close relationships with the Company's customers and drivers,
from time to time the Company has suffered a terminal personnel defection,
following which the former staff has sought to exploit such relationships in
competition with the Company. The Company does not expect that future
defections, if any, would have a material affect on its operations. In addition
to the 140 terminal personnel, the Company employs approximately 232 full-time
employees. The Company also has 17 employee drivers in Manufactured housing and
six in Outsourcing.
Seasonality
Shipments of manufactured homes tend to decline in the winter months in
areas where poor weather conditions inhibit transport. This usually reduces
operating revenues in the first and fourth quarters of the year. Motor home and
travel trailer movements are generally stronger in the spring, when dealers
build stock in anticipation of the summer vacation season, and late summer and
early fall when new vehicle models are introduced. The Company's operating
revenues, therefore, tend to be stronger in the second and third quarters.
Risk Management, Safety and Insurance
The risk of substantial losses arising from traffic accidents is
inherent in any transportation business. The Company carries insurance to cover
such losses up to $25 million per occurrence with a deductible of up to $250,000
per occurrence for personal injury and property damage. The Company carries
cargo insurance of $1 million per occurrence with a $250,000 deductible. The
frequency and severity of claims under the Company's liability insurance affects
the cost and potentially the availability of such insurance. If the Company is
required to pay substantially greater insurance premiums, or incurs substantial
losses above $25 million or below its $250,000 deductibles, its results could be
materially adversely affected. The Company does have an "aggregate stop loss"
insurance policy for the period July 1, 1997 through June 30, 1998 whereby
personal injury, property damage, and worker's compensation losses below its
$250,000 deductible cannot exceed $4.3 million (could be adjusted up dependent
on operating revenues). The Company has been approved for self-insurance
authority of up to $1 million. There are no immediate plans to institute this
self-insurance. The granting of self-insurance would provide the Company
alternatives if insurance pricing levels do not meet the Company's expectations.
There can be no assurance that the Company can continue to maintain its present
insurance coverage on acceptable terms.
The following table sets forth information with respect to bodily
injury and property damage and cargo claims reserves for the years ended
December 31, 1995, 1996, and 1997, respectively.
Bodily Injury/Property Damage and Cargo
Claims Reserve History
Years Ended December 31,
(in thousands)
1995 1996 1997
------- ------- -------
Beginning Reserve Balance $3,326 $3,623 $4,564
Provision for Claims 4,849 6,080 6,591
Payments, net (4,552) (5,139) (5,938)
------- ------- -------
Ending Reserve Balance $3,623 $4,564 $5,217
====== ====== ======
The Company has implemented and is enhancing driver screening and
training procedures to promote safe driver practices and enhance compliance with
Department of Transportation regulations. The Company's driver recognition
programs emphasize safety and provide for equipment maintenance, helping to
enhance the Company's overall safety record. In 1997, over 1,340 drivers were
honored and obtained recognition for accident free driving. In addition to
periodic recognition for safe operations and regulatory compliance, the Company
has implemented several award programs associated with particular customers.
These programs are intended to provide incentives for drivers to drive safely,
perform well and maintain their equipment. One such program provides certain
toter drivers with a credit for miles traveled while meeting standards for
safety and professional performance. The owner operator is entitled to use the
amount credited to obtain reimbursement from the Company for equipment
purchases, maintenance, or upgrade expenses. (This program paid out $213,000 in
1997 to owner operators). The Company has a Senior Vice President of Risk
Management and Safety, Director of Compliance and Legalization, four Safety
Directors, and a Driver Trainer dedicated to assist the operating groups in
training and highway safety. The Company has incentives for dispatchers based
upon accident free miles. In 1997, over $77,000 was paid out under this program
and it is expected that over $80,000 will be paid in 1998 for 1997 performance.
Interstate, a wholly-owned insurance subsidiary of the Company, makes
available physical damage insurance coverage for the Company's owner operators.
Interstate also writes performance surety bonds for Morgan. The Company may also
utilize its wholly-owned insurance subsidiary to secure business insurance for
Morgan through re-insurance contracts.
Interstate may begin offering new insurance products as a managing
general agent. Interstate may determine to accept a limited portion of the
underwriting risk, retaining an appropriate proportion of the premiums.
Competition
All of the Company's activities are highly competitive. In addition to
fleets operated by manufacturers, the Company competes with large national
carriers and numerous small regional or local carriers. The Company's principal
competitors in the Manufactured Housing and Outsourcing marketplaces are
privately owned. In the specialized transport market, the Company competes with
large national interstate carriers, many of whom have substantially greater
resources than the Company. No assurance can be given that the Company will be
able to maintain its competitive position in the future.
Competition among carriers is based on the rate charged for services,
quality of service, financial strength, and insurance coverage. The availability
of tractor equipment and the possession of appropriate registration approvals
permitting shipments between points required by the customer may also be
influential.
Regulation
The Company's interstate operations (Morgan and TDI) are subject to
regulation by the Federal Highway Administration ("FHWA") which is an agency of
the United States Department of Transportation ("D.O.T."). Effective August 26,
1994, essentially all motor common carriers were no longer required to file
individually determined rates, classifications, rules or practices with the
former Interstate Commerce Commission. Effective January 1, 1995, the economic
regulation of certain intrastate operations by various state agencies was
preempted by federal law. The states will continue to have jurisdiction
primarily to insure that carriers providing intrastate transportation services
maintain required insurance coverage, comply with all applicable safety
regulations, and conform to regulations governing size and weight of shipments
on state highways. Most states have adopted D.O.T. safety regulations and
actively enforce them in conjunction with D.O.T. personnel.
Carriers normally are required to obtain approval and/or authority from
the FHWA as well as various state agencies. Morgan is approved and/or holds
authority to provide transportation services from, to, and between all points in
the continental United States.
The Company provides services to certain specific customers under
contract and non-contract services to the shipping public pursuant to governing
rates and charges maintained at its corporate and various dispatching offices.
Transportation services provided pursuant to a written contract are designed to
meet a customer's specific shipping needs or by dedicating equipment exclusively
to a given customer for the movement of a series of shipments during a specified
period of time.
Federal regulations govern not only operating authority and
registration, but also such matters as the content of agreements with owner
operators, required procedures for processing of cargo loss and damage claims,
and financial reporting. The Company believes that it is in substantial
compliance with all material regulations applicable to its operations.
The D.O.T. regulates safety matters with respect to the interstate
operations of the Company. Among other things, the D.O.T. regulates commercial
driver qualifications and licensing; sets minimum levels of carrier liability
and cargo insurance; requires carriers to enforce limitations on drivers' hours
of service; prescribes parts, accessories and maintenance procedures for safe
operation of commercial/motor vehicles; establishes noise emission and employee
health and safety standards for commercial motor vehicle operators; and utilizes
audits, roadside inspections and other enforcement procedures to monitor
compliance with all such regulations. The D.O.T. has established regulations
which mandate random, periodic, pre-employment, post-accident and reasonable
cause drug testing for commercial drivers. The D.O.T. has also established
similar regulations for alcohol testing. The Company believes that it is in
substantial compliance with all material D.O.T. requirements applicable to its
operations.
In Canada, provincial agencies grant both intraprovincial and
extraprovincial authority; the latter permits transborder operations to and from
the United States. The Company has obtained from Canadian provincial agencies
all required extraprovincial authority to provide transborder transportation of
manufactured homes and motor homes throughout most of Canada.
Most manufactured homes, when being transported by a toter, exceed the
maximum dimensions allowed on state highways without a special permit. The
Company obtains these permits for its owner operators from each state which
allows the Company to transport their manufactured homes on state highways. The
states and Canadian provinces have special requirements for over-dimensional
loads detailing permitted routes, timing required, signage, escorts, warning
lights and similar matters.
Most states and provinces also require operators to pay fuel taxes,
comply with a variety of other tax and/or registration requirements, and keep
evidence of such compliance in their vehicles while in transit. The Company
coordinates compliance with these requirements by its drivers and owner
operators, and monitors their compliance with all applicable safety regulations.
Interstate, the Company's insurance subsidiary, is a captive insurance
company incorporated under Vermont law. It is required to report annually to the
Vermont Department of Banking Insurance & Securities and must submit to an
examination by this Department on a triennial basis. Vermont regulations require
Interstate to be audited annually and to have its loss reserves certified by an
approved actuary. The Company believes Interstate is in substantial compliance
with Vermont insurance regulations.
Finance, the Company's finance subsidiary, is incorporated under
Indiana law. Finance is subject to Indiana's Equal Credit Opportunity Laws and
other state and federal laws relating generally to fair financing practices.
Item 2. PROPERTIES
The Company owns approximately 24 acres of land with improvements in
Elkhart, Indiana. The improvements include a 23,000 square foot office building
housing the Company's principal office and Manufactured Housing; a 7,000 square
foot building housing Outsourcing; a 9,000 square foot building used for the
Company's safety and driver service departments; and an 8,000 square foot
building partially used for driver training and licensing. Most of the Company's
13 regional and 123 locations are situated on leased property. The Company also
owns and leases property for parking and storage of equipment at various
locations throughout the United States, usually in proximity to manufacturers of
products moved by the Company. The property leases have term commitments of a
minimum of thirty days and a maximum of five years, at monthly rentals ranging
from $100 to $11,048. The Elkhart facility is currently mortgaged to one of the
Company's lenders. The following table summarizes the Company's owned real
property.
Property Location Property Description Approximate Acreage
- ----------------- -------------------- -------------------
Elkhart, Indiana Corporate and region 24
Wakarusa, Indiana Terminal and storage 4
Middlebury, Indiana Terminal and storage 13
Mocksville, North Carolina Terminal and storage 8
Edgerton, Ohio Terminal and storage 2
Woodburn, Oregon Storage 4
Woodburn, Oregon Region and storage 1
Fort Worth, Texas Region and storage 6
Ocala, Florida Terminal and storage 4
Montevideo, Minnesota Terminal and storage 3
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are party to litigation in the
ordinary course of business, generally involving liability claims in connection
with traffic accidents incidental to its transport business. From time to time
the Company may become party to litigation arising outside the ordinary course
of business. The Company does not expect such pending suits to have a material
adverse effect on the Company or its results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange
under the symbol MG. As of March 25, 1998, the approximate number of
shareholders of record of the Company's Class A Common Stock was 161. This
figure does not include shareholders with shares held under beneficial ownership
in nominee name or within clearinghouse position of brokerage firms and banks.
The Class B Common Stock is held of record by Lynch Corporation.
Market Price of Class A Common Stock:
<TABLE>
<CAPTION>
1997 1996
Quarter Ended High Low High Low
<S> <C> <C> <C> <C>
March 31 $ 8.38 $7.00 $9.38 $7.56
June 30 10.25 8.25 9.75 8.00
September 30 10.25 8.38 9.19 7.25
December 31 10.38 8.88 7.75 7.13
</TABLE>
Dividends Declared:
<TABLE>
<CAPTION>
Class A Class B
Cash Dividends Cash Dividends
Quarter Ended 1997 1996 1997 1996
<S> <C> <C> <C> <C>
March 31 $.02 $.02 $.01 $.01
June 30 .02 .02 .01 .01
September 30 .02 .02 .01 .01
December 31 .02 .02 .01 .01
</TABLE>
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
THE MORGAN GROUP, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
Operations
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 146,154 $ 132,208 $ 122,303 $ 101,880 $ 82,793
Operating Income (Loss)(1) 1,015 (3,263) 3,371 3,435 2,267
Pre-tax Income (Loss) 296 (3,615) 3,284 3,367 1,714
Net Income (Loss) before
Extraordinary Item 196 (2,070) 2,269 2,212 1,595
Net Income (Loss) 196 (2,070) 2,269 2,212 1,595
Per Share
Basic Net Income (Loss)
Class A Common Stock $ 0.09 $ (0.76) $ 0.81 $ 0.79 $ 0.75
Class B Common Stock 0.05 (0.80) 0.77 0.75 0.72
Diluted Net Income (Loss)
Class A Common Stock 0.09 (0.76) 0.79 0.76 0.70
Class B Common Stock 0.05 (0.80) 0.77 0.72 0.68
Cash Dividends Declared
Class A Common Stock 0.08 0.08 0.08 0.08 0.02
Class B Common Stock 0.04 0.04 0.04 0.04 0.01
Financial Position
Total Assets $ 32,746 $ 33,066 $ 30,795 $ 28,978 $ 24,399
Working Capital 2,129 1,635 8,293 11,045 9,600
Long-term Debt 2,513 4,206 3,275 1,925 2,347
Redeemable Preferred Stock -- -- -- 3,104 3,089
Common Shareholders' Equity 12,724 13,104 15,578 12,980 11,170
Common Shares Outstanding at Year End
Class A Common Stock 1,437,910 1,485,520 1,449,554 1,366,665 1,366,665
Class B Common Stock 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
Weighted Average Shares Outstanding:
Class A Common Stock
Basic 1,456,690 1,484,242 1,382,548 1,366,665 680,730
Diluted 1,463,184 1,486,272 1,422,445 1,447,179 834,816
Class B Common Stock
Basic and Diluted 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
Other Information
Company Unit Moves
New Manufactured Homes 154,389 121,136 114,821 98,181 76,188
Driver Outsourcing 45,857 58,368 49,885 32,060 30,978
- --------------
</TABLE>
(1) Operating Income (Loss) in 1997 and 1996 is after special charges of
$624,000 and $3,500,000, respectively.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Year 1997 Compared to 1996
Operating results for the year ended December 31, 1997, compared to
1996 were significantly impacted by the acquisition of Transit Homes of America
("Transit") in December of 1996 and the discontinuance of the Truckaway
operation in May of 1997. Transit is a provider of outsourcing services
primarily to the Manufactured housing and Specialized transport industries.
Operating revenues increased 11% from $132.2 million in 1996 to $146.2
million in 1997. Transit contributed $21.2 million of the 1997 operating
revenues. Revenues from continued operations, including Transit and excluding
the Truckaway operating revenues of $3.3 million, increased 19% in 1997 over
1996.
Manufactured housing operating revenues are generated from arranging
delivery services for new manufactured homes, modular homes and office trailers.
The increase in Manufactured housing operating revenues of 28% was primarily due
to the Transit acquisition.
Driver outsourcing operating revenues consist of the relocation of
consumer rental trucks, delivery of motor homes, and delivery of new commercial
vehicles. Decreases in relocation of rental trucks, principally due to
management's decision to de-emphasize participation in this cyclical industry
segment and competitive pressures, was a significant factor contributing to the
13% decline in Driver outsourcing operating revenues. Additionally, motor home
operating revenues decreased through a combination of reduced production from a
major customer and other competitive issues. Operating revenues from the
delivery of new commercial vehicles declined slightly in 1997 primarily due to
the realignment of our customer base in order to better position this product
line for greater profitability.
The discontinuance of the Truckaway operation in May of 1997 resulted
in a decline in comparable Specialized transport operating revenues. The
Specialized transport operating revenues increased $2.6 million after giving
effect to the discontinuance of the Truckaway operation. This increase was
attributed to a renewed focus on the Towaway business and the Transit
acquisition which brought new travel trailer operating revenues.
The increase in other service revenues of 32% relates primarily to
highway permits and labor billings added through the Transit acquisition.
Operating income increased from a loss of $3.3 million in 1996 to
operating income of $1.0 million in 1997. The operating loss in 1996 included a
special charge of $3.5 million taken in connection with the closing of
unprofitable operations. 1996 operating income before the special charge was
$0.2 million. The 1997 operating income included two special items, for a net
charge to income of $0.6 million. The first item was for a change in accounting
of $1.0 million; the second item was a special credit of $0.4 million. The
change in accounting was to account for certain components of driver pay on an
accrual rather than a cash basis. The special credit related primarily to the
gain on the sale of Truckaway assets in excess of reserves established in the
prior year. 1997 operating income before the net special charge was $1.6
million.
Operating income in 1997 was aided by the Transit acquisition and the
discontinuance of the Truckaway operation, which had an operating loss of $1.8
million in 1996. The discontinuance of the Truckaway operation was in line with
the Company's plan to exit lines of business which are unrewarding. Operating
income was negatively impacted by reduced profits from the Company's Driver
outsourcing business. Additionally, operating costs and expenses increased due
to terminal manager training, safety training for all Morgan's employees and
drivers, and an increase in employee-related health benefit cost. The investment
in safety training was in line with the Company's objective of improving its
safety performance. Claims costs in 1997, as a percent of operating revenues,
increased slightly from 4.6% in 1996 to 4.7% in 1997.
Selling, general and administrative expenses increased from $8.2
million in 1996 to $9.7 million in 1997 of which approximately $0.6 million
related to costs associated with the addition of the Transit operation.
Additionally, expenses increased because of higher computer lease costs and
higher employee related benefit costs. These increased expenses were partially
offset by lower corporate compensation costs as a result of a partial
restructuring of the corporate office.
The decrease in depreciation and amortization expenses in 1997 related
to the discontinuance of the Truckaway operation partially offset by increased
amortization from the Transit acquisition.
Net interest expense increased from $0.4 million to $0.7 million
primarily due to increases in debt related to the Transit operation and
increased borrowing on the credit facility.
In 1997, the income tax provision of $0.1 million resulted in an
effective tax rate of 34%, a more normalized rate than the 43% effective tax
benefit in 1996.
Net income for the Company in 1997 was $0.2 million (Class A $0.09 and
Class B $0.05 per basic share). The net loss in 1996 was $2.1 million (Class A
$0.76 loss and Class B $0.80 loss per basic share).
Year 1996 Compared to 1995
Operating revenues rose by 8% to $132.2 million in 1996 from $122.3
million in 1995. Prior to giving effect to the TDI acquisition, which closed on
May 22, 1995, comparable operating revenues increased 6%. Morgan's Manufactured
housing operating revenues increased 15%, outpacing the 1996 national production
growth of 9%. The growth in Manufactured housing was partially offset by an 11%
decline in the Company's Specialized transport operations. Specialized transport
was impacted by weakened demand which drove down the Company's utilization of
equipment and rates. The Truckaway operation of Specialized transport was
discontinued in 1997.
During 1996, the Company reported an operating loss, after special
charges of $3.3 million and a net loss of $2.1 million. In 1995, the Company
reported operating income of $3.4 million and net income of $2.3 million (Class
A $0.81 and Class B $0.77 per basic share). The special charge for 1996 amounted
to $3.5 million before taxes ($2.1 million after tax or $0.78 per share of Class
A and Class B) and resulted from the discontinuance of the Truckaway operation
and the write down of four properties.
The Truckaway operation generated approximately 10% of the Company's
1996 total revenue. The operating loss from this operation was approximately
$1.8 million in 1996. During 1996, the Company also initiated a plan to dispose
of certain land and buildings, two of which were associated with the Truckaway
operation, that were carried at values which prove to be higher than fair market
value.
<PAGE>
Excluding the special charges of $3.5 million, operating income
declined from $3.4 million in 1995 to $0.2 million in 1996. The decline in
operating income in 1996 was attributed to (i) weakened freight demand in the
Specialized transport, (ii) increases of $1.3 million in claims costs,
especially in the Driver outsourcing and Specialized transport, and (iii) an
increase in operating costs specifically to build infrastructure and to invest
in the operating structure.
The investment in operating costs included, but were not limited to,
dispatch personnel, regional personnel, and driver retention programs. Selling,
general and administrative costs increased from $7.3 million in 1995 to $8.2
million in 1996. Investments in 1996 were made in automation of dispatch
facilities and personnel. In addition, the Company had a full year of selling,
general and administrative expenses for the TDI organization.
Net interest expense increased from $0.1 million to $0.4 million
primarily due to increases in debt related to the TDI acquisition and reduced
cash on hand during the year.
In 1996, the income tax benefit of $1.5 million, including federal and
state tax benefits, resulted in an effective tax benefit of 43% compared to an
effective tax rate of 31 % in 1995.
Liquidity and Capital Resources
Operating activities used $0.3 million of cash in 1997. Net income plus
the non-cash special charge and depreciation and amortization were more than
offset by increases primarily in trade accounts receivable. Trade accounts
receivables increased $2.1 million due to the increase in 1997 fourth quarter
operating revenues of 17% and an increase in days sales outstanding to 37 days.
The Company is focused on reducing overhead, including selling, general
and administration expense, and redundant operating costs. Management has also
initiated processes to expedite customer billings and collections to improve
cash flow.
Investing activities provided cash of $0.7 million in 1997. Proceeds
from the sale of property and equipment principally from the Truckaway operation
were greater than capital expenditures and acquisitions expenditures. 1997
capital expenditures were $0.9 million. Presently, the 1998 capital expenditure
plan approximates $1.0 million which will be primarily funded through revolving
credit notes.
<PAGE>
Net cash used in financing activities increased to $1.3 million in
1997. An increase of $1.0 million in revolving credit notes, additional
financing of $0.7 million, and cash were used for payments on term and
promissory notes, purchases of 47,600 shares of Class A common stock, and the
regular dividend payments. Payments on term and promissory notes were $2.4
million in 1997. Payments on term and promissory notes for 1998 will approximate
$1.2 million.
Outstanding revolving credit notes increased to $2.5 million at
December 31, 1997. The Company, at December 31, 1997, had total borrowings
available for revolving credit notes and letters of credit of $10.0 million, of
which there was $3.3 million available. On March 25, 1998, the Company replaced
this facility with a $15.0 million revolving line of credit with a bank which
matures on April 30, 2001. Additionally, the Company also obtained from the same
bank an $8.0 million facility for letters of credit which expires on April 30,
1999. Revolving credit borrowings are limited to 80% of qualified trade accounts
receivable. These facilities provide financing for working capital needs,
letters of credit, and general corporate needs.
It is the current policy of the Company to pay annual Class A common
stock dividends totaling $.08 per share and Class B common stock dividends
totaling $.04 per share. Payment of any future dividends will be dependent,
among other things, upon earnings, capital expenditure requirements, financing
agreement covenants, future growth plans, legal restrictions, and the financial
condition of the Company.
It is management's opinion that the Company's foreseeable cash
requirement will be met through a combination of improved internally generated
funds and the credit available from the new facility.
Impact of Seasonality
Shipments of manufactured homes tend to decline in the winter months in
areas where poor weather conditions inhibit sales and transport. This usually
reduces operating revenues in the first and fourth quarters of the year. Motor
home and travel trailer movements are generally strong in the spring, when
dealers build stock in anticipation of the summer vacation season, and late
summer and early fall when new vehicle models are introduced. The Company's
operating revenues, therefore, tend to be stronger in the second and third
quarters.
Impact of Year 2000
Some of the Company's older purchased software applications were
written using two digits rather than four digits to define the applicable year.
As a result, that software may interpret a date using "00" as the year 1900
rather than the year 2000. This could possibly cause a system failure or
miscalculations, causing disruptions of operations, including, among other
things, a temporary inability to process transactions, or engage in normal
business activities.
The Company is in the process of completing an assessment and will have
to modify or replace portions of its software to ensure that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The total cost of this year 2000 project has not been fully
quantified, but preliminary assessments are that conversion costs will be
immaterial to the Company. The Company believes that with the necessary
modifications to existing software and any necessary conversions to new
software, the year 2000 issue does not pose significant operational problems for
its computer systems.
The cost of the project and the date on which the Company believes it
will complete the year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
The Company has not completed an evaluation of its major customers and
suppliers to determine if they have taken adequate measures to ensure that
necessary modifications are made to their software prior to the year 2000. While
the Company is not dependent on any one customer or supplier, failure to make
necessary year 2000 modifications by any large group of customers or suppliers
could result in a material adverse impact on the Company.
<PAGE>
Forward-Looking Discussion
This report contains a number of forward-looking statements. From time
to time, the Company may make other oral or written forward-looking statements
regarding its anticipated operating revenues, costs and expenses, earning and
other matters affecting its operations and condition. Such forward-looking
statements are subject to a number of material factors which could cause the
statements or projections contained therein to be materially inaccurate. Such
factors include, without limitation, the risk of declining production in the
Manufactured housing industry; the risk of losses or insurance premium increases
from traffic accidents; the risk of loss of major customers; risks of
competition in the recruitment and retention of qualified drivers and in the
transportation industry generally; risks of acquisitions or expansion into new
business lines that may not be profitable; risks of changes in regulation and
seasonality of the Company's business. Such factors are discussed in greater
detail in the Company's Annual Report on Form 10-K for 1997 under Part I, Item
1, Business.7
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Morgan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31
1997 1996
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 380 $ 1,308
Trade accounts receivable, less allowance for doubtful 13,362 11,312
accounts of $183 in 1997 and $59 in 1996
Accounts receivable, other 126 274
Refundable taxes 263 584
Prepaid expenses and other current assets 2,523 2,985
Deferred income taxes 1,095 --
-------- --------
Total current assets 17,749 16,463
Property and equipment, net 4,315 2,763
Assets held for sale -- 2,375
Intangible assets, net 8,451 8,911
Deferred income taxes 767 1,683
Other assets 1,464 871
-------- --------
Total assets $ 32,746 $ 33,066
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 2,250 $ 1,250
Trade accounts payable 3,410 3,226
Accrued liabilities 4,966 4,808
Accrued claims payable 2,175 1,744
Refundable deposits 1,666 1,908
Current portion of long-term debt 1,153 1,892
-------- --------
Total current liabilities 15,620 14,828
Long-term debt, less current portion 1,360 2,314
Long-term accrued claims payable 3,042 2,820
Commitments and contingencies -- --
Shareholders' equity:
Common stock, $.015 par value
Class A: Authorized shares - 7,500,000 23 23
Issued shares - 1,605,553
Class B: Authorized shares - 2,500,000 18 18
Issued and outstanding shares - 1,200,000
Additional paid-in capital 12,453 12,441
Retained earnings 2,160 2,126
-------- --------
Total capital and retained earnings 14,654 14,608
Less - treasury stock at cost; 167,643 and (1,426) (1,000)
120,043 Class A shares
- loan to officer for stock purchase (504) (504)
-------- --------
Total shareholders' equity 12,724 13,104
-------- --------
Total liabilities and shareholders' equity $ 32,746 $ 33,066
======== ========
</TABLE>
See accompanying notes.
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
For the twelve months ended
December 31
1997 1996 1995
--------- --------- ---------
Operating revenues:
<S> <C> <C> <C>
Manufactured housing $ 93,092 $ 72,616 $ 63,353
Driver outsourcing 20,163 23,090 19,842
Specialized transport 19,173 26,169 29,494
Other service revenues 13,726 10,333 9,614
--------- --------- ---------
146,154 132,208 122,303
Costs and expenses:
Operating costs 133,732 122,238 110,408
Special charges 624 3,500 --
Selling, general and administration 9,708 8,235 7,260
Depreciation and amortization 1,075 1,498 1,264
--------- --------- ---------
145,139 135,471 118,932
--------- --------- ---------
Operating income (loss) 1,015 (3,263) 3,371
Net interest expense 719 352 87
--------- --------- ---------
Income (loss) before income taxes 296 (3,615) 3,284
Total Income tax expense (benefit):
Current 279 268 859
Deferred (179) (1,813) 156
--------- --------- ---------
Total income tax expense (benefit) 100 (1,545) 1,015
--------- --------- ---------
Net income (loss) 196 (2,070) 2,269
Less preferred dividends -- -- 221
--------- --------- ---------
Net income (loss) applicable to common stocks $ 196 ($ 2,070) $ 2,048
========= ========= =========
Net income (loss) per common share:
Basic:
Class A common stock $ 0.09 ($ 0.76) $ 0.81
Class B common stock $ 0.05 ($ 0.80) $ 0.77
Diluted:
Class A common stock $ 0.09 ($ 0.76) $ 0.79
Class B common stock $ 0.05 ($ 0.80) $ 0.77
</TABLE>
See accompanying notes.
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Redeemable Preferred
Stock, Common Stocks, and Other Shareholders' Equity
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Redeemable
Series A Class A Class B Additional
Preferred Common Common Paid-in Officer Treasury Retained
Stock Stock Stock Capital Loan Stock Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 3,104 $20 $18 $ 10,459 $ 2,483 $ 16,084
Net income 2,269 2,269
Redeemable preferred
Stock dividends:
Accrued 221 (221) --
Paid (337) (337)
Redemption of Series A
Preferred stock (2,988) 2 1,686 (1,300)
Conversion of warrants,
including tax benefit 1 296 297
Purchase of treasury stock (1,274) (1,274)
Common stock dividends:
Class A ($.08 per share) (113) (113)
Class B ($.04 per share) (48) (48)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 23 18 12,441 (1,274) 4,370 15,578
Net (loss) (2,070) (2,070)
Sale of treasury stock, net (504) 274 (230)
Common stock dividends:
Class A ($.08 per share) (126) (126)
Class B ($.04 per share) (48) (48)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 23 18 12,441 (504) (1,000) 2,126 13,104
Net income 196 196
Purchase of treasury stock (426) (426)
Common stock dividends:
Class A ($.08 per share) (114) (114)
Class B ($.04 per share) (48) (48)
Issuance of a director's
stock options 12 12
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 23 $ 18 $ 12,453 ($ 504) ($ 1,426) $ 2,160 $ 12,724
===================================================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
The Morgan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
For the twelve months ended
December 31
1997 1996 1995
------- ------- -------
Operating activities:
<S> <C> <C> <C>
Net income (loss) $ 196 ($2,070) $ 2,269
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,108 1,533 1,304
Deferred income taxes (179) (1,719) 156
Special charges 624 3,500 --
Non-cash compensation expense for stock options 12
(Gain) loss on disposal of property and equipment (37) 37 (19)
Changes in operating assets and liabilities:
Trade accounts receivable (2,050) (27) (1,743)
Other accounts receivable 148 240 (92)
Refundable taxes 321 (584) --
Prepaid expenses and other current assets 429 (431) (372)
Other assets (593) (374) (44)
Trade accounts payable 184 (779) 45
Accrued liabilities (890) 86 433
Accrued claims payable 653 341 297
Refundable deposits (242) 363 157
------- ------- -------
Net cash (used in) provided by operating activities (316) 116 2,391
Investing activities:
Purchases of property and equipment (919) (780) (1,955)
Proceeds from sale of property and equipment 159 94 28
Proceeds from disposal of assets held 1,656 -- --
Business acquisitions (227) (895) (1,018)
------- ------- -------
Net cash provided by (used in) investing activities 669 (1,581) (2,945)
Financing activities:
Net proceeds from notes payable to bank 1,000 1,250 --
Principle payments on long-term debt (2,366) (924) (514)
Proceeds from long-term debt 673 -- --
Conversion of warrants -- -- 297
Purchase of treasury stock (426) (286) (1,274)
Proceeds from sale of treasury stock -- 56 --
Redemption of series A preferred stock -- -- (1,300)
Common stock dividends paid (162) (174) (161)
Redeemable preferred stock dividends paid -- -- (337)
------- ------- -------
Net cash used in financing activities (1,281) (78) (3,289)
------- ------- -------
Net decrease in cash and cash equivalents (928) (1,543) (3,843)
Cash and cash equivalents at beginning of period 1,308 2,851 6,694
------- ------- -------
Cash and cash equivalents at end of period $ 380 $ 1,308 $ 2,851
===================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Morgan Group, Inc. ("Company"), through its wholly owned
subsidiaries, Morgan Drive Away, Inc. ("Morgan") and TDI, Inc. ("TDI"), provides
outsourced transportation and logistical services to the manufactured housing
and motor home industries and is a leading provider of delivery services to the
commercial truck and trailer industries in the United States. Lynch Corporation
("Lynch") owns all of the 1,200,000 shares of the Company's Class B Common stock
and 155,000 shares of the Company's Class A Common stock, which in the aggregate
represents 67% of the combined voting power of the combined classes of the
Company's Common Stock.
The Company's services also include certain insurance and financing
services to its owner operators through Interstate Indemnity Company
("Interstate") and Morgan Finance, Inc. ("Finance"), both wholly owned
subsidiaries. Operating revenues, operating profits, or identified assets of
these subsidiaries do not account for over 10% of the Company's operating
revenues, operating profits, or identifiable assets, and accordingly, no
segment information is required.
A majority of the Company's accounts receivable are due from companies
in the manufactured housing, motor home, and commercial truck and trailer
industries located throughout the United States. While the Company does not
consider its business to be dependent upon any one customer, services provided
to Fleetwood Enterprises, Inc. accounted for approximately 21%, 20%, and 24% of
operating revenues in 1997, 1996, and 1995 and 15% and 12% of gross accounts
receivables at December 31, 1997 and 1996, respectively. In addition, Oakwood
Homes Corporation accounted for approximately 16% of operating revenues in 1997,
and 10% of gross accounts receivables at December 31, 1997.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Morgan, TDI, Interstate, and Finance. Significant
inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements; and (ii) the reported amounts of operating revenues and expenses
during the reporting period. Actual results could materially differ from those
estimates.
<PAGE>
Recognition of Operating Revenues
Operating revenues and related driver pay are recognized when movement
of the product is completed. Other operating expenses are recognized when
incurred.
Cash Equivalents
All highly liquid investments with a maturity of three months or less
when purchased are considered to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the property
and equipment.
Intangible Assets
Intangible assets, including goodwill, are being amortized by the
straight-line method over their estimated useful lives.
Impairment of Assets
The Company periodically assesses the net realizable value of its
long-lived assets and evaluates such assets for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. For assets to be held, impairment is determined to exist if
estimated undiscounted future cash flows are less than the carrying amount. For
assets to be disposed of, impairment is determined to exist if the estimated net
realizable value is less than the carrying amount. As discussed in Note 17, the
Company recognized an adjustment during 1996 for write-downs of certain assets.
Insurance and Claim Reserves
The Company maintains liability insurance coverage of up to $25,000,000
per occurrence, with a deductible of $250,000 per occurrence for personal injury
and property damage. The Company currently maintains cargo damage insurance of
$1,000,000 per occurrence with a deductible of $250,000. The Company carries
statutory insurance limits on workers' compensation with a deductible of
$50,000. Claims and insurance accruals reflect the estimated ultimate cost of
claims for cargo loss and damage, personal injury and property damage not
covered by insurance. The Company accrues its self-insurance liability using a
case reserve method based upon claims incurred and estimates of unasserted and
unsettled claims and these reserves have not been discounted.
Stock Based Compensation
The Company accounts for stock based compensation under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees".
Because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Pro forma information regarding net income and earnings
per share as if the Company had accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method, which is required
by Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," is immaterial.
Net Income (Loss) Per Common Share
Effective for the Company's consolidated financial statements for the
year ended December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," which replaces the
presentation of primary earnings per share ("EPS") and fully diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes
dilution and is computed by dividing earnings available to each class of common
stock by the weighted average number of common shares outstanding for the
period. Similar to fully diluted EPS, diluted EPS assumes the issuance of common
stock for all potentially dilutive equivalent shares outstanding. All
prior-period EPS data have been restated. The adoption of this new accounting
standard did not have a material effect on the Company's reported EPS amounts
other than disclosing EPS for each class of common stock.
Earnings available to each class of common stock are computed by
reducing net income by the amount of dividends declared in the current period
for each class of stock and by the contractual amounts that must be paid to
preferred stockholders, if any. The remaining undistributed earnings are
allocated to each class of common stock equally per share. The earnings
available to each class of common stock are determined by adding together the
amount allocated for dividends and the amount of undistributed earnings
allocated.
The net income (loss) applicable to common stocks is the same for the
basic and diluted EPS computations for 1997 and 1996. For 1995, the difference
between the net income applicable to common stocks used in the EPS calculations
is the reallocation of undistributed earnings of $13,000 between Class A common
stock and Class B common stock. The following table reconciles the differences
between basic and diluted weighted average shares outstanding.
<TABLE>
<CAPTION>
For the twelve months ended December 31
1997 1996 1995
--------- --------- ---------
Weighted average shares outstanding
Class A stock:
<S> <C> <C> <C>
Basic 1,456,690 1,484,242 1,382,548
Dilutive effect of stock options 6,494 2,030 4,742
Dilutive effect of warrants -- -- 35,155
--------- --------- ---------
Diluted 1,463,184 1,486,272 1,422,445
========= ========= =========
Class B stock - basic and diluted 1,200,000 1,200,000 1,200,000
========= ========= =========
</TABLE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income," which is effective beginning in
1998. SFAS No. 130 establishes standards for reporting and display for
comprehensive income and its components in a full set of general purpose
financial statements. Comparative periods are required to be reclassified to
reflect the provisions of the statement. The adoption of this SFAS will not
affect earnings as previously reported.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This SFAS requires
disclosure of selected financial and descriptive information for each operating
segment based on management's internal organizational decision-making structure.
Additional information is required on a company-wide basis for operating
revenues by product or service, operating revenues and identifiable assets by
geographic location and information about significant customers. The Company
will begin presenting any additional information as required by SFAS No. 131 in
its financial statements for the year ending December 31, 1998.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
Estimated December 31
Useful Life 1997 1996
- --------------------------------------------------------------------------------
(Years)
Land -- $925 $487
Buildings 25 1,763 524
Transportation equipment 3 to 5 620 1,470
Office and service equipment 5 to 8 3,293 3,145
- --------------------------------------------------------------------------------
6,601 5,626
Less accumulated depreciation 2,286 2,863
- --------------------------------------------------------------------------------
Property and equipment, net $4,315 $2,763
- --------------------------------------------------------------------------------
3. INTANGIBLE ASSETS
The components of intangible assets and their estimated useful lives
are as follows (in thousands):
Estimated December 31
Useful Life 1997 1996
- --------------------------------------------------------------------------------
(Years)
Trained work force 3 to 12 $ 880 $ 880
Covenants not to compete 5 to 15 1,206 1,170
Trade name and goodwill - original 40 1,660 1,660
Trade name and goodwill - purchased 20 6,894 6,812
- --------------------------------------------------------------------------------
10,640 10,522
Less accumulated amortization 2,189 1,611
- --------------------------------------------------------------------------------
Intangible assets, net $8,451 $8,911
- --------------------------------------------------------------------------------
<PAGE>
4. INDEBTEDNESS
The Company at December 31, 1997 had credit facilities of $10,000,000,
of which $2,250,00 of revolving credit notes (bearing interest at 8.5% per
annum), and $4,490,000 of letters of credit were outstanding. The remaining
$3,260,000 was available for borrowing. On March 25, 1998, the Company replaced
this facility with a $15,000,000 revolving line of credit that matures on April
30, 2001. Additionally, the Company obtained from the same bank an $8,000,000
facility for letters of credit which expires on April 30, 1999. Revolving credit
borrowings are limited to 80% of qualified trade accounts receivable. These
facilities provide financing for working capital needs, letters of credit, and
general corporate needs.
Interest on the line of credit is determined at the Company's option at
the time of the borrowing, based on the bank's prime rate or until December 31,
1998 at the London Interbank Offering Rate ("LIBOR"), plus 165 basis points. The
LIBOR rate will be adjusted after December 31, 1998. The letter of credit rate
is the applicable LIBOR margin rate.
The agreement requires payment of a closing fee of $25,000 and a
facility fee of 25 basis points payable quarterly on the $15,000,000 revolving
line of credit. The Company, beginning in 1998, is to maintain certain minimum
levels of net worth and a debt to net worth and interest coverage ratio.
Borrowings are secured by the trade accounts receivable, transportation
equipment, office and service equipment, and general intangible assets.
<PAGE>
As of December 31, 1997 and 1996, long-term debt consisted of the
following (in thousands):
December 31
1997 1996
------ ------
Promissory note, principal due on January 2, 1997 -- $ 697
Real estate note with principal and interest
payable monthly through November 1, 1997 -- 330
Term note with imputed interest at 6.509%,
principal and interest payments due
monthly through April 25, 1998 $ 303 --
Promissory note with imputed interest at 8.0%,
principal and interest payments due
annually through September 1, 1998 112 270
Term note with principal and interest payable
monthly at 8.25% through July 31, 2000 232 341
Promissory note with imputed interest at 7.81%,
principal and interest payments due
annually through August 11, 2000 914 1,154
Promissory note with imputed interest at 7.0%,
principal and interest payments due
monthly through October 31, 2001 205 256
Promissory note with imputed interest at 6.31%,
principal and interest payments due
quarterly through December 31, 2001 747 1,158
------ ------
2,513 4,206
Less current portion 1,153 1,892
------ ------
Long-term debt, net $1,360 $2,314
====== ======
Maturities on long-term debt for the five succeeding
years are as follows:
1998 $1,153
1999 627
2000 545
2001 140
2002 48
------
$2,513
======
Cash payments for interest were $717,000 in 1997, $482,000 in 1996, and $308,000
in 1995.
<PAGE>
5. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The income tax provisions (benefits) are summarized as follows (in
thousands):
1997 1996 1995
---- ---- ----
Current:
State -- $ 28 $ 180
Federal $279 240 679
------ ------- ------
279 268 859
Deferred
State 45 (267) --
Federal (224) (1,546) 156
------ ------- ------
(179) (1,813) 156
------ ------- ------
$ 100 $(1,545) $1,015
====== ======= ======
Deferred tax assets (liabilities) are comprised of the following at
December 31 (in thousands):
1997 1996
------- -------
Deferred tax assets:
Accrued insurance claims $ 2,080 $ 1,595
Special charges 734 1,260
Minimum tax carryforward 42 96
------- -------
2,856 2,951
Deferred tax liabilities:
Depreciation (684) (709)
Prepaid expenses (290) (482)
Other (20) (77)
------- -------
(994) (1,268)
------- -------
$ 1,862 $ 1,683
======= =======
A reconciliation of the income tax provisions and the amounts computed
by applying the statutory federal income tax rate to income before income taxes
follows (in thousands):
1997 1996 1995
------- ------- -------
Income tax provision (benefit)
at federal statutory rate $ 101 $(1,229) $ 1,117
Increases (decreases):
State income tax, net of
federal tax benefit 3 (155) 118
Reduction attributable to
special election by captive
insurance company (155) (216) (223)
Permanent differences 94 50 --
Other 57 5 3
------- ------- -------
$ 100 $(1,545) $ 1,015
======= ======= =======
Cash payments for income taxes were $54,000 in 1997, $934,000 in 1996,
and $736,000 in 1995.
<PAGE>
6. COMMON STOCKS
The Company has two classes of common stock outstanding, Class A and
Class B. Under the bylaws of the Company: (i) each share of Class A is entitled
to one vote and each share of Class B is entitled to two votes; (ii) Class A
stockholders are entitled to a dividend ranging from one to two times the
dividend declared on Class B stock; (iii) any stock distributions will maintain
the same relative percentages outstanding of Class A and Class B; (iv) any
liquidation of the Company will be ratably made to Class A and Class B
stockholders after satisfaction of the Company's other obligations; and (v)
Class B stock is convertible into Class A stock at the discretion of the holder;
Class A stock is not convertible into Class B stock.
7. REDEEMABLE PREFERRED STOCK
The Company redeemed the Series A Redeemable Preferred Stock in a
transaction approved by a special meeting of the Board of Directors on November
22, 1995. The transaction involved the redemption of the 1,493,942 preferred
shares owned by Lynch Corporation in exchange for $1,300,000 in cash and 150,000
shares of Class A Common stock. The consideration received in exchange for the
shares of Class A Common stock exceeded the book value at the date of the
exchange by $450,000. The resulting premium was recorded as an increase to the
paid-in capital account in the Company's shareholders' equity.
On December 7, 1994, June 22, 1995 and November 22, 1995, the Board of
Directors declared Series A Redeemable Preferred Stock cash dividends pursuant
to its terms. Accordingly, $337,000 of cash dividends were paid to Lynch during
1995.
8. STOCK WARRANTS
In June 1995, an officer exercised warrants to purchase 88,888 shares
of Class A Common stock at an option price of $.75 per share. This exercise
represented two-thirds of the total outstanding warrants. The final third of the
warrants, representing 44,445 shares, were cancelled.
The Company accepted 22,660 shares of stock from the officer to satisfy
the federal income tax withholding resulting from the warrant exercise. The
stock price on the warrant exercise date was $8.375 per share.
9. STOCK OPTION PLAN
On June 4, 1993, the Board of Directors approved the adoption of a
stock option plan which provides for the granting of incentive or non-qualified
stock options to purchase up to 200,000 shares of Class A Common stock to
officers, including members of the Board of Directors, and other key employees.
No options may be granted under this plan for less than the fair market value of
the Common stock at the date of the grant, except for certain non-employee
directors. Although the exercise period is determined when options are actually
granted, an option shall not be exercised later than ten years and one day after
it is granted. Stock options granted will terminate if the grantee's employment
terminates prior to exercise for reasons other than retirement, death, or
disability. Stock options vest over a four year period pursuant to the terms of
the plan, except for stock options granted to a non-employee director, which are
immediately vested.
Employees have been granted non-qualified stock options to purchase
118,000 shares of Class A Common stock, net of cancellations and exercises, at
prices ranging from $7.38 to $9.38 per share. Non-employee directors have been
granted non-qualified stock options to purchase 49,000 shares of Class A Common
stock, net of cancellations and exercises, at prices ranging from $6.20 to $9.00
per share. As of December 31, 1997, there were 110,625 options to purchase
shares granted to employees and non-employee directors which were exercisable
based upon the vesting terms, of which all shares had option prices less than
the December 31, 1997 closing price of $9.25. The following table summarizes
activity under the option plan:
Shares Option Price
- --------------------------------------------------------------------------------
Outstanding at December 31, 1994 160,500
Grants 15,000 $7.88 - $8.38
Exercises (1,250)
Cancellations (35,250)
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 139,000
Grants 48,500 $7.38 - $8.69
Exercises ------
Cancellations (12,000)
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 175,500
Grants 25,500 $6.20 - $9.38
Exercises ------
Cancellations (34,000)
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 167,000
<PAGE>
10. SPECIAL EMPLOYEE STOCK PURCHASE PLAN
In February of 1996, the Company adopted a Special Employee Stock
Purchase Plan ("Plan") under which an officer purchased 70,000 shares of Class A
Common stock from treasury stock at the then current market value price of
$560,000. Under the terms of the Plan, $56,000 was delivered to the Company and
a promissory note was executed in the amount of $504,000 bearing an interest
rate of five (5%) percent per annum due in 2003. Interest for 1997 was forgiven.
The Plan allows for repayment of the note using shares at $8.00 per share.
11. TREASURY STOCK
The Company's Board of Directors has approved the purchase of up to
250,000 shares of Class A Common stock for its Treasury at various dates and
market prices. As of December 31, 1997, 149,255 shares had been repurchased at
prices between $7.25 and $10.25 per share for a total of $1,266,000. In addition
to these purchases, the 22,660 shares tendered to the Company as a result of the
exercise of warrants (see Note 8) were placed in the Treasury at a value of
$190,000. On December 15, 1995, the Company's Board of Directors approved the
repurchase of 66,228 shares from a prior officer of the Company at a market
price of $8.00 per share totaling $530,000.
12. BENEFIT PLAN
The Company has a 401(k) Savings Plan covering substantially all
employees, which matches 25% of the employee contributions up to a designated
amount. The Company's contributions to the Plan were $38,000 in 1997, $27,000 in
1996, and $23,000 in 1995.
13. TRANSACTIONS WITH LYNCH
The Company pays Lynch an annual service fee of $100,000 for executive,
financial and accounting, planning, budgeting, tax, legal, and insurance
services. Additionally, Lynch charged the Company for officers' and directors'
liability insurance $16,000 in 1997, $15,000 in 1996, and $15,000 in 1995. As
discussed in Note 7, the Redeemable Preferred Stock owned by Lynch Corporation
was redeemed during 1995 at a discount.
The Company's Class A and Class B Common Stock owned by Lynch is
pledged to secure a Lynch Corporation line of credit.
14. LEASES
The Company leases certain land, buildings, computer equipment,
computer software, and motor equipment under non-cancelable operating leases
that expire in various years through 2002. Several land and building leases
contain monthly renewal options. Total rental expenses were $2,531,000 in 1997,
$2,087,000 in 1996, and $1,804,000 in 1995.
Future payments under non-cancelable operating leases with initial
terms of one year or more consisted of the following at December 31, 1997 (in
thousands):
1998 $1,732
1999 813
2000 260
2001 6
2002 1
--------------------------------------------
Total lease payments $2,812
============================================
15. ACQUISITIONS
Effective May 22, 1995, the Company purchased the assets of TDI, a
market leader in the driver outsourcing services business focusing on relocating
rental equipment for a total purchase price of $2,750,000. The acquisition was
financed through a payment of $1,000,000 on May 11, 1995, with the balance of
$1,725,000 financed with the seller over five years. The present value of the
acquisition was $2,462,000; $75,000 of which related to the operating assets
purchased and $2,387,000 to the purchase of intangible assets. In addition, the
Company entered into a consulting agreement with two of the principals from the
seller, pursuant to which the principals agreed to provide consulting services
to the Company for sixty-three months for consideration totaling $202,500,
payable over the consulting period. The book value of the promissory note in
this transaction was $914,000 at December 31, 1997.
<PAGE>
Effective December 30, 1996, the Company purchased the assets of
Transit Homes of America, Inc., a provider of outsourcing services to the
manufactured housing and specialized transport industries. The aggregate
purchase price was $4,417,000 which includes the cost of the acquisition and
certain limited liabilities assumed as part of the acquisition. The acquisition
was financed through available cash resources and issuance of a promissory note.
In addition, the Company entered into an employment agreement with the seller
which provides for incentive payments up to $300,000 and $200,000 in years 1998
and 1999, respectively, and $100,000 in each of the years 2000 and 2001. The
incentive payments are based upon achieving certain profit levels in the
Company's Manufactured Housing Group and will be treated as compensation expense
if earned. The excess purchase price over assets acquired was approximately
$4,091,000 and is being amortized over twenty years. In connection with the
acquisition, liabilities assumed were as follows (in thousands):
Fair value of assets acquired $326
Goodwill acquired 4,091
Cash paid (940)
Note issued due January 2, 1997 (697)
Note issued at acquisition date (1,158)
-------
Liabilities assumed $ 1,622
=======
16. CONTINGENCIES
The Company has general liabilities claims pending, incurred in the
normal course of business for which the Company maintains liability insurance
covering amounts in excess of its self-insured retention. Management believes
that adequate reserves have been established on its self-insured claims and that
their ultimate resolution will not have a material adverse effect on the
consolidated financial position, liquidity, or operating results of the Company.
17. SPECIAL CHARGES
In the fourth quarter of 1996, the Company recorded special charges of
$2,675,000 ($1,605,000 after tax) associated with exiting the truckaway
operation. The special charges were comprised principally of the anticipated
loss on sales of revenue equipment, projected losses through April 30, 1997, and
write-downs of accounts receivable and other assets. Additionally, the Company
recognized an adjustment to the carrying value of four properties of $825,000
($495,000 after tax).
A pretax special charge for 1997 of $624,000 ($412,000 after tax or
$0.16 per Class A and Class B share) is comprised of gains in excess of the
estimated net realizable value associated with exiting the truckaway operation
discussed above of $361,000, offset by charges related to driver pay. During
1997, management concluded that certain components of driver pay were being
accounted for on a cash basis. Accordingly, the Company recorded total charges
of $1.2 million ($985,000 in special charges and $215,000 as operating costs) in
the fourth quarter of 1997 to account for all components of driver pay on an
accrual basis. It is the opinion of management that the effects of this change
in accounting are immaterial to the results of operations of the previous years
presented.
<PAGE>
18. OPERATING COSTS AND EXPENSES (in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchased transportation costs $100,453 $ 92,037 $84,315
Operating taxes and licenses 7,284 6,460 6,052
Insurance 3,524 3,502 4,000
Claims 6,913 6,080 4,797
Dispatch costs 9,492 8,204 6,997
Regional costs 4,917 3,733 2,900
Repairs and maintenance 350 918 770
Other 799 1,304 577
- ------------------------------------------------------------------------------------------------
$133,732 $122,238 $110,408
================================================================================================
</TABLE>
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for the years ended December 31, 1997 and 1996 (in thousands, except share
data):
<TABLE>
<CAPTION>
1997 ----- Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues $33,633 $39,211 $38,290 $35,020
Operating income (loss) 431 1,286 1,251 (1,953)
Net income (loss) 266 699 705 (1,474)
Net income (loss) per common share:
Class A common stock
Basic 0.10 0.27 0.27 (0.55)
Diluted 0.10 0.27 0.26 (0.55)
Class B common stock
Basic 0.09 0.26 0.26 (0.56)
Diluted 0.09 0.26 0.25 (0.56)
</TABLE>
<TABLE>
<CAPTION>
1996 ----- Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues $30,506 $36,698 $35,305 $29,699
Operating income (loss) (48) 678 788 (4,681)
Net income (loss) 9 417 495 (2,991)
Net income (loss) per common share:
Class A common stock
Basic 0.01 0.16 0.19 (1.11)
Diluted 0.01 0.16 0.19 (1.11)
Class B common stock
Basic 0.00 0.15 0.18 (1.12)
Diluted 0.00 0.15 0.18 (1.12)
</TABLE>
In the fourth quarter of 1997, the Company recorded special charges of
$624,000 ($412,000 after tax, or $0.16 per Class A and Class B share). In the
fourth quarter of 1996, the Company recorded special charges of $3,500,000
($2,100,000 after taxes, or $0.78 per Class A and Class B share). See Note 17.
<PAGE>
Report of Independent Auditors
The Board of Directors
The Morgan Group, Inc.
We have audited the accompanying consolidated balance sheets of The Morgan
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in redeemable preferred stock,
common stocks and other shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Morgan Group,
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Greensboro, North Carolina
March 4, 1998, except for Note 4,
as to which the date is
March 25, 1998
<PAGE>
To the Shareholders and Board of Directors of
The Morgan Group, Inc.:
We have audited the accompanying consolidated statements of operations,
changes in redeemable preferred stock, common stocks and other shareholders'
equity and cash flows of The Morgan Group, Inc. (a Delaware Corporation) and
Subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
The Morgan Group, Inc. and Subsidiaries for the year ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
February 5, 1996
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the section entitled "Proposal One - Election of Directors" of the Company's
Proxy Statement for its 1998 Annual Meeting of Stockholders expected to be filed
with the Commission on or about April 30, 1998 (the "1998 Proxy Statement").
Item 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive
compensation is incorporated by reference to the section entitled "Management
Remuneration" of the 1998 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference to
the sections entitled "Voting Securities and Principal Holders Thereof" and
entitled "Proposal One - Election of Directors" of the 1998 Proxy
Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the section entitled "Certain Transactions with Related Persons" of the 1998
Proxy Statement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements are included in Item 8:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Change in Redeemable Preferred
Stock, Common Stocks and Other Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Reports of Independent Auditors
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
(a)(3) Exhibits Filed.
The exhibits filed herewith or incorporated by reference herein
are set forth on the Exhibit Index. Included in those exhibits
are management contracts and compensatory plans and arrangements
which are identified as Exhibits 10.1 through 10.10.
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the
quarter ending December 31, 1997.
(c) The exhibits filed herewith or incorporated by reference
herein are set forth on the Exhibit Index.
<PAGE>
Schedule II
The Morgan Group Inc. and Subsidiaries
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
-----------------------------------------------------------------------------------
Additions Amounts
Beginning Charged to Costs Written Off Ending
Description Balance and Expenses Net of Recoveries Balance
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997 $59,000 $336,000 $212,000 $183,000
Year ended December 31, 1996 $102,000 $244,000 $287,000 $59,000
Year ended December 31, 1995 $171,000 $184,000 $253,000 $102,000
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
THE MORGAN GROUP, INC.
Date: March 31, 1998 BY: /s/ Charles C. Baum
--------------------------------
Charles C. Baum, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 27th day of March, 1998.
1) Chief Executive Officer:
By: /s/ Charles C. Baum
-------------------------------
Charles C. Baum
2) Chief Financial Officer and
Chief Accounting Officer
By: /s/ Dennis R. Duerksen
-------------------------------
Dennis R. Duerksen
3) A Majority of the Board of Directors:
/s/ Charles C. Baum Director
-------------------------------
Charles C. Baum
/s/ Bradely J. Bell Director
-------------------------------
Bradley J. Bell
Director
-------------------------------
Richard B. Black
/s/ Frank E. Grzelecki Director
-------------------------------
Frank E. Grzelecki
/s/ Robert S. Prather, Jr. Director
-------------------------------
Robert S. Prather, Jr.
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- --------------------------------------------------------------------------------
3.1 Registrant's Restated Certificate of Incorporation, as
amended, is incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on Form S-1,
File No. 33-641-22, effective July 22, 1993.
3.2 Registrant's Code of By-Laws, as restated and amended,
is incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form S-1, File
No. 33-641-22, effective July 22, 1993.
4.1 Form of Class A Stock Certificate is incorporated by
reference to Exhibit 3.3 of the Registrant's
Registration Statement on Form S-1, File No. 33-641-22,
effective July 22, 1993.
4.2 Fourth Article - "Common Stock" of the Registrant's
Certificate of Incorporation, is incorporated by
reference to the Registrant's Certificate of
Incorporation, as amended, filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, File
No. 33-641-22, effective July 22, 1993.
4.3 Article II - "Meeting of Stockholders," Article VI -
"Certificate for Shares" and Article VII - "General
Provisions" of the Registrant's Code of By-Laws,
incorporated by reference to the Registrant's Code of
By-Laws, as amended, filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1, File
No. 33-641-22, effective July 22, 1993.
4.4 Loan Agreements, dated September 13, 1994, between the
Registrant and Subsidiaries and Society National Bank,
are incorporated by reference to Exhibit 4.4 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1994, filed November 15,
1994.
4.5 Amended and Restated Credit and Security Agreement,
effective March 25, 1998, among the Registrant, Morgan
Drive Away, Inc., TDI, Inc., Interstate Indemnity
Company and KeyBank National Association. _____
4.6 Revolving Credit Facility Agreement, effective March 27,
1997, among Morgan Drive Away, Inc., TDI, Inc.,
Interstate Indemnity Company and KeyBank National
Association is incorporated by reference to Exhibit
4.5(a) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, filed March 31,
1997.
4.7 Master Revolving Note, dated March 27, 1997, among
Morgan Drive Away, Inc., TDI, Inc., and Interstate
Indemnity Company to KeyBank National Association is
incorporated by reference to Exhibit 4.5(b) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed March 31, 1997.
4.8 Amended and Restated Revolving Credit Note, dated March
31, 1998, among Morgan Drive Away, Inc., TDI, Inc.,
Interstate Indemnity Company to KeyBank National
Association is incorporated by reference to Exhibit A to
the Amended and Restated Credit and Security Agreement,
effective March 25, 1998, among the Registrant, Morgan
Drive Away, Inc., TDI, Inc., Interstate Indemnity
Company and KeyBank National Association, filed herewith
as Exhibit 4.5.
4.9 Security Agreement, effective as of March 27, 1997,
between Morgan Drive Away, Inc. and KeyBank National
Association is incorporated by reference to Exhibit
4.5(c) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, filed March 31,
1997.
4.10 Absolute, Unconditional and Continuing Guaranty,
effective as of March 27, 1997, by the Registrant to Key
Bank National Association is incorporated by reference
to Exhibit 4.5(d) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, filed
March 31, 1997.
4.11 Amended and Restated Continuing Guaranty, effective as
of March 31, 1998, by the Registrant to KeyBank
National Association is incorporated by reference to
Exhibit D to the Amended and Restated Credit and
Security Agreement, effective March 25, 1998, among the
Registrant, Morgan Drive Away, Inc., TDI, Inc.,
Interstate Indemnity Company and KeyBank National
Association, filed herewith as Exhibit 4.5. _____
<PAGE>
10.1 The Morgan Group, Inc. Incentive Stock Plan is
incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1, File
No. 33-641-22, effective July 22, 1993.
10.2 First Amendment to the Morgan Group, Inc. Incentive
Stock Plan is incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1997, filed November 14,
1997.
10.3 Memorandum to Charles Baum and Philip Ringo from Lynch
Corporation, dated December 8, 1992, respecting Bonus
Pool, is incorporated by reference to Exhibit 10.2 to
the Registrant's Registration Statement on Form S-1,
File No. 33-641-22, effective July 22, 1993.
10.4 Term Life Policy from Northwestern Mutual Life Insurance
Company insuring Paul D. Borghesani, dated August 1,
1991, is incorporated by reference to Exhibit 10.4 to
the Registrant's Registration Statement on Form S-1,
File No. 33-641-22, effective July 22, 1993.
10.5 Long Term Disability Insurance Policy from Northwestern
Mutual Life Insurance Company, dated March 1, 1990, is
incorporated by reference to the Registrant's
Registration Statement on Form S-1, File No. 33-641-22,
effective July 22, 1993.
10.6 Long Term Disability Insurance Policy from CNA Insurance
Companies, effective January 1, 1998. _____
10.7 The Morgan Group, Inc. Employee Stock Purchase Plan, as
amended, is incorporated by reference to Exhibit 10.16
to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994, filed on March 30, 1995.
10.8 Consulting Agreement between Morgan Drive Away, Inc. and
Paul D. Borghesani, effective as of April 1, 1996, is
incorporated by reference to Exhibit 10.19 the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995, filed on April 1, 1996.
10.9 Employment Agreement between Morgan Drive Away, Inc. and
Terence L. Russell is incorporated by reference to
Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995, filed on
April 1, 1996.
10.10 Stock Purchase Agreement between Morgan Drive Away, Inc.
and Terence L. Russell is incorporated by reference to
Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995, filed on
April 1, 1996.
10.11 Asset Purchase Agreement, dated May 21, 1993, between
Registrant, Transamerican Carriers, Inc., Ruby and Billy
Davis and Morgan Drive Away, Inc., is incorporated by
reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1, File No. 33-641-22,
effective July 22, 1993.
10.12 Management Agreement between Skandia International and
Risk Management (Vermont), Inc. and Interstate Indemnity
Company, dated December 15, 1992, is incorporated by
reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1, File No. 33-641-22,
effective July 22, 1993.
10.13 Agreement for the Allocation of Income Tax Liability
between Lynch Corporation and its Consolidated
Subsidiaries, including the Registrant (formerly Lynch
Services Corporation), dated December 13, 1988, as
amended, is incorporated by reference to Exhibit 10.13
the Registrant's Registration Statement on Form S-1,
File No. 33-641-22, effective July 22, 1993.
10.14 MCI Corporate Service Agreement, dated December 12,
1994, between MCI Telecommunications Corporation and
Morgan Drive Away, Inc., is incorporated by reference to
Exhibit 10.17 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994, filed on
March 30, 1995.
10.15 First Amendment to MCI Corporate Service Plan and other
service agreements dated May 7, 1996 and September 30,
1997. _____
<PAGE>
10.16 Certain Services Agreement, dated January 1, 1995,
between Lynch Corporation and the Registrant is
incorporated by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994, filed on March 30, 1995.
10.17 Asset Purchase Agreement for Transfer Drivers Inc. and
List of Schedules is incorporated by reference to
Exhibit 10.22 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995, filed on
April 1, 1996.
10.18 Asset Purchase Agreement between Registrant and Transit
Homes of America, Inc., dated as of November 19, 1996,
as amended as of December 30, 1996, is incorporated by
reference to Exhibit (2)-1 to the Registrant's Form 8-K
filed January 14, 1997.
10.19 Amendment to Asset Purchase Agreement between Registrant
and Transit, Inc., dated as of December 29, 1996 is
incorporated by reference to Exhibit (2)-2 to the
Registrant's Form 8-K filed January 14, 1997.
11 Statement Re: Computation of Per Share Earnings _____
21 Subsidiaries of the Registrant _____
23.1 Consent of Arthur Andersen LLP _____
23.2 Consent of Ernst & Young LLP _____
27.1 Financial Data Schedule (1997) _____
27.2 Restated Financial Data Schedule (1996) _____
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
THIS AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT ("Agreement")
is made as of the 25th day of March, 1998, by and among KEYBANK NATIONAL
ASSOCIATION, a national banking association (the "Bank"), with an office at 127
Public Square, Cleveland, Ohio 44114; MORGAN DRIVE AWAY, INC., an Indiana
corporation with offices at 2746 Old U.S. Route 20 West, Elkhart, Indiana 46515
("Morgan"); TDI, INC., an Indiana corporation with offices at 2746 Old U.S.
Route 20 West, Elkhart, Indiana 46515 ("TDI") and INTERSTATE INDEMNITY COMPANY,
a Vermont corporation with offices at 2746 Old U.S. Route 20 West, Elkhart,
Indiana 46515 ("Interstate" and, collectively with Morgan and TDI, the
"Borrowers", with each being a "Borrower"); and THE MORGAN GROUP, INC., a
Delaware corporation with offices at 2746 Old U.S. Route 20 West, Elkhart,
Indiana 46515 ("Group").
R E C I T A L S:
A. The Borrowers and the Bank are the parties to that certain Revolving
Credit Facility Agreement dated March 27, 1997 (as amended by a First Amendment
thereto dated March 6, 1998, the "Original Credit Agreement").
B. The Borrowers' loan indebtedness to the Bank pursuant to the
Original Credit Agreement, is evidenced by a Master Revolving Note dated March
27, 1997 and amended March 6, 1998 in the principal amount of $13,000,000 (the
"Existing Revolving Loans"), and such loan indebtedness, together with all of
the Borrowers' other indebtedness and obligations to the Bank, is secured by the
Security Agreements of Morgan and TDI in favor of the Bank and dated March 27,
1997 (collectively, as amended, the "Existing Security Agreements").
C. The Borrowers have requested the Bank to increase the aggregate
principal amount of loans available to the Borrowers, to extend the maturity of
such indebtedness to the Bank and to amend and restate the terms and conditions
of the Original Credit Agreement.
D. Subject to the terms and conditions hereinafter set forth, the Bank
has indicated its willingness to increase such availability, to extend said
maturity and amend and restate the Original Credit Agreement.
E. In addition to the foregoing, from time to time the Borrowers may
request the Bank to issue letters of credit on behalf of some or all of the
Borrowers; however, the Bank has made no commitment to do so.
<PAGE>
F. None of the Borrowers' indebtedness and obligations in respect of
the Existing Revolving Loans outstanding as of the date hereof shall be deemed
repaid or otherwise satisfied upon the execution and closing of the transactions
contemplated by this Agreement; but, instead, the loans hereunder are and shall
be deemed to be the same indebtedness as that of the Borrowers under the
Existing Revolving Loans.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, and of any extension of credit heretofore, now or hereafter made by the
Bank to or for the benefit of the Borrowers and Group, the parties hereto hereby
agree that the Original Credit Agreement and the Existing Security Agreements
are hereby amended and restated in their entirety to provide as follows:
1. GENERAL DEFINITIONS
When used herein, the following terms shall have the following
meanings:
Account(s): Account(s) and any other right to payment for goods sold or
leased or for services rendered which is not a General Intangible or evidenced
by an Instrument, Document or Chattel Paper, whether or not it has been earned
by performance, and includes, without limitation, all rights to payment earned
or unearned under a charter or other contract involving the use or hire of a
vessel and all rights incident to the charter or contract.
Account Debtor: Any Person who, or any of whose property, shall at the
time in question be obligated in respect of all or any part of a Receivable or
any part thereof and includes, without limitation, co-makers, indorsers,
guarantors, pledgors, hypothecators, mortgagors, and any other Person who
agrees, conditionally or otherwise, to make any loan to, purchase from, or
investment in, any other Account Debtor or otherwise assure or guaranty against
loss on any Receivable in which a Borrower now has or hereafter acquires any
rights.
Adjusted LIBOR: A rate per annum equal to the quotient obtained
(rounded upwards, if necessary, to the nearest 1/100th of 1%) by dividing (i)
the applicable LIBOR rate by (ii) 1.00 minus the Reserve Percentage, and which
Adjusted LIBOR shall be automatically adjusted on and as of the effective date
of any change in the Reserve Percentage.
<PAGE>
Affiliate: When used with reference to any Person (the "subject"), a
Person that is in control of, under the control of, or under common control
with, the subject, the term "control" meaning the possession, directly or
indirectly, legally or beneficially, of the power to direct the management or
policies of a Person, whether through the ownership of voting securities, by
contract, or otherwise. For the purposes of this Agreement, and without limiting
the generality of the foregoing, any holder of Stock in a Borrower or their
parent, Group, shall be deemed to be an Affiliate of a Borrower.
Annualized EBIT: As of the end of any fiscal quarter, EBIT for such
fiscal quarter, plus EBIT for the three (3) immediately preceding fiscal
quarters; provided, however, that (i) as at the end of the fiscal quarter ending
June 30, 1998 only, Annualized EBIT shall be deemed to mean EBIT for such fiscal
quarter, plus EBIT for the immediately preceding fiscal quarter, and (ii) as at
the end of the fiscal quarter ending September 30, 1998 only, Annualized EBIT
shall be deemed to mean EBIT for such fiscal quarter, plus EBIT for the two (2)
immediately preceding fiscal quarters.
Annualized Interest Expense: As of the end of any fiscal quarter, the
aggregate of Consolidated interest expense (including without limitation, that
attributable to capitalized leases in accordance with GAAP) on all Funded Debt,
on a Consolidated basis, for such fiscal quarter, plus Consolidated interest
expense for the three (3) immediately preceding fiscal quarters; provided,
however, that (i) as at the end of the fiscal quarter ending June 30, 1998 only,
Annualized Interest Expense shall be deemed to mean Consolidated interest
expense for such fiscal quarter, plus Consolidated interest expense for the
immediately preceding fiscal quarter, and (ii) as at the end of the fiscal
quarter ending September 30, 1998 only, Annualized Interest Expense shall be
deemed to mean Consolidated interest expense for such fiscal quarter, plus
Consolidated interest expense for the two (2) immediately preceding fiscal
quarters.
<PAGE>
Bank Debt: Collectively, all Debt of the Borrowers to the Bank, whether
incurred directly to the Bank or acquired by it by purchase, pledge, or
otherwise, and whether participated to or from the Bank in whole or in part,
including, without limitation, the Borrowers' Debt to the Bank in respect of
letters of credit from time to time issued for a Borrower and any reimbursement
agreement in connection therewith, interest, charges, expenses, attorneys' fees
and other sums chargeable to the Borrowers by the Bank and future advances made
to or for the benefit of a Borrower, whether arising under this Agreement, under
any of the Other Agreements or acquired by the Bank from any other source,
whether evidenced by the Revolving Note or any other instrument, or any note or
instrument in modification, replacement, supplement or substitution thereof,
whether heretofore, now or hereafter owing, arising, due or payable from any
Borrower to the Bank and howsoever evidenced, created, incurred, acquired or
owing, whether primary, secondary, direct, contingent, fixed or otherwise,
including obligations of performance.
Banking Day: Any day of the week, other than Saturday or Sunday, on
which the Bank is open for business in Cleveland, Ohio; provided, however, that,
when used in connection with a LIBOR Loan (other than in the definition of LIBOR
Margin), "Banking Day" shall mean any such day on which banks are open for
dealings in or quoting deposit rates for dollar deposits in the London interbank
market.
Basis Point: One one-hundredth of one percent (0.01%) per annum.
Borrowing Base: At any time and from time to time, an amount equal to
eighty percent (80%) of the sum of (i) the aggregate face value of the
Borrowers' Eligible Accounts at such time, plus (ii) the amount equal to the
remainder of (a) the In Transit Amount at such time, minus (b) the Eligible
Reserve at such time.
Change in Control: After the Closing Date, (i) the acquisition by any
Person or group of Persons (within the meaning of Section 13 or 14 of the
Securities Exchange Act of 1934, as amended), of beneficial ownership (within
the meaning of Rule 13d-3 of the Securities and Exchange Commission under such
Act) or control of __% or more of the outstanding shares of the Stock (on a
fully diluted basis) of any Obligor or (b) during any period of twelve (12)
consecutive calendar months, the ceasing of individuals who were directors of
Group on the first day of such period to constitute a majority of the board of
directors of Group.
Charges: As defined in Section 6.1(D).
Chattel Paper: A writing or writings (other than a charter or other
contract involving the use or hire of a vessel) which evidence both a monetary
obligation and a security interest in or a lease of specific goods, and, when a
transaction is evidenced both by such a security agreement or lease and by an
Instrument or series of Instruments, the group of writings taken together
constitutes Chattel Paper.
Closing Date: As defined in Section 3.3.
Collateral: All of the property and interests in property described in
Section 5.1 and all other property and interests in property which shall, from
time to time, secure the Bank Debt, including, without limitation, the Accounts
and other Receivables, the General Intangibles, the Inventory, and the
Equipment.
<PAGE>
Consolidated: Group and its Subsidiaries, including, without
limitation, the Borrowers, taken as a whole.
Consolidated Net Worth: The excess of the net book value of Group's
Consolidated assets over all of Group's Consolidated liabilities, as determined
on an accrual basis and in accordance with GAAP.
Controlled Group: All members of a controlled group of corporations and
all trades or businesses (whether or not incorporated), if any, under common
control which, together with a Borrower, are treated as a single employer under
Section 414(b) or 414(c) of the Internal Revenue Code of 1986, as amended.
Debt: Collectively, all liabilities, indebtedness and other obligations
of the Person or Persons in question, including, without limitation, every such
obligation whether owing by one such Person alone or with one or more other
Persons in a joint, several, or joint and several capacity, whether now owing or
hereafter arising, whether owing absolutely or contingently, whether created by
lease, loan, overdraft, guaranty of payment, or other contract, or by
quasi-contract, tort, statute, other operation of law, or otherwise. Without in
any way limiting the generality of the foregoing, Debt of an Obligor
specifically includes (i) all obligations or liabilities of any Person that are
secured by any Lien upon property owned by such Obligor, even though such
Obligor has not assumed or become liable for the payment thereof; (ii) all
obligations or liabilities created or arising under any lease of real or
personal property, or conditional sale or other title retention agreement in
respect of property used and/or acquired by such Obligor, even though the rights
and remedies of the lessor, seller and/or lender thereunder are limited to
repossession of such property; (iii) all unfunded pension fund obligations and
liabilities; and (iv) deferred taxes.
Debt Service: For any period, the sum of all interest, principal, fees
and other charges, if any, including the current maturities thereof, due and
payable by an Obligor during such period on Funded Debt.
Default Interest Rate: As defined in Section 8.4.
<PAGE>
Document: (a) A document that purports to be issued by or addressed to
a bailee and that purports to cover goods that are in the bailee's possession
that are either identified or fungible portions of an identified mass, and
includes a bill of lading, dock warrant, dock receipt, warehouse receipt, or
order for the delivery of goods, and any other document that in the regular
course of business or financing is treated as adequately evidencing that the
Person in possession of it is entitled to receive, hold, and dispose of the
document and the goods it covers or (b) a receipt issued by the owner of goods
including distilled spirits or agricultural commodities that are stored under a
statute requiring a bond against withdrawal or a license for the issuance of
receipts in the nature of a warehouse receipt
EBIT: For any period, net income of Group and its Subsidiaries on a
Consolidated basis determined in accordance with GAAP but (i) before deduction
for interest expense on all Funded Debt, (ii) before provision for taxes based
on income, if any, and (iii) excluding the effect of any (a) non-recurring,
non-cash gains and (b) gains and losses from the sale or other disposition of
assets, other than Inventory in the ordinary course of business.
Eligible Accounts: Those Accounts determined by the Bank to be Eligible
Accounts as provided in Section 4.1.
Eligible Reserve: As of any date on which a Borrowing Base certificate
or report of Accounts is delivered to the Bank that portion of those Accounts
included in the In Transit Amount contained in such certificate or report which,
in the Borrowers' reasonable and prudent judgment based upon the Borrowers'
experience with Accounts of such type (but at all times subject to the approval
of the Bank in its sole discretion) are out of period (i.e., as to which, on
such delivery date, the applicable transportation services have not been
completed, necessary Documents in respect thereof have not been delivered, or
both) and which were identified in the Borrower's Borrowing Base Certificate or
report of Accounts (as required by Section 7.1(B)(iv) hereof) as of the end of
the immediately preceding month.
Equipment: All goods that (a) are used or bought for use primarily in
business, including, without limitation, farming or a profession, or by a Person
who is a non-profit organization or a governmental subdivision or agency or (b)
are not Inventory, farm products, or consumer goods, it being the intention that
the term Equipment include, without limitation, machinery, equipment, tools,
furniture, furnishings and fixtures, including, but not limited to, all
manufacturing, fabricating, processing, transporting and packaging equipment,
power systems, heating, cooling and ventilating systems, lighting and
communication systems, fire prevention, alarm and security systems, laundry
systems, and computing and data processing systems.
ERISA: Title IV of the Employee Retirement Income Security Act of 1974,
as amended.
Eurocurrency Liabilities: As that term is defined in Regulation D of
the Board of Governors of the Federal Reserve System, as in effect from time to
time.
<PAGE>
Event of Default: As defined in Section 8.1.
Existing Revolving Loans: As defined in Recital B, above.
Existing Security Agreements: As defined in Recital B above.
Fed Funds Rate: For any period, a fluctuating interest rate per annum
equal for each day during such period to the weighted average of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by federal funds brokers, as published for such day (or, if such day is
not a Banking Day, for the next preceding Banking Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Banking Day, the average of the quotations for such day on such transactions
received by the Bank from three (3) federal funds brokers of recognized standing
selected by it.
Financials: Those financial statements of Borrowers listed on Schedule
1A hereto, all of which financial statements have been delivered to the Bank in
connection with its review of the Borrowers' request for credit.
Funded Debt: With respect to any Person, without duplication, (a)
obligations for money borrowed including, without limitation, all capitalized
leases, notes payable, drafts accepted representing extensions of credit,
obligations evidenced by bonds, debentures, notes or other similar instruments,
and obligations upon which interest charges are customarily paid or discounted,
(b) obligations to pay the deferred purchase price of property or services, (c)
obligations secured by any Lien on the properties or assets of the Person, (d)
obligations of such Person in respect of currency or interest rate swap or
comparable transactions and (e) obligations under direct or indirect guaranties
in respect of, and obligations (contingent or otherwise) to purchase or
otherwise acquire, or otherwise to assure a creditor against loss in respect of,
indebtedness or obligations of others of the kinds referred to in clauses (a)
through (d) above, the amount of which indebtedness or obligation under this
clause (e) shall be deemed to be an amount equal to the stated or determinable
amount of such primary obligation, or if less, the maximum amount of such
primary obligation for which such Person may be liable, or if not stated or
determinable, the maximum reasonably anticipated in respect thereof (assuming
such Person is required to perform thereunder).
GAAP: Generally accepted accounting principles as from time to time in
effect which shall include the official interpretations thereof by the Financial
Accounting Standards Board or any successor accounting authority of comparable
standing, consistently applied.
<PAGE>
General Intangible: Any personal property, including things in action,
other than goods, Accounts, Chattel Paper, Documents, Instruments, money, and
all other contract rights, choses in action, causes of action, company or other
business records, inventions, designs, patents, patent applications, trademarks,
trade names, trade secrets, good will, copyrights, registrations, licenses,
franchises, permits, tax claims, computer programs, and any guarantee claims,
security interests or other security held by or granted to a Borrower to secure
payment by an Account Debtor of any of the Accounts and all other intangible
personal property of every kind and nature whatsoever. All licenses, patents,
patent applications, copyrights, trademarks and trade names now owned by the
Borrowers which, as of the date hereof, shall serve as Collateral are listed on
Schedule 1B hereto.
Guaranty: As defined in Section 3.1(Q).
In Transit Amount: As of any date during a month, an amount equal to
the lesser of (i) the aggregate amount of Accounts for transportation services
of a Borrower which the Borrowers have included in their Borrowing Base
certificate or report of Accounts (as required by Section 7.1(B)(iv) hereof) as
of the end of the immediately preceding month, which otherwise meet all of the
criteria to be Eligible Accounts, but as to which, although transportation
services in respect thereof were commenced to be performed as of such month end,
not all such transportation services were completed as of such month end or, if
such services were completed as of such month end, not all necessary Documents
were received as of such month end by such Borrower or (ii) $3,500,000.
Instrument: A negotiable instrument, or a certificated security, or any
other writing which evidences a right to the payment of money and is not itself
a security agreement or lease and is of a type which is in the ordinary course
of business transferred by delivery with any necessary indorsement or
assignment.
Interest Coverage Ratio: As of any date, the ratio of (i) Annualized
EBIT as of such date to (ii) Annualized Interest Expense as of such date.
<PAGE>
Interest Period: For each LIBOR Loan, the period commencing on the date
of such LIBOR Loan or the date of the Rate Conversion or Rate Continuation of a
Revolving Loan into such LIBOR Loan and ending on the numerically corresponding
day of the period selected by the Borrowers pursuant to the provisions hereof
and each subsequent period commencing on the last day of the immediately
preceding Interest Period in respect of such Revolving Loan and ending on the
last day of the period selected by the Borrowers pursuant to the provisions
hereof. The duration of each such Interest Period shall be one (1), two (2),
three (3) or six (6) months, in each case as the Borrowers may select, upon
delivery to the Bank of a notice therefor in accordance with this Agreement;
provided, however, that:
(i) no Interest Period may end on a date later than the
Revolving Facility Termination Date;
(ii) if there is no such numerically corresponding day in
the month that is such, as the case may be, first,
second, third or sixth month after the commencement
of an Interest Period, such Interest Period shall end
on the last day of such month; and
(iii) whenever the last day of any Interest Period in
respect of a LIBOR Loan would otherwise occur on a
day other than a Banking Day, the last day of such
Interest Period shall be extended to occur on the
next succeeding Banking Day; provided, however, that
if such extension would cause the last day of such
Interest Period to occur in the next following
calendar month, the last day of such Interest Period
shall occur on the immediately preceding Banking Day.
Inventory: Goods that are held by a Person who holds them for sale or
lease or to be furnished under contracts of service or if that Person has so
furnished them, or if they are parts, supplies, raw materials, work in process,
or materials used or consumed in a business, repossessed goods, returned goods
and goods in transit, except that Inventory does not include Equipment.
Leverage Ratio: As of any date, the percentage equivalent of the number
resulting from dividing (i) the amount of Consolidated Funded Debt on such date
by (ii) an amount equal to the sum of (a) the amount of Consolidated Funded Debt
on such date, plus (b) Consolidated Net Worth on such date.
<PAGE>
LIBOR: With respect to any LIBOR Loan for any Interest Period, the per
annum rate of interest, determined by the Bank in accordance with its usual
procedures (which determination shall be conclusive absent manifest error) as of
approximately 11:00 A.M. (London time) two (2) Banking Days prior to the
beginning of such Interest Period pertaining to such LIBOR Loan, appearing on
page 3750 of the Telerate Service (or any successor to or substitute page of
such Service, or any successor to or substitute for such Service providing rate
quotations comparable to those currently provided on such page of such Service,
as determined by the Bank from time to time for purposes of providing quotations
of interest rates applicable to dollar deposits in the London interbank market)
as the rate in the London interbank market for dollar deposits in immediately
available funds with a maturity comparable to such Interest Period. In the event
that such a rate quotation is not available for any reason, then the rate shall
be the rate, determined by the Bank as of approximately 11:00 A.M. (London time)
two (2) Banking Days prior to the beginning of such Interest Period pertaining
to such LIBOR Loan, to be the average (rounded upwards, if necessary, to the
nearest one sixteenth of one percent (1/16th of 1%) of the per annum rates of
interest at which dollar deposits in immediately available funds approximately
equal in principal amount to such LIBOR Loan and for a maturity comparable to
the Interest Period are offered to the Reference Bank by prime banks in the
London interbank market.
LIBOR Loan: Those Revolving Loans described in Sections 2.1(A) and 2.3
hereof on which the Borrowers shall pay interest at a rate based on LIBOR.
LIBOR Margin: (a) Until five (5) Banking Days (or such lesser period as
the Bank may determine in its discretion) after the Borrowers have delivered to
the Bank the Consolidated financial statements and related certificates in
respect of the fiscal year ending December 31, 1998 pursuant to Section 7.1(B),
below, one hundred sixty-five (165) Basis Points, and (b) thereafter, at such
time(s), and from time to time, as Interest Coverage Ratio as at the end of the
immediately preceding fiscal quarter (commencing with the fiscal quarter ending
December 31, 1998) is any of the following ratios, the number of Basis Points
set forth opposite such ratio:
Interest Coverage Ratio LIBOR Margin
Less than 3.00 to 1 LIBOR Loans not available
Equal to or greater than 3.00 to
1 and less than 3.50 to 1 One hundred fifty (150)
Basis Points
Equal to or greater than 3.50 to
1 and less than 4.50 to 1 One hundred twenty-five
(125) Basis Points
Equal to or greater than 4.50 to 1 One hundred (100) Basis
Points.
<PAGE>
Decreases in the LIBOR Margin shall be made effective five (5) Banking Days (or
such lesser period as the Bank may determine in its discretion) after the Bank's
receipt of the Obligors' financial statements and related certificates pursuant
to Section 7.1(B), below,; increases in the LIBOR Margin shall be made effective
as of the earlier of (i) five (5) Banking Days (or such lesser period as the
Bank may determine in its discretion) after the Bank's receipt of the Obligors'
financial statements and related certificates pursuant to Section 7.1(B), below,
or (ii) the date on which such statements are due to be delivered to the Bank
pursuant to said Section.
LIBOR Prepayment Compensation Rate: As defined in Section 2.8, below.
Lien: Any mortgage, pledge, assignment, lien, claim, charge,
encumbrance, or security interest of any kind, or the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement.
Lock box Agreement: As defined in Section 5.9(D).
Maximum Commitment: Fifteen Million Dollars ($15,000,000), as such
amount may from time to time be reduced pursuant to Section 2.5, below.
Maximum Revolving Credit: At any time and from time to time, the lesser
of (i) the Maximum Commitment or (ii) the Borrowing Base at such time.
Multiemployer Plan: A "multiemployer plan" as defined in Section
4001(a)(3) of ERISA, under which a Borrower is an employer.
Obligors: Collectively, Morgan, TDI, Interstate, and Group, each being
an "Obligor".
Original Credit Agreement: As defined in Recital A, above.
Other Agreements: The Revolving Note, the Guaranty, subordination or
intercreditor agreements, patent and trademark security agreements and all
Supplemental Documentation and all other documents or writings executed by or on
behalf of any Obligor or delivered to the Bank in connection with the
transaction contemplated hereby.
PBGC: Pension Benefit Guaranty Corporation or any governmental entity
succeeding to the functions thereof.
Permitted Encumbrances: As defined in Section 6.1(B).
Person: Any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, entity, party, or government (whether national,
federal, state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency body or department thereof).
<PAGE>
Plan: Any employee pension benefit plan subject to ERISA established or
maintained by a Borrower or any member of the Controlled Group, or any such Plan
to which such Borrower or any member of the Controlled Group is required to
contribute on behalf of any of its employees.
Possible Default: Any event, situation or thing which, with the lapse
of any applicable grace period or the giving of notice or both, would constitute
an Event of Default and which has not been consented to by the Bank in writing.
Prepayment LIBOR: As defined in Section 2.8, below.
Previous Minimum: As at the end of any fiscal quarter, the minimum
Consolidated Net Worth required to be maintained by the Obligors as at the end
of the immediately preceding fiscal quarter pursuant to the provisions of
Section 7.2(G), below.
Prime Rate: The higher of (i) the per annum rate equal to the Fed Funds
Rate plus one hundred fifty (150) Basis Points or (ii) that variable interest
rate established from time to time by the Bank as the Bank's Prime Rate (or
equivalent rate otherwise named), whether or not such rate is publicly
announced; the Prime Rate may not necessarily be the lowest interest rate
charged by Bank for commercial or other extensions of credit.
Prime Rate Loans: Those loans described in Sections 2.1(A) and 2.3
hereof on which the Borrowers shall pay interest at the rate based on the Prime
Rate.
Proceeds: Whatever is received or receivable upon sale, exchange,
collection, or other disposition of any property (including, without limitation,
Collateral) or Proceeds, whether directly or indirectly, and includes, without
limitation, the proceeds of any casualty, liability, or title insurance relating
to any such property and any goods or other property returned after any such
sale, exchange, collection, or other disposition.
Products: Property directly or indirectly resulting from any
manufacturing, processing, assembling, or commingling of any goods.
Quarterly Increase: As at the end of any fiscal quarter, the greater of
(i) an amount equal to fifty percent (50%) of Consolidated net income for such
quarter determined in accordance with GAAP or (ii) zero dollars ($0).
Rate Continuation: A continuation of a LIBOR Loan having a particular
Interest Period as a LIBOR Loan having an Interest Period of the same duration
pursuant to Section 2.1(B) hereof.
<PAGE>
Rate Conversion: A conversion pursuant to Section 2.1(B) of a Revolving
Loan of one Type into a Revolving Loan of another Type and, with respect to
LIBOR Loans, from one permissible Interest Period to another permissible
Interest Period.
Rate Conversion/Continuation Request: A request for Rate Conversion or
Rate Continuation made pursuant to Section 2.1(B).
Receivable: Any claim for or right to payment, however arising, whether
classified as an Account, a General Intangible, or otherwise, whether contingent
or fixed, whether or not evidenced by any writing, and, if so evidenced, whether
evidenced by Chattel Paper, one or more Instruments, or otherwise.
Reference Bank: The Cayman Islands branch office of the Bank.
Regulatory Change: As to the Bank, any change in United States federal,
state or foreign laws or regulations or the adoption or making of any
interpretations, directives or requests of or under any United States federal,
state or foreign laws or regulations (whether or not having the force of law) by
any court or governmental authority charged with the interpretation or
administration thereof.
Request: Any of the borrowing request for a Revolving Loan described in
Section 2.1(A), below., or a Rate Conversion or Rate Continuation Request.
Reserve Percentage: For any day, that percentage (expressed as a
decimal) which is in effect on such day, as prescribed by the Board of Governors
of the Federal Reserve System (or any successor) for determining the maximum
reserve requirement (including, without limitation, all basic, supplemental,
marginal and other reserves and taking into account any transitional adjustments
or other scheduled changes in reserve requirements) for a member bank of the
Federal Reserve System in Cleveland, Ohio, in respect of "Eurocurrency
Liabilities".
Revolving Credit Facility: As defined in Section 2.1(A).
Revolving Facility Termination Date: As defined in Section 2.1(E).
Revolving Loan(s): As defined in Section 2.1(A).
Revolving Note: As defined in Section 2.1(D).
Special Collateral: As defined in Section 5.2.
<PAGE>
Stock: All shares, options, membership interests, partnership
interests, participation or other equivalents or equity interests (howsoever
designated) of or in, as the case may be, a corporation or a limited liability
company, whether voting or non-voting, including without limitation, warrants,
convertible debentures and all agreements, instruments and documents
convertible, in whole or in part, into any one or more or all of the foregoing.
Subordinated Debt: That portion of the Debt of an Obligor which is
subordinated in a manner satisfactory in form and substance to the Bank as to
right and time of payment of principal and interest thereon to any and all of
the Bank Debt.
Subsidiary: Any corporation, limited liability company, partnership,
entity or other Person of which more than 50% of the outstanding capital Stock
having ordinary voting power to vote for directors of such Person (irrespective
of whether, at the time, stock of any other class or classes of such Person
shall have or might have voting power by reason of the happening of any
contingency) is at the time, directly or indirectly, owned by a Person and/or
one or more Subsidiaries of such Person.
Supplemental Documentation: Agreements, instruments, documents,
certificates of title, financing statements, warehouse receipts, bills of
lading, notices of assignment of accounts, schedules of accounts assigned,
mortgages and other written matter necessary or requested by the Bank to perfect
and maintain perfected the Bank's Liens in the Collateral.
Type: When used in respect of any Revolving Loan, LIBOR or Prime Rate
as applicable to such Revolving Loan.
Other Terms. Other terms contained in this Agreement shall, unless the
context indicates otherwise, have the meanings provided for by the Uniform
Commercial Code (the "Code") of the State of Ohio to the extent the same are
used or defined therein. Any accounting terms used in this Agreement which are
not specifically defined herein shall have the meanings customarily given such
terms in accordance with GAAP. The terms "fiscal year" and "fiscal quarter"
shall refer to the fiscal year of the Obligors ending December 31 of each year
and the quarters thereof ending March 31, June 30, September 30 and December 31
of each year. Unless otherwise expressly stated, all references to a time of day
shall be deemed to mean Cleveland, Ohio time.
2. LOANS: GENERAL TERMS
2.1. Revolving Credit; Revolving Note.
<PAGE>
(A) Advance of Loans. Subject to the terms and conditions of this
Agreement, on the Closing Date the terms and conditions of the Original Credit
Agreement and the Existing Security Agreements shall be amended and restated in
their entirety to provide for an amended and restated revolving credit facility
(the "Revolving Credit Facility") under which, subject to the terms and
conditions hereof, the Bank shall, from time to time, upon written or oral
(confirmed promptly in writing) request of a Borrower therefor, advance loans to
one or more of the Borrowers (each a "Revolving Loan" and, collectively, the
"Revolving Loans") in the maximum aggregate principal amount at any time
outstanding of not more than the Maximum Revolving Credit. The Borrowers'
requests for Revolving Loans shall be in form and content from time to time
prescribed by the Bank and shall be delivered to the Bank not later than 12:00
noon of the Banking Day on which a Prime Rate Loan is to be advanced and not
later than 12:00 noon three (3) Banking Days prior to the Banking Day on which a
LIBOR Loan is to be advanced. Unless otherwise requested by a Borrower in
writing (and approved by the Bank), all Revolving Loans shall be advanced into
demand deposit account No. ___________, maintained by the Borrowers at an office
of the Bank designated by the Bank and reasonably satisfactory to Borrowers.
Subject to the terms and conditions set forth in this Agreement, the Borrowers
shall have the option to request Revolving Loans comprised of (i) Prime Rate
Loans maturing on or before the Revolving Facility Termination Date, in
aggregate amounts of not less than One Hundred Thousand Dollars ($100,000) or
(ii) LIBOR Loans in aggregate amounts of not less than Two Hundred Fifty
Thousand Dollars ($250,000). Subject to the terms and conditions of this
Agreement, the Borrowers may, during the term of the Revolving Credit Facility,
repay and reborrow the Revolving Loans advanced thereunder.
(B) Rate Conversion and Continuation. The Borrowers shall have the
right to cause a Rate Conversion or Rate Continuation in respect of Revolving
Loans then outstanding, upon request delivered by the Borrowers to the Bank not
later than 12:00 noon (i) on the day which is the Banking Day that the Borrowers
desire to convert any LIBOR Loans into a Prime Rate Loan, (ii) on the day that
is three (3) Banking Days prior to the Banking Day upon which the Borrowers
desire to convert any Prime Rate Loan into a LIBOR Loan for a given Interest
Period, (iii) on the day which is three (3) Banking Days prior to the Banking
Day upon which the Borrowers desire to continue any LIBOR Loan as a LIBOR Loan
for an additional Interest Period of the same duration, (iv) on the day which is
three (3) Banking Days prior to the Banking Day upon which the Borrowers desire
to convert any LIBOR Loan having a particular Interest Period into a LIBOR Loan
having a different permissible Interest Period, provided, however, that each
such Rate Conversion or Rate Continuation shall be subject to the following:
<PAGE>
(1) if less than all the outstanding principal amount of a
Revolving Loan is converted or continued, the aggregate principal
amount of such Revolving Credit Loans converted or continued shall be,
(i) in the case of LIBOR Loans, not less than Two Hundred Fifty
Thousand Dollars ($250,000), and (ii) in the case of Prime Rate Loans,
not less than One Hundred Thousand Dollars ($100,000);
(2) each Rate Conversion or Rate Continuation shall be
effected by the Bank's applying the proceeds of the Revolving Loan
resulting from such Rate Conversion or Rate Continuation to the
Revolving Loan being converted or continued, as the case may be, and
the accrued interest on any such Revolving Loan (or portion thereof)
being converted or continued shall be paid to the Bank by the Borrowers
at the time of such Rate Conversion or Rate Continuation;
(3) LIBOR Loans may not be converted or continued at a time
other than the end of the Interest Period applicable thereto unless the
Borrowers shall pay, upon demand, any amounts due to the Bank pursuant
to Section 2.8;
(4) Revolving Loans may not be converted into or continued as
LIBOR Loans (a) at any time during which an Event of Default exists
(provided that this clause shall not be construed to limit any other
right or remedy of the Bank) or (b) less than one month prior to the
Revolving Facility Termination Date or for an Interest Period which
would continue after the Revolving Facility Termination Date;
(5) any LIBOR Loan that cannot be converted into or continued
as a LIBOR Loan by reason of clause (4) shall be automatically
converted at the end of the Interest Period in effect for such LIBOR
Loan into a Prime Rate Loan.
<PAGE>
Each such request for a conversion or continuation (a "Rate
Conversion/Continuation Request") in respect of a Revolving Loan shall be
transmitted by the Borrowers to the Bank, by telecopier, telex or cable (in the
case of telex or cable, confirmed in writing prior to the effective date of the
Rate Conversion or Rate Continuation requested), in form and content prescribed
by the Bank, specifying (i) the identity and amount of the Revolving Loan that
the Borrowers request be converted or continued, (ii) the Type of Revolving
Credit Loan into which such Revolving Loan is to be converted or continued,
(iii) if such notice requests a Rate Conversion, the date of the Rate Conversion
(which shall be a Banking Day) and (iv) in the case of a Revolving Loan being
converted into or continued as a LIBOR Loan, the Interest Period for such LIBOR
Loan. The Borrowers may make a Rate Conversion/Continuation Request
telephonically so long as written confirmation thereof is received by the Bank
by 1:00 p.m. on the same day of such telephonic Rate Conversion/Continuation
Request. The Bank may rely on such telephonic Rate Conversion/Continuation
Request to the same extent that the Bank may rely on a written Rate Conversion/
Continuation Request. Each Rate Conversion/Continuation Request, whether
telephonic or written, shall be irrevocable and binding on the Borrowers and
subject to the indemnification provisions of this Article 2. The Borrowers shall
bear all risks related to their giving any Rate Conversion/Continuation Request
telephonically or by such other method of transmission as any Borrower shall
elect.
(C) Failure Of Borrowers To Elect. If no Interest Period is specified
in any Request for a LIBOR Loan, the Borrowers shall be deemed to have selected
an Interest Period with a duration of one (1) month with respect to such LIBOR
Loan. If the Borrowers shall not have given notice in accordance with Section
2.1(B) to continue any LIBOR Loan into a subsequent Interest Period (and shall
not have otherwise delivered a Rate Conversion/Continuation Request in
accordance with Section 2.1(B) to convert such LIBOR Loan), subject to the
limitations set forth in Sections 2.1 and 2.3, such LIBOR Loan shall, at the end
of the Interest Period applicable thereto (unless repaid pursuant to the terms
hereof), automatically shall be converted to a Prime Rate Loan.
(D) Revolving Note. The Borrowers' joint and several Debt under the
Revolving Loans shall be evidenced by an amended and restated promissory note
executed and delivered by the Borrowers to evidence the Revolving Loans (the
"Revolving Note", which term, for the purposes of this Agreement and the Other
Agreements, shall include any and all amendments, modifications, replacements,
supplements and substitutions thereof), which shall be in the form of Exhibit A
attached hereto and made a part hereof.
(E) Term. The Revolving Credit Facility shall have an initial term
commencing on the Closing Date and terminating on April 30, 2001 (as such date
may be extended pursuant to a writing executed by the Borrowers and the Bank, in
the Bank's sole and absolute discretion, the "Revolving Facility Termination
Date").
2.2. Security; Guaranty. The payment of the Bank Debt, including,
without limitation, the Revolving Loans, shall be secured by Liens in favor of
the Bank in the Collateral and shall be guaranteed by Group pursuant to the
Guaranty.
2.3. Interest Rates. The Revolving Loans shall be advanced as Prime
Rate Loans or LIBOR Loans pursuant to Section 2.1, above. The Borrowers shall
pay interest on the unpaid principal amount of each Revolving Loan made by the
Bank from the date of such Revolving Loan until such principal amount shall be
paid in full at the following times and rates per annum:
<PAGE>
(i) Prime Rate Loans. During such periods as a Revolving Loan is a
Prime Rate Loan, a rate per annum equal at all times to the
Prime Rate, payable quarterly, in arrears, on the last day of
each calendar quarter and at maturity (whether by reason of
acceleration or otherwise).
(ii) LIBOR Loans. During such periods as a Revolving Loan is a
LIBOR Loan, a rate per annum equal to the sum of the Adjusted
LIBOR, plus the LIBOR Margin from time to time in effect,
payable (a) on the last day of each Interest Period and (b) if
such Interest Period has a duration of more than three months,
three months after the first day of such Interest Period and
(c) on the date such LIBOR Loan shall be converted to a Prime
Rate Loan or to a LIBOR Loan of a different Interest Period or
paid in full and at maturity (whether by reason of
acceleration or otherwise).
Interest on Prime Rate Loans shall be calculated daily on the basis of a 365-day
year, or when applicable 366-day year (that is, computed by obtaining a daily
interest factor at the applicable rate based upon a 365-day (or 366-day) year
and multiplying such factor by the actual number of days elapsed) Interest on
LIBOR Loans shall be calculated daily on the basis of a 360-day year (that is,
computed by obtaining a daily interest factor at the applicable rate based upon
a 360-day year and multiplying such factor by the actual number of days
elapsed). Subject to any maximum interest rate limitation specified by
applicable law, the variable rate of interest provided for herein shall change
automatically without notice to the Borrowers with each change in the Prime
Rate. In no contingency or event whatsoever shall the interest rate charged
pursuant to the terms of this Agreement exceed the highest rate permissible
under any law which a court of competent jurisdiction shall, in a final
determination, deem applicable hereto. In the event that such a court determines
that the Bank has received interest hereunder in excess of the highest
applicable rate, the Bank shall promptly refund such excess interest to the
Borrowers; and the Borrowers hereby agrees that the refund of such excess shall
be the Borrowers' sole remedy or claim, at law and in equity, in respect of the
Bank's charging or receipt of interest in excess of that permitted by law.
2.4. Payments. Except as otherwise provided in Section 5.9, all
payments to the Bank shall be payable at the Bank's address set forth above or
at such other place or places as the Bank may designate from time to time in
writing to the Borrowers. Subject always to the provisions of Article 8, the
Bank Debt shall be payable as follows:
<PAGE>
(A) Interest. Interest payable pursuant to this Agreement shall be due
on the dates specified in Section 2.3, above, or, at the Bank's option, the
amount of interest payable under the Revolving Note shall be added to the
principal balance of the Revolving Note and be deemed an additional Revolving
Loan thereunder; provided, however, that, in addition, all accrued and unpaid
interest in respect of the Revolving Note not theretofore paid shall be due and
payable at maturity, whether by acceleration or otherwise;
(B) Costs, Fees. Costs, fees and expenses payable pursuant to this
Agreement shall be payable as and when provided in this Agreement and, if not
specified, then on demand;
(C) Principal. From and after the Closing Date, principal payable on
account of Revolving Loans shall be due and payable to the extent required
pursuant to Section 7.1(A), below; and, without limiting any other remedy
available to the Bank, upon and during the continuance of an Event of Default,
to the extent and on the date of any collections received with respect to any
Proceeds of the Collateral and not applied to interest, and the entire unpaid
principal balance of all Revolving Loans shall be payable in full on the
Revolving Facility Termination Date;
(D) Other Bank Debt. The balance of the Bank Debt, if any, shall be
payable as and when provided in this Agreement or the Other Agreements and, if
not specified, then on demand.
To the extent, if any, that the Bank renders statements of account relating to
the Revolving Loans and other Bank Debt (and the Bank shall have no obligation
to do so), such statements shall be presumed correct and accurate and shall,
except for the Bank's right to reapply payments, constitute an account stated
between the Borrowers and the Bank, unless thereafter waived in writing by the
Bank or unless, within thirty (30) days after the Bank's mailing thereof, the
Borrowers deliver to the Bank, by registered or certified mail, written
objection thereto specifying the error or errors, if any, contained therein.
Except as provided in the definition of Interest Period, whenever any payment to
be made hereunder, including without limitation any payment to be made on the
Revolving Note, shall be stated to be due on a day which is not a Banking Day,
such payment shall be made on the next succeeding Banking Day and such extension
of time shall in each case be included in the computation of the interest
payable on the Revolving Note. Each Borrower hereby authorizes the Bank,
automatically and without further instruction from such Borrower, to withdraw
from and charge any demand deposit or other account of such Borrower maintained
at the Bank to pay to the Bank any principal, interest or other Bank Debt on the
date on which the same are due and payable, whether at stated maturity or
acceleration.
<PAGE>
2.5. Optional Reduction of Commitment. The Borrowers may, at their
option from time to time, reduce the amount of the Maximum Commitment by an
amount which is One Million Dollars ($1,000,000) or an integral multiple
thereof; provided that (i) the Borrowers shall deliver to the Bank written
notice of the amount and effective date of any requested reduction at least
three (3) Banking Days prior to such proposed effective, and (ii) on or prior to
the date on which such reduction is effective, the Borrowers shall have (a) paid
to the Bank such portion of the principal of the Revolving Loans as may be
required by the terms of Section 7.1(A) of this Agreement and (b) executed and
delivered to the Bank such amendments to this Agreement, the Revolving Note and
the Other Agreements as the Bank may reasonably request to reflect such
reduction.
2.6. Closing Fee. On the Closing Date, the Borrowers shall pay to the
Bank a closing fee in the amount of Twenty-five Thousand Dollars ($25,000).
2.7. Facility Fee. The Borrowers agree to pay to the Bank, on the last
day of each calendar quarter during the term of the Revolving Credit Facility
and at earlier maturity, whether by acceleration or otherwise, as a facility
fee, in arrears in respect of the immediately preceding quarter or portion
thereof, an amount equal to twenty-five (25) Basis Points of the Maximum
Commitment, calculated on the basis of a 360-day year (that is, computed by
obtaining a daily factor at such per annum rate based upon a 360-day year and
multiplying such factor by the actual number of days elapsed). In addition to
the foregoing, the Borrowers shall pay, on the quarter end next following the
Closing Date, any and all unpaid facility fee payments accrued under the
Original Credit Agreement as of the Closing Date.
<PAGE>
2.8. Prepayment Compensation for LIBOR Loans. In any case of prepayment
of any LIBOR Loan, the Borrowers agree that if Adjusted LIBOR as determined as
of 11:00 a.m. London time, two (2) Banking Days prior to the date of prepayment
of any LIBOR Loan (hereafter, "Prepayment LIBOR") shall be lower than the last
Adjusted LIBOR previously determined for such LIBOR Loan with respect to which
prepayment is intended to be made (hereinafter, "Last LIBOR"), then the
Borrowers shall, upon written notice by the Bank, promptly pay to the Bank, in
immediately available funds, compensation for such prepayment measured by a rate
(the "LIBOR Prepayment Compensation Rate") which shall be equal to the
difference between the Last LIBOR and the Prepayment LIBOR. In determining the
Prepayment LIBOR, the Bank shall apply a rate equal to Adjusted LIBOR for a
deposit approximately equal to the amount of such prepayment which would be
applicable to an Interest Period commencing on the date of such prepayment and
having a duration as nearly equal as practicable to the remaining duration of
the actual Interest Period during which such prepayment is to be made. The LIBOR
Prepayment Compensation Rate shall be applied to all or such part of the
principal amount of the Revolving Note as related to the LIBOR Loan to be
prepaid, and the prepayment compensation shall be computed for the period
commencing with the date on which such prepayment is to be made to that date
which coincides with the last day of the Interest Period previously established
when the LIBOR Loan which is to be prepaid was made. In the event a Borrower
cancels a Request with respect to a LIBOR Loan subsequent to the delivery to the
Bank of such notice, such cancellation shall be treated as a prepayment as to
which the Bank shall be entitled to the aforementioned prepayment compensation
for the full Interest Period which would have been in effect had such Request
not been canceled; provided that, in such case, Prepayment LIBOR shall be
measured on the date on which the Bank receives notice of cancellation and not
two (2) Banking Days prior thereto.
2.9 Reserves; Taxes; Indemnities.
(A) Reserves or Deposit Requirements. If at any time any law, treaty or
regulation (including, without limitation, Regulation D of the Board of
Governors of the Federal Reserve System) or the interpretation thereof by any
governmental authority charged with the administration thereof or any central
bank or other fiscal, monetary or other authority shall impose (whether or not
having the force of law), modify or deem applicable any reserve and/or special
deposit requirement (other than reserves included in the Reserve Percentage, the
effect of which is reflected in the interest rate(s) of the LIBOR Loan(s) in
question) against assets held by, or deposits in or for the amount of any loans
by, the Bank, and the result of the foregoing is to increase the cost (whether
by incurring a cost or adding to a cost) to the Bank of making or maintaining
hereunder LIBOR Loans or to reduce the amount of principal or interest received
by the Bank with respect to such LIBOR Loans, then upon demand by the Bank the
Borrowers shall pay to the Bank from time to time on the dates on which interest
is otherwise due with respect to such loans, as additional consideration
hereunder, additional amounts sufficient to fully compensate and indemnify the
Bank for such increased cost or reduced amount, assuming (which assumption the
Bank need not corroborate) such additional cost or reduced amount was allocable
to such LIBOR Loans. A certificate as to the increased cost or reduced amount as
a result of any event mentioned in this Section 2.9(A), setting forth the
calculations therefor, shall be promptly submitted by the Bank to the Borrowers
and shall, in the absence of manifest error, be conclusive and binding as to the
amount thereof. Notwithstanding any other provision of this Agreement, after any
such demand for compensation by the Bank, the Borrowers, upon at least three (3)
Banking Days' prior written notice to the Bank, may prepay the affected LIBOR
Loans in full or convert all LIBOR Loans to Prime Rate Loans regardless of the
Interest Period of any thereof. Any such prepayment or conversion shall entitle
the Bank to the prepayment compensation provided for in Section 2.8 hereof. The
Bank will notify the Borrowers as promptly as practicable of the existence of
any event which will likely require the payment by the Borrowers of any such
additional amount under this Section.
<PAGE>
(B) Imposition Of Taxes. In the event that by reason of any law,
regulation or requirement or in the interpretation thereof by an official
authority, or the imposition of any requirement of any central bank whether or
not having the force of law, the Bank shall, with respect to this Agreement or
any transaction under this Agreement, be subjected to any tax, levy, impost,
charge, fee, duty, deduction or withholding of any kind whatsoever (other than
any tax imposed upon the total net income of the Bank) and if any such measures
or any other similar measure shall result in an increase in the cost to the Bank
of making or maintaining any LIBOR Loan or in a reduction in the amount of
principal, interest or commitment fee receivable by the Bank in respect thereof,
then the Bank shall promptly notify the Borrowers stating the reasons therefor.
The Borrowers shall thereafter pay to the Bank upon demand from time to time on
the dates on which interest is otherwise due with respect to such LIBOR Loans,
as additional consideration hereunder, such additional amounts as will fully
compensate the Bank for such increased cost or reduced amount. A certificate as
to any such increased cost or reduced amount, setting forth the calculations
therefor, shall be submitted by the Bank to the Borrowers and shall, in the
absence of manifest error, be conclusive and binding as to the amount thereof.
Notwithstanding any other provision of this Agreement, after any such demand for
compensation by the Bank, the Borrowers, upon at least three (3) Banking Days
prior written notice to the Bank, may prepay the affected LIBOR Loans in full or
convert all LIBOR Loans to Prime Rate Loans regardless of the Interest Period of
any thereof. Any such prepayment or conversion shall entitle the Bank to
prepayment compensation provided for in Section 2.8 hereof.
(C) Eurodollar Deposit Unavailable or Interest Rate Unascertainable. In
respect of any LIBOR Loan, in the event that the Bank shall have determined that
dollar deposits of the relevant amount for the relevant Interest Period for such
LIBOR Loan are not available to the Reference Bank in the applicable Eurodollar
market or that, by reason of circumstances affecting such market, adequate and
reasonable means do not exist for ascertaining the LIBOR rate applicable to such
Interest Period, the Bank shall promptly give notice of such determination to
the Borrowers and (i) any notice of a new LIBOR Loan (or conversion or
continuation of an existing loan to a LIBOR Loan) previously given by the
Borrowers and not yet borrowed (or converted or continued, as the case may be)
shall be deemed a notice to make a Prime Rate Loan, and (ii) the Borrowers shall
be obligated either to prepay or to convert any outstanding LIBOR Loans on the
last day of the then current Interest Period or Periods with respect thereto.
Any such prepayment or conversion shall entitle the Bank to prepayment
compensation provided for in Section 2.8 hereof.
<PAGE>
(D) Indemnity. Without prejudice to any other provisions of this
Article 2, the Borrowers hereby jointly and severally agree to indemnify the
Bank against any loss or expense which the Bank may sustain or incur as a
consequence of any default by the Borrowers in payment when due of any amount
due hereunder in respect of any LIBOR Loan, including, but not limited to, any
loss of profit, premium or penalty incurred by the Bank in respect of funds
borrowed by it for the purpose of making or maintaining such LIBOR Loan, as
determined by the Bank in the exercise of its sole but reasonable discretion. A
certificate as to any such loss or expense shall be promptly submitted by the
Bank to the Borrowers and shall, in the absence of manifest error, be conclusive
and binding as to the amount thereof.
(E) Changes in Law Rendering LIBOR Loans Unlawful. If at any time any
new law, treaty or regulation, or any change in any existing law, treaty or
regulation, or any interpretation thereof by any governmental or other
regulatory authority charged with the administration thereof, shall make it
unlawful for the Bank to fund any LIBOR Loan which it is committed to make
hereunder with moneys obtained in the Eurodollar market, the commitment of the
Bank to fund LIBOR Loans shall, upon the happening of such event forthwith be
suspended for the duration of such illegality, and the Bank shall by written
notice to the Borrowers declare that its commitment with respect to such LIBOR
Loans has been so suspended; and, if and when such illegality ceases to exist,
such suspension shall cease, and the Bank shall similarly notify the Borrowers.
If any such change shall make it unlawful for the Bank to continue in effect the
funding in the applicable Eurodollar market of any LIBOR Loan previously made by
it hereunder, the Bank shall, upon the happening of such event, notify the
Borrowers thereof in writing stating the reasons therefor, and the Borrowers
shall, on the earlier of (i) the last day of the then current Interest Period or
(ii) if required by such law, regulation or interpretation, on such date as
shall be specified in such notice, either convert all LIBOR Loans to Prime Rate
Loans to the extent permissible under this Agreement or prepay all LIBOR Loans
to the Bank in full. Any such prepayment or conversion shall entitle the Bank to
prepayment compensation as provided in Section 2.8 hereof.
(F) Funding. The Bank may, but shall not be required to, make LIBOR
Loans hereunder with funds obtained outside the United States.
<PAGE>
2.10. Capital Adequacy. If the Bank shall have determined, that,
whether in effect at the date of this Agreement or hereafter in effect, any
applicable law, rule, regulation or guideline regarding capital adequacy, or any
change therein, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Bank with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on the Bank's capital allocated
to the transactions contemplated by this Agreement (or the capital of its
holding company) as a consequence of its obligations hereunder to a level below
that which the Bank (or its holding company) could have achieved but for such
adoption, change or compliance (taking into consideration the Bank's policies or
the policies of its holding company with respect to capital adequacy) by an
amount deemed by the Bank to be material, then from time to time, within fifteen
(15) days after demand by the Bank, the Borrowers shall pay to the Bank such
additional amount or amounts as will compensate the Bank (or its holding
company) for such reduction. The Bank will designate a different lending office
if such designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the judgment of the Bank, be otherwise
disadvantageous to the Bank. A certificate of the Bank claiming compensation
under this Section and setting forth the additional amount or amounts to be paid
to it hereunder shall be conclusive in the absence of manifest error. In
determining such amount, the Bank may use any reasonable averaging and
attribution methods. Failure on the part of the Bank to demand compensation for
any reduction in return on capital with respect to any period shall not
constitute a waiver of the Bank's rights to demand compensation for any
reduction in return on capital in such period or in any other period. The
protection of this Section 2.10 shall be available to the Bank regardless of any
possible contention of the invalidity or inapplicability of the law, regulation
or other condition which shall have been imposed.
2.11. All Advances to Constitute One Debt; Same Debt.
(A) Single Indebtedness. All Revolving Loans and other advances of
credit by the Bank to or for the benefit of any or all of the Borrowers under
this Agreement and the Other Agreements shall constitute one Debt, and all Debt
and obligations of the Borrowers to the Bank under this Agreement and all Other
Agreements shall constitute one general obligation, (i) secured by the Bank's
Lien in the Collateral and by other Liens heretofore, now, or at any time or
times hereafter granted to the Bank by the Borrowers or others, and (ii)
guaranteed by the Guaranty. The Borrowers and Group agree that all of the rights
of the Bank set forth in this Agreement shall apply to any modification of or
supplement to this Agreement and the Other Agreements, unless such rights are
expressly modified by any such modification or supplement.
<PAGE>
(B) Same Indebtedness. This Agreement and the Other Agreements shall
not be deemed to provide for or effect a repayment and re-advance of any portion
of the Existing Revolving Loans now outstanding, it being the intention of both
the Borrowers and the Bank hereby that the Indebtedness owing under this
Agreement be and hereby is the same Indebtedness as that owing under the
Original Credit Agreement immediately prior to the effectiveness hereof.
3. CONDITIONS TO ADVANCE OF LOANS
3.1. Conditions to Initial Advance of Revolving Loans. The initial
advance of Revolving Loans, and the performance by the Bank of the other actions
to be taken by it hereunder, are subject to the fulfillment (unless waived by
the Bank) of each of the following conditions precedent:
(A) Representations and Warranties. All of the representations and
warranties in Article 6 shall have been true on the date when made and shall be
true on and as of the Closing Date.
(B) Compliance. The Borrowers shall be in compliance on the Closing
Date with all the applicable terms and provisions of this Agreement and the
Other Agreements to be observed or performed by it, and no Event of Default or
Possible Default shall have occurred and be continuing.
(C) Closing Certificate. The Borrowers shall have delivered to the Bank
a certificate, dated as of the Closing Date and signed by their respective
President or Treasurer certifying compliance with the conditions of subsections
3.1(A) and (B).
(D) Note. The Borrowers shall have executed and delivered to the Bank
the Revolving Note.
(E) Opinion. The Bank shall have received the favorable written opinion
of Barnes & Thornburg, counsel to the Obligors, dated the Closing Date and
addressed to the Bank and substantially to the effect set forth in Exhibit B
hereto, and covering such other matters as the Bank may reasonably request.
(F) Perfection. The Bank shall have received evidence satisfactory to
it of the perfection and priority of the Bank's security interest in the
Collateral by the filing of appropriate financing statements with the
Secretaries of State of Indiana and Vermont and the Recorder of Elkhart County,
Indiana.
(G) Insurance. The Borrowers shall have furnished a certificate or
other satisfactory evidence that the insurance required by Section 7.4 is in
full force and effect.
<PAGE>
(H) Entity Certificates. On or before the Closing Date, each Obligor
shall deliver to the Bank the following (provided, however, that at the option
of the Borrowers, the documents required by clauses (ii) and (iii), below, may
be delivered to the Bank not later than sixty (60) days following the Closing
Date):
(i) a certificate of existence for such Obligor from the
Secretary of the state of its incorporation and
certificates of qualification for such Obligor from
the Secretary of State of each other state with which
such Obligor is required to qualify to do business as
a foreign corporation, all dated as of a date as near
to the Closing Date as practicable;
(ii) a true and complete copy of such Obligor's Articles
of Incorporation/Charter certified by the Secretary
of State of the state of its incorporation as of a
date as near to the Closing Date as practicable;
(iii) a certificate of such Obligor signed by its Secretary
dated as of the Closing Date certifying that attached
thereto are true and complete copies of its Code of
Regulations/Bylaws;
(iv) a certificate of such Obligor signed by its Secretary
dated as of the Closing Date certifying (a) that
attached thereto is a complete copy of resolutions
adopted by the directors of such Obligor, authorizing
the execution, delivery and performance of this
Agreement and the Other Agreements to be performed by
such Obligor hereunder, (b) that such resolutions are
in full force and effect, without modification
thereto and (c) the names and signatures of the
officers of such Obligor; and
(v) such other documents as the Bank may reasonably
request in connection with the company proceedings
taken by such Obligor authorizing this Agreement and
the transactions contemplated hereby.
(I) Special Counsel. All legal matters incident to this Agreement and
the consummation of the transactions contemplated hereby shall be reasonably
satisfactory to Berick, Pearlman & Mills Co., L.P.A., Cleveland, Ohio, special
counsel to the Bank.
(J) Landlord Waivers. Each Borrower shall have delivered to the Bank a
landlord consent and waiver agreement in the form of Exhibit C hereto from each
lessor or licensor of real property occupied by such Borrower or at which any
Collateral is located.
<PAGE>
(K) Guaranty. Group shall have executed and delivered to the Bank its
Amended and Restated Continuing Guaranty in the form of Exhibit D hereto (the
"Guaranty").
(L) Opening Eligible Accounts. The Borrowers shall have delivered to
the Bank an opening borrowing base certificate, in form prescribed by the Bank,
attached to which shall be an aging of the Borrowers' Accounts meeting the
criteria set forth in Section 7.1(B)(iv), reflecting such Accounts as of the
close of business February 28, 1998.
(M) Closing Fee. The Bank shall have received the closing fee required
by Section 2.6 hereof in immediately available funds.
(N) Other Matters. The Bank shall have received such other
certificates, opinions, agreements and documents, in form and substance
satisfactory to it, as the Bank may request.
3.2. Conditions Precedent to Subsequent Revolving Loans. The advance of
Revolving Loans after the Closing Date shall be subject to the fulfillment of
each of the following conditions precedent:
(A) Representations and Warranties. The representations and warranties
contained in this Agreement shall be true in all material respects on and as of
the date of such subsequent Revolving Loan, with the same effect as if made on
and as of such date.
(B) No Default. No Event of Default or Possible Default shall have
occurred and be continuing.
(C) Documents. The Bank shall have received such Requests, other
certificates (including, without limitation, borrowing certificates), agreements
and documents, in form and substance satisfactory to it, as the Bank may
reasonably request.
3.3. Closing. The closing of the initial advance of Revolving Loans
hereunder shall, subject to the terms and conditions of this Agreement,
including, without limitation, Section 3.1, take place at the offices of Berick,
Pearlman & Mills Co., L.P.A., 1350 Eaton Center, 1111 Superior Avenue,
Cleveland, Ohio, on a date mutually agreed upon by the Borrowers and the Bank,
but not later than April 3, 1998, at 11:00 a.m., or at such other time and place
as the parties may agree (such date of initial advance being referred to as the
"Closing Date").
<PAGE>
4. ELIGIBLE ACCOUNTS
4.1. Eligible Accounts. On the report of Accounts (delivered to the
Bank monthly pursuant to Section 7.1(B)(iv) and as provided in Section 5.6), the
Borrowers shall designate which of the Accounts listed thereon the Borrowers
believe to be Eligible Accounts pursuant to the criteria (other than that set
forth on clause (J), below). The Bank shall review such report and determine, in
its sole discretion (exercised in good faith), which Accounts listed thereon
shall be deemed an "Eligible Account"; the Bank shall have no obligation
whatsoever to accept the designations of the Borrowers.
In determining which Accounts will be "Eligible Accounts", the Bank
may, inter alia, consider the following requirements:
The Account is subject to a perfected first priority Lien in favor of
the Bank and is due no more than thirty (30) days from the date of invoice under
the original terms of shipment or service, arises from the delivery of goods or
performance of services by a Borrower in the ordinary course of its business,
conforms to the warranties and representations set forth in Section 6.2 and:
(A) is an Account upon which such Borrower's right to receive payment
is absolute and not contingent upon any further performance or delivery or the
fulfillment of any condition whatsoever (e.g., consignment or guaranteed sale)
and does not include any sales or other taxes, and such Borrower has possession
of, or has delivered or will deliver as required hereunder to the Bank, copies
of invoices, shipping and delivery receipts evidencing such performance or
shipment;
(B) is unpaid for not more than thirty (30) days following the due date
of the invoice therefor;
(C) does not arise from a sale or sales to an Affiliate or from a
consumer transaction (being one for primarily personal, family or household
purposes);
(D) is not the obligation of an Account Debtor located in a foreign
country other than Canada, except those foreign Accounts supported by a letter
of credit acceptable to the Bank which letter of credit is confirmed or issued
by a United States bank or other bank acceptable to the Bank or is an Eligible
Account insured by the Foreign Credit Insurance Association, provided that the
letter of credit or insurance in respect of such foreign Accounts is assigned to
the Bank by assignments in form and substance satisfactory to the Bank;
(E) does not arise from a contract containing a prohibition against the
assignment or grant of a security interest therein;
<PAGE>
(F) is not an Account from the United States of America or any state
thereof, or any department, administration, agency or instrumentality of any
thereof, unless the Bank is satisfied that its security interest in such Account
has been perfected pursuant to the Federal Assignment of Claims Act or
equivalent state statute;
(G) is not an Account of an Account Debtor who has suspended business,
made a general assignment for the benefit of creditors, committed any act of
insolvency, filed or has had filed against it any petition under any bankruptcy
law or any other law or laws for the relief of debtors;
(H) is not evidenced by an Instrument, Chattel Paper or other written
agreement (other than invoices), unless the Instrument or Chattel Paper
evidencing the Account has been delivered to and endorsed in favor of the Bank;
(I) is not an Account of an Account Debtor who shall have objected to
paying such Account, or any portion thereof, as a result of an objection to the
quality or quantity of goods or services provided by such Borrower, or shall
have rejected, returned or refused to accept such goods or services;
(J) is not an Account which is, in the Bank's good faith judgment, (i)
the Account of an Account Debtor which is an undue credit risk or (ii) otherwise
unacceptable to the Bank.
5. COLLATERAL: GENERAL TERMS
5.1. Security Interest.
(A) Grant. To secure the prompt payment to the Bank and performance of
the Bank Debt, on the Closing Date, (1) all of the terms, conditions and
provisions of each Security Agreement are hereby merged into, and amended and
restated in their entirety by, this Agreement, and (2) each Borrower hereby
regrants (or, in the case of Interstate, grants) to the Bank a continuing
security interest in and to all of the following property and interests in
property of such Borrower, whether now owned or existing, hereafter acquired or
arising, or in which such Borrower now or hereafter has any rights, and
wheresoever located:
(i) All Accounts and other Receivables, Instruments,
Documents, Chattel Paper and General Intangibles;
(ii) All Equipment;
(iii) All Inventory;
(iv) All monies, residues and property of any kind, now or
at any time or times hereafter, in the possession or
under control of the Bank or a bailee of the Bank;
<PAGE>
(v) All accessions to, substitutions for and all
replacements, Products and Proceeds of the foregoing,
including, without limitation, proceeds of insurance
policies insuring the Collateral; and
(vi) All books and records (including, without limitation,
customer lists, credit files, computer programs,
print-outs and other computer materials and records)
of such Borrower pertaining to any of the foregoing.
5.2. Special Collateral. Immediately upon a Borrower's receipt of that
portion of the Collateral which is or becomes evidenced by an agreement,
instrument and/or document, including, without limitation, promissory notes,
trade acceptances, documents of title and warehouse receipts (the "Special
Collateral"), such Borrower shall deliver the original thereof to the Bank,
together with appropriate endorsements and/or other specific evidence (in form
and substance acceptable to the Bank) of assignment thereof to the Bank.
5.3. Further Assurances. At the Bank's request, each Borrower shall
execute and/or deliver to the Bank, at any time hereafter, all Supplemental
Documentation that the Bank may reasonably request, in form and substance
acceptable to the Bank, and pay the costs of any recording or filing of the
same. Without limiting the generality of the foregoing, at the Bank's request,
each Borrower shall execute and deliver for filing a Patent and Trademark
Security Agreement in form and substance satisfactory to the Bank upon such
Borrower's acquisition of any patent or registered mark or interest therein or
rights thereto. The Borrowers agree that a carbon, photographic, or other
reproduction of a financing statement, is sufficient as a financing statement.
Each Borrower immediately on demand therefor by the Bank, shall deliver to the
Bank evidence of ownership, if any, of any of the Collateral.
5.4. Preservation of Collateral. The Borrowers will keep the Collateral
and all rights with respect thereto and proceeds of both free from any adverse
Lien, except for Permitted Encumbrances, and, subject to ordinary wear and tear
and obsolescence, in good condition, and will not waste or destroy any of the
same. The Borrowers will not use the Collateral in violation of any applicable
statute or ordinance.
5.5. Verification of Collateral; Inspections; Audit.
<PAGE>
(A) Any of the Bank's officers, employees or agents shall have the
right, at any time or times hereafter, in the Bank's name or in the name of a
Borrower to verify the validity, amount or any other matter relating to any
Collateral by mail, telephone, telegraph or otherwise. The Bank shall endeavor
to give the Borrowers prompt notice of the names of Account Debtors with whom
the Bank has conducted such verification, provided that the Bank's failure to do
so shall not give rise to any claim or defense against the Bank.
(B) The Bank (by any of its officers, employees and/or agents) shall
have the right, at any time or times during usual business hours, to inspect the
Collateral, all records related thereto (and to make extracts from such records)
and the premises upon which any of the Collateral is located, to discuss
Borrower's affairs and finances with any attorney, accountant, Account Debtor or
creditor of a Borrower and to verify the amount, quality, quantity, value and
condition of, or any other matter relating to, the Collateral.
5.6. Assignments; Records and Reports of Accounts. Each Borrower shall
keep accurate and complete records of its Accounts; and, on the date specified
in Section 7.1(B)(iii) below (and upon earlier demand by the Bank), each
Borrower shall deliver to the Bank, in form and substance acceptable to the
Bank, a detailed aged trial balance of all then existing Accounts specifying the
names, face value and dates of invoice(s) for each Account Debtor obligated on
an Account so listed and, upon demand by the Bank, the original copy of all
documents, including, without limitation, repayment histories and present status
reports, relating to the Accounts so scheduled and such other matters and
information relating to the status of the Accounts as the Bank shall in its
discretion request.
5.7. Federal and State Accounts. Upon the Bank's request, the Borrowers
shall, if any Accounts arise out of contracts with the United States of America
or any state thereof or any department, administration, agency or
instrumentality of any thereof, immediately notify the Bank thereof in writing
and execute any and all instruments and take all steps required by the Bank in
order that all monies due and to become due under such contract shall be
assigned to the Bank and notice thereof given to the Government under the
Federal Assignment of Claims Act, as amended. Or equivalent state statute.
5.8. Inventory and Equipment. The Borrowers shall at all reasonable
times and from time to time allow the Bank, by or through any of its officers,
agents, attorneys or accountants, to examine or inspect the Inventory and the
Equipment and all records concerning the same wherever located and shall furnish
to the Bank such other information with respect thereto as the Bank may
reasonably request.
<PAGE>
5.9. Collections; Notice of Assignment; Lock Box. Upon and during the
continuance of an Event of Default, without limiting or otherwise impairing the
Bank's right to exercise any other right or remedy which may be available to the
Bank, the Bank may, upon notice to the Borrowers, require that the following
provisions shall become effective:
(A) So long as the Bank does not request that the Account
Debtors on the Accounts be notified of the assignment thereof to the
Bank, the Borrowers may make collections on the Accounts, and hold the
proceeds for the Bank in the exact form in which they are received from
collections in trust for the Bank, and turn over such proceeds to the
Bank in the exact form in which they are received, together with
endorsements in favor of the Bank and a collection report in a form
acceptable to the Bank. Said proceeds shall be deposited with the Bank
in a collections account(s) maintained with the Bank or other
nationally chartered bank acceptable to the Bank over which the Bank
alone shall have power of withdrawal, pursuant to an account agreement
in form and substance satisfactory to the Bank. The Bank may in its
discretion at least once a Banking Day apply the whole or any part of
the funds on deposit in such collections account(s) against the
principal and/or interest of any Revolving Loans or any other Bank Debt
which is then due, and any portion of said funds on deposit in such
collection account(s) which the Bank elects not to apply to such Bank
Debt shall be paid over and deposited by the Bank to the Borrowers'
commercial account, provided, however, that no such transfer from the
collections account(s) will be made of funds deposited in the
collections account(s) less than one (1) Banking Day before the date of
such transfer.
(B) The Bank may notify Account Debtors on any Accounts that
the Accounts have been assigned to the Bank and shall be paid to the
Bank. Upon request of the Bank at any time, the Borrowers will so
notify such Account Debtors and will indicate on all billings to such
Account Debtors that the Accounts are payable to the Bank. The Bank is
hereby authorized to make any endorsement on any collection on a
Borrower's behalf.
(C) To evidence the Bank's rights hereunder, each Borrower
will upon request of the Bank assign or endorse the Accounts or
proceeds thereof to the Bank as the Bank may request. The Bank shall
have full power to collect, compromise, endorse, sell or otherwise deal
with the Accounts or proceeds thereof in its own name or that of a
Borrower. The cost of collection and enforcement of Accounts, or any
Instrument belonging to a Borrower for goods sold or services rendered,
including attorneys' fees and out-of-pocket expenses, shall be borne
solely by the Borrowers, whether the same are incurred by the Bank or a
Borrower.
<PAGE>
(D) Each Borrower shall cause all Accounts to be collected
through a lock-box arrangement with the Bank and shall execute a
lock-box agreement in form and substance satisfactory to the Bank (the
"Lock-box Agreement"). In the event that a Borrower shall default on
its obligation to have Accounts collected through a lock-box
arrangement, the Bank may forthwith notify all or any Account Debtors
of the security interest granted to the Bank and request said Account
Debtors to send all payments to be made in respect of Accounts to said
lock box, or to otherwise remit the same to the Bank. The Bank in such
event shall have full power and authority to endorse Borrower's name on
any check, draft, note or other instrument for the payment of money
which shall be received from an Account Debtor. Each Borrower also
agrees upon the Bank's request to execute and deliver to the Bank a
power of attorney in form satisfactory to the Bank authorizing any
officer of the Bank to notify postal authorities to change the address
for delivery of such Borrower's mail to an address designated by the
Bank, and authorizing the Bank to open all such mail delivered to the
designated address with full power to endorse such Borrower's name on
any check, draft or other instrument for the payment of money from an
Account Debtor for collection, provided that the Bank promptly provides
a list of all such instruments for the payment of money endorsed by the
Bank and delivers all other unrelated mail promptly to such Borrower.
<PAGE>
5.10. Additional Collateral. Any and all deposits or other sums at any
time credited by or due from the Bank to the Borrowers or any of them shall at
all times constitute additional security for the Bank Debt and may be set off
against any such Bank Debt at any time, whether or not it is then due, or
whether or not other security held by the Bank is considered by the Bank to be
adequate. Any and all Instruments, documents, policies, certificates of
insurance, securities, goods, accounts receivable, choses in action, Chattel
Paper, cash, property and the proceeds thereof (whether or not the same are
Collateral or the proceeds thereof) owned by a Borrower or in which a Borrower
has an interest, which now or hereafter are at any time in possession or control
of the Bank, in transit by mail or carrier to or from the Bank, or in the
possession of any third party acting in the Bank's behalf, without regard to
whether the Bank received the same in pledge for safekeeping, as agent for
collection or transmission or otherwise, or whether the Bank has conditionally
released the same, shall constitute additional security for the Bank Debt and
may be applied at any time to any such Bank Debt which is then due, whether by
acceleration or otherwise. In addition, all other collateral security given by a
Borrower in favor of the Bank, whether by pledge, mortgage lien or security
interest, shall secure all of the Bank Debt as if expressly stated in the
agreement or document relating to such collateral security.
5.11. Proceeds of Collateral. The Borrowers shall not, without the
prior written consent of the Bank, sell, lease, grant a security interest in or
otherwise dispose of or encumber (other than Permitted Encumbrances) the
Collateral, or any part thereof or interest therein, except for the sale of
Inventory in the normal course of the Borrowers' business and the sale or other
disposition of Equipment which is obsolete or otherwise in need of replacement.
In the event any Collateral is sold, transferred or otherwise disposed of as
herein provided, the Borrowers shall deliver all of the cash proceeds of any
such sale, transfer or disposition to the Bank, which proceeds shall be applied
to the repayment of the Bank Debt in such order as the Bank may determine;
provided that, so long as no Event of Default or Possible Default then exists,
the Borrowers may utilize such proceeds for the acquisition of replacement
Equipment of like kind and utility.
6. WARRANTIES AND REPRESENTATIONS
6.1. General Warranties and Representations. Each Obligor hereby
warrants and represents that:
(A) Organization. Each Obligor is a corporation duly organized, validly
existing and in good standing under the laws of the State of its incorporation
and is qualified or licensed to do business and is in good standing in every
other jurisdiction wherein failure to so qualify would have a material adverse
effect on the financial condition, operations, business or property of such
Obligor;
(B) Title. Each Borrower has good, indefeasible and merchantable title
to and ownership of all Collateral, free and clear of all Liens except those of
the Bank and those, if any, listed on Schedule 6.1(B) hereto (the "Permitted
Encumbrances");
(C) ERISA. No Obligor has received any notice to the effect that it is
not in full compliance with any of the requirements of ERISA, and the
regulations promulgated thereunder and, to the best of its knowledge there
exists no event described in Section 4043(b)(3) thereof ("Reportable Event"). No
Obligor now has, or ever has had, any obligation to contribute to a
Multiemployer Plan;
<PAGE>
(D) Taxes. Each Obligor has filed all federal, state and local tax
returns and other reports required by law and has paid, to the extent due and
payable, all federal, state, county, municipal, and other governmental
(including, but not limited to, the PBGC) taxes, levies, assessments, or Liens
upon or relating to the Collateral, the Bank Debt, its employees, payroll,
income and gross receipts, its ownership or use of any of its assets, and any
other aspect of its business (hereinafter referred to collectively as the
"Charges");
(E) Locations. The offices and/or locations where each Borrower keeps
its respective Inventory, Equipment and books and records relating to
Collateral, including, without limitation, computer programs, printouts and
other computer materials and records concerning the Collateral, are at the
locations listed on Schedule 6.1(E) hereto; the chief executive office of each
Borrower is located at 2746 Old U.S. Route 20 West, Elkhart, Indiana 46515,
except that c/o Skandia International Risk Management, 346 Shelburne Road, P.O.
Box 64649, Burlington, Vermont 05406-4649 is also an address at which certain
records of Interstate may be located from time to time.
(F) Other Names. No Borrower has, during the preceding five (5) years,
been known as or used any other company or fictitious name; no Borrower has any
Subsidiaries;
(G) Stock. 100% of all outstanding shares or units of Stock of each
Borrower are owned by Group, and all such shares or units have been duly
authorized and are validly issued, fully paid for and non-assessable and have
been issued in compliance with all applicable federal and state laws, rules and
regulations, including, without limitation, all so-called "Blue-Sky" laws;
(H) Real Property. Certain of the Borrowers own parcels of real
property at various locations throughout the United States; however, none is
deemed by the Borrowers to be material on a Consolidated basis, other than the
premises owned by Morgan known as 2746 Old U.S. Route 20 West, Elkhart, Indiana
46515; and no Borrower is a party to any material lease for real property;
(I) Authorization; Valid and Binding. Each Obligor has full power and
authority and is duly authorized and empowered to enter into, execute, deliver
and perform this Agreement and the Other Agreements to which it is a party, and
its officers executing and delivering this Agreement and the Other Agreements
are duly authorized and empowered to do so; and each of this Agreement and the
Other Agreements upon delivery to the Bank, will be valid and binding obligation
of such Obligor enforceable in accordance with its respective terms; provided,
however, such enforceability may be (i) limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally (except that the Bank Debt and Liens in favor of
the Bank described or set forth in or created by this Agreement and the Other
Agreements are not void ab initio or voidable), and (ii) subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law);
<PAGE>
(J) No Violation. The execution, delivery and performance by each
Obligor of this Agreement and the Other Agreements to which it is a party shall
not, by the lapse of time, the giving of notice or otherwise, constitute a
violation of any applicable law or a breach of any provision contained in such
Obligor's Articles of Incorporation/Charter or Code of Regulations/Bylaws or
contained in any agreement, instrument or document to which such Obligor is now
a party or by which it is bound;
(K) Financials. The Financials have been prepared in accordance with
GAAP and fairly present in all material respects the assets, liabilities and
financial condition and results of operations of each Borrower and Group as of
the dates thereof; there are no omissions or other facts or circumstances which
are or may be material and there has been no material and adverse change in the
assets, liabilities or financial condition of any Obligor since the date of the
Financials; there exist no equity or long-term investments in, or outstanding
advances to, any Person by any Obligor not reflected in the Financials; there
exist no actions or proceedings pending or threatened against any Obligor, nor
has any Obligor guaranteed the obligations of any other Person;
(L) Judgments; Decrees. No Obligor is in default in respect of any
judgment, order, writ, injunction, decree or decision of any governmental body,
which default would have a material adverse effect on the financial condition,
operations, business or property of such Obligor; and each Obligor is in
compliance in all material respects with all applicable statutes and
regulations, a violation of which would have a material adverse effect upon the
financial condition, operations, business or property of such Obligor;
(M) Valid Liens. Upon execution and delivery of this Agreement and the
Other Agreements, the Liens in favor of the Bank provided for hereunder and
thereunder will constitute a duly perfected first priority Lien in the property
described therein (to the extent, as to personal property, that a security
interest therein can be perfected by the filing of financing statements) subject
to no prior or equal Liens, except for the Permitted Encumbrances; and
(N) Fed Regulations. Each Obligor's execution and delivery of this
Agreement and the Other Agreements to which it is a party does not directly or
indirectly violate or result in a violation of Regulations G, U or X of the
Board of Governors of the Federal Reserve System, and no Borrower owns nor
intends to purchase or carry any "margin security", as defined in said
Regulations.
<PAGE>
6.2. Account Warranties and Representations. Each Borrower hereby
warrants and represents to the Bank, that the Bank may, in determining which
Accounts listed on or included or reflected in any borrowing certificate or
report of Accounts are Eligible Accounts, rely on all statements or
representations made by the Borrowers on or with respect to any such Certificate
or report and, unless otherwise indicated in writing by a Borrower, that:
(A) Genuine. They are genuine, are in all respects what they purport to
be, are not evidenced by a judgment and are evidenced by only one, if any,
executed original instrument, agreement, contract or document, which has been
delivered to the Bank;
(B) Complete Transactions. Except for Accounts included in the In
Transit Amount, they represent bona fide transactions completed in accordance
with the terms and provisions contained in any documents related thereto;
(C) Due and Owing. The face amounts included in or shown on any
schedule of Accounts provided to the Bank, and/or all invoices and statements
delivered to the Bank with respect to any Account are, except for Accounts
included in the In Transit Amount, actually and absolutely owing to a Borrower
and are not contingent for any reason;
(D) No Setoff. To the best of such Borrower's knowledge, there are no
setoffs, counterclaims or disputes existing or asserted in respect thereof, and
such Borrower has not made any agreement with any Account Debtor thereunder for
any deduction therefrom, except a discount or allowance allowed in the ordinary
course of business for prompt payment, all of which discounts or allowances are
reflected in the calculation of the face value of each respective invoice
related thereto;
(E) No Impairment. To the best of such Borrower's knowledge, except for
Accounts included in the Eligible Reserve, there are no facts, events or
occurrences which in any way impair the validity or enforcement thereof or tend
to reduce the amount payable thereunder included in or shown on any borrowing
certificate or report of Accounts, and on all contracts, invoices and statements
delivered to the Bank in respect thereof;
(F) Capacity. To the best of such Borrower's knowledge, all Account
Debtors thereunder had the capacity to contract at the time any contract or
other document giving rise to the Account was executed;
(G) No Liens. They are not subject to any Lien except for the security
interest in favor of the Bank created hereby; and
(H) Valid. Such Borrower has no knowledge of any fact of circumstance
which would impair the validity or collectibility thereof, except for Accounts
included in the Eligible Reserve.
<PAGE>
6.3. Warranty and Reaffirmation of Warranties and Representations;
Survival of Warranties and Representations. Except as otherwise disclosed in
writing by the Borrowers to the Bank, each request for an advance made by a
Borrower pursuant to this Agreement shall constitute (i) a warranty and
representation by the Borrowers to the Bank that there does not then exist an
Event of Default or Possible Default, and (ii) a reaffirmation by the Borrowers
as of the date of said request of the representations and warranties contained
in Sections 6.1 and 6.2 with respect to Collateral then existing. All
representations and warranties of the Borrowers and the other Obligors contained
in this Agreement and the Other Agreements shall survive the execution, delivery
and acceptance thereof by the parties thereto and the closing of the
transactions described therein or related thereto.
7. COVENANTS AND CONTINUING AGREEMENTS
7.1. Affirmative Covenants. The Borrowers jointly and severally
covenant and agree, and where indicated the other Obligors jointly and severally
covenant and agree, that they shall:
(A) Collateral Maintenance. The Borrowers shall maintain as minimum
security for the Revolving Loans, Eligible Accounts having, in the aggregate, a
Borrowing Base (as determined pursuant to the definition thereof, above) not
less than the aggregate unpaid principal of all Revolving Loans; and, if not,
immediately pay to the Bank the difference between the Borrowing Base at such
time and the aggregate unpaid principal amount of the Revolving Loans;
(B) Financial Reporting. The Obligors shall keep and maintain accurate
books of account and financial records in respect of their respective businesses
and property and cause to be furnished to the Bank the following:
(i) as soon as available, but not later than ninety (90)
days after the close of each fiscal year of Group
hereafter, audited financial statements of Group on a
Consolidated basis and of Interstate as at the end of
such year prepared in accordance with generally
accepted auditing principles by a firm of independent
certified public accountants of recognized standing,
acceptable to the Bank and selected by Group or
Interstate, as the case may be, which financial
statements shall include a balance sheet, statements
of income and surplus, statements of cash flow, a
reconciliation of capital accounts, any management
letters written by such accountants and consolidating
financial statements for each of the other Obligors;
<PAGE>
(ii) concurrently with the delivery of the financial
statements described in Subsection (i) above, a
certificate of such certified public accountants
certifying to the Bank that, based upon their
examination of the affairs of Group and its
Subsidiaries or of Interstate, as the case may be,
performed in connection with the preparation of said
financial statements, they are not aware of the
existence of any Event of Default or Possible
Default, or, if they are aware of such condition or
event, the nature thereof;
(iii) as soon as available, but not later than forty-five
(45) days after the end of each fiscal quarter of
Group, as of the end of such quarter (a) unaudited
interim financial statements of Group on a
Consolidated basis, including a balance sheet and
statements of income and surplus (together with
consolidating statements for each of the other
Obligors), fairly representing in all material
respects Group's Consolidated financial condition as
of the end of such month and (b) a certificate in
form and substance satisfactory to the Bank executed
by the chief financial officer of each Borrower,
certifying as to compliance by the Borrowers with the
covenants contained in Sections 7.2 (F), (G) and (H)
of this Agreement, which certificate shall set forth
in detail satisfactory to the Bank calculations
evidencing such compliance;
(iv) as soon as available, but not later than twenty (20)
days after the end of each month, (a) a Borrowing
Base certificate (in form and substance designated by
the Bank from time to time) duly completed and which
shall contain the In Transit Amount and the Eligible
Reserve as of such month end and (b) upon the Bank's
request, a report as to each Borrower's Accounts with
a supporting aged trial balance listing for each
Account Debtor, the number and dollar amount of the
Accounts due from such Account Debtor that are past
due for not more than thirty (30) days, past due for
not more than sixty (60) days, past due for not more
than ninety (90) days, and past due for more than
ninety (90) days, with the total dollar amount of
each of the foregoing;
(v) not later than thirty (30) days after the end of each
fiscal year of the Borrowers, a business plan of each
Borrower in respect of the immediately succeeding
fiscal year, which shall have been approved by the
Board of Directors of such Borrower, and which shall
include a projection of such Borrower's balance
sheet, earnings/loss and cash flow for each fiscal
quarter during such succeeding fiscal year;
(vi) immediately upon becoming aware of the existence of
an Event of Default, a written notice specifying the
nature and period of existence thereof and what
action the Obligor in question is taking or proposing
to take in respect thereof; and
<PAGE>
(vii) promptly, such other data and information (financial
and otherwise) as the Bank, from time to time,
reasonably may require;
(C) Existence; Qualification. Each Obligor shall maintain (i) its
corporate existence in the jurisdiction of its formation and (ii) its
qualification in each other jurisdiction in which the failure so to do would
have a material adverse effect on its financial condition, business, operations
or property;
(D) Charges. The Obligors shall pay and discharge promptly when due (i)
all Charges and (ii) all lawful Debt, obligations and claims for labor,
materials and supplies or otherwise which, if unpaid, might have a material
adverse effect on its financial condition, operations, business or property,
provided that Obligors shall not be required to pay and discharge or cause to be
paid and discharged any such Charges, Debt (other than the Bank Debt),
obligations or claims so long as the validity thereof shall be contested in good
faith and by appropriate proceedings diligently conducted, and further provided
that a reserve or other appropriate provision as shall be in accordance with
GAAP shall have been made therefor;
(E) Compliance with Laws. The Obligors shall observe and comply in all
material respects with all laws (including ERISA), ordinances, orders,
judgments, rules, regulations, certifications, franchises, permits, licenses,
directions and requirements of all governmental bodies, which now or at any time
hereafter may be applicable to it, a violation of which might have a material
adverse effect on its financial condition, operations, business or property;
(F) Inspection. Each Obligor shall permit representatives of the Bank
to visit its offices during normal business hours to examine the books and
records thereof and accountants' reports relating thereto, and to make copies or
extracts therefrom, and to discuss the affairs of such Obligor with the officers
thereof, at all reasonable times, and, at all reasonable times, to meet and
discuss the affairs of such Obligor with Group's accountants;
(G) Material Commitments. Each Borrower shall maintain in full force
and effect, all material agreements, including, without limitation, all leases,
franchises, copyrights, patents, licenses, permits, applications, reports,
authorizations and other rights, as are necessary for the conduct of its
business;
<PAGE>
(H) Account Notification. The Borrowers shall, immediately upon a
Borrower's learning thereof, inform the Bank, in writing, of (i) any material
delay in a Borrower's performance of any of its obligations to any Account
Debtor and of any assertion of any material claims, offsets or counterclaims by
any Account Debtor and of any allowances, credits (other than as permitted in
Section 6.2(D)) or other monies granted by a Borrower to any Account Debtor;
(ii) all material adverse information relating to the financial condition of any
Account Debtor; (iii) any facts relating to any Account which would render
untrue, in any material respects, any representation or warranty made pursuant
to Section 6.2; (iv) any litigation affecting a Borrower, whether or not the
claim is considered by the Borrowers to be covered by insurance, and of the
institution of any suit or administrative proceeding which may materially and
adversely affect the operations, financial condition or business of a Borrower
or the Bank's security interest in the Collateral;
(I) Taxes. The Borrowers shall pay all stamp and any other similar
excise taxes claimed payable by any Federal or state authority with respect to
this Agreement or the Revolving Note, which obligation shall survive the
termination of this Agreement and payment of the Bank Debt;
(J) Discharge Liens. The Borrowers shall promptly after discovery of
existence discharge any Liens against the Collateral, other than the Permitted
Encumbrances;
(K) Repair. The Borrowers shall keep and maintain all tangible
Collateral in good operating order and repair, ordinary wear and tear and
obsolescence excepted; and
(L) Other Covenants. The Borrowers shall perform, observe and comply
with such other covenants as the Bank may from time to time reasonably require
of the Borrowers to assure the repayment in full of all of the Bank Debt or the
complete and timely performance by the Borrowers of all the provisions of the
Borrowers hereunder.
7.2. Negative Covenants. The Borrowers jointly and severally covenant
and agree, and where indicated the other Obligors jointly and severally covenant
and agree, that they shall not:
(A) Other Debt. No Borrower shall incur, create, assume, or have
outstanding any Funded Debt, except (i) instruments creating or securing
Permitted Encumbrances, (ii) the Revolving Note, (iii) notes for Debt otherwise
owing to the Bank, (iv) Subordinated Debt, (v) Funded Debt shown as liabilities
of one or more of the Obligors on the Consolidated balance sheet of Group as of
December 31, 1997 delivered to the Bank prior to the Closing Date, and (vi)
Funded Debt, in addition to that described in clauses (i) through (v), above,
which does not at any time in the aggregate exceed $750,000 on a Consolidated
basis;
<PAGE>
(B) Sale and Leaseback; Liens. Except as provided in Section 5.11, no
Borrower shall enter into any sale and leaseback transaction or arrangement with
any Person with respect to any of the assets of such Borrower or its
Subsidiaries, or grant a security interest, mortgage, pledge, hypothecate or
otherwise voluntarily place a Lien upon any assets for any obligation of such
Borrower, except for Permitted Encumbrances;
(C) Merger; Consolidation; Sale. No Obligor shall merge or consolidate
with or into, or enter into any merger agreement with any other entity, or
lease, sell or transfer all or substantially all its property, assets and
business to any other entity, other than another Obligor;
(D) Investments. No Obligor shall make any advance to, or investment of
any kind in, or loan any money to, or guarantee any obligation of any other
Person or purchase any evidence of Debt or securities (including Stock) or the
business or substantially all of the property of any other Person or hereafter
make prepayments or advances to others except for (i) endorsements of
instruments or items of payment for deposit to the general account of such
Obligor in the ordinary course of business or for delivery to the Bank on
account of the Bank Debt, (ii) loans to officers of a Borrower the proceeds of
which are used to fund his or her obligations in connection with his or her
exercise of rights under an employee stock option plan, so long as the aggregate
amount of all such loans at any time outstanding does not exceed $600,000 on a
Consolidated basis, (iii) advances to employees (other than of the type
described in clause (ii), above) made in the ordinary course of such Obligor's
business in the aggregate amount of not more than $150,000 at any time
outstanding on a Consolidated basis, (iv) the obligations of such Obligor under
and pursuant to this Agreement and the Other Agreements and (v) Subsidiaries of
Group which are guarantors of the Bank Debt pursuant to a Guaranty in the form
of Exhibit D hereto;
(E) Assignment of Accounts. No Obligor shall sell, assign or transfer
any notes, accounts receivable or money due or to become due either as security
or otherwise, except to secure the Debt of the Obligors hereunder or other Debt
now or hereafter owing to the Bank;
(F) Leverage. The Obligors shall not allow the Leverage Ratio as at the
end of any fiscal quarter to be greater than forty-five percent (45%).
(G) Net Worth. The Obligors shall not allow Consolidated Net Worth (i)
as at the end of the fiscal quarter ending March 31, 1998 to be less than an
amount equal to the sum of (a) $12,000,000, plus (b) the Quarterly Increase for
such fiscal quarter; and (ii) as at the end of any fiscal quarter thereafter to
be less than an amount equal to the sum of (a) the Previous Minimum for such
fiscal quarter, plus (b) the Quarterly Increase for such fiscal quarter.
<PAGE>
(H) Interest Coverage. The Obligors shall not allow the Interest
Coverage Ratio as of the end of any fiscal quarter, commencing June 30, 1998, to
be less than (a) as at the end of the fiscal quarters ending June 30, and
September 30, 1998, 2.50 to 1, and (b) as at the end of any fiscal quarter
thereafter, 3.00 to 1;
(I) Drafts; Trade Acceptances. No Obligor shall accept any drafts or
trade acceptances against it;
(J) Records and Collateral Locations. No Borrower shall remove its
books and records and/or the Collateral from the location(s) set forth in
Schedule 6.1(E) or keep any of such books and records and/or the Collateral at
any other office(s) or location(s) unless (i) such Borrower gives the Bank
written notice thereof and of the new location of said books and records and/or
the Collateral at least thirty (30) days prior thereto and (ii) the other office
or location is within the continental United States of America; or
(K) Plans. No Obligor shall terminate any Plan which would (i) result
in any liability of any Obligor to the PBGC, or (ii) permit the occurrence of
any Reportable Event (as defined in Section 6.1(C)), or any other event or
condition, which presents a risk of such a termination by the PBGC of any Plan,
or (iii) withdraw or effect a partial withdrawal from a Multiemployer Plan if
such withdrawal would result in any Obligor's incurring any withdrawal liability
in excess of $100,000.
7.3. Payment of Charges and Claims. If an Obligor at any time or times
hereafter, shall fail to pay the Charges when due or promptly obtain the
discharge of such Charges or of any Lien asserted against the Collateral, the
Bank may, without waiving or releasing any obligation or liability of the
Obligors or any Event of Default, in its sole discretion, at any time or times
thereafter, make such payment, or any part thereof, or obtain such discharge and
take any other action with respect thereto which the Bank deems advisable. All
sums paid by the Bank hereunder and any expenses, including reasonable
attorneys' fees, court costs, expenses and other charges relating thereto, shall
be payable, upon demand, by the Borrowers to the Bank and shall be additional
Bank Debt hereunder secured by the Collateral.
7.4. Insurance, Payment of Premiums.
<PAGE>
(A) Maintenance of Insurance. Each Borrower shall, at its sole cost and
expense, keep and maintain (i) the tangible Collateral and the records relating
to the Accounts insured for their full insurable value against loss or damage by
fire (including so-called "extended coverage"), theft, explosion, sprinkler
leakage and all other hazards and risks ordinarily insured against by other
prudent owners or users of such properties in similar businesses (sometimes
referred to herein as "casualty insurance"), and (ii) insurance for liability
from personal injury and property damage in such amounts as similar businesses
maintain. The Borrowers shall notify the Bank promptly of any event or
occurrence causing a material loss or decline in value of such Collateral and
the estimated (or actual, if available) amount of such loss or decline. All
policies of insurance on such Collateral shall be in form and with insurers
recognized as adequate by prudent business persons and all such policies shall
provide such coverages and be in such amounts as may be reasonably satisfactory
to the Bank.
(B) Evidence; Requirements; Power of Attorney. At the Bank's request,
the Borrowers shall deliver to the Bank the original (or certified copy) of each
policy of insurance required hereunder and evidence of payment of all premiums
therefor. Such policies of casualty insurance shall contain a mortgagee
endorsement or provision, in form and substance acceptable to the Bank, and
shall show loss payable to the Bank. Such policies, or an independent instrument
furnished to the Bank, shall provide that the insurance companies will give the
Bank at least thirty (30) days prior written notice before any such policy or
policies of insurance shall be altered or canceled and that no act or default of
a Borrower, or any other Person shall affect the right of the Bank to recover
under such policy or policies of insurance in case of loss or damage. Each
Borrower hereby directs all insurers under such policies of casualty insurance
to pay all proceeds payable thereunder directly to the Bank. Each Borrower
irrevocably makes, constitutes and appoints the Bank (and all officers,
employees or agents designated by the Bank) as such Borrower's true and lawful
attorney and agent-in-fact for the purpose of making, settling and adjusting
claims under such policies of casualty insurance, endorsing the name of such
Borrower on any check, draft, instrument or other items of payment for the
proceeds of such policies of casualty insurance and for making all
determinations and decisions with respect to such policies of casualty
insurance. In the event a Borrower, at any time hereafter, shall fail to obtain
or maintain any of the policies of insurance required above or to pay any
premium in whole or in part relating thereto, then the Bank, without waiving or
releasing any obligations or Event of Default, may at any time thereafter (but
shall be under no obligation to) obtain and maintain such policies of insurance
and pay such premium and take any other action with respect thereto which the
Bank deems advisable. All sums so disbursed by the Bank, including reasonable
attorneys' fees, court costs, expenses and other charges relating thereto, shall
be payable on demand by the Borrowers to the Bank and shall be additional Bank
Debt hereunder secured by the Collateral.
<PAGE>
7.5. Use of Proceeds. The Borrowers covenant and agree that the
proceeds of the Revolving Loans for working capital for corporate purposes and
the conduct of their respective businesses.
7.6. Survival of Obligations Upon Termination of Agreement. Except as
otherwise expressly provided for in this Agreement and in the Other Agreements,
no termination or cancellation (regardless of cause or procedure) of this
Agreement or the Other Agreements shall in any way affect or impair the powers,
obligations, duties, rights, and liabilities of the Obligors or the Bank
relating to any transaction or event occurring prior to such termination or
cancellation.
8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
8.1. Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default":
(A) Payment. If the Borrowers shall fail to pay (i) when due, or within
five (5) days thereafter, any principal (including, without limitation,
principal due pursuant to Section 7.1(A), above) or interest under the Revolving
Note or (ii) any other portion of the Bank Debt within ten (10) days after the
Bank sends to the Borrowers written demand therefor;
(B) Other Covenants. If an Obligor (i) shall fail or omit to perform,
observe or satisfy any of the warranties, covenants, agreements or conditions
contained in Section 7.2, above or (ii) shall fail or omit to perform, observe
or satisfy any of the warranties, covenants, agreements or conditions (other
than those referred to in Paragraph (A) or in clause (i) of this Paragraph (B))
contained in this Agreement or any of the Other Agreements and such failure or
omission shall not have been fully corrected within thirty (30) days after the
giving of written notice thereof to the Borrowers by the Bank that the specified
Possible Default is to be remedied; provided, however, that if any such failure
or omission is not of the type which is susceptible to correction within said 30
day period, then such failure or omission shall be deemed an Event of Default as
of the date of occurrence thereof;
(C) Representations and Warranties. Any warranty, representation or
written statement made or furnished to the Bank by or on behalf of an Obligor
proves to have been false in any material respect when made or furnished;
(D) Cross Default. If any event occurs which allows the acceleration of
the maturity of the Debt of any Obligor for Funded Debt owing to Persons other
than the Bank in excess of $500,000, including, without limitation, the
Subordinated Debt;
<PAGE>
(E) Levy. If any Collateral is levied upon, seized or attached
judicially, and, in any of such events, the Bank does not immediately receive
substitute or replacement Collateral satisfactory to the Bank in its sole
discretion;
(F) Obligor Insolvency. If any Obligor shall suspend business, or if
any Obligor shall become insolvent or shall file a voluntary petition in
bankruptcy, or shall file a voluntary petition or an answer admitting the
jurisdiction of the court and the material allegations of, or shall consent to,
any involuntary petition pursuant to or purporting to be pursuant to any
bankruptcy, reorganization or insolvency law of any jurisdiction, or shall make
an assignment for the benefit of creditors, or shall apply for or consent to the
appointment of any receiver or trustee of all or a substantial part of the
property of such Obligor;
(G) Obligor Involuntary Proceedings. If an order shall be entered
against any Obligor (without the application, approval or consent of such
Obligor) and shall not be dismissed or stayed within thirty (30) days from its
entry pursuant to or purporting to be pursuant to any bankruptcy, reorganization
or insolvency law of any jurisdiction (i) approving an involuntary petition
seeking reorganization or liquidation; or (ii) approving an involuntary petition
seeking an arrangement with creditors of such Obligor; or (iii) appointing any
receiver or trustee of all or a substantial part of the property of such
Obligor;
(H) Other Insolvency. Default by any other surety or guarantor for an
Obligor in any obligation or liability to the Bank or the occurrence of any
event described in Section 8.1(F) or (G) in respect of any such guarantor or
surety;
(I) Loss of Collateral. Any material portion of the Collateral is
damaged or lost by fire, theft or other casualty which is uninsured, and the
Borrowers do not immediately, upon demand, furnish additional security
satisfactory to the Bank;
(J) Change of Control. A Change of Control shall occur;
(K) Judgments. Final judgment for the payment of money in excess of
$100,000 shall be rendered against any Obligor, and the same shall remain
undischarged for a period of thirty (30) days during which execution shall not
be effectively stayed;
(L) Subordinated Default. Any obligee of Subordinated Debt shall (i)
fail to materially comply with the subordination provisions of the instruments
evidencing such Subordinated Debt or any separate subordination agreement, or
(ii) initiate judicial proceedings against a Borrower or take any action seeking
to obtain possession of any assets of a Borrower without the consent of the
Bank; or
<PAGE>
(M) ERISA. If (i) any Reportable Event occurs and the Bank in its
reasonable determination deems such Reportable Event to constitute grounds (A)
for the termination of any Plan by the PBGC or (B) for the appointment by the
appropriate United States district court of a trustee to administer any Plan and
such Reportable Event shall not have been fully corrected or remedied to the
full satisfaction of the Bank within thirty (30) days after giving of written
notice of such determination to the Borrowers by the Bank or (ii) any Plan shall
be terminated within the meaning of title IV of ERISA, or (iii) a trustee shall
be appointed by the appropriate United States district court to administer any
Plan, or (iv) the PBGC shall institute proceedings to terminate any Plan or to
appoint a trustee to administer any Plan.
8.2. Acceleration of the Bank Debt.
(A) Optional Acceleration. Upon the occurrence of an Event of Default
described in Section 8.1(A), (B), (C), (D), (E), (H), (I), (J), (K), (L), or (M)
and at any time thereafter, if any such Event of Default shall then be
continuing, the Revolving Loans and all other Bank Debt shall, at the option of
the Bank and without demand, notice, or legal process of any kind, be declared,
and thereupon immediately shall become, due and payable in full, and the Bank
shall have no further obligation to advance Revolving Loans hereunder.
(B) Automatic Acceleration. Upon the occurrence of an Event of Default
described in Section 8.1(F) or (G), all of the Bank Debt shall automatically
without any declaration or other action by the Bank, and without demand, notice
or legal process of any kind, be declared, and immediately shall become, due and
payable, and the Bank shall have no further obligation to advance Revolving
Loans hereunder.
8.3. Remedies. Upon, and thereafter during the continuance of, an Event
of Default, the Bank shall have the following other rights and remedies:
(A) Cumulative Remedies. In addition to any other rights and remedies
contained in this Agreement and in all of the Other Agreements, all of the
rights and remedies of a secured party under the Code or other applicable law,
all of which rights and remedies (under this Agreement, the Other Agreements,
the Code and at law and in equity) shall be cumulative and nonexclusive, to the
extent permitted by law;
(B) Mail. The right to open the mail of the Borrowers and collect any
and all amounts due from the Account Debtors;
<PAGE>
(C) Entry; Assembly of Collateral. The right to (i) enter upon the
premises of the Borrowers without any obligation to pay rent, through self-help
and without judicial process, without first obtaining a final judgment or giving
notice and opportunity for a hearing on the validity of the Bank's claim, or any
other place or places where the Collateral is located and kept, and remove the
Collateral therefrom to the premises of the Bank or any agent of the Bank, for
such time as the Bank may desire, in order to collect or liquidate effectively
the Collateral, or (ii) require the Borrowers to assemble the Collateral and
make it available to the Bank at a place to be designated by the Bank, in its
sole discretion;
(D) Collection, Compromise of Accounts. The right to (i) demand payment
of the Accounts; (ii) enforce payment of the Accounts, by legal proceedings or
otherwise; (iii) exercise all of a Borrower's rights and remedies with respect
to the collection of the Accounts and Special Collateral; (iv) settle, adjust,
compromise, extend or renew the Accounts; (v) settle, adjust or compromise any
legal proceedings brought to collect the Accounts; (vi) if permitted by
applicable law, sell or assign the Accounts and Special Collateral upon such
terms, for such amounts and at such time or times as the Bank deems advisable;
(vii) discharge and release the Accounts and Special Collateral; (viii) take
control, in any manner, of any item of payment or proceeds referred to in
Section 5.9; (ix) prepare, file and sign each Borrower's name on any Proof of
Claim in bankruptcy or similar document against any Account Debtor; (x) prepare,
file and sign each Borrower's name on any Notice of Lien, Assignment or
Satisfaction of Lien or similar document in connection with the Accounts and
Special Collateral; (xi) do all acts and things necessary in the Bank's sole
discretion, and at its option to fulfill each Borrower's obligations under this
Agreement; (xii) endorse the name of each Borrower upon any chattel paper,
document, instrument, invoice, freight bill, bill of lading or similar document
or agreement relating to the Collateral; (xiii) use each Borrower's stationery
and sign the name of such Borrower to verifications of the Accounts and notices
thereof to Account Debtors and (xiv) use the information recorded on or
contained in any data processing equipment and computer hardware and software
relating to the Collateral to which such Borrower has access; and
<PAGE>
(E) Sale; Disposition. The right to (i) sell or to otherwise dispose of
all or any Collateral in its then condition or after any further modification or
processing thereof, at public or private sale or sales, in lots or in bulk, for
cash or on credit, all as the Bank, in its sole discretion, may deem advisable;
(ii) adjourn such sales from time to time with or without notice; (iii) conduct
such sales on a Borrower's premises or elsewhere and use a Borrower's premises
without charge for such sales for such time or times as the Bank may see fit.
The Bank is hereby granted a license or other right to use, without charge, each
Borrower's labels, copyrights, rights of use of any name, trade secrets, trade
names, trademarks and advertising matter, or any property of a similar nature as
it pertains to the Collateral, in advertising for sale and selling any
Collateral, and each Borrower's rights under all licenses, permits and all
franchise agreements which are Collateral shall inure to the Bank's benefit. The
Bank shall have the right to sell, lease or otherwise dispose of the Collateral,
or any part thereof, for cash, credit or any combination thereof, and the Bank
may purchase all or any part of the Collateral at public or, if permitted by
law, private sale and, in lieu of actual payment of such purchase price, may
setoff the amount of such price against the Bank Debt. The proceeds realized
from the sale of any Collateral shall be applied first to the reasonable costs,
expenses and attorneys' fees and expenses incurred by the Bank for collection
and for acquisition, completion, protection, removal, storage, sale and delivery
of the Collateral; second to interest due upon any of the Bank Debt; third to
the principal of the Revolving Loans; and fourth to the remaining Bank Debt, if
any. Subject to any applicable order of court or other requirement of law, any
surplus shall be paid to the Borrowers or other claimants as their interests may
appear. If any deficiency shall arise, the Borrowers shall remain liable to the
Bank therefor.
8.4. Interest Rate in the Event of Default. Upon the occurrence and
during the continuance of an Event of Default, the rate of interest accruing on
the Bank Debt (the "Default Interest Rate") shall, at the Bank's option, be
increased to a rate per annum which shall be three hundred (300) Basis Points in
excess of the rate of interest which would otherwise accrue pursuant to Section
2.3.
8.5. Notice. Any notice required to be given by the Bank of a sale,
lease, other disposition of the Collateral or any other intended action by the
Bank, if given five (5) days prior to such proposed action, shall constitute
commercially reasonable and fair notice thereof to the Borrowers.
8.6. Rights Cumulative. The Bank's rights and remedies herein are
cumulative and non-exclusive; and no such right or remedy specified in this
Article 8 shall be deemed to limit, before or after the occurrence of an Event
of Default, the exercise of any right of the Bank provided for elsewhere in this
Agreement or in the Other Agreements, including, without limitation Article 5,
above, or at law or in equity.
9. MISCELLANEOUS
9.1. Appointment of the Bank as Lawful Attorney. Each Borrower
irrevocably designates, makes, constitutes and appoints the Bank (and all
persons designated by the Bank) as such Borrower's true and lawful attorney (and
agent-in-fact) and the Bank, or the Bank's agent, may, without notice to such
Borrower:
<PAGE>
(A) At such time or times hereafter as the Bank or said agent, in its
sole discretion, may determine, in such Borrower's or the Bank's name, endorse
such Borrower's name on any checks, notes, drafts or any other payment relating
to and/or proceeds of the Collateral which come into the possession of the Bank
or under the Bank's control; and
(B) Sign the name of such Borrower on any of the Supplemental
Documentation and deliver any of the Supplemental Documentation to such Persons
as the Bank, in its sole discretion, may elect.
9.2. Modification of Agreement; Sale of Interest. This Agreement and
the Other Agreements may not be modified, altered or amended, except by an
agreement in writing signed by the Obligors and the Bank. No Borrower may sell,
assign or transfer this Agreement, or the Other Agreements or any portion
thereof, including, without limitation, such Borrower's rights, title, interest,
remedies, powers, and/or duties hereunder or thereunder. Each Obligor hereby
consents to the Bank's participation, sale, assignment, transfer or other
disposition, at any time or times hereafter of this Agreement, or the Other
Agreements, or of any portion hereof or thereof, including, without limitation,
the Bank's rights, title, interest, remedies, powers, and/or duties hereunder or
thereunder.
9.3. Expenses (Including Attorneys' Fees). The Borrowers shall pay, and
upon demand reimburse the Bank, for all of the Bank's costs and expenses
incidental to the extension of credit and the administration or modification
thereof (including, without limitation, the collection of any and all Bank Debt
and the negotiation, preparation and enforcement of this Agreement and all of
the Other Agreements) provided for in this Agreement or any Other Agreement
including reasonable fees and out-of-pocket expenses of the Bank's counsel,
title fees, survey fees, inspection fees, revenue, stamp, excise, note and
mortgage taxes claimed payable by any federal, state or local authority, with
obligation to pay all such costs to survive the termination of this Agreement
and payment of the Bank Debt. All such expenses paid by the Bank hereunder shall
be additional Bank Debt secured by the Collateral.
<PAGE>
9.4. Waiver by the Bank. The Bank's failure, at any time or times
hereafter, to require strict performance by an Obligor of any provision of this
Agreement or the Other Agreements shall not waive, affect or diminish any right
of the Bank thereafter to demand strict compliance and performance. Any
suspension or waiver by the Bank of an Event of Default under this Agreement or
the Other Agreements shall not suspend, waive or affect any other Event of
Default under this Agreement or the Other Agreements, and no Event of Default
under this Agreement or the Other Agreements shall be deemed to have been
suspended or waived by the Bank, unless such suspension or waiver is by an
instrument in writing signed by an officer of the Bank, directed to the
Borrowers and specifying such suspension or waiver.
9.5. Severability. Wherever possible, each provision of this Agreement
and the Other Agreements shall be interpreted in such manner as to be effective
and valid under applicable law. If, however, any provision of this Agreement
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement, unless the ineffectiveness of such provision materially and adversely
alters the benefits accruing to any party hereunder.
9.6. Parties. This Agreement and the Other Agreements shall be binding
upon and inure to the benefit of the Obligors and the Bank and their respective
successors and assigns. This provision, however, shall not be deemed to modify
Section 9.2 hereof.
9.7. Conflict of Terms. The Other Agreements and all Exhibits hereto
are incorporated in this Agreement by this reference thereto. Except as
otherwise provided in this Agreement and except as otherwise provided in the
Other Agreements by specific reference to the applicable provision of this
Agreement, if any provision contained in this Agreement is in conflict with, or
inconsistent with, any provision in the Other Agreements, the provision
contained in this Agreement shall govern and control.
9.8. Waivers by Obligors. Except as otherwise provided for in this
Agreement, each Obligor waives (i) presentment, demand and protest and notice of
presentment, protest, default, non-payment, maturity, release, compromise,
settlement, extension or renewal of any or all commercial paper, accounts,
contract rights, documents, instruments, chattel paper and guaranties at any
time held by the Bank on which such Obligor may in any way be liable and hereby
ratifies and confirms whatever the Bank may do in this regard; (ii) all rights
to notice of a hearing prior to the Bank's taking possession or control of, or
to the Bank's replevy, attachment or levy upon, the Collateral or any bond or
security which might be required by any court prior to allowing the Bank to
exercise any of the Bank's remedies; and (iii) the benefit of all valuation,
appraisement and exemption laws. Each Obligor acknowledges that it has been
advised by counsel of its choice with respect to this Agreement and the
transactions evidenced by this Agreement.
<PAGE>
9.9. Governing Law. THIS AGREEMENT IS EXECUTED AND DELIVERED IN THE
STATE OF OHIO, THE LAWS OF WHICH SHALL GOVERN THE VALIDITY, ENFORCEMENT, AND
INTERPRETATION HEREOF AND OF THE OTHER AGREEMENTS. EACH OBLIGOR HEREBY CONSENTS
TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF
OHIO OR ANY JURISDICTION IN WHICH COLLATERAL IS LOCATED, AND WAIVES PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON ITSELF, AND CONSENTS THAT ALL SUCH SERVICE
OF PROCESS BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO SUCH OBLIGOR AT
THE ADDRESS OF SUCH OBLIGOR SET FORTH IN SECTION 9.11, BELOW, AND SERVICE SO
MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF.
9.10. WAIVER OF JURY TRIAL. EACH OF THE BANK, MORGAN, TDI, INTERSTATE
AND GROUP, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR
OTHERWISE, BETWEEN THE BANK AND ANY OF THE OBLIGORS ARISING OUT OF, IN
CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN ANY AND ALL OF THE OBLIGORS AND THE BANK IN CONNECTION WITH THIS
AGREEMENT OR ANY OF THE OTHER AGREEMENTS OR THE TRANSACTIONS RELATED THERETO.
THIS WAIVER SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY THE
BANK'S ABILITY TO PURSUE REMEDIES PURSUANT TO ANY CONFESSION OF JUDGMENT OR
COGNOVIT PROVISION CONTAINED IN THE REVOLVING NOTE, ANY GUARANTY OF PAYMENT OR
ANY OTHER AGREEMENT, INSTRUMENT OR DOCUMENT RELATED THERETO.
9.11. Notice. All notices, requests, demands, directions and other
communications given to or made upon any party hereto under the provisions of
this Agreement shall be in writing (including telecopied communication) and
shall be hand delivered or sent by certified mail, return receipt requested, or
first class "Express Mail" or overnight courier service, with receipt for
delivery thereof, or by telex, telecopy or telegram with confirmation in writing
by certified mail, return receipt requested or Express Mail or overnight courier
service, with receipt for delivery thereof, in all cases with postage or charges
prepaid, to the applicable party, addressed as follows:
If to the Bank: KeyBank National Association
127 Public Square
Cleveland, Ohio 44114
Attn: Mark A. LoSchiavo
With a copy to: Berick, Pearlman & Mills Co., L.P.A.
1350 Eaton Center
1111 Superior Avenue
Cleveland, Ohio 44114
Osborne Mills, Jr., Esq.
If to an Obligor: c/o The Morgan Group, Inc.
2746 Old U.S. Route 20 West
Elkhart, Indiana 46515
Attn: Dennis Duerksen
<PAGE>
With a copy to: Barnes & Thornburg
600 1st Source Bank Center
100 North Michigan
South Bend, Indiana 46601
Attn: Brian J. Lake, Esq.
or in accordance with any unrevoked written direction from any party to each of
the other parties hereto. Each such notice shall be deemed to have been given or
received on the date received, except when sent by Express Mail or overnight
courier service, in which case such notice shall be deemed to have been received
on the next business day thereafter, and except further when sent by certified
mail, in which case such notice shall be deemed to have been received on the
third business day thereafter.
9.12. Section Titles. The Section titles contained in this Agreement
are and shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreement between the parties hereto.
9.13. No Assurance of Extension or Renewal. The Borrowers confirm that
the Bank has not made or given any agreement, understanding or other assurance
that the Bank will agree to extend or renew the term of the Revolving Credit
Facility beyond its maturity stated above. Without limiting the generality of
the foregoing sentence, the Borrowers also confirm that the inclusion in this
Agreement of certain covenants or other provisions containing or contemplating
dates which are after such stated maturity of the Revolving Credit Facility were
included herein solely for convenience in the event that such term is extended
or renewed and shall not be construed to imply that the Bank has made or given
any agreement, understanding or other assurance that it will extend or renew
such term.
<PAGE>
10. JOINT AND SEVERAL
The Borrowers agree and acknowledge that their liability to pay all
Bank Debt and to perform all other obligations under this Agreement and each
Other Agreement to which they are a party is and shall be joint and several. No
Borrower shall have any right of subrogation, reimbursement or similar right in
respect of its payment of any sum or its performance of any other obligation
hereunder unless and until all Bank Debt has been paid in full and the Bank has
no further obligation hereunder. In addition, each Borrower confirms that upon
the Bank's advance of the Revolving Loans, it will have received adequate
consideration and reasonably equivalent value for the Debt incurred and other
agreements made in the this Agreement and the Other Agreements in that (i) their
businesses are operated as an integrated group, (ii) due to the nature of such
businesses, it is highly unlikely that the Borrowers could be financed
separately upon terms as favorable as they are under a unified credit facility,
and (iii) without the financing provided by the Bank hereunder to the Borrowers
jointly, no Borrower could reasonably expect to obtain financing separately on
terms as favorable as those provided for herein.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year first set forth above.
BANK BORROWERS
KEYBANK NATIONAL ASSOCIATION MORGAN DRIVE AWAY, INC.
By:/s/ Richard A. Pohle By:/s/ Dennis Duerksen
-------------------------- ----------------------------
Richard A. Pohle, Dennis Duerksen,
Vice President Chief Financial Officer
GUARANTOR
THE MORGAN GROUP, INC. TDI, INC.
By:/s/ Dennis Duerksen By: /s/ Dennis Duerksen
-------------------------- ----------------------------
Dennis Duerksen, Dennis Duerksen,
Chief Financial Officer Chief Financial Officer
INTERSTATE INDEMNITY COMPANY
By:/s/ Dennis Duerksen
----------------------------
Dennis Duerksen,
Vice President
<PAGE>
SCHEDULES AND EXHIBITS
Schedules:
Schedule 1A Financials
Schedule 1B Licenses, Patents, Etc.
Schedule 6.1(B) Permitted Encumbrances
Schedule 6.1(E) Locations of Inventory, Equipment,
Books and Records Relating to Collateral
Exhibits:
Exhibit A Form of Revolving Note
Exhibit B Form of Opinion of Borrower's Counsel
Exhibit C Form of Landlord Waiver
Exhibit D Form of Continuing Guaranty
<PAGE>
EXHIBIT A
AMENDED AND RESTATED REVOLVING CREDIT NOTE
$15,000,000 Cleveland, Ohio
March 31, 1998
FOR VALUE RECEIVED, the undersigned MORGAN DRIVE AWAY, INC., TDI, INC.,
and INTERSTATE INDEMNITY COMPANY (each a "Borrower" and, collectively, the
"Borrowers"), jointly and severally, promise to pay to the order of KEYBANK
NATIONAL ASSOCIATION (together with any subsequent holder of all or any portion
of this Note, the "Bank"), at 127 Public Square, Cleveland, Ohio 44114 or such
other address as the Bank may from time to time designate in writing, on April
30, 2001 the principal sum of FIFTEEN MILLION DOLLARS ($15,000,000) or the
aggregate unpaid principal amount of all loans evidenced by this Note made by
the Bank to the Borrowers or any of them pursuant to the Credit Agreement (as
hereinafter defined), whichever is less, in lawful money of the United States of
America. Capitalized terms used herein and not otherwise defined herein shall
have the meanings ascribed to such terms in that certain Amended and Restated
Credit Agreement and Security Agreement dated March 25, 1998 (as the same may
from time to time be amended, supplemented, restated or otherwise modified, the
"Credit Agreement"), among the Borrowers, the Bank and The Morgan Group, Inc.
The Borrowers jointly and severally promise to pay interest on the
unpaid principal amount of each Revolving Loan evidenced hereby from the date of
such Revolving Loan until principal amount is paid in full, at such interest
rates, computed in such manner, and payable at such times, as are specified in
the Credit Agreement. The Borrowers jointly and severally promise to pay on
demand interest on any overdue principal and, to the extent permitted by law,
overdue interest from their due dates at the rate or rates set forth in the
Credit Agreement; and upon and during the continuance of an Event of Default,
the indebtedness evidenced hereby shall bear interest at the Default Interest
Rate.
The portions of the principal sum hereof from time to time representing
Prime Rate Loans and LIBOR Loans, and payments of principal of any thereof, will
be shown on a ledger or other record of the Bank or by such other method as the
Bank may generally employ; provided, however, that failure to make any such
entry or any error in such entries shall in no way detract from the Borrowers'
obligations under this Note.
<PAGE>
This Note is the Revolving Note referred to in the Credit Agreement.
Reference is made to the Credit Agreement for a description of the right of the
Borrowers to anticipate payments hereof, the right of the Bank to declare this
Note due prior to its stated maturity, and other terms and conditions upon which
this Note is issued. Without limiting the generality of the foregoing, upon the
occurrence of an Event of Default of the type described in Section 8.1(F) or (G)
of the Credit Agreement, the maturity of the obligations evidenced hereby shall,
automatically and without any action by the Bank, be accelerated, and such
obligations shall be immediately due and payable. Upon the occurrence of any
other Event of Default, the Bank may, at its option, without notice or demand,
accelerate the maturity of the obligations evidenced hereby, which obligations
shall become immediately due and payable. In the event the Bank shall institute
any action for the enforcement or collection of the obligations evidenced
hereby, the undersigned agrees to pay all costs and expenses of such action,
including reasonable attorneys' fees, to the extent permitted by law.
The indebtedness evidenced by this Note is secured by a Lien in the
Collateral pursuant to the Credit Agreement and is guaranteed by the Guaranty of
The Morgan Group, Inc.
This Note evidences the Borrowers' indebtedness for Revolving
Loans and amends and restates in its entirety the Master Revolving Note of
Morgan and TDI in the face amount of $13,000,000 in favor of the Bank dated
March 27, 1997 (as amended by an amendment dated March 6, 1998, the "Prior
Note")(with Interstate joining in this Note pursuant to the Credit Agreement),
provided that this Note shall not be construed to evidence a payment and
readvance of the Revolving Loans evidenced thereby and hereby, it being the
intention of the Borrowers and, by its acceptance hereof, the Bank that both
such Notes evidence the same indebtedness. In addition to the foregoing, this
Note also evidences the indebtedness of the Borrowers for accrued and unpaid
interest due under the Prior Note which remains unpaid on the date hereof, all
of which interest shall be due and payable in full on March 31, 1998.
The Borrowers and each endorser, surety and guarantor hereby waive
diligence, presentment, demand, protest and notice of any kind whatsoever. The
failure to exercise or delay in exercise by the Bank of any of its rights
hereunder in any particular instance shall not constitute a waiver in that or
any subsequent instance.
<PAGE>
The joint and several obligations of each of the Borrowers under this
Note shall be absolute and unconditional and shall remain in full force and
effect until all of the obligations hereunder shall have been paid or deemed
paid and, until such payment has been made, shall not be discharged, affected,
modified or impaired upon the happening from time to time of any event,
including without limitation, any of the following, whether or not with notice
to or the consent of any of the Borrowers:
(a) the waiver, compromise, indulgence, settlement, release,
termination, modification or amendment (including, without
limitation, any extension or postponement of the time for
payment or performance or renewal or refinancing) of any or
all of the obligations, covenants or agreements of any of the
Borrowers under this Note, the Credit Agreement or any of the
Other Agreements;
(b) the failure to give notice to any or all of the Borrowers of
the occurrence of an Event of Default;
(c) the release, substitution or exchange by the Bank of any
security held by it for the payment of any of the Liabilities
or the acceptance by the Bank of any additional security for
the Bank Debt or the availability, or claimed availability, of
any other security, collateral or source of repayment;
(d) the voluntary or involuntary liquidation, dissolution, sale or
other disposition of all or substantially all of the assets,
marshaling of assets and liabilities, receivership,
insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangement, composition with
creditors or readjustment of, or other similar proceedings
affecting, any or all of the Borrowers or any other person or
entity who, or any of whose property, shall at any time in
question be obligated in respect of the Liabilities or any
part thereof;
(e) any failure, omission, delay or neglect by the Bank in
enforcing asserting or exercising any right, power or remedy
under this Note, the Credit Agreement or any of the Other
Agreements or at law or in equity;
(f) the release of any person primarily or secondarily liable for
all or any part of the Bank Debt;
(g) any nonperfection or other impairment of any security;
(h) any assignment or transfer by the Bank of all or any interest
in this Note;
(i) the invalidity or unenforceability of any term or provision in
this Note, the Credit Agreement or any of the Other
Agreements; or
<PAGE>
(j) to the extent permitted by law, any event or action that
would, in the absence of the provisions hereof, result in the
release or discharge of any or all of the Borrowers from the
performance or observance of any obligation, covenant or
agreement contained in this Note, the Credit Agreement or any
of the Other Agreements.
Without limiting the foregoing, it is the intention of the parties that any
modification, limitation, or discharge of the obligations of any of the
Borrowers arising out of or by virtue of any bankruptcy, reorganization, or
similar proceeding for relief of debtors under federal or state law shall not
affect, modify, limit or discharge the liability of any other co-Obligor in any
manner whatsoever, and this Note shall remain and continue in full force and
effect and shall be enforceable against such co-Obligors to the same extent and
with the same force and effect as if any such proceedings had not been
instituted, and the other co-Obligors shall be jointly and severally liable to
the Bank under this Note for the full amount payable hereunder, irrespective of
any modification, limitation, or discharge of the liability of any co-Obligor
that may result from any such proceeding. The obligations of the Borrowers to
the Bank pursuant hereto include and apply to any payment or repayments received
by the Bank on account of the liabilities evidenced hereby which payment or
payments or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside and/or required to be paid to a trustee,
receiver, or any other person or entity under any bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar law or equitable
doctrine. If any action or proceeding seeking such repayment is pending or, in
the Bank's sole judgment, threatened, this Note and, any security interest
herefor, shall remain in full force and effect notwithstanding that one, or more
or all of the Borrowers may not then be obligated to the Bank. The joint and
several obligations of the Borrowers to the Bank under and pursuant to this Note
and any security therefor, shall remain in full force and effect until the Bank
has received payment in full of all obligations hereunder and the expiration of
any applicable preference or similar period pursuant of any bankruptcy,
insolvency, reorganization, moratorium or similar law, or at law or in equity,
without any claim having been made before the expiration of such period
asserting an interest in all or any part of any payments received by the Bank.
If any of the terms or provisions of this Note shall be deemed
unenforceable, the enforceability of the remaining terms and provisions shall
not be affected. This Note shall be governed by and construed in accordance with
the law of the State of Ohio.
<PAGE>
Each Borrower (a) hereby irrevocably submits to the jurisdiction of the
state courts of the State of Ohio and to the jurisdiction of the United States
District Court for the Northern District of Ohio, for the purpose of any suit,
action or other proceeding arising out of or based upon this Note or the subject
matter hereof brought by the Bank or its successors or assigns and (b) hereby
waives, and agrees not to assert, by way of motion, as a defense, or otherwise,
in any such suit, action or proceeding, any claim that it is not subject
personally to the jurisdiction of the above-named courts, that its property is
exempt or immune from attachment or execution, that the suit, action or
proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that this Note or the subject matter hereof
may not be enforced in or by such court and (c) hereby waives and agrees not to
seek any review by any court of any other jurisdiction which may be called upon
to grant an enforcement of the judgment of any such Ohio state or federal court.
Each Borrower agrees that its submission to jurisdiction and its consent to
service of process by mail is made for the express benefit of the Bank. Final
judgment against any Borrower in any such action, suit or proceeding may be
enforced in other jurisdictions (a) by suit, action or proceeding on the
judgment, or (b) in any other manner provided by or pursuant to the laws of such
other jurisdiction; provided, however, that the Bank may at its option bring
suit, or institute other judicial proceedings, against a Borrower in any state
or federal court of the United States or of any country or place where such
Borrower or its property may be found.
EACH BORROWER AND, BY ACCEPTANCE HEREOF, THE BANK , TO THE EXTENT
PERMITTED BY LAW WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY
DISPUTE WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE BANK AND
SUCH BORROWER ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO
THE RELATIONSHIP ESTABLISHED BETWEEN SUCH BORROWER (AND, IF APPLICABLE, THE
OTHER BORROWERS AND MORGAN GROUP, INC.) AND THE BANK IN CONNECTION WITH THIS
NOTE, THE CREDIT AGREEMENT OR ANY OTHER AGREEMENT, INSTRUMENT, OR DOCUMENT
EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS RELATED
THERETO.
MORGAN DRIVE TDI, INC. INTERSTATE INDEMNITY
AWAY, INC. COMPANY
By /s/ Dennis Duerksen By /s/ Dennis Duerksen By /s/ Dennis Duerksen
-------------------- --------------------- ----------------------
Dennis Duerksen, Dennis Duerksen, Dennis Duerksen,
Chief Financial Chief Financial Vice President
Officer Officer
<PAGE>
EXHIBIT C
LANDLORD ESTOPPEL CERTIFICATE, WAIVER AND CONSENT
This Landlord Estoppel Certificate, Waiver and Consent is made this __
day of March, 1998, by ____________________________, a _______________________
("Landlord"), for the benefit of KEYBANK NATIONAL ASSOCIATION, a national
banking association, and its successors and assigns ("Bank").
Landlord has entered into a certain Lease Agreement dated
_____________, 199__ ("Lease") with ______________________, a __________
corporation ("Borrower"), as lessee or tenant, for certain premises consisting
of _______ square feet located at ________________________________, ___________,
_______, ___________ County, _____ _____ ("Premises").
Bank is about to enter into a financing arrangement with Borrower and
as a condition to Bank's financing, Bank requires, among other things, certain
liens and security interests in and to all of Borrower's personal property, now
owned or hereafter acquired, including, without limitation, all of Borrower's
existing and future contract rights, accounts, accounts receivable, general
intangibles and all goods, inventory, machinery, equipment, fixtures, cash,
documents, instruments and chattel paper now owned or hereafter acquired by
Borrower, wherever located, including all proceeds of any and all of the
foregoing and all payments under insurance policies with respect to any of the
foregoing (collectively, the "Personal Property").
In addition, Bank requires, as a condition to its agreement to enter
into the above-referenced transaction, among other things, certain agreements
from Landlord with respect to the Lease and the Premises.
In consideration of the foregoing and of Landlord's ongoing business
relationship with Borrower, Landlord hereby represents and agrees as follows:
1. The Lease, a true and complete copy of which is attached
hereto as Exhibit A, is at present in full force and effect on
the date hereof; it has not been amended, supplemented,
extended or renewed in any respect except for such amendments
as may be included in said Exhibit; and there is no other
agreement or instrument to which Landlord is a party, which is
binding upon Borrower and which relates to the Premises,
including any assignment of the Lease. The terms of the Lease
include the following:
a. The term of the Lease is __ (__) years. The
commencement date is ____________________. The
expiration date is ________________.
<PAGE>
b. The Lease provides for the following renewal or
expansion options:
============================
c. The initial annual base rent payable under the Lease
is $____________ payable in equal monthly
installments of $_____________.
d. The Lease provides for payment by Borrower of
additional rent as follows:
-----------------------------
e. The amount of the security deposit or any other
deposit of Borrower being held by Landlord tinder the
Lease is: $___________
2. There is no action, whether voluntary or otherwise, pending against
Landlord under bankruptcy or insolvency laws of the United States or
any state thereof which would prevent Landlord from fulfilling its
obligations under the Lease.
3. Landlord represents that Landlord is not in default under the Lease and
that Landlord has no knowledge that Borrower is currently in default
thereunder.
4. Landlord waives and relinquishes all rights of levy or distraint for
rent.
5. The Personal Property may be stored, utilized and/or installed in the
Premises and will not be deemed to be a fixture, real property or part
of the Premises, but rather will at all times be considered personal
property.
6. Landlord disclaims any interest in the Personal Property and agrees to
assert no claim to the Personal Property while Borrower is indebted to
Bank. Landlord represents and warrants to Bank that the Personal
Property is not subject to any lien or claim in favor of any mortgagee
of the Premises, and Landlord agrees that any future mortgage or lien
in favor of any mortgagee of the Premises will not create a security
interest or lien against the Personal Property.
7. Bank or its representatives may enter upon the Premises at any
reasonable time to inspect or remove the Personal Property provided,
however, that Bank shall repair at its own expense any injury to the
Premises caused by such removal, and may advertise and conduct a public
auction or private sale on the Premises.
<PAGE>
8. In the event of a default by Borrower under any of its agreements or
other financial arrangements with Bank and notice of such default
having been given to the Landlord, at the option of Bank, the Personal
Property may remain on the Premises for up to one hundred eighty (180)
days at the base rental provided under the Lease, without Bank
incurring any other obligations of Borrower under the Lease and without
Bank being deemed to be in possession of the Premises.
9. Landlord agrees that simultaneously with any written notice to Borrower
of any default by Borrower of any of the provisions of the Lease, the
Landlord will give a copy of such written notice to Bank at:
KeyBank National Association
127 Public Square
Cleveland, Ohio 44114
Attention: Mark A. LoSchiavo
Upon receipt of the notice, Bank will have at least thirty (30) days to
cure the default (in which event the Lease shall remain in full force
and effect), but Bank will have no obligation to do so.
10. Landlord consents to the grant by Borrower of an assignment of
Borrower's leasehold interest in the Lease in favor of Bank as security
for the financing extended to Borrower. Landlord hereby further
consents to acquisition by Bank, at Bank's option (which option is to
be exercised in writing within thirty (30) days of Bank's receipt of
notice of default as provided in Section 9, above, with notice to the
Landlord), of the absolute ownership of Borrower's interest in the
Lease, and does hereby agree that if Bank (or any purchaser under or
through Bank, including a purchaser by foreclosure or deed in lieu
thereof) takes possession of the leasehold estate, Bank (or such
purchaser) will, pursuant to the aforementioned notice, be recognized
as the lessee under the Lease. If Bank shall become the lessee
hereunder, Bank may sublease or assign the Lease for any lawful
purpose, subject to Landlord's consent as to the sublessee or assignee,
and the assignment of the Lease shall release and relieve Bank of all
obligations under the Lease.
11. This Waiver and Consent is binding on Landlord and the heirs, personal
representatives, successors and assigns of Landlord and inures to the
benefit of Bank and the successors and assigns of Bank.
12. The agreements contained herein shall continue in force until all of
Borrower's obligations and liabilities to Bank are paid and satisfied
in full and Bank's financing commitments to Borrower have been
terminated.
<PAGE>
13. Landlord will notify all successor owners, transferees, purchasers and
mortgagees of the Premises of which Landlord is aware of the existence
of this Waiver and Consent. Landlord shall not agree to subordinate the
Lease to the right of any present or future lender or mortgagee of
Landlord unless such subordination includes a provision that in the
event of foreclosure or other right asserted under the mortgage, the
Lease and the rights of Borrower thereunder shall continue in full
force and effect and shall not be disturbed unless Borrower is in
default under the Lease.
14. The agreements contained herein may not be modified or terminated
orally.
IN WITNESS WHEREOF, Landlord has hereunto set its hand as of the date
first above written.
LANDLORD:
------------------------
By:_______________________
Its:_________________
BORROWER'S ACKNOWLEDGMENT
Borrower hereby acknowledges and concurs with the foregoing agreements
by Landlord as of this ___ day of March, 1998
------------------------
By:_____________________
Its:_______________
<PAGE>
Acknowledgment
STATE OF ______________ )
)
COUNTY OF ____________ )
BEFORE ME, a Notary Public for said county and state, personally
appeared _______________________________, a ________________, by its
_____________, ______________________, who acknowledged that he/she signed the
foregoing Waiver and Consent and that the same is the free act and deed of said
___________ and of him/her personally and as such ___________.
Witness my hand at _______________, _________, this ____ day of March,
1998.
-----------------------------
NOTARY PUBLIC
My Commission expires:
<PAGE>
EXHIBIT D
AMENDED AND RESTATED CONTINUING GUARANTY
WHEREAS, MORGAN DRIVE AWAY, INC., TDI, INC., and INTERSTATE INDEMNITY
COMPANY (each a "Company" and, collectively, the "Companies"), have entered into
a certain Amended and Restated Credit and Security Agreement dated March 25,
1998 (as hereafter amended and supplemented, the "Credit Agreement") with
KeyBank National Association, a national banking association (the "Bank"),
pursuant to which the Companies have executed and delivered the Revolving Note
(as this and other capitalized terms not otherwise herein are defined in the
Credit Agreement) in evidence of its obligations thereunder to the Bank;
WHEREAS, the undersigned (the "Guarantor") is the record and beneficial
holder of all of the issued and outstanding Voting Stock of each Company; and
the Guarantor will derive benefits as a result of the Credit Agreement and the
Revolving Loans to be advanced thereunder; and
WHEREAS, it is a condition precedent to the effectiveness of the Credit
Agreement that the Guarantor execute and deliver this Guaranty; and the
Guarantor desires that the Credit Agreement become effective;
NOW, THEREFORE, in order to induce the Bank to enter into the Credit
Agreement, and in consideration of the benefits expected to accrue to the
Guarantor by reason thereof, and for other good and valuable consideration,
receipt and sufficiency of which are hereby acknowledged, the Guarantor hereby
represents and warrants to, and covenants and agrees with the Bank, as follows:
<PAGE>
The Guarantor does hereby irrevocably and unconditionally guarantee to
the Bank the punctual payment of the full amount, when due (whether by demand,
acceleration or otherwise), of (i) the principal and interest on the Revolving
Note issued by the Companies pursuant to the Credit Agreement, and any amendment
or supplement thereto whether now outstanding or hereafter issued (including
interest accruing thereon after the commencement of any case or proceeding under
any federal or state bankruptcy, insolvency or similar law (a "Proceeding")
whether or not a claim for such interest is allowable in such Proceeding
("Post-Petition Interest")), and (ii) all other obligations and liabilities of
the Companies to the Bank under the Credit Agreement or under any other
agreement or instrument, including, without limitation, in respect of any letter
of credit or any reimbursement agreement in connection therewith, whether now or
hereafter existing, due or to become due, direct or contingent, joint, several
or independent, secured or unsecured and whether matured or unmatured (including
Post-Petition Interest ) (all of the liabilities included in clauses (i) and
(ii) of this Paragraph are hereinafter collectively referred to as the
"Guaranteed Obligations"). This is a guaranty of payment and not of collection
and is the primary obligation of the Guarantor; and the Bank may enforce this
Guaranty against the Guarantor without any prior pursuit or enforcement of the
Guaranteed Obligations against the Companies, any collateral, any right of
set-off or similar right, any other guarantor or other obligor or any other
recourse or remedy in the power of the Bank.
All payments made by the Guarantor under or by virtue of this Guaranty
shall be paid to the Bank at its office at 127 Public Square, Cleveland, Ohio
44114 or such other place as the Bank may hereafter designate in writing. The
Guarantor hereby agrees to make all payments under or by virtue of this Guaranty
to the Bank as aforesaid no later than ten (10) days following the date on which
the Bank sends written demand hereunder to the Guarantor.
The Guarantor hereby waives (i) notice of acceptance of this Guaranty,
notice of the creation, renewal or accrual of any of the Guaranteed Obligations
and notice of any other liability to which it may apply, and notice of or proof
of reliance by the Bank upon this Guaranty, (ii) diligence, protest, notice of
protest, presentment, demand of payment, notice of dishonor or nonpayment of any
of the Guaranteed Obligations, suit or taking other action or making any demand
against, and any other notice to the Companies or any other party liable
thereon, (iii) any defense based upon any statute or rule of law to the effect
that the obligation of a surety must be neither larger in amount nor in other
respects more burdensome than that of the principal, (iv) any defense based upon
the Bank's administration or handling of the Guaranteed Obligations, except
behavior which amounts to bad faith, and (v) to the fullest extent permitted by
law, any defenses or benefits which may be derived from or afforded by law which
limit the liability of or exonerate guarantors or sureties, or which may
conflict with terms of this Guaranty.
So far as the Guarantor is concerned, the Bank may, at any time and
from time to time, without the consent of, or notice to, the Guarantor, and
without impairing or releasing any of the Guaranteed Obligations hereunder, upon
or without any terms or conditions and in whole or in part:
1. modify or change the manner, place or terms of, and/or change
or extend the time of payment of, renew or alter, any of the
Guaranteed Obligations, any security therefor, or any
liability incurred directly or indirectly in respect thereof,
and this Guaranty shall apply to the Guaranteed Obligations as
so modified, changed, extended, renewed or altered;
<PAGE>
2. request, accept, sell, exchange, release, subordinate,
surrender, realize upon or otherwise deal with, in any manner
and in any order, (a) any other guaranty by whomsoever at any
time made of the Guaranteed Obligations or any liabilities
(including any of those hereunder) incurred directly or
indirectly in respect thereof or hereof, and/or any offset or
right with respect thereto, and (b) any property by whomsoever
at any time pledged, mortgaged or otherwise encumbered to
secure, or howsoever securing, the Guaranteed Obligations or
any liabilities (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and/or
any offset or right with respect thereto;
3. exercise or refrain from exercising any rights against the
Companies or against any collateral or others (including,
without limitation, any other guarantor) or otherwise act or
refrain from acting;
4. settle or compromise any of the Guaranteed Obligations, and
security therefor or any liability (including any of those
hereunder) incurred directly or indirectly in respect thereof
or hereof, and subordinate the payment of all or any part
thereof to the payment of any liability (whether due or not)
of any Company to creditors of such Company other than the
Bank when, in the Bank's sole judgment, it considers such
subordination necessary or helpful in the protection of its
interest or the exercise of its remedies, including, without
limitation, the sale or other realization upon collateral;
5. apply in the manner determined by the Bank any sums by
whomsoever paid or howsoever realized to any of the Guaranteed
Obligations, regardless of what liability or liabilities of
the Companies remain unpaid; and
6. amend or otherwise modify, consent to or waive any breach of,
or any act, omission or default or Event of Default under the
Credit Agreement or the Revolving Note, or any agreements,
instruments or documents referred to therein or executed and
delivered pursuant thereto or in connection therewith.
<PAGE>
This Guaranty and the obligations of the Guarantor hereunder shall be
valid and enforceable and shall not be subject to limitation, impairment or
discharge for any reason (other than the payment in full of the Guaranteed
Obligations), including, without limitation, the occurrence of any of the
following, whether or not the Guarantor shall have had notice or knowledge of
any of them: (i) any failure to assert or enforce or agreement not to assert or
enforce, or the stay or enjoining, by order of court, by operation of law or
otherwise, of the exercise or enforcement of, any claim or demand of any right
power or remedy with respect to the Guaranteed Obligations or any agreement
relating thereto or with respect to any other guaranty thereof or security
therefor, (ii) any waiver, amendment or modification of, or any consent to
departure from, any of the terms or provisions (including, without limitation,
provisions relating to Events of Default) of the Credit Agreement, the Revolving
Note or any other agreement at any time executed in connection therewith, (iii)
the Guaranteed Obligations or any portion thereof at any time being found to be
illegal, invalid or unenforceable in any respect, (iv) the application of
payments received from any source to the payment of indebtedness other than the
Guaranteed Obligations, even though the Bank might have elected to apply such
payment to the payment of all or any part of the Guaranteed Obligations, (v) any
failure to perfect or continue perfection of a security interest in any
collateral which secures any of the Guaranteed Obligations, (vi) any defenses,
set-offs or counterclaims which any Company may allege or assert against the
Bank in respect of the Guaranteed Obligations, (vii) the avoidance or
voidability of the Guaranteed Obligations under the Bankruptcy Code or other
applicable laws, and (viii) any other act or thing or omission which may or
might in any manner or to any extent vary the risk of the Guarantor as an
obligor in respect of the Guaranteed Obligations.
The Guarantor makes the following representations and warranties, which
shall survive the execution and delivery of this Guaranty:
The execution, delivery and performance of this Guaranty has
been duly authorized by all necessary action of the
Guarantor's shareholders and directors.
<PAGE>
Neither the execution and delivery of this Guaranty nor the
consummation of the transactions herein contemplated, nor
compliance with the terms and provisions hereof, will
contravene any provision of the Guarantor's charter or by-laws
or of any law, statute, rule or regulation to which the
Guarantor is subject or any judgment, decree, award,
franchise, order or permit, or will conflict or will be
inconsistent with, or will result in any breach of, any of the
terms, covenants or provisions of, or constitute a default
under, or result in the creation or imposition of any lien,
security interest, charge or other encumbrance upon any of the
properties or assets of the Guarantor pursuant to the terms of
any indenture, mortgage, deed of trust, agreement or other
instrument to which the Guarantor is a party or by which it is
bound or to which it may be subject.
Any and all rights and claims of the Guarantor against any
Company or any of its property, arising by reason of any payment by the
Guarantor to the Bank pursuant to the provisions of this Guaranty, shall be
subordinate and subject in right of payment to the prior and indefeasible
payment in full of all Guaranteed Obligations to the Bank, and until such time,
the Guarantor shall have no right of subrogation, contribution, reimbursement or
similar right and hereby waives any right to enforce any remedy the Bank or the
Guarantor may now or hereafter have against the Companies, any endorser or any
other guarantor of all or any part of the Guaranteed Obligations of the
Companies and any right to participate in, or benefit from, any security given
to the Bank to secure any Guaranteed Obligations. Any promissory note evidencing
such liability of any Company to the undersigned shall be non-negotiable and
shall expressly state that it is subordinated pursuant to this Guaranty. All
liens and security interests of the Guarantor, whether now or hereafter arising
and however existing, in any assets of any Company or any assets securing
Guaranteed Obligations shall be and hereby are subordinated to the rights and
interests of the Bank in those assets until the prior and indefeasible payment
in full of all Guaranteed Obligations to the Bank and termination of all
financing arrangements between the Companies and the Bank, provided that the
provisions of this sentence shall not be construed as a waiver or modification
of the provisions of Section 7.2 of the Credit Agreement restricting each
Company's right to grant or permit liens or encumbrances on its property.
The Guarantor hereby agrees to indemnify and hold harmless the Bank from
and against any losses, costs or expenses (including, without limitation,
reasonable attorneys' fees and litigation costs) ("Loss and Expense") incurred
by the Bank in connection with the Bank's collection of any sum due hereunder or
its enforcement of its rights hereunder.
All notices, requests, demands or other communications hereunder shall be
in writing, either by letter (delivered by hand or commercial delivery service
or sent by certified mail, return receipt requested), addressed as follows:
If to the Guarantor: 2746 Old U.S. Route 20 West
Elkhart, Indiana 46515
Attn: Dennis Duerksen
If to the Bank: 127 Public Square
Cleveland, Ohio 44114
Attn: Mark A. LoSchiavo
<PAGE>
Any notice, request, demand or other communication hereunder shall be
deemed to have been duly given when delivered, in the case of hand delivery or
commercial delivery service, and three (3) business days following deposit in
the mails, postage prepaid. The Bank and any Guarantor may change the person or
address to whom or which notices are to be given hereunder, by notice duly given
hereunder.
No delay on the part of the Bank in exercising any of its options, powers
or rights, and no partial or single exercise thereof, whether arising hereunder,
under the Credit Agreement, the Revolving Note, or otherwise, shall constitute a
waiver thereof or affect any right hereunder. No waiver of any such rights and
no modification, amendment or discharge of this Guaranty shall be deemed to be
made by the Bank or shall be effective unless the same shall be in writing
signed by the Bank, and then such waiver shall apply only with respect to the
specific instance involved and shall in no way impair the rights of the Bank or
the obligations of the Guarantor to the Bank in any other respect at any other
time.
Whenever the Bank shall credit any payment to the Guaranteed Obligations
or any part thereof, whatever the source or form of payment, the credit shall be
conditional as to the Guarantor unless and until the payment shall be final and
valid and indefeasible as to all the world. Without limiting the generality of
the foregoing, the Guarantor agrees that if any check or other instrument so
applied shall be dishonored by the drawer or any party thereto, or if any
proceeds of collateral so applied shall thereafter be recovered by any trustee
in bankruptcy or anyone else, the Bank in each case may reverse any entry
relating thereto in its books, and the Guarantor shall remain liable therefor
even if the Bank may no longer have in its possession any evidence of the
Guaranteed Obligations to which the payment in question was applied.
This Guaranty and the respective rights and obligations of the Bank and
the Guarantor hereunder shall be construed and enforced in accordance with the
laws of the State of Ohio applicable to contracts made and to be performed
wholly within such state. The Guarantor irrevocably consents that service of
notice, summons or other process in any action or suit in any court of record to
enforce this Guaranty may be made upon the Guarantor by mailing a copy of the
summons to the Guarantor by certified or registered mail, at the address
specified above. The Guarantor hereby waives the right to interpose
counterclaims or set-offs of any kind and description in any such action or suit
arising hereunder or in connection herewith.
<PAGE>
It is the intention of the Guarantor hereby, and by acceptance of this
Guaranty the Lender agrees, that this Guaranty amends and restates in its
entirety the existing guaranty of the Guarantor in favor of the Bank dated March
27, 1997, which, subject to the effectiveness of this Guaranty, shall be deemed
to be superseded and of no further effect.
This Guaranty shall be binding upon the Guarantor and its successors and
assigns, and shall inure to the benefit of the Bank and its successors and
assigns. This Guaranty embodies the entire agreement and understanding between
the Bank and the Guarantor and supersedes all prior agreements and
understandings relating to the subject matter hereof.
If this Guaranty by the Guarantor is held or determined to be void,
invalid or unenforceable, in whole or in part, such holding or determination
shall not impair or affect the validity and enforceability of any clause or
provision not so held to be void, invalid or unenforceable. If this Guaranty as
to the Guarantor would be held or determined by a court or tribunal having
compe-tent jurisdiction to be void, invalid or unenforceable on account of the
amount of its aggregate liability under this Guaranty, then, notwithstanding any
other provision of this Guaranty to the contrary, the aggregate amount of the
liability of the Guarantor under this Guaranty shall, without any further action
by the Guarantor, the Bank or any other person, be automatically limited and
reduced to an amount which is valid and enforceable.
The Guarantor (a) hereby irrevocably submits to the jurisdiction of the
state courts of the State of Ohio and to the jurisdiction of the United States
District Court for the Northern District of Ohio, for the purpose of any suit,
action or other proceeding arising out of or based upon this Guaranty or the
subject matter hereof brought by the Bank or its successors or assigns and (b)
hereby waives, and agrees not to assert, by way of motion, as a defense, or
otherwise, in any such suit, action or proceeding, any claim that it is not
subject personally to the jurisdiction of the above-named courts, that its
property is exempt or immune from attachment or execution, that the suit, action
or proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that this Guaranty or the subject matter
hereof may not be enforced in or by such court and (c) hereby waives and agrees
not to seek any review by any court of any other jurisdiction which may be
called upon to grant an enforcement of the judgment of any such Ohio state or
federal court. The Guarantor agrees that its submission to jurisdiction and its
consent to service of process by mail is made for the express benefit of the
Bank. Final judgment against the Guarantor in any such action, suit or
proceeding may be enforced in other jurisdictions (a) by suit, action or
proceeding on the judgment, or (b) in any other manner provided by or pursuant
to the laws of such other jurisdiction; provided, however, that the Bank may at
its option bring suit, or institute other judicial proceedings, against the
Guarantor in any state or federal court of the United States or of any country
or place where the Guarantor or its property may be found.
<PAGE>
Unless the context otherwise requires, all capitalized terms used in this
Guaranty without definition shall have the meanings provided therefor in the
Credit Agreement.
Without limiting the effect or intentions of the warrant of attorney
contained in the following paragraph, THE GUARANTOR AND, BY ITS ACCEPTANCE OF
THIS GUARANTY, THE BANK HEREBY IRREVOCABLY AGREE TO WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THE CREDIT AGREEMENT, ANY NOTE, OR THIS GUARANTY OR ANY DEALINGS BETWEEN THEM
RELATING TO THE SUBJECT MATTER OF THE CREDIT AGREEMENT, ANY NOTE OR THIS
GUARANTY AND THE RELATIONSHIPS THEREBY ESTABLISHED. The scope of this waiver is
intended to be all-encompassing of any and all disputes that may be filed in any
court and that relate to the subject matter of this transaction, including,
without limitation, contract claims, tort claims, breach of duty claims, and all
other statutory and common law claims. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS OF THIS GUARANTY. In the
event of litigation, this provision may be filed as a written consent to a trial
by the court.
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly
executed as fully written above as of this 31st day of March, 1998.
THE MORGAN GROUP, INC.
By /s/ Dennis Duerksen
---------------------------
Dennis Duerksen,
Chief Financial Officer
CNA INSURANCE COMPANIES
[LETTERHEAD]
<PAGE>
Continental Casualty Company
[LETTERHEAD]
Policy Number, SR-83099599
Application is hereby made to the Continental Casualty Company for a policy of
group disability income insurance based on the following statements and
representations:
1. Employer: The Morgan Group, Inc.
Address: 2746 US 20 West
City: Elkhart State: IN Zip Code: 46514
Nature of Business: Transportation Services
2. What period of time must elapse before an employee is eligible
for this coverage?
Present Employees: 0 days New Employees: 0 days
The following group or groups of employees are eligible:
DESCRIPTION OF ELIGIBLE EMPLOYEES
Class 1: All active, full-time* Officers and Management.
Class II: All active, full-time* Employees excluding Truck Drivers,
Warehouse Employees, Officers and Management.
*"Active, full-time" means an employee works at least 30 hours per week.
Part-time, temporary or seasonal employees are not eligible.
3. Total Number of Employees on Payroll: 341 Total Number Eligible: 341
4. Insured Employee Occupation Period: Class 1: To the end of the Maximum
Period Payable.
Class 11: 24 months
5. Premium is calculated by: SEE ADDENDUM 1.
6. Premium is payable in the following manner: SEE ADDENDUM 1.
7. What percent of the premium is to be paid by the Employer? 100%
8. This policy shall be made effective at 12:01 A.M., Standard Time at the above
address of the Employer on January 1, 1998.
The insurance of Employees who become eligible after the effective date of this
policy shall become effective on the first day of the month that falls on or
next follows the date the employee becomes eligible for this insurance.
<PAGE>
9. Schedule of Benefits MONTHLY BENEFIT 67% of the Insured Employee's
salary (1) or $10,000, whichever is the lesser amount, minus the
reductions in (2) below.
60% of the Insured Employee's salary (1) or $4,000, whichever is the
lesser amount, minus the reductions in (2) below.
MAXIMUM PERIOD PAYABLE
See Addendum 3.
ELIMINATION PERIOD
180 days
Includes Features Checked
[ ] PARTIAL DISABILITY BENEFIT - REDUCTION.
[ ] REHABILITATIVE EMPLOYMENT BENEFIT - REDUCTION:
[X] RESIDUAL DISABILITY BENEFIT
[X] SURVIVOR INCOME BENEFIT - MAXIMUM PERIOD PAYABLE: 6 MONTHS
[ ] COST OF LIVING ADJUSTMENT BENEFIT
(1) See Addendum 2
(2) See Addendum 2
AGENT OR BROKER EMPLOYER
Name of Firm: Financial Name: Lyle C. Haws
Partners, Inc. ----------------------
(please print)
Name of agent or
broker (please print): Title: VP-Human Resources
Melvin Jacobson
Signature: /s/ Melvin Jacobson Signature: /s/ Lyle C. Haws
-------------------
Date: March 30, 1998 Date: March 9, 1998
<PAGE>
ADDENDUM 1 SR-83099599
Policy Number
The Morgan Group, Inc. January 1, 1998
Employer Effective Date
5. Premium is calculated by:
Multiplying the total insured salary by .0033. Do not include salary for any
individual in excess of per month in the premium calculation.
Class I: $15,000
Class II: $ 6,667
6. Premium is payable in the following manner:
The policy is issued in consideration of the payment in arrears of the monthly
premium. The monthly premium is calculated at the premium rate stated above.
Such payment shall be made within 20 days after the end of each monthly premium
accounting period and shall be accompanied by a premium adjustment report.
If an addition, termination or change in insurance takes place other than on a
regular due date, any premium adjustment will take effect on the next due date.
If notice of termination or change is received more than six months after the
termination or change became effective, We are not required to give a refund or
credit for the period in excess of six months.
"Salary" as used in Statements 5 and 6 shall mean the monthly wage or salary
paid to the Insured Employee by the Employer excluding commissions, overtime
earnings, incentive pay, bonuses or other compensation.
<PAGE>
ADDENDUM 2 SR-83099599
Policy Number
The Morgan Group, Inc. January 1, 1998
Employer Effective Date
(1) "Salary" means the monthly wage or salary that the Insured Employee was
receiving from the Employer on the date the Disability began. It
excludes commissions, overtime earnings, incentive pay, bonuses or other
compensation.
(2) The Monthly Benefit under this policy shall be reduced by:
1. Disability benefits paid, payable, or for which there is a
right under:
a. The Social Security Act, including any amounts for
which the Insured Employee's dependents may qualify
because of the Insured Employee's Disability,
b. Any Workers Compensation or Occupational Disease Act
or Law, or any other law which provides compensation
for an occupational injury or sickness, or
c. Any State Disability Benefit Law:
2. Disability benefits paid under:
a. Any group insurance plan provided by or through the
Employer:
b. Any formal sick leave plan provided by the Employer;
c. Any Retirement Plan provided by the Employer; or
3. Retirement benefits paid under the Social Security Act
including any amounts for which the Insured Employee's
dependents may qualify because of the Insured Employee's
retirement;
4. Retirement benefits paid under a Retirement Plan provided by
the Employer except for amounts attributable to the Insured
Employee's contributions.
If any benefit described above is paid in a single sum through
compromise settlement or as an advance on future liability, the amount
which pertains to the Insured Employee's Disability will be divided by
the number of months from the date of its receipt to the end of the
benefit period applicable to the Insured Employee. The result shall be
deducted from the Insured Employee's Monthly Benefit.
The Monthly Benefit, after the reductions stated above, if any, will
not be further reduced for subsequent cost-of-living increases which
are paid, payable, or for which there is a right under any other
benefit described above.
"Retirement Plan" means a plan which provides retirement benefits to
employees and is not funded wholly by employee contributions. It does
not include: 1) a profit sharing plan, a thrift or savings plan; 2) an
individual retirement account (IRA); 3) a tax sheltered annuity (TSA);
4) a stock ownership plan; or 5) a deferred compensation plan.
In no event will the Monthly Benefit payable for Total Disability (but
not for Residual Disability) be reduced to less than $100 or 10% of
the Insured Employee's Monthly Benefit prior to the reductions stated
above, whichever is greater.
<PAGE>
ADDENDUM 3
The Morgan Group, Inc.
Employer
Applicable to Class 1:
MAXIMUM PERIOD PAYABLE
Age on Date
Disability Commences
61 years or younger
62 years
63 years
64 years
65 years
66 years
67 years
68 years
69 years or older
Applicable to Class II:
65 years
66 years
67 years
68 years
69 years or older
SR-83099599
Policy Number
January 1, 1998
Effective Date
To the Insured Employee's 65th birthday
42 months
36 months
30 months
24 months
21 months
18 months
15 months
12 months
24 months
21 months
18 months
15 months
12 months
<PAGE>
ADDENDUM 4 SR-83099599
Policy Number
The Morgan Group, Inc. January 1, 1998
Employer Effective Date
Listed below are the Subsidiaries and/or Affiliates insured under this policy:
Morgan Drive Away
Interstate Indemnity
Transfer Drivers, Inc. (T.D.I.)
Morgan Financial, Inc.
MCI
MCI Telecommunications
Corporation
205 N. Michigan Avenue
Chicago, IL 60601
312 856 2121
FIRST AMENDMENT TO MCI
CORPORATE SERVICE PLAN
THIS FIRST AMENDMENT TO MCI CORPORATE SERVICE PLAN (hereinafter
referred to as the "Amendment") is entered into as of the dates set forth below,
by and between MCI Telecommunications Corporation ("MCI") and Morgan Group, Inc.
and its wholly owned subsidiaries (identified in Exhibit A, attached hereto and
incorporated herein) ("collectively, the Customer "), effective as of the first
day of the fire full month after the tariff governing the offering under this
First Amendment becomes effective or the first day of the month if the tariff
effective date is the same date (such date is hereinafter referred to as the
"First Amendment Effective Date").
WITNESSETH:
WHEREAS, heretofore, Customer and MCI entered into that certain MCI
Corporate Service Plan dated December 5, 1994 (the "Agreement") with respect to
certain services to be provided to Customer by MCI, as more particularly
described therein; and
WHEREAS, Customer and MCI wish to amend the Agreement to reflect
certain changes;
NOW, THEREFORE, in consideration of the premises, the terms and
conditions stated herein, and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto hereby agree
as follows:
1. Definitions. All capitalized terms used herein and not expressly
defined herein shall have the respective meanings given to such terms
in the Agreement.
2. CSP Definitions. Section I of the Agreement is hereby amended by adding
the following:
"For purposes of this Agreement, the collective term "Customer" shall
also include (i) Morgan Group, Inc. and (ii) Morgan Group, Inc.'s
wholly owned subsidiaries identified in Exhibit A. The monthly
recurring usage charges for Representatives of Morgan Drive Away who
chose to participate under this Agreement pursuant to Section 22 below
("Representatives") shall be included in the calculation of the Annual
Minimum under this Agreement."
3. Term. The Agreement is hereby amended by deleting Section 5 in its
entirety and replacing it with the following new Section 5:
-1-
<PAGE>
"5. The initial term of this Agreement shall be for a period of
thirty (30) months commencing on the First Amendment Effective
Date. After the initial term, this Agreement shall remain in
effect on a month to month basis, unless terminated by Morgan
Group, Inc. or MCI on thirty (30) days prior written notice;
provided, however, that during the period of usage following
the initial service term Morgan Group, Inc. shall not receive
any discounts or credits in any month in which Customer's use
of MCI services does not equal or exceed one-twelfth (1/12th)
of the Annual Minimum ("Monthly Minimum"). In the event Morgan
Group, Inc.'s usage meets the Monthly Minimum during the each
month following the initial service term, Morgan Group, Inc.
shall be entitled to receive the rates and discounts provided
pursuant to this Agreement."
4. Annual Minimum. The Agreement is hereby amended by deleting Section 6
in its entirety and replacing it with the following new Section 6:
"6. ANNUAL MINIMUM. (a) Customer agrees that during each
consecutive twelve (12) month period of the initial term
("Annual Period"), Customer will purchase from MCI at least
Nine Hundred Thousand Dollars ($900,000), or a pro rata
portion thereof for any partial Annual Period ("Annual
Minimum") in the MCI services set forth in Attachments I and 2
(as more fully time elect to convert the balance remaining in
the Fund to invoice credits. Such credits will be applied
within two (2) invoices following Customer's request.
(e) In the event Customer's MCI account is in arrears at any time
during the initial term of this Agreement, MCI may elect in
its sole discretion to convert Customer's outstanding Fund
balance, at any time, into invoice credits in order to offset
amounts owed to MCI, including without limitation
underutilization charges and charges arising from early
termination. In the event this Agreement is terminated
pursuant to Section 7 hereof, any credit balances remaining in
the Fund at the date of early termination will be forfeited,
and any amount which was used towards participating vendor
products or MCI invoice credits will be charged back to
Customer.
(f) The Fund balance will be unavailable to Customer during any
period in which Customer has failed to comply with any payment
arrangement pursuant to the Tariff, or has failed to pay
invoices in a timely manner.
6. Representatives Program. The Agreement is hereby amended by adding the
following new Section 22:
"22. (a) in order to remain eligible to participate under this
Agreement, each Morgan Drive Away Representative must fulfill
all the requirements to be considered a Representative
according to Morgan Drive Away's terms and conditions. The
parts of this agreement that relate to the provision of
telecommunications services and any
-2-
<PAGE>
related discounts and credits to Representatives shall
constitute the "Program." Morgan Drive Away shall notify MCI
in a mutually agreed upon manner of the Representatives which
elect to participate under this Agreement. Morgan Drive Away
shall make reasonable efforts to notify MCI on or before the
tenth (10th) day of each month of the term of this Agreement
of any changes, modifications or alterations to the
Representatives participating under this Agreement for such
month. Such changes, alterations, or modifications shall be
effective on the first day of the next month. Any changes,
modifications or alterations received by MCI after the
fifteenth (15th) day of a month shall be effective on the
first day of the second full billing month after the date of
the written or electronic notification to MCI.
(b) Morgan Group, Inc. agrees to actively promote participation
under this Agreement to the Morgan Drive Away Representatives.
Morgan Group, Inc. will not during the term of this Agreement
enter into or promote participation with any other programs
for the provision of interstate, intrastate, or international
telecommunications services. This provision shall not apply to
any existing written arrangements currently in place at the
time of execution of this First Amendment."
7. Payment. The Agreement is hereby amended by adding the following new
Section 23:
"23. Payment.
(a) Morgan Group, Inc. Services.
For any MCI Services purchased by Morgan Group, Inc.
during the Service term, Morgan Group, Inc. shall pay
MCI the total invoiced amount for such MCI Service(s)
within twenty-five (25) days of the MCI invoice date.
(b) Morgan Drive Away Representatives' Services.
In addition to Paragraph 23(a) above, Morgan Group,
Inc. assumes responsibility for payment of MCI's
invoices to Representatives. Notwithstanding the
foregoing, MCI shall directly bill the
Representatives who participate in the Program. MCI
will attempt to collect the invoiced amounts directly
from such Representatives in accordance with its
standard business practices. In the event that MCI is
unable to collect any of such invoiced amounts within
thirty (30) days from the MCI invoice date, MCI will
invoice Morgan Group, Inc. for the unpaid invoice
amounts. Morgan Group, Inc. shall pay MCI the total
amounts invoiced to Morgan Group, Inc. under this
Paragraph within twenty-five (25) days of the MCI
invoice date."
8. The Agreement is hereby amended by adding the following new Section 24:
-3-
<PAGE>
"24. Commencing on the First Amendment Effective Date and through
expiration of the initial term:
(a) Customer shall have no less than ten (10) locations purchasing
MCI Vision Services pursuant to this Agreement. If Customer
fails to meet the requirement identified in this Section
24(a), Customer shall pay standard tariff rates for MCI Vision
Services, excluding any discount provided herein;
(b) No less than 9% of Customer's total outbound Vision usage
(excluding access/egress charges, feature charges, tax and tax
related surcharges), as measured in minutes, shall occur
during OFF-Peak hours (as defined in the Tariff). If
Customer's actual outbound Vision usage is less than the 9%
threshold, Customer shall be charged a per minute surcharge of
$0.03 on each minute below the 9% threshold;
(c) No less than 25% of Customer's total usage of MCI Services
provided herein (excluding access/egress charges, feature
charges, tax and tax related surcharges), as measured in
minutes, shall originate via dedicated access facilities. If
Customer's actual usage of MCI Services provided herein
originating via dedicated access facilities is less than the
25% threshold, Customer shall be charged a per minute
surcharge of $0.03 on each minute below the 25% threshold;
(d) No less than 50% of Customer's total MCI Vision usage
(excluding access/egress charges, feature charges, tax and tax
related surcharges), as measured in minutes, shall be
interstate usage. If Customer's actual usage of interstate MCI
Vision Service is less than the 50% threshold, Customer shall
be charged a per minute surcharge of $0.03 on each minute
below the 50% threshold."
9. Pricing/Discounts. The Agreement is hereby amended by deleting Section
2.A.(I) in its entirety and replacing it with the following new Section
2.A.(l):
"2.A. MCI Vision Service and MCI Vision 800 Service.
(1) Morgan Group, Inc. shall receive the rates and charges on
MCI Vision Service and MCI Vision 800 Service associated with
the Vision Value Insurance Plan Plus ("Vision VIP Plus"), a
and the discounts below. Morgan Group, Inc. will receive the
rates and charges associated with the thirty-six (36) month
Vision VIP Plus at the Four Hundred Eighty Thousand Dollar
($480,000) commitment level, but minimum volume and term
requirements in MCI Tariff FCC No. 1 ("Tariff') will not
apply.
In addition, the following discounts will apply to domestic
interstate charges only.
MCI Vision Service 29%
MCI Vision 800 Service 29%
-4-
<PAGE>
No other discounts shall apply to domestic MCI Vision and MCI Vision 800
services. Morgan Drive Away Representatives shall not be eligible for the
discounts identified in this Section 2.A(l). "
10. Credits. Attachment 1 of the Agreement is hereby amended by deleting
subsections 2.F(l), 2.F.(2) and 2.F.(3) in their entirety and replacing
them with the following new subsections 2.F.(I) and 2.F. (2):
"F. (1) Domestic Intrastate Vision Service. For domestic intrastate
Vision Service, Morgan Group, Inc. shall pay standard tariffed rates.
In addition, Morgan Group, Inc. shall receive a monthly credit in an
amount equal to thirty-three percent (331/6) times Morgan Group, Inc.'s
domestic intrastate Vision monthly usage charges (exclusive of taxes,
surcharges, pass-through access/egress or related charges) at standard
tariffed rates after application of applicable tariffed discounts based
on Morgan Group, Inc.'s domestic intrastate Vision usage charges. The
resulting credit shall be applied to Morgan Group, Inc.'s domestic
interstate usage charges (excluding taxes, surcharges and pass-through
access/egress or related charges). Morgan Drive Away Representatives
shall not be eligible for the discounts identified in this Section 2.F.
(2) Domestic Intrastate Vision 800 Service. For domestic intrastate
Vision 800 Service, Morgan Group, Inc. shall pay standard tariffed
rates. In addition, Morgan Group, Inc. shall receive a monthly credit
in an amount equal to thirty-two percent (32%) times Morgan Group,
Inc.'s domestic intrastate Vision 800 monthly usage charges (exclusive
of taxes, surcharges, pass-through access/egress or related charges) at
standard tariffed rates after application of applicable tariffed
discounts based on Morgan Group, Inc.'s domestic intrastate Vision 800
usage charges. The resulting credit shall be applied to Morgan Group
Inc.'s domestic interstate usage charges (excluding taxes, surcharges
and pass-through access/egress or related charges). Morgan Drive Away
Representatives shall not be eligible for the discounts identified in
this Section 2.F."
11. Dedicated Leased Line Services. Attachment 1 of the Agreement is hereby
amended by adding the following new Section 2.H.:
"H. For each type of MCI Dedicated Leased Line Service, Morgan
Group, Inc. shall receive the discounts associated with a
corresponding three (3) year Twenty Five Thousand Dollar
($25,000) Network Pricing Plan (NPP). Morgan Drive Away
Representatives shall not be eligible for the discounts
identified in this Section 2.H."
12. Rate Stabilization. Attachment 1 of the Agreement is hereby amended by
adding the following new Section 2.1.:
"I. To the extent that the effective tariffed rates for MCI Vision
Service and/or MCI Vision 800 Service subscribed to by Morgan
Group), Inc, increase during the initial service term of this
Agreement, Morgan Group, Inc, will be subject to any
applicable tariff increase,
-5-
<PAGE>
provided, however, that Morgan Group, Inc. will only be subject to a
maximum increase of four percent (4%) for MCI Vision Service and four
percent (4%) for MCI Vision 800 Service during each year of the initial
service term. For purposes of this Section 2.1. of Attachment 1, the
term "effective tariffed rate" shall mean the tariffed base rate in
effect on the First Amendment Effective Date."
13. Representative Pricing and Discounts. Attachment 1 of the Agreement is
hereby amended by adding the following new Section 3:
"3. Rates and Discounts for MCI Services Provided to Morgan Drive
Away Representatives. The rates identified below are in lieu
of all other rates and discounts provided by MCL Except as
provided in this Section 3 of Attachment 1, Morgan Drive Away
Representatives shall not be eligible for any other services,
rates or discounts provided in this Agreement.
(a) MCI Vision Service.
For domestic MCI Vision Service, Representatives will
receive the following postalized per minute rates for
switched interstate usage:
Switched/Interstate $0.145
(b) MCI Vision 800 Service.
For domestic MCI Vision 800 Service, Representatives
will receive the following postalized per minute
rates for switched interstate usage:
Switched/Interstate $0.1625
14. Revenue Achievement Credits. Attachment 1 of the Agreement is hereby
amended by adding the following new Section 4:
"4. Revenue Achievement Credits. Morgan Group, Inc. shall receive the
applicable one- time credit in the event it meets the following
requirements. Morgan Group, Inc. shall notify MCI in writing, within
thirty days such requirements are met, of the option it selects.
Option Number 1:
(a) In the event Customer's usage (excluding tax and tax-related
surcharges), attributable to end-users participating in the Morgan
Drive Away Representatives Program. equals or exceeds One Hundred
Thousand ($100,000) in either the first six (6) month period or second
six (6) month period of the first Annual Period of the initial term
commencing on the First Amendment Effective Date, Morgan Group, Inc.
shall receive a credit equal to Twelve
-6-
<PAGE>
Thousand Five Hundred Dollars ($12,500), which shall be applied to
Morgan Group, Inc.'s sixth monthly invoice following the applicable
period in which such credit is earned; provided however, if the credit
earned is due after expiration of the initial term, such amount shall
be added to the Customer's final invoice.
(b) In the event Customer's usage (excluding tax and tax-related
surcharges), attributable to end-users participating in the Morgan
Drive Away Representatives Program, equals or exceeds One Hundred Fifty
Thousand ($150,000) in either the first six (6) month period or second
six (6) month period of the second Annual Period of the initial term,
commencing on the First Amendment Effective Date, Morgan Group, Inc.
shall receive a credit equal to Seventeen Thousand Five Hundred Dollars
($17,500), which shall be applied to Morgan Group, Inc.'s sixth monthly
invoice following the applicable period in which such credit is earned;
provided however, if the credit earned is due after expiration of the
initial term, such amount shall be added to the Customer's final
invoice.
or
Option Number 2:
(a) In the event Customer's usage (excluding tax and tax-related
surcharges), attributable to end-users participating in the Morgan
Drive Away Representatives Program, equals or exceeds One Hundred
Thousand ($100,000) in either the first six (6) month period or second
six (6) month period of the first Annual Period of the initial term
commencing on the First Amendment Effective Date, Morgan Group, Inc.
shall receive a discount in the form of a credit equal to 1.75% on
Customer's total domestic interstate usage for MCI Services purchased
hereunder. Such credit shall be applied to Morgan Group, Inc.'s sixth
monthly invoice following the applicable period in which such credit is
earned; provided however, if the credit earned is due after expiration
of the initial term, such amount shall be added to the Customer's final
invoice.
(b) In the event Customer's usage (excluding tax and tax-related
surcharges) , attributable to end-users participating in the Morgan
Drive Away Representatives Program, equals or exceeds One Hundred Fifty
Thousand ($150,000) in either the first six (6) month period or second
six (6) month period of the second Annual Period of the initial term,
commencing on the First Amendment Effective Date, Morgan Group, Inc.
shall receive a discount in the form of a credit equal to 2.25% on
Customer's total domestic interstate usage for MCI Services purchased
hereunder. Such credit shall be applied to Morgan Group, Inc.'s sixth
monthly invoice following the applicable period in which such credit is
earned; provided however, if the credit earned is due after expiration
of the initial term, such amount shall be added to the Customer's final
invoice.
In the event Customer meets the requirements identified in this Section
4 of Attachment 1, Morgan Group, Inc. shall not be entitled to the
credits set forth in both options. Morgan
-7-
<PAGE>
Group, Inc. shall only be entitled to one (1) credit per sixth month
period if Customer meets the applicable requirements. The discount in
Option Number 2 shall only apply to usage charges for domestic
interstate traffic (excluding access/egress charges, non-recurring
charges, taxes or tax-related surcharges)."
15. HyperStream Frame Relay Services. The Agreement is hereby amended by
adding the following new Section 25:
"25. Commencing on the First Amendment Effective Date and through
expiration of the initial term, during each monthly billing period of
the initial tern, Customer shall purchase no less than Ten Thousand
Dollars ($10,000) of monthly recurring port and PVC charges associated
with MCI HyperStream Frame Relay Service, as more fully described in
the Tariff, ("HyperStream Subminimum"), in accordance with the terms
and conditions, including, but not limited to any underutilization and
early termination charges, set forth in Attachment 2. For purposes of
calculating the Annual Minimum, monthly recurring port and PVC charges
associated with basic HyperStream Frame Relay Service shall be included
in such calculation, however, any charges for Customer Premise
Equipment associated with HyperStream Frame Services shall not
contribute to the Annual Minimum or HyperStream Subminimum identified
herein. In addition, monthly recurring charges associated with
HyperStream Frame Relay Service shall in no way contribute to the
Revenue Achievement Credits identified in Section 4 of Attachment 1."
16. Entire Agreement. Except as expressly modified by this Amendment, the
Agreement shall be and remain in full force and effect in accordance
with its terms and shall constitute the legal, valid, binding and
enforceable obligations of Customer and MCI. This Amendment, including
the Agreement and the applicable MCI tariffs, is the complete agreement
of the parties and supersedes any prior agreements of representations,
whether oral or written, with respect thereto.
17. Successors and Assigns. This Amendment shall be binding upon and inure
to the benefit of the successors and permitted assigns of the parties
hereto.
18. Section References. Section titles and references used in this
Amendment shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreements among the parties
hereto evidenced hereby.
-8-
<PAGE>
IN WITNESS WHEREOF, MCI and Customer have caused this Amendment to be duly
executed by their authorized representatives as of the dates set forth below,
effective as of the Effective Date.
MCI Telecommunications Corporation
By: /s/ Tom Schilling
---------------------------
Tom Schilling, Director
Date: May 7, 1996
Morgan Group, Inc.
By: /s/ JohnPaul H. Hoyer
Name: JohnPaul H. Hoyer
Title: CFO
Date: April 11, 1996
-9-
<PAGE>
EXHIBIT A
Customer's Wholly Owned Subsidiaries
The following entities shall be eligible for the Morgan Group, Inc. rates and
discounts identified herein:
TDI, Inc.
Morgan Drive Away
-10-
<PAGE>
ATTACHMENT 2
HyperStream(sm) Frame Relay services
MCI will furnish the HyperStream(sm) Frame Relay services (the "Services") to
Morgan Group, Inc. pursuant to the terms set forth in MCI Tariff F.C.C. No. 1
("Tariff"), as revised from time to time. This HyperStream(sm) Frame Relay
Attachment incorporates by reference the Tariff, as it may be amended or
modified from time to time. In the event of any inconsistency between the terms
of the Tariff and this Attachment 2, the Tariff shall be deemed controlling. MCI
will furnish the service to Customer pursuant to the terms of this Attachment 2
and the Tariff, and any other applicable interstate, international or state
tariffs, of MCI and its affiliates.
Rates and Charges. Schedules 2 and 3 to this Agreement, which are incorporated
herein by reference, contain the applicable rates and charges for the Services
provided hereunder. Revisions of the applicable rates and charges may become
effective upon revisions of any applicable tariff provisions. Any other service
customer orders from MCI or any of its affiliates will not be subject to the
terms of this Attachment 2.
<PAGE>
SCHEDULE 1
HyperStream Frame Relay Service Description
Overview
HyperStream Frame Relay Service is a packet-oriented interLATA data transport
service. At the originating customer premises Motorola provided equipment
(equipment provided pursuant to a separate agreement) places the data into
packets and gives each packet a terminating address. MCI routes the packets over
the MCI network to the terminating address. HyperStream Frame Relay is available
at speeds up to 1.544Mbps (where clear channel access is available).
Technical Description
HyperStream Frame Relay operates at layer two of the OSI model and is designed
to conform to the ANSI T1.617 Annex D Standard.
Access
Customers obtain access to HyperStream Frame Relay via dedicated digital
facilities, only. MCI will provide access under the terms of its filed and
effective tariffs or customer may obtain access via alternate access vendors.
Availability
HyperStream Frame Relay is available between cities listed in MCI Tariff FCC No.
1, Section C.12, Table IV, Part A, as amended from time to time, or any
successor tariff.
Performance Criteria
MCI shall provide Customer certain performance criteria for domestic HyperStream
Frame Relay Service as identified in Schedule 4, hereto attached and
incorporated by reference.
<PAGE>
SCHEDULE 2
DOMESTIC HYPERSTREAM FRAME RELAY RATES AND CHARGES
HYPERSTREAM FRAME RELAY DOMESTIC PRICING
A. RATES AND CHARGES: Basic Month-to-Month Rates and Charges.
1. Installation Changes.
(a) Access Lines -- Per Tariff (if MCI provided)
or alternate access vendor
(b) Per Port (each location) -- $300.00
(c) Per Permanent Virtual Circuit (PVC) -- $15
simplex
2. Reconfiguration Charges.
(a) Access Lines -- Per Tariff (if MCI provided)
or alternate vendor
(b) Per Port (each Location) -- $300.00
(c) Per PVC - $1 5.00 simplex
3. Monthly Recurring Charges.
(a) Access line charges -- Per Tariff (if MCI
provided) or alternate vendor
(b) Port Charges -- All port charges are
applicable per port (per location). Port
charges depend upon the port speed selected
by you.
Port Speed Selected Rate/Month
56/64 Kbps $ 180.00
112/128 Kbps $ 336.00
224/256 Kbps $ 394.00
336/384 Kbps $ 578.00
448/512 Kbps $ 735.00
672/768 Kbps $ 946.00
896/1024 Kbps $1,178.00
1344/1536 Kbps $1,470.00
<PAGE>
(c) PVC Charges -- PVC rates are either fixed or
usage based. Usage based charges are either
on a committed information rate (CIR) or
zero CIR basis.
(1) Fixed CIR PVC Rates. You select the
fixed CIR per simplex PVC and pay
one monthly usage charge per PVC.
CIR Speed Selected Rate/Month
16 Kbps $ 37.00
32 Kbps $ 57.00
48 Kbps $ 77.00
64 Kbps $ 97.00
128 Kbps $ 177.00
192 Kbps $ 257.00
256 Kbps $ 337.00
320 Kbps $ 417.00
384 Kbps $ 497.00
448 Kbps $ 577.00
512 Kbps $ 657.00
576 Kbps $ 729.00
640 Kbps $ 801.00
704 Kbps $ 873.00
768 Kbps $ 945.00
832 Kbps $1,010.00
896 Kbps $1,075.00
960 Kbps $1,140.00
1,024 Kbps $1,205.00
(2) Usage-based PVC Rates. All
usage-based rates are per delivered
megabyte.
(i) CIR Usage-based PVC Rates.
(a) You select the CIR for each PVC to
be rated. Frames within the CIR
selected will be rated at the CIR
Usage rate of Forty-one Cents
($0.4100) per megabyte of delivered
data. Frames in excess of the CIR
selected by you will be discarded
eligible (DE) and rated at the DE
Usage rate of Twenty-one Cents
($0.21 00) per megabyte of
delivered data. Sampling intervals
for measuring bandwidth usage will
be 0.4 seconds for CIR at or below
256 Kbps and 1.5 seconds for CIR
over 256 Kbps. MCI
<PAGE>
reserves the right to revise the
sampling intervals.
Rates are simplex based.
(b) Cost Capping. CIR Usage-based PVC
rates are capped at one hundred
percent (1 00%) of the
corresponding Fixed CIR PVC rates
that are set forth in Section
A.3.c.1 above.
(c) CIR Usage-based PVC Monthly
Minimum. If your usage charges for
a PVC in a month are less than
forty percent (40%) of the Fixed
CIR PVC rate selected from the
chart set forth in Section A.3.c.1
above, your charge for said PVC
will be forty percent (40%) of the
Fixed CIR PVC rate (which charges
are set forth below). Minimums
count toward HyperStream Network
Pricing Plan Monthly Minimums (see
B below).
CIR Speed Selected Minimum Rate/Month
16 Kbps $ 15.00
32 Kbps $ 23.00
48 Kbps $ 31.00
64 Kbps $ 39.00
128 Kbps $ 71.00
192 Kbps $103.00
256 Kbps $135.00
320 Kbps $167.00
384 Kbps $199.00
448 Kbps $231.00
512 Kbps $263.00
576 Kbps $292.00
640 Kbps $320.00
704 Kbps $349.00
768 Kbps $378.00
832 Kbps $404.00
896 Kbps $430.00
960 Kbps $456.00
1,024 Kbps $482.00
(iii) Zero CIR PVC Rates. All
frames will be marked DE. All usage
is at the rate of Three Cents
($0.0300) per megabyte of delivered
data. Monthly minimum
<PAGE>
charges per simplex PVC will
be Seven Dollars ($7.00).
There will be no usage charge cap.
B. TERM AND VOLUME COMMITMENTS
RATE PLANS: You may select from the following rate plans:
1. Month to Month. No term or volume commitments will
apply, except PVC monthly minimums. or 2. HyperStream
Pricing Plan.
(a) if you order HS-FR under the HyperStream
Pricing Plan, you will receive discounts on
certain HS-FR service elements as follows:
Monthly
HyperStream Term (years)
Subminimum 1 2 3 4 5
---------- --- --- --- ---- ---
$ 2,000 5% 6% 7% 8% 9%
$ 5,000 8% 10% 12% 14% 16%
X $ 10,000 12% 14% 17% 19% 21%
$ 25,000 14% 17% 20% 23% 25%
$ 50,000 16% 19% 22% 25% 27%
$100,000 18% 21% 24% 27% 30%
X identified above in bold determines Customer's term
and volume commitment (i.e.2 year-14% discount).
(b) If a HyperStream Pricing Plan is selected,
then commencing with the seventh full
monthly billing cycle if your monthly usage
charges for the HS-FR recurring charges fall
below the HyperStream Subminimum, then you
will pay an underutilization charge equal to
one hundred percent (1 00%) of the
difference between the amount you purchased
in such month and the HyperStream
Subminimum.
(c) The discount applies to basic month to month
charges for the following recurring HS-FR
service elements: PVC charges and Port
charges (excludes access charges, access
coordination charges, taxes and- tax related
surcharges). Taxes, tax-related surcharges,
access charges, and access coordination
charges do not count toward the HyperStream
Subminimum.
(d) Under the HyperStream Pricing Plan, the
start of the term is from implementation of
the first service element and lasts through
the end
<PAGE>
of the term selected. The HS-FR term
commitment is independent of the terms
committed to in individual Access Pricing
Plans.
(e) In addition to any other early termination
charges identified in this Agreement, if you
terminate this Agreement before the end of
the term selected under the HyperStream
Pricing Plan, you will pay an early
termination charge equal to a portion of the
discounts from the month-to-month basic
rates provided to you under this Attachment
2, as follows: For a three (3) year term,
100% of the discount if you terminate in the
first year, 75% if you terminate in the
second year, or 50% if you terminate in the
third year. For a two (2) year term, 1 00%
of the discount if you terminate in the
first year, 50% if you terminate in the
second year. For a one (1) year term, 50% of
the discount if you terminate in the first
year.
<PAGE>
SCHEDULE 3
MCI HyperStream(sm) Frame Relay
SATISFACTION GUARANTEE
If for any reason Customer is not completely satisfied with HyperStream(sm)
Frame Relay at any time before the completion of three (3) full billing months,
Customer may:
o Discontinue HyperStream(sm) Frame Relay with MCI without
liability for termination charges;
o Receive a credit or refund for HyperStream(sm) Frame Relay and
associated MCI installation charges; and
o Receive a credit for or refund of recurring usage charges for
HyperStream(sm) Frame Relay and associated service Customer
incurred during the Satisfaction Guarantee three 13) month
period in an amount up to the amount of reasonable
re-installation charges Customer may incur from another
carrier for re-installation of the service that Customer had
replaced with HyperStream(sm) Frame Relay.
Covered MCI Charges:
o Installation charges:
o Installation of access circuits associated with
HyperStream(sm) Frame Relay
o Recurring charges:
o HyperStream(sm) Frame Relay Ports
o HyperStream(sm) Frame Relay Permanent Virtual Circuits (PVCs)
o Access coordination
To exercise Customer's rights under this Satisfaction Guarantee, please notify
Customer's MCI account representative in writing not later than the close of the
third full billing month after initial installation of HyperStream(sm) Frame
Relay.
MCI's offer of Satisfaction Guarantee expires if not exercised on or prior to
the earlier of (i) three full billing months after initial installation of
HyperStream(sm) Frame Relay or (ii) July 31, 1996.
Other than the rights expressly granted in this Satisfaction Guarantee, this
Satisfaction Guarantee shall not be construed to create any rights or remedies
not otherwise expressly provided for nor expand MCI's obligations under the
Attachment 2 for HyperStream(sm) Frame Relay to which this Satisfaction
Guarantee is attached.
<PAGE>
SCHEDULE 4
HyperStream Frame Relay
Service Level Guarantee
MCI is committed to providing its customers with quality Domestic HyperStream
Frame Relay services. This document defines the specific quality of service
levels MCI will seek to maintain while providing Domestic HyperStream Frame
Relay Services to Morgan Group, Inc.; herein referred to as Customer. In the
event MCI's HyperStream Frame Relay Services fail to perform to the quality of
the applicable service levels as defined herein, MCI's sole and exclusive
obligations, and Customer's sole and exclusive remedies, shall be as set forth
in this Schedule 4.
1.0 Definition
A Service Level Guarantee (SLG) is a commitment on the part of MCI to
attempt to meet specific network and service performance levels.
2.0 Network Availability
2.1 Description
The HyperStream(sm) Frame Relay (HSFR) network
availability measurement is equal to the total number
of minutes in a calendar month during which core
network PVC routes are available to exchange data
between the two network infrastructure node end
points divided by the total number of minutes in a
calendar month ("Network Availability Time"). Network
Availability Time is calculated commencing with the
date on which the trouble ticket is opened by the
customer and ending upon confirmation of resolution
with the customer.
For purposes of measuring Network Availability Time,
the PVC route referenced above includes the HSFR
network infrastructure connectivity from
infrastructure port to infrastructure port, excluding
Customer Premise Equipment and local access lines.
2.2 Network Availability Objective
MCI will attempt to achieve a Network Availability Time of
99.5 % for networks designed with all of the following:
o fully meshed network topology or a star network
topology in which each remote site has PVCs connected
to at least two network hubs engineered to separate
infrastructure node , and
o 10 or more customer sites are involved in the network
<PAGE>
MCI will attempt to achieve a Network Availability Time of 99%
for any networks not meeting the above requirements.
2.3 Exclusions
Network Availability Time measurements exclude HSFR
unavailability resulting in whole or in part from one or more
of the following causes:
o Any act or omission on the part of Customer, customer
contractors, and customer vendors (including, but not
limited to Motorola)
o Scheduled maintenance
o Labor strikes
o Natural disasters
o Force majeure events beyond the reasonable control of
MCI (i.e. acts of God, government regulation,
national emergency, etc.)
2.4 Calculation
Customer HSFR Network Availability Time is calculated on a
monthly basis
Monthly Network Availability Time (%) = 1 - [Total minutes of
PVC downtime per month or "Unavailability Percentage"]
Total # PVCs x #days in month x 24 hrs x 60min
2.5 Components of Calculation
Total minutes in month, total minutes available, total minutes
unavailable, total minutes unavailable due to exclusions,
unavailable minutes due to excluded causes, broken down by
occurrence (exception) category.
2.6 Credits
o In the event MCI is unable to satisfy the HSFR
Availability Time objective of 99.5% for two (2)
consecutive months, during the service term, Customer
will receive a credit equal to five percent (5%)
multiplied by the fixed rates for all Port and PVC
charges for both the first(1st) and the second (2nd )
month.
o In the event MCI in unable to satisfy the HSFR
Availability Time objective of 99.5 % for a third
(3rd) consecutive month, during the service term.
Customer will receive a credit equal to ten percent
(10%) multiplied by the fixed rates for all Port and
PVC charges for the given month.
o In the event MCI is unable to satisfy the HSFR
Network Availability Time objective of 99.5% for a
fourth (4th) consecutive month, Customer will have
<PAGE>
the option to discontinue MCI Service on the Service
Element that has failed to satisfy the HSFR
Availability Time objective and MCI will reduce the
HyperStream. Subminimum by the amount of charges
associated with the discontinued Service Element.
3.0 Frame Delivery
3.1 Description
The HyperStream(sm) Frame Relay Frame Delivery is the
percentage of frames which are successfully delivered. HSFR
Frame Delivery encompasses the successful delivery of frames
through the network based on certain factors. The calculations
are based on total frames sent through the network according
to the following parameters:
The percentage of all non-CIR frames that are successfully
delivered.
The percentage of all CIR frames that are successfully
delivered.
3.2 Frame Delivery Objective
99.99% of all frames that do not exceed the Committed
Information Rate (CIR) are targeted to be successfully
delivered. End to end CIR packet delivery only applies to
frames not marked discard eligible.
99% of all non-CIR frames are targeted to be successfully
delivered. Non-CIR packet delivery only applies to frames
marked discard eligible, (i.e.; traffic exceeding the
subscribed CIR and all zero CIR PVC traffic).
3.3 Frequency of Calculation
HSFR Frame Delivery is calculated monthly based upon the frame
delivery statistics as stated in the HyperScope reports minus
any applicable exclusions below.
3.4 Exclusions
HyperStream(sm) Frame Relay Service frame delivery
measurements exclude:
o Frames dropped at the infrastructure egress due to
improper customer specification of customer's port
speeds
o Local access and CPE (CPE-upon contract execution
provided by Motorola)
o Force majeure events beyond the reasonable control of
MCI (i.e. acts of God, government regulation,
national emergency, etc.)
<PAGE>
3.5 Credits
o In the event MCI is unable to satisfy the HSFR Frame
Delivery objective for two (2) consecutive months,
during the service term, Customer will receive a
credit equal to five percent (5%) multiplied by the
fixed rates for all Port and PVC charges for both the
first(1st) and the second (2nd ) month.
o In the event MCI in unable to satisfy the HSFR Frame
Delivery objective for a third (31) consecutive
month, during the service term. Customer will receive
a credit equal to ten percent (10%) multiplied by the
fixed rates for all Port and PVC charges for the
given month.
o In the event MCI is unable to satisfy the HSFR Frame
Delivery objective for a fourth (41) consecutive
month, Customer will have the option to discontinue
MCI Service on the Service Element that has failed to
satisfy the HSFR MTTR objective and MCI will reduce
the HyperStream Subminimum by the amount of charges
associated with the discontinued Service Element.
4.0 Mean Time To Restore (MTTR)
4.1 Description
Mean-Time-To-Restore ("MTTR") is the period of time commencing
on the date customer opens on trouble ticket and ending on the
date of service restoration (closing of a trouble ticket),
calculated as an average of all trouble tickets having the
same severity level (as set forth below).
MTTR measurements are reported based on the percentage of
trouble tickets closed within specific time intervals, grouped
by severity level.
MCI will assign each trouble ticket a severity level based
upon the impact of the service issue on the customer's
business:
Severity 1 - System down or degraded (limited or no ability to
conduct business)
Severity 4 - Problem circumvented / Inquiries (no impact to
customer business)
4.2 MTTR Objective
HyperStream(sm) Frame Relay MTTR objectives are based upon the
severity level of the trouble ticket and proximity to an MCI
terminal or field service point of presence "POP" broken down
by ticket severity as follows:
<PAGE>
Severity 1 -MTTR Objective is 4 hrs if within 50-mile radius
of MCI terminal and field service POP,
or
24 hrs or best-effort basis if outside 50-mile radius of MCI
terminal and field service POP
Severity 4 - not measured
4.3 Frequency of Calculation
Customer network MTTR will be calculated on a monthly basis.
4.4 Exclusions
MTTR measurements will exclude the following:
o Trouble tickets associated with new installations
(before new service acceptance by the customer)
o Trouble tickets that are not associated with
MCI-provided service
o Required customer premise access is not available
o Required customer circuit release for testing is
disallowed o Trouble tickets opened by customer for
circuit monitoring purposes only o Force majeure
events beyond the reasonable control of MCI (i.e.
acts of God, government regulation, national
emergency, etc.)
4.5 Calculation
Monthly MTTR Average = Sum of minutes between opening and
closing of Severity 1 trouble tickets within 30 days Total
number of trouble tickets per month
4.6 Components for Calculations
Total number of trouble tickets, total time between opening of
trouble tickets and applicable service restoration, with total
time of opened trouble tickets subtracting total time of each
exclusion category.
4.7 Credits
o In the event MCI is unable to satisfy the HSFR MTTR
objective for two (2) consecutive months, during the
service term, Customer will receive a credit equal to
five percent (5 %) multiplied by the fixed rates for
all Port and PVC charges for the given month.
<PAGE>
o In the event MCI in unable to satisfy the HSFR MTTR
objective for a third (3rd) consecutive month, during
the service term. Customer will receive a credit
equal to ten percent (10%) multiplied by the fixed
rates for all Port and PVC charges for the given
month.
o In the event MCI is unable to satisfy the HSFR MTTR
objective for a fourth (4th) consecutive month,
Customer will have the option to discontinue MCI
Service on the Service Element that has failed to
satisfy the HSFR MTTR objective and MCI will reduce
the HyperStream Subminimum by the amount of charges
associated with the discontinued Service Element.
5.0 Network Transit Delay
5.1 Description
The HyperStream(sm) Frame Relay Network Transit Delay measures
one-way delay between the origination and destination
infrastructure ports. It is defined as the time between the
LAST bit of a ping packet being sent from the origination
infrastructure port to the FIRST bit of the packet received by
the destination infrastructure port, in other words between
the two MCI HyperStream frame relay points of presence.
5.2 Network Transit Delay Guarantee
Average HSFR one way network transit delay of 70 milliseconds
or less in the domestic U.S. and 250 milliseconds or less
internationally.
5.3 Frequency of Calculation
Customer gateway to customer gateway network transit delay is
tested monthly by MCI as part of standard performance
monitoring and capacity planning methodologies. Any customer
incident where network transit delay is measured or suspected
to be greater than the levels stated above will be considered
an abnormal situation and will be addressed through
established trouble handling procedures (e.g., a ticket opened
and technicians work through the problem until the performance
is back to acceptable levels).
5.4 Exclusions
The network transit delay parameters are not guaranteed during
disaster situations where a major network component such as a
backbone link or gateway switch is down hard and the network
is in an emergency reroute configuration. Also, HyperStream
Network Transit Delay measurements exclude ping packets that
are not
<PAGE>
returned, and ports over which the transit delay is measured
can not be more than 5% utilized during any hour over which
transit delay measurements are taken.
Customer calculations of end to end network transit delay must
exclude access serialization delay (calculated as defined
below), access circuit propagation delay, any delay induced by
congestion on the access link, and any CPE induced delay such
as that caused by high router utilization levels. The frame
size for the test must be no more than two hundred (200) bytes
in length, including protocol overhead. Customer tests must
also consist of a minimum of 60 ping tests evenly distributed
over a 6 hour period.
5.5 Components for Calculations
If you are attempting to calculate cpe to cpe delay, the
following are components you will have to consider in addition
to the MCI published network delay:
o access/egress link utilization
o cpe nodal processing time at each end.
o local loop propagation factor = .008 ms/mile
o backhaul (mci pop to frame switch) = .008 ms/mile
o INGRESS/EGRESS SERIAL DELAY (ms) =
(Packet size in bytes)x8xI000
------------------------------
Access speed in bps
5.6 Credits
o In the event MCI is unable to satisfy the HSFR
Transit Delay objective for two (2) consecutive
months, during the service term, Customer will
receive a credit equal to five percent (5%)
multiplied by the fixed rates for all Port and PVC
charges for the given month.
o In the event MCI in unable to satisfy the HSFR
Transit Delay objective for a third (3rd) consecutive
month, during the service term. Customer will receive
a credit equal to ten percent (10%) multiplied by the
fixed rates for all Port and PVC charges for the
given month.
o In the event MCI is unable to satisfy the HSFR
Transit Delay objective for a fourth (4th)
consecutive month, Customer will have the option to
discontinue MCI Service on the Service Element that
has failed to satisfy the HSFR MTTR objective and MCI
will reduce the HyperStream Subminimum by the amount
of charges associated with the discontinued Service
Element.
<PAGE>
6.0 Credit Limitation
In the event the customer experiences network or service
performance for HSFR at levels below stated MCI objectives for
Network Availability Time, MTTR, Network Transit Delay, or
HSFR Frame Delivery during the same month, customer shall only
be entitled to receive credits, if any, pursuant to one (1) of
the applicable credit sections.
<PAGE>
networkMCI ONE SPECIAL CUSTOMER ARRANGEMENT
This networkMCI ONE Special Customer Arrangement together with all Attachments
hereto (this "Agreement") is made by and between MCI TELECOMMUNICATIONS
CORPORATION ("MCI") and MORGAN DRIVE AWAY, INC. ("Customer"), is binding on
Customer upon execution and delivery of this Agreement by Customer to MCI (the
"Effective Date"). Provided that this Agreement is subsequently accepted by MCI,
the rates, discounts, charges and credits set forth herein shall be effective
the first day of the second billing cycle following the Effective Date (the
"Commencement Date"). All capitalized terms used in this Agreement and not
defined herein will have the meaning ascribed to them in MCI Tariff FCC No. 1.
1. Service Provisioning and Receipt. MCI will provide to Customer
international, interstate, intrastate and local
telecommunications "service(s)" (as hereinafter defined)
pursuant to the applicable tariffs and price lists of MCI and
its U.S.-based affiliates (individuals, a "Tariff" and
collectively, the "Tariffs"), each as supplemented by this
Agreement to the extent permitted by law. This Agreement
incorporates by reference the terms of each such Tariff. MCI
may modify its Tariff from time to time in accordance with law
and thereby affect the services furnished to Customer. This
Agreement is a "Specialized Customer Arrangement" as defined
in Section B-17.03 of the Tariff.
If prior to the expiration of the "Term" (as hereinafter
defined) of this Agreement, MCI voluntarily or involuntarily
as a result of government or judicial action cancels, in whole
or in part, any tariff on file with the Federal Communications
Commission ("FCC"), where the affected provisions prior to
such cancellation applied to any service(s) MCI provides under
this Agreement, then effective on such cancellation and for
the remainder of the Term, this Agreement shall consist of the
following, in order of precedence from (a) through (c):
(a) MCI Tariff provisions that remain in effect
("Effective Tariffs"), as MCI may amend from time to
time in accordance with law, and
(b) Specific provisions contained in this Agreement that
expressly apply in lieu of, or that apply in addition
to, provisions contained in Effective Tariffs and/or
in MCI's standard Guide to Services and Pricing
("Price Guide"), and
(c) Provisions contained in the Price Guide to the extent
that (a) and (b) above are not applicable. MCI may
amend the Price Guide from time to time and will
maintain the Price Guide open for public inspection
at one or more offices during normal business hours.
Immediately prior to the cancellation of any tariff
provisions applicable to service(s) provided under
this Agreement, MCI shall incorporate such provisions
into the Price Guide and if MCI fails to incorporate
any such provisions, such provisions shall be deemed
incorporated
-1-
<PAGE>
into this Agreement as if MCI had so incorporated such
provisions in the Price Guide.
In all events, the applicable rates and rate schedules shall
continue to be subject to any discounts, waivers, credits, of
restrictions on rate changes that may be contained in this
Agreement. Where rate and/or discount adjustments would have
been made by reference to any canceled tariff rate, rate
schedule, discount and/or discount schedule, these adjustments
shall instead be made by reference to the Price Guide. To the
extent that any adjustment to tariffed rates, rate schedules,
discounts and/or discount schedules is permitted under this
Agreement, such adjustment may be made by MCI to its Price
Guide.
2. Tariff Option. MCI shall, if required, file a Tariff option (a
"Tariff Option") consistent with the terms of Attachment A,
which is incorporated into this Agreement by this reference,
and applicable regulatory authority.
3. Confidential Information. Customer will not disclose to any
third party during the Term, or during the three (3) year
period after expiration or termination of this Agreement, any
of the terms and conditions of this Agreement unless such
disclosure is lawfully required by any federal governmental
agency or is otherwise required to be disclosed by law or is
necessary in any legal proceeding establishing rights and
obligations under this Agreement. MCI reserves the right to
terminate this Agreement by giving written notice to Customer
in the event of any unpermitted disclosure hereunder.
4. Governing Law. This Agreement, and all causes of action
arising out of this Agreement, will be subject to the
Communications Act of 1934, as amended (the "Act"), or, if any
part of this Agreement is not governed by the Act, by the
domestic law of the State of New York without regard to its
choice of law principles.
5. Waiver. No waiver of any of the provisions of this Agreement
shall be binding unless it is in writing and signed by the
party making the waiver. No waiver shall be deemed, or shall
constitute, a waiver of any other provision, whether or not
similar, and no waiver shall be deemed, or shall constitute, a
continuing waiver.
6. Notices. All notices, requests, or other communications
(excluding invoices) hereunder will be in writing and either
transmitted via facsimile, overnight courier, hand delivery or
certified or registered mail, postage prepaid and return
receipt requested to the parties at the addresses below or
such other addresses as may be specified by written notice.
All notices will be effective when received.
7. Severability. All provisions of this Agreement are severable,
and the unenforceability or invalidity of any of the
provisions will not affect the validity or enforceability of
the
-2-
<PAGE>
remaining provisions. The remaining provisions will be
construed in such a manner as to carry out the full intention
of the parties. Section titles or references used in this
Agreement will not have substantive meaning or content and are
not a part of this Agreement.
8. Entire Agreement. This Agreement, together with the Tariffs,
the Attachments to this Agreement, and any optional cellular,
paging HyperStream Frame Relay, an Local Service agreements
entered into by Customer, constitutes the entire agreement
between the parties with respect to its subject matter and
supersedes all other representations, understandings or
agreements which are not expressed herein, whether oral or
written. No amendment to this Agreement will be valid unless
in writing and signed by both parties.
9. Optional Cellular and Paging Services. Should Customer choose
to order networkMCI Cellular Service or networkMCI Paging
Service, subject to availability and Customer's enrollment
under an MCI approved and accepted month to month cellular or
paging term plan agreement, Customer shall receive during the
term of this Agreement only (and in lieu of all other
discounts): (i) a discount equal to ten percent (10%) on all
paging service elements eligible for discount under the terms
of MCI's paging agreement, and (ii) a discount equal to ten
percent (10%) on all cellular service elements eligible for
discount under the terms of MCI's cellular agreement. Separate
credit and payment terms may apply.
10. Domestic MCI HyperStream Frame Relay Service.
(a) During each month of the Term, the Customer agrees to
purchase not less than the amount identified in
Section 3.1 below of MCI HyperStream Frame Relay
Service.
(b) During each month of the Term, the Customer shall
receive a discount equal to seventeen percent (17%)
which will be applied to Customer's recurring MCI
HyperStream Frame Relay Service port and PVC usage
charges (exclusive of applicable taxes, surcharges,
access/egress (or related) charges).
11. Optional MCI Local Service. Where MCI has received applicable
regulatory approval and filed the necessary tariff(s), and
Customer elects to enroll in an MCI Local Service Term Plan,
Customer will receive a 10%, 15%, or 20% discount (based upon
the length of the Term herein) on its eligible monthly charges
for MCI facilities based on local exchange service. MCI Local
Service is provided by MCImetro Access Transmission Services,
Inc., and is subject to the terms and conditions of the MCI
Local Service Term Plan program set forth in the applicable
tariffs or price lists.
-3-
<PAGE>
12. Acceptance Deadline. This Agreement shall be of no force and
effect and the offer contained herein shall be withdrawn
unless this Agreement is executed by Customer and delivered to
MCI on or before September 30, 1997.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the dates set forth below.
MORGAN DRIVE MCI TELECOMMUNICATIONS
AWAY, INC. CORPORATION
2746 U.S. 20 West, P.O. Box 1168 Three Ravinia Drive
Elkhart, Indiana 46515 Atlanta, Georgia 30346
/s/ Richard B. DeBoer
Richard B. DeBoer Jon McGuire, Vice President
September 30, 1997
Date Date
-4-
<PAGE>
ATTACHMENT A TO AGREEMENT
This Attachment A to the Agreement contains the rates, discounts and certain
other provisions applicable to the Services provided to Customer pursuant to the
Agreement.
1. Term; Ramp Period; Contract Year. The "Term" will begin on the
Effective Date and end two (2) years following the Commencement Date.
Each consecutive twelve (12) month period of the Term commencing on the
Commencement Date and on each anniversary thereof will be a "Contract
Year".
2. Selected Definitions.
2.1 "Base Rates" shall mean the rates as reduced by the discounts
(if any) provided to Customer pursuant to this Agreement or
for "Services" (as hereinafter defined) not specifically set
forth herein, the rates set forth in the Tariffs following
application of all applicable tariffed discounts.
2.2 "Postalized Rates" shall refer to per minute rates for
Services that are nondistance- sensitive.
2.3 "Services" shall refer to any one or more of those
telecommunications services provided to Customer pursuant to
the Tariffs.
2.4 "Usage Charges" shall mean Customer's recurring usage charges
for the Services calculated at Base Rates. Usage Charges do
not include the following: (i) taxes and tax related
surcharges; (ii) charges for any non-Tariffed services; (iii)
charges for equipment and collocation; and (iv) charges
incurred where MCI or an MCI affiliate acts as agent for
Customer in the acquisition of goods or services.
3. Annual Minimum. During each Contract Year, Customer's Usage Charges
must equal or exceed Eight Hundred Forty Thousand Dollars ($840,000)
(the "Annual Minimum").
3.1 During each month of the Contract Years, Customer's MCI
HyperStream Frame Relay port and PVC Usage Charges must equal
or exceed Ten Thousand Dollars ($10,000) (the "Monthly
HyperStream Subminimum").
4. Rates and Discounts for the Services. Except as expressly provided to
the contrary, the rates, charges, discounts and/or credits set forth
herein are in lieu of, and not in addition to, any other rates,
charges, discounts and/or credits (tariffed or otherwise). For Services
not specifically set forth herein, Customer will be charged MCI's
standard Tariffed rates. References in this Attachment A to standard
Tariffed rates and/or discounts refer to the corresponding standard
rates and/or discounts set forth in the applicable Tariffs for such
Service(s) and in the event that MCI voluntarily or involuntarily as a
result of government or judicial action cancels in whole or in part any
tariff on file with the Federal Communications Commission, such
references shall refer to the corresponding, rates and/or discounts set
forth
-1-
<PAGE>
in the Price Guide for such Service(s). All references to "intrastate"
and "interstate" contained herein shall refer to domestic Services
only.
4.1 networkMCI One Service. Customer will pay the following rates
for networkMCI One Service:
4.1.1 Interstate networkMCI One Service. Customer will pay
the following Postalized Rates for networks One
Outbound Service, including interstate networkMCI One
Card Service, based on call type. These Postalized
Rates will be adjusted on the first day of each
January during each calendar year of the Term by an
amount equal to the same percentage by which standard
Tariffed interstate networkMCI One Service rates were
adjusted during the immediately preceding calendar
year. These Postalized Rates will fluctuate with
changes in the Tariff, not to exceed a maximum
increase or decrease of three percent (3%) per annual
period. Such adjustments shall be made on a
prospective basis only. No retroactive adjustments
will be made to previous years during the Term of
this Agreement.
Call Type Rate Per Minute
Dedicated/Dedicated $0.0870
Switched/Dedicated $0.1070
Dedicated/Switched $0.1070
Switched/Switched $0.1570
4.1.1.1 Customer will receive a fixed discount of
thirty seven percent (37%) off the
Postalized Rates described in Section 4.1.1
above to be applied to Customer's monthly
Usage Charges for said Service.
4.1.2 Customer will pay the following Postalized
Rates for networkMCI One Toll Free Service,
based on termination type. These Postalized
Rates will be adjusted on the first day of
each January during each calendar year of
the Term by an amount equal to the same
percentage by which standard Tariffed
interstate networkMCI One Service rates were
adjusted during the immediately preceding
calendar year. These Postalized Rates will
fluctuate with changes in the Tariff, not to
exceed a maximum increase or decrease of
three percent (3%) per annual period. Such
adjustments shall be made on a prospective
basis only. No retroactive adjustments will
be made to previous years during the Term of
this Agreement.
Termination Rate Per Minute
Direct Access Line $0.1070
Business Line $0.1570
-2-
<PAGE>
4.1.2.1 Customer will receive a fixed discount of
thirty seven percent (37%) off the
Postalized Rates described in Section 4.1.2
above and off Dynamic Routing Charges as
described in the Tariff, to be applied to
Customer's monthly Usage Charges for said
Service.
4.1.3 International networkMCI One and networkMCI One Toll
Free Service. For international [toll free and/or
outbound] networkMCI One Service, including
international networkMCI One Card Service, Customer
will pay standard Tariffed rates less a fixed ten
percent (10%) discount off standard Tariffed rates,
including Canada.
4.1.4 Intrastate networkMCI One and networkMCI One Toll
Free Service. For intrastate [toll free and/or
outbound] networkMCI One Service, including
intrastate networkMCI One Card Service, Customer will
pay standard Tariffed rates without application of
any discounts (tariffed or otherwise).
except as described in Section 5.2 below.
4.1.5 networkMCI One Card Surcharge. Notwithstanding
anything herein to the contrary, Customer will pay a
thirty five cent ($0.35) per call surcharge for all
networkMCI One Card calls.
4.2 networkMCI Audio Conferencing. Customer will pay the following
rates for networkMCI Audio Conferencing Service.
In lieu of standard Tariffed rates, for all
networkMCI Audio Conferencing Service, Customer will
be charged the following, per-minute per bridge port
rates (with rounding to the next higher full minute).
In addition, MCI will waive per bridge port set-up
fees.
Service Rate
Attended Meet-Me Service* $.3500
Unattended Meet-Me Service $.3400
Attended Toll Meet-Me Service $.2300
Unattended Toll Meet-Me Service $.2100
* includes Dial-Out Service, Personal Toll
Free Meet-Me Service, and Toll Free Meet-Me
Service
4.3 Dedicated Access Services. Customer subscribes to and will
receive the discounts off local loop charges only for
channelized and unchannelized T-1 access, DSO access and DDS
access and analog access provided pursuant to MCI's three (3)
year Access Pricing Plan ("APP").
-3-
<PAGE>
4.3.1 In addition to the discount described in Section 4.3 above,
the Customer will receive a thirty percent (30%) discount on
its MCI monthly recurring charges under this Agreement for up
to ten (10) MCI provided T-1 digital access channels and
associated access coordination and central office connection
charges, provided such channels are installed for use with MCI
Services and are billed on MCI invoices. This monthly discount
will be applied to Customer's T-1 carrier charges for domestic
interstate service (as long as Customer makes payment pursuant
to this Agreement). Customer shall also be eligible for the
T-1 Digital Access Install Waiver Promotion, pursuant to the
Tariff.
4.4 Dedicated Leased Line Services. For MCI Dedicated Leased Line
Services, Customer will pay standard Tariffed rates less the
discounts associated with the three (3) year and Fifty
Thousand Dollar ($50,000) Network Pricing Plan as set forth in
the Tariff. The standard term and volume commitments set forth
in the Tariff will not apply.
4.5 Charges Not Eligible For Discount. The rates and discounts set
forth in this Section 4 do not apply to the following: charges
for MCI Services other than those set forth in Section 4;
non-Tariffed products; access or egress (or related) charges
imposed by third parties; standard Tariffed non-recurring
charges, calling card surcharges and taxes or tax-like
surcharges.
5. Credits.
5.1 Installation Credit. Customer shall receive credits in the
aggregate of up to Forty Five Thousand Dollars ($45,000)
Dollars for the one-time installation and other one-time,
nonrecurring, standard (non-expedite) charges associated with
the implementation of domestic Services under this Agreement.
Such credits will be issued from time to time throughout the
Term as MCI services are installed by Customer and shall be
applied following, application of all standard Tariffed
installation promotions.
5.2 Interstate Service Credits. Customer will receive a monthly
recurring credit (the "Interstate Service Credit") to be
applied to Customer's interstate Usage Charges of Services
hereunder equal to the sum of. (i) the product of a fixed
twenty five percent (25%) discount multiplied by Customer's
intrastate networkMCI One Usage Charges for the immediately
preceding month at standard Tariffed rates plus (ii) a fixed
discount of twenty five percent (25%) multiplied by Customer's
intrastate networkMCI One Toll Free Usage Charges for the
immediately preceding month at standard Tariffed rates.
Notwithstanding the foregoing, in no event shall the amount of
any such Interstate Service Credit exceed Customer's
interstate Usage Charges for the month in which such credit is
to be applied.
-4-
<PAGE>
5.3 Revenue Stimulation Credits. At the end of each Contract Year,
the Customer will receive a one-time credit for that year that
corresponds to the Annual Usage Amounts* identified below.
Such credit shall be applied in the form of a dollar amount to
Customer's domestic interstate Usage Charges (exclusive of
applicable taxes, surcharges, access/egress (or related)
charges) in the thirteenth (13th) and twenty fifth (25th)
months of the Term.
Annual Usage
Amounts Credit Amount
------- -------------
125% of Annual Minimum 1% of annual usage
140% of Annual Minimum 1.75% of annual usage
*For purposes of this Section 5.3, only revenue that counts
towards the satisfaction of the Annual Minimum will be
measured.
6. Underutilization. If in any Contract Year, Customer's Usage Charges are
less than the applicable Annual Minimum, then Customer will pay: (1)
all accrued but unpaid usage and other charges incurred by Customer;
and (2) an underutilization charge (which Customer agrees is
reasonable) equal to one hundred percent, (100%) of the difference
between Customer's Usage Charges during such Contract Year and the
applicable Annual Minimum.
6.1 HyperStream Underutilization. If in any month of the Contract
Years, Customer's MCI HyperStream Frame Relay Usage Charges
are less than the applicable Monthly HyperStream Subminimum,
then Customer will pay: (1) all accrued but unpaid usage and
other charges incurred by Customer; and (2) an
underutilization charge (which Customer agrees is reasonable)
equal to one hundred percent (100%) of the difference between
Customer's MCI HyperStream Frame Relay Usage Charges during
such month of the Contract Year and the applicable Monthly
HyperStream Subminimum.
7. Termination Liability. If (1) Customer terminates this Agreement during
the Term, for reasons other than (i) for "Cause" (as hereinafter
defined) or (ii) to take service under another arrangement with MCI
having equal or greater term and volume requirements or (2) MCI
terminates this Agreement for Cause, Customer will pay within thirty
(30) days after such termination: (a) all accrued but unpaid usage and
other charges incurred through the date of such termination (b) an
amount equal to one hundred percent (100%) of the aggregate of the
Annual Minimum(s) (or pro rata portion thereof for partial Contract
Year) that would have been applicable for the remaining unexpired
portion of the Term on the date of such termination and (c) any and all
credits received by Customer hereunder (exclusive of credits for the
Interstate Service Credits), in full, without setoff or deduction. As
used herein, "Cause" shall mean a failure of the other party to perform
a material obligation under this Agreement which failure is not
remedied by the defaulting party within thirty (30) days after receipt
of written notice thereof.
-5-
<PAGE>
8. Payment Arrangements. Customer is required to pay MCI for Services
within twenty-five (25) days after Customer's receipt of MCI's invoice.
9. Exclusivity Requirement.
9.1 Customer agrees it shall use MCI exclusively as its
interexchange carrier ("IXC") during the Term hereof for
ninety five percent (95%) of all IXC services for which
Customer is not contractually committed at the execution of
this Agreement [including, without limitation, inbound toll
free services, outbound voice services, conference calling
services, domestic and international outbound, and domestic
and international data services.] Compliance with the
foregoing exclusivity covenant shall be measured on a monthly
basis based on Customer's dollar usage of all IXC services.
9.2 After the Effective Date of this Agreement, but not more than
once annually, MCI may request, and Customer shall provide to
MCI in writing, Customer records, data and invoices pertaining
to its total IXC service usage for the most recent twelve (12)
month period preceding the request. MCI may review this
information for the sole purpose of determining Customer's
compliance with the exclusivity covenant set forth in this
Section.
10. MCI Local Service.
(i) From time to time during the Term, MCI or an MCI affiliate may
offer local access or local exchange telephone services
(collectively, "Local Service"). As of the Effective Date,
Local Service is provided by MCImetro Access Transmission
Services, Inc. "Local Service Charges" (as defined below) will
contribute to Customer's Annual Minimum, but will not be
eligible to receive any discounts under this Agreement unless
otherwise expressly stated. For purposes of this Agreement,
"Local Service Charges" means MCI's tariffed or standard rates
and charges for Local Service, net of associated credits or
discounts, and includes applicable monthly usage and monthly
recurring, charges, local line charges, analog and digital
trunk charges, and Direct-Inward Dialing analog, digital and
number charges. Local Service Charges do not include charges
for Bell Operating Company resold local exchange services
within the meaning of Section 251(c)(4) of the
Telecommunications Act of 1996, Directory Assistance charges
and surcharges, charges for enhanced services (such as charges
for voice mail or call manager), non-recurring charges,
Operator Services charges and surcharges, access/egress (or
related) charges imposed by a third party other than MCI or an
MCI affiliate, applicable sales, use, excise, utility, and
gross receipts taxes and other similar tax-like surcharges.
(ii) Where MCI has received the applicable regulatory approval and
filed the necessary tariff(s), Customer will be automatically
enrolled in an MCI Local Service Term Plan and will receive a
twenty percent (20%) discount on its eligible monthly charges
for
-6-
<PAGE>
MCI facilities-based local exchange service. Enrollment in the
MCI Local Service Term Plan is subject to the terms and
conditions of the MCI Local Service Term Plan program set
forth in the applicable tariffs or price lists.
11. Quality Assurance. Notwithstanding the provisions of Section 7
("Termination Liability") above, Customer shall be permitted to
terminate during the Term, without liability or further obligation,
except for charges incurred up to the date of termination, a circuit
that experiences "MCI-caused" quality deficiencies that are
demonstrated by Customer to affect adversely and materially Customer's
telecommunications applications (such a termination under this clause
shall constitute a "Termination for Quality Assurance"). As used
herein, "MCI-caused" shall mean MCI acts or omissions regarding the
provision of a circuit to Customer. A Termination for Quality Assurance
shall not be effective unless Customer has reported troubles on a
circuit-specific, ANI basis to (and received a corresponding trouble
ticket number from) MCI's Support Center and a period of not less than
thirty (30) days after receipt of Customer's written notice of
termination has elapsed during which time MCI fails to correct such
MCI-caused quality deficiencies for such circuit. Such thirty (30) day
period shall commence upon MCI's receipt of Customer's written notice
and will not re-commence if the same MCI-caused quality deficiencies
occur again for such circuit during said thirty (30) day period.
12. Provisions for Service Interruptions.
(a) Credit Allowance for Service Interruptions.
Customer shall be entitled to Credit Allowances for Service
Interruptions in accordance with Section B.15 of the Tariff. A
Service Interruption begins when Customer reports the
interruption to MCI and releases the "Service Element" (as
hereinafter defined) for testing and repair and ends when MCI
retenders the Service Element to Customer. For the purpose of
determining compliance with the Annual Minimum, MCI will not
reduce monthly charges by the amount of Credit Allowances
applied. For purposes of this Agreement, "Service Element"
refers to the specific MCI service affected at the specific
geographic Customer location affected.
(b) Partial Discontinuance without Liability.
Customer may discontinue receipt of service on a Service
Element at any time without liability except as otherwise
expressly provided for in the applicable Tariff or this
Agreement (an example of such a provision might be where a
private line installation charge is waived but is to be
assessed if the line is not in place for a minimum period). If
Customer discontinues receipt of service on a Service Element
having chronic Service Interruptions and does not take
substitute service from MCI, the Annual Minimum for purposes
of assessing underutilization charges shall be reduced by the
average monthly charges for the discontinued Service Element
measured over the last
-7-
<PAGE>
three (3) billing months prior to discontinuation multiplied
by twelve (12). A Service Element with chronic Service
Interruptions is one on which there have been three (3) or
more Service Interruptions, each consisting of thirty (30) or
more minutes, totaling twenty-four (24) or more hours within
three (3) consecutive calendar months.
13. Technology Upgrade.
(a) In the event that: (i) Customer is unable to satisfy the
Annual Minimum solely as a result of a Customer's migration
from Services to enhanced services of MCI which are not
includable in determining Customer's compliance with the
Annual Minimum ("MCI Enhanced Services") and (ii) Customer
certifies to MCI in writing that: (x) it has not substituted
services provided by other vendors in place of the Services
and (y) it is not able to substitute for such migrated usage
other telecommunications services provided to Customer by
other vendors, then MCI agrees to reduce the Annual Minimum by
the Customer's minimum volume requirement, calculated on an
annual basis, for such MCI Enhanced Service(s) pursuant to its
agreement with MCI governing such usage.
(b) Following the establishment by MCI of a revised Annual Minimum
as set forth above in Section 13(a), the revised Annual
Minimum shall replace the Annual Minimum throughout this
Agreement and Customer shall remain liable for charges
pursuant to this Agreement, including, without limitation,
those charges set forth in Sections 6 and 7 hereof, based on
the revised Annual Minimum. Notwithstanding anything herein to
the contrary, in the event of the establishment of a revised
Annual Minimum, MCI may increase the rates provided and/or
lower the discounts to Customer hereunder by sending at least
thirty (30) days' prior written notice thereof to Customer.
14. Business Downturn.
(a) In the event that Customer is unable to meet the Annual
Minimum, notwithstanding Customer's best efforts to do so, or
anticipates that it will be unable to meet the Annual Minimum,
notwithstanding Customer's best efforts to do so, and Customer
establishes the foregoing to MCI's satisfaction and such
failure results solely from a business downturn beyond
Customer's control, which materially and permanently reduces
the size or scope of Customer's operations and the volume of
Services required by Customer hereunder, then MCI agrees to
reduce the Annual Minimum by the product of the average
monthly demonstrated purchases displaced by such business
downturn multiplied by twelve (12). By way of illustration and
not by limitation, business downturn shall not include a
change in Customer's usage of Services hereunder resulting
from a decision by Customer to: (i) reduce its overall use of
telecommunications services; (ii) alter its telecommunications
network architecture; or (iii) transfer portions of its
telecommunications traffic or projected
-8-
<PAGE>
growth to carriers other than MCI. This Section 14(a) shall
also not apply during the first Contract Year of the Term, and
thereafter, may only be used one (1) time during the Tenn.
Customer shall give MCI immediate notice of the conditions it
believes will require the application of this Section 14(a)
and provide copies of documentation and/or data demonstrating
the resulting decrease in usage of Services hereunder.
(b) Following the establishment by MCI of a revised Annual Minimum
as set forth above in Section 14(a), the revised Annual
Minimum shall replace the Annual Minimum throughout this
Agreement and Customer shall remain liable for charges
pursuant to this Agreement, including, without limitation,
those charges set forth in Sections 6 and 7 hereof, based on
the revised Annual Minimum. Notwithstanding anything herein to
the contrary, in the event of the establishment of a revised
Annual Minimum, MCI may increase the rates and/or lower the
discounts provided to Customer hereunder by sending at least
thirty (30) days' prior written notice thereof to Customer.
15. Business Divestiture.
(a) In the event that (i) Customer is unable to satisfy the Annual
Minimum solely as a result of a "Business Divestiture" (as
such term is hereinafter defined) and (ii) Customer certifies
to MCI in writing that it has not substituted services
provided by other vendors in place of the Services and it is
not able to substitute for such diminished MCI usage other
telecommunications services provided to Customer by other
vendors, then MCI agrees to reduce the Annual Minimum by the
product of the average monthly purchases attributable to such
Business Divestiture during the six (6) months (or in the
event that such Business Divestiture occurs prior to the sixth
(6th) monthly billing cycle of the Term, during the monthly
billing cycles since the Commencement Date) preceding such
Business Divestiture multiplied by twelve (12). For purposes
of this provision, "Business Divestiture" shall mean the sale
or divestiture by Customer of a subsidiary, affiliate or
significant operating unit that uses Services hereunder.
Customer shall give MCI immediate notice of a Business
Divestiture and shall promptly provide to MCI in writing,
documentation satisfactory to MCI which establishes that a
Business Divestiture has occurred.
(b) Following the establishment by MCI of a revised Annual Minimum
as set forth above in Section 15(a), the revised Annual
Minimum shall replace the Annual Minimum throughout this
Agreement and Customer shall remain liable for charges
pursuant to this Agreement, including, without limitation,
those charges set forth in Sections 6 and 7 hereof, based on
the revised Annual Minimum. Notwithstanding anything herein to
the contrary, in the event of the establishment of a revised
Annual Minimum, MCI may increase the rates and/or lower the
discounts provided to Customer hereunder by sending at least
thirty (30) days' prior written notice thereof to Customer.
-9-
<PAGE>
MCI HyperStream(sm) Frame Relay Service
ENROLLMENT FORM AND AGREEMENT
MCI
MCI HyperStream(sm) Frame Relay Service is subject to the
terms of this Enrollment Form and Agreement ("Agreement"),
including any attachments and documents incorporated by
reference.
Morgan Group, Inc. MCI Telecommunications Corporation
Customer Name
28651 U.S. 20 West
Street Address Authorized MCI Signature
Elkhart, IN 46515
City/State/Zip Print Name and Title
Customer Signature MCI Acceptance Date
Valid only if executed by Customer
and returned to MCI by January 19, 1996
Print Name and Title and subsequently accepted by MCI.
Customer Signature Date
- --------------------------------------------------------------------------------
TERMS AND CONDITIONS
1. Definitions. "MCI" refers to MCI Telecommunications Corporation.
"HyperStream(sm) Frame Relay" means MCI's frame-based data networking
service, an enhanced service, as described in the HyperStream(sm) Frame
Relay Service Description, as revised from time to time, which is
attached hereto as Attachment 1.
2. Service Terms.
a. MCI will furnish the HyperStream(sm) Frame Relay services (the
"Services") to Customer pursuant to the terms of this
Agreement. This Agreement incorporates by reference the Rules
and Regulations contained in MCI Tariff FCC No. 1 (the
"Tariff"), with specific reference to Section 8.4.02 thereof,
as the Tariff may be modified from time to time by MCI in
accordance with applicable law, except as expressly varied or
supplemented herein. Other than as expressly set forth herein,
MCI DISCLAIMS ALL WARRANTIES, INCLUDING ANY IMPLIED WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
<PAGE>
PURPOSE. In no event shall MCI be liable to Customer or any
third party for indirect, incidental or consequential damages,
even if aware of the possibility thereof. In the event of any
inconsistency between this Agreement and the terms the Tariff,
the terms of this Agreement shall govern. This Agreement is
the complete agreement between Customer and MCI for the
services subject to this Agreement and supersedes any prior
written or oral agreements and understandings concerning the
Services.
b. Customer acknowledges that MCI has been ordered by the Federal
Communications Commission (the "FCC") to provide the Services
pursuant to a tariff filed with the FCC. MCI and Customer
agrees that as of the date that MCI tariffs the Service: (1)
This Agreement is subject to said tariff; and (2) the parties
will promptly execute appropriate additional agreements and
amendments to this Agreement, the effect of which shall be to
eliminate the Services from this Agreement and to incorporate
the Services into an agreement for MCI tariffed services.
Customer acknowledges and agrees that MCI shall have no
obligation to include any other nontariffed service or
equipment provided under this Agreement or any charges payable
for such service or equipment in any such agreement for
tariffed services. In the event the FCC significantly and
materially alters the terms and conditions contained herein,
MCI and Customer will cooperate in efforts to develop a
mutually agreeable alternative proposal that will address the
concerns of both parties and comply with all applicable legal
and regulatory requirements and restrictions.
c. With the exception of revisions to the Tariff made in
accordance with applicable law, this Agreement may only be
amended ir writing signed by authorized representatives of the
parties.
3. Rates and Charges. Attachments 2 and 3 to this Agreement, which are
incorporated herein by reference, contain the applicable rates and
charges for the Services provided hereunder. Revisions of the
applicable rates and charges may become effective upon revisions of any
applicable tariff provisions (if the service is offered under tariff)
or upon notification that MCI has revised the applicable rates and
charges (if the service is not offered under tariff). Any other service
Customer orders from MCI or any of its affiliates will not be subject
to the terms of this Agreement.
4. Term. The initial term of this Agreement shall commence on the MCI
Acceptance Date and shall be coterminous with the MCI Corporate Service
Plan Agreement, signed by the Customer on December 5, 1994 and
subsequently accepted by MCI on January 4, 1995, as amended. After the
initial term, the service arrangement shall continue month to month,
unless terminated by Customer or MCI on thirty 130) days' written
notice.
5. Governing Law. The provision of service under this Agreement is subject
to and shall be interpreted in accordance with the terms of the
Communications Act of 1934, as administered by the Federal
Communications Commission.
<PAGE>
6. Nondisclosure. Customer agrees not to disclose the financial provisions
of this Agreement to any third party during the term and for one (1)
year after termination, except that this provision does not apply to
information in the public domain or information which is lawfully
required to be disclosed. MCI reserves the right to terminate the
provision of service under this Agreement if there is any unpermitted
disclosure.
<PAGE>
ATTACHMENT 1
HyperStream Frame Relay Service Description
Overview
HyperStream Frame Relay Service is a packet-oriented interLATA data transport
service. At the originating customer promises Motorola provided equipment
(equipment provided pursuant to a separate agreement) places the data into
packets and gives each packet a terminating address. MCI routes the packets over
the MCI network to the terminating address. HyperStream Frame Relay is available
at speeds up to 1.544Mbps (where clear channel access is available).
Technical Description
HyperStream Frame Relay operates at layer two of the OSI model and is designed
to conform to the ANSI T1.617 Annex D Standard.
Access
Customers obtain access to HyperStream Frame Relay via dedicated digital
facilities, only. MCI will provide access under the terms of its filed and
effective tariffs or customer may obtain access via alternate access vendors.
Customer Promises Equipment (CPE)
Customer may provide required CPE or may obtain CPE from MCI under separate
agreement.
Availability
HyperStream Frame Relay is available between cities listed in MCI Tariff FCC No.
1, Section C. 1 2, Table IV, Part A, as amended from time to time, or any
successor tariff.
Performance Criteria
MCI shall provide Customer certain performance criteria for domestic HyperStream
Frame Relay Service as identified in Attachment 4, hereto attached and
incorporated by reference.
<PAGE>
ATTACHMENT 2
DOMESTIC HYPERSTREAM FRAME RELAY RATES AND CHARGES
HYPERSTREAM FRAME RELAY DOMESTIC PRICING
A. RATES AND CHARGES: Basic Month-to-Month Rates and Charges.
1. Installation Charges.
(a) Access Lines -- Per Tariff (if MCI provided)
or alternate access vendor
(b) Per Port (each location) -- $300.00
(c) Per Permanent Virtual Circuit (PVC) -- $15
simplex
2. Reconfiguration Charges.
(a) Access Lines - Per Tariff (if MCI provided)
or alternate vendor
(b) Per Port (each Location) -- $300.00
(c) Per PVC - $15.00 simplex
3. Monthly Recurring Charges.
(a) Access line charges -- Per Tariff (if MCI
provided) or alternate vendor
(b) Port Charges -- All port charges are
applicable per port (per location). Port
charges depend upon the port speed selected
by you.
Port Speed Selected Rate/Month
56/64 Kbps $ 180.00
112/128 Kbps $ 336.00
224/256 Kbps $ 394.00
336/384 Kbps $ 578.00
448/512 Kbps $ 735.00
672/768 Kbps $ 946.00
896/1024 Kbps $1,178.00
1344/1536 Kbps $1,470.00
<PAGE>
(c) PVC Charges -- PVC rates are either fixed or
usage based. Usage based charges are either
on a committed information rate (CIR) or
zero CIR basis.
(1) Fixed CIR PVC Rates. You select the
fixed CIR per simplex PVC and pay
one monthly usage charge per PVC.
CIR Speed Selected Rate/Month
16 Kbps $ 37.00
32 Kbps $ 57.00
48 Kbps $ 77.00
64 Kbps $ 97.00
128 Kbps $ 177.00
192 Kbps $ 257.00
256 Kbps $ 337.00
320 Kbps $ 417.00
384 Kbps $ 497.00
448 Kbps $ 577.00
512 Kbps $ 657.00
576 Kbps $ 729.00
640 Kbps $ 801.00
704 Kbps $ 873.00
768 Kbps $ 945.00
832 Kbps $1,010.00
896 Kbps $1,075.00
960 Kbps $1,140.00
1,024 Kbps $1,205.00
(2) Usage-based PVC Rates. All
usage-based rates are per delivered
megabyte.
(i) CIR Usage-based PVC Rates.
(a) You select the CIR for each PVC to
be rated. Frames within the CIR
selected will be rated at the CIR
Usage rate of Forty-one Cents
($0.4100) per megabyte of delivered
data. Frames in excess of the CIR
selected by you will be discarded
eligible (DE) and rated at the DE
Usage rate of Twenty-one Cents
($0.2100) per megabyte of delivered
data. Sampling intervals for
measuring bandwidth usage will be
0.4 seconds for CIR at or below 256
Kbps and 1.5 seconds for CIR over
256
<PAGE>
Kbps. MCI reserves the right to
revise the sampling intervals.
Rates are simplex based.
(b) Cost Capping. CIR Usage-based PVC
rates are capped at one hundred
percent (100%) of the corresponding
Fixed CIR PVC rates that are set
forth in Section A.3.c.1 above.
(c) CIR Usage-based PVC Monthly
Minimum. If your usage charges for
a PVC in a month are less than
forty percent (40%) of the Fixed
CIR PVC rate selected from the
chart set forth in Section A.3.c.1
above, your charge for said PVC
will be forty percent (40%) of the
Fixed CIR PVC rate (which charges
are set forth below). Minimums
count toward Network Pricing Plan
Monthly Minimums (see B below).
CIR Speed Selected Minimum Rate/Month
16 Kbps $ 15.00
32 Kbps $ 23.00
48 Kbps $ 31.00
64 Kbps $ 39.00
128 Kbps $ 71.00
192 Kbps $103.00
256 Kbps $135.00
320 Kbps $167.00
384 Kbps $199.00
448 Kbps $231.00
512 Kbps $263.00
576 Kbps $292.00
640 Kbps $320.00
704 Kbps $349.00
768 Kbps $378.00
832 Kbps $404.00
896 Kbps $430.00
960 Kbps $456.00
1,024 Kbps $482.00
(ii) Zero CIR PVC Rates. All frames will
be marked DE. All usage is at the
rate of Three Cents ($0.0300) per
megabyte of delivered data. Monthly
minimum
<PAGE>
charges per simplex PVC will be Seven
Dollars ($7.00). There will be no usage
charge cap.
B. TERM AND VOLUME COMMITMENTS
RATE PLANS: You may select from the following rate plans:
1. Month to Month. No term or volume commitments will apply,
except PVC monthly minimums. or 2. Network Pricing Plan.
(a) If you order HS-FR under the Network Pricing Plan,
you will receive discounts on certain HS-FR service
elements as follows:
Monthly Term (years)
Minimum 1 2 3 4 5
- - - - -
$ 2,000 5% 6% 7% 8% 9%
$ 5,000 8% 10% 12% 14% 16%
X $ 10,000 12% 14% 17% 19% 21%
$ 25,000 14% 17% 20% 23% 25%
$ 50,000 16% 19% 22% 25% 27%
$100,000 18% 21% 24% 27% 30%
(b) If a Network Pricing Plan is selected, then
commencing with the fourth full monthly billing cycle
if your monthly usage charges for the HS-FR recurring
charges fall below the monthly minimum selected
("Monthly Minimum"), then you will pay an
underutilization charge equal to one hundred percent
(100%) of the difference between the amount you
purchased in such month and the Monthly Minimum.
(c) The discount applies to basic month to month charges
for the following recurring HS-FR service elements:
PVC charges and Port charges (excludes network
management, CPE, access charges, access coordination
charges, taxes and tax related surcharges). Taxes,
tax-related surcharges, access charges, access
coordination charges, network management and CPE
charges do not count toward the Monthly Minimum.
(d) In the event you have a signed Annex to this
Agreement for the provision of HyperStream
International Frame Relay Service ("HSI-FR"), the
following recurring HSIFR service elements shall
count toward the HS-FR Monthly Minimum: Overseas PVC
charges and Overseas Port Charges.
<PAGE>
(e) Under the Network Pricing Plan, the start of the term
is from implementation of the first service element
and lasts through the end of the term selected. The
HS-FR term commitment is independent of the terms
committed to in individual Access Pricing Plans.
(f) Except as otherwise provided in this Agreement, if
you terminate this Agreement before the and of the
term selected under the Network Pricing Plan, you
will pay an early termination charge equal to a
portion of the discounts from the month-to-month
basic rates provided to you under this Agreement, as
follows: For a three (3) year term, 100% of the
discount if you terminate in the first year, 75% if
you terminate in the second year, or 50% if you
terminate in the third year. For a two (2) year term,
100% of the discount if you terminate in the first
year, 50% if you terminate in the second year. For a
one (1) year term, 50% of the discount if you
terminate in the first year.
<PAGE>
ATTACHMENT 3
MCI HyperStream(sm) Frame Relay
SATISFACTION GUARANTEE
If for any reason Customer is not completely satisfied with HyperStream(sm)
Frame Relay at any time before the completion of three (3) full billing months,
Customer may:
o Discontinue HyperStream(sm) Frame Relay and any associated
customer premises equipment and network management agreements
with MCI without liability for termination charges;
o Receive a credit or refund for HyperStream(sm) Frame Relay and
associated MCI installation charges; and
o Receive a credit for or refund of recurring usage charges for
HyperStream(sm) Frame Relay and associated service Customer
incurred during the Satisfaction Guarantee three (3) month
period in an amount up to the amount of reasonable
re-installation charges Customer may incur from another
carrier for re-installation of the service that Customer had
replaced with HyperStream(sm) Frame Relay.
Covered MCI Charges:
o Installation charges:
o Installation of access circuits associated with
HyperStream(sm) Frame Relay
o Recurring charges:
o HyperStream(sm) Frame Relay Ports
o HyperStream(sm) Frame Relay Permanent Virtual
Circuits (PVCs)
o Access coordination
To exercise Customer's rights under this Satisfaction Guarantee, please notify
Customer's MCI account representative in writing not later than the close of the
third full billing month after initial installation of HyperStream(sm) Frame
Relay.
MCI's offer of Satisfaction Guarantee expires if not exercised on or prior to
the earlier of 10 three full billing months after initial installation of
HyperStream(sm) Frame Relay or (ii) March 30, 1996.
Other than the rights expressly granted in this Satisfaction Guarantee, this
Satisfaction Guarantee shall not be construed to create any rights or remedies
not otherwise expressly provided for nor expand
<PAGE>
MCI's obligations under the Agreement for HyperStream(sm) Frame Relay to which
this Satisfaction Guarantee is attached.
<PAGE>
ATTACHMENT 4
HyperStream Frame Relay
Service Level Guarantee
MCI is committed to providing its customers with quality Domestic HyperStream
Frame Relay services. This document defines the specific quality of service
levels MCI will seek to maintain while providing Domestic HyperStream Frame
Relay Services to Morgan Group, Inc.; herein referred to as Customer. In the
event MCI's HyperStream. Frame Relay Services fail to perform to the quality of
the applicable service levels as defined herein, MCI's sole and exclusive
obligations, and Customer's sole and exclusive remedies, shall be as set forth
in this Attachment 3.
1.0 Definition
A Service Level Guarantee (SLG) is a commitment on the part of MCI to
attempt to meet specific network and service performance levels.
2.0 Network Availability
2.1 Description
The HyperStream(sm) Frame Relay (HSFR)network availability
measurement is equal to the total number of minutes in a
calendar month during which core network PVC routes are
available to exchange data between the two network
infrastructure node end points divided by the total number of
minutes in a calendar month ("Network Availability Time").
Network Availability Time is calculated commencing with the
date on which the trouble ticket is opened by the customer and
ending upon confirmation of resolution with the customer.
For purposes of measuring Network Availability Time, the PVC
route referenced above includes the HSFR network
infrastructure connectivity from infrastructure port to
infrastructure port, excluding Customer Premise Equipment and
local access lines.
Customer Premise Equipment ("CPE") refers to the
telecommunications hardware located at the customer site and
supplied by MCI (i.e. modem, router, or multiplexer) or
supplied by the customer.
2.2 Network Availability Objective
MCI will attempt to achieve a Network Availability Time of
99.5% for networks designed with all of the following:
o fully meshed network topology or a star network
topology in which each remote site has PVCs connected
to at least two network hubs engineered to separate
infrastructure node , and
<PAGE>
o 10 or more, customer sites are involved in the
network MCI will attempt to achieve a Network
Availability Time of 99%
for any networks not meeting the above requirements.
2.3 Exclusions
Network Availability Time measurements exclude HSFR
unavailability resulting in whole or in part from one or more
of the following causes:
o Any act or omission on the part of Customer, customer
contractors, and customer vendors
o Scheduled maintenance
o Labor strikes
o Natural disasters
o Force majeure events beyond the reasonable control of
MCI (i.e. acts of God, government regulation,
national emergency, etc.)
2.3 Calculation
Customer HSFR Network Availability Time is calculated on a
monthly basis
Monthly Network Availability Time (%) = 1 - [ Total minutes of
PVC downtime per month or "Unavailability Percentage"]
Total # PVCs x #days in month x 24 hrs x 60min
2.4 Components of Calculation
Total minutes in month, total minutes available, total minutes
unavailable, total minutes unavailable due to exclusions,
unavailable minutes due to excluded causes, broken down by
occurrence (exception) category.
2.5 Credits
o In the event MCI is unable to satisfy the HSFR
Availability Time objective for two (2) consecutive
months, during the Service Term, Customer will
receive a credit equal to five percent (5%)
multiplied by the fixed rates for all Port and PVC
charges for both the first(lst) and the second (2nd)
month.
o In the event MCI in unable to satisfy the HSFR
Availability Time objective for a third (3rd)
consecutive month, during the Service Term. Customer
will receive a credit equal to ten percent (10 %)
multiplied by the fixed rates for all Port and PVC
charges for the given month.
<PAGE>
o In the event MCI is unable to satisfy the HSFR
Network Availability Time objective for a fourth
(4th) consecutive month, Customer will have the
option to discontinue MCI Service on the Service
Element that has failed to satisfy the HSFR
Availability Time objective and MCI will reduce the
Minimum Volume Requirement (MVR) by the amount of
charges associated with the discontinued Service
Element.
3.0 Frame Delivery
3.1 Description
The HyperStream(sm) Frame Relay Frame Delivery is the
percentage of frames which are successfully delivered. HSFR
Frame Delivery encompasses the successful delivery of frames
through the network based on certain factors. The calculations
are based on total frames sent through the network according
to the following parameters:
The percentage of all non-CIR frames that are successfully
delivered.
The percentage of all CIR frames that are successfully
delivered.
3.2 Frame Delivery Objective
99.99% of all frames that do not exceed the Committed
Information Rate (CIR) are targeted to be successfully
delivered. End to end CIR packet delivery only applies to
frames not marked discard eligible.
99 % of all non-CIR frames are targeted to be successfully
delivered. Non-CIR packet delivery only applies to frames
marked discard eligible, (i.e.; traffic exceeding the
subscribed CIR and all zero CIR PVC traffic).
3.3 Frequency of Calculation
HSFR Frame Delivery is calculated monthly based upon the frame
delivery statistics as stated in the HyperScope reports minus
any applicable exclusions below.
3.4 Exclusions
HyperStream(sm) Frame Relay Service frame delivery
measurements exclude:
o Frames dropped at the infrastructure egress due to
improper customer specification of customer's port
speeds
o Local access and CPE
o Force majeure events beyond the reasonable control of
MCI (i.e. acts of God, government regulation,
national emergency, etc.)
<PAGE>
3.5 Credits
o In the event MCI is unable to satisfy the HSFR Frame
Delivery objective for two (2) consecutive months,
during the Service Term, Customer will receive a
credit equal to five percent (5%) multiplied by the
fixed rates for all Port and PVC charges for both the
first (lst) and the second (2nd) month.
o In the event MCI in unable to satisfy the HSFR Frame
Delivery objective for a third (3rd) consecutive
month, during the Service Term. Customer will receive
a credit equal to ten percent (10%) multiplied by the
fixed rates for all Port and PVC charges for the
given month.
o In the event MCI is unable to satisfy the HSFR Frame
Delivery objective for a fourth (4th) consecutive
month, Customer will have the option to discontinue
MCI Service on the Service Element that has failed to
satisfy the HSFR MTTR objective and MCI will reduce
the Minimum Volume Requirement (MVR) by the amount of
charges associated with the discontinued Service
Element.
4.0 Mean Time To Restore (MTTR)
4.1 Description
Mean-Time-To-Restore ("MTTR") is the period of time commencing
on the date customer opens on trouble ticket and ending on the
date of service restoration (closing of a trouble ticket),
calculated as an average of all trouble tickets having the
same severity level (as set forth below).
MTTR measurements are reported based on the percentage of
trouble tickets closed within specific time intervals, grouped
by severity level.
MCI will assign each trouble ticket a severity level based
upon the impact of the service issue on the customer's
business:
Severity 1 - System down or degraded (limited or no
ability to conduct business) Severity 4 - Problem
circumvented / Inquiries (no impact to customer
business)
4.2 MTTR Objective
HyperStream(sm) Frame Relay MTTR objectives are based upon the
severity level of the trouble ticket and proximity to an MCI
terminal or field service point of presence "POP" broken down
by ticket severity as follows:
<PAGE>
Severity 1 -MTTR Objective is 4 hrs if within 50-mile radius
of MCI terminal and field service POP,
or
24 hrs or best-effort basis if outside 50-mile radius of MCI
terminal and field service POP
Severity 4 - not measured
4.3 Frequency of Calculation
Customer network MTTR will be calculated on a monthly basis.
4.4 Exclusions
MTTR measurements will exclude the following:
o Trouble tickets associated with now installations
(before new service acceptance by the customer)
o Trouble tickets that are not associated with
MCI-provided service
o Required customer premise access is not available
o Required customer circuit release for testing is
disallowed
o Trouble tickets opened by customer for circuit
monitoring purposes only
o Force majeure events beyond the reasonable control of
MCI (i.e. acts of God, government regulation,
national emergency, etc.)
4.5 Calculation
Monthly MTTR Average = Sum of minutes between opening and
closing of Severity within 30 days
Total number of trouble tickets per month
4.5 Components for Calculations
Total number of trouble tickets, total time between opening of
trouble tickets and applicable service restoration, with total
time of opened trouble tickets subtracting total time of each
exclusion category.
4.6 Credits
o In the event MCI is unable to satisfy the HSFR MTTR
objective for two (2) consecutive months, during the
Service Term, Customer will receive a credit
<PAGE>
equal to five percent (5 %) multiplied by the fixed
rates for all Port and PVC charges for the given
month.
o In the event MCI in unable to satisfy the HSFR MTTR
objective for a third (3) consecutive month, during
the Service Term. Customer will receive a credit
equal to ten percent (10%) multiplied by the fixed
rates for all Port and PVC charges for the given
month.
o In the event MCI is unable to satisfy the HSFR MTTR
objective for a fourth (4) consecutive month,
Customer will have the option to discontinue MCI
Service on the Service Element that has failed to
satisfy the HSFR MTTR objective and MCI will reduce
the Minimum Volume Requirement (MVR) by the amount of
charges associated with the discontinued Service
Element.
5.0 Network Transit Delay
5.1 Description
The HyperStream(sm) Frame Relay Network Transit Delay measures
one-way delay between the origination and destination
infrastructure ports. It is defined as the time between the
LAST bit of a ping packet being sent from the origination
infrastructure port to the FIRST bit of the packet received by
the destination infrastructure port, in other words between
the two MCI HyperStream frame relay points of presence.
5.2 Network Transit Delay Guarantee
Average HSFR one way network transit delay of 70 milliseconds
or less in the domestic U.S. and 250 milliseconds or less
internationally.
5.3 Frequency of Calculation
Customer gateway to customer gateway network transit delay is
tested monthly by MCI as part of standard performance
monitoring and capacity planning methodologies. Any customer
incident where network transit delay is measured or suspected
to be greater than the levels stated above will be considered
an abnormal situation and will be addressed through
established trouble handling procedures (e.g., a ticket opened
and technicians work through the problem until the performance
is back to acceptable levels).
5.4 Exclusions
The network transit delay parameters are not guaranteed during
disaster situations where a major network component such as a
backbone link or gateway switch is down hard and the network
is in an emergency reroute configuration. Also, HyperStream.
Network Transit Delay measurements exclude ping packets that
are
<PAGE>
not returned, and ports over which the transit delay is
measured can not be more than 5% utilized during any hour over
which transit delay measurements are taken.
Customer calculations of end to end network transit delay must
exclude access serialization delay (calculated as defined
below), access circuit propagation delay, any delay induced by
congestion on the access link, and any CPE induced delay such
as that caused by high router utilization levels. The frame
size for the test must be no more than two hundred (200) bytes
in length, including protocol overhead. Customer tests must
also consist of a minimum of 60 ping tests evenly distributed
over a 6 hour period.
5.5 Components for Calculations
If you are attempting to calculate cpe to cpe delay, the
following are components you will have to consider in addition
to the MCI published network delay:
o access/egress link utilization
o cpe nodal processing time at each end.
o local loop propagation factor = .008 ms/mile
o backhaul (mci pop to frame switch) = .008 ms/mile
o INGRESS/EGRESS SERIAL DELAY (ms) =
(Packet size in bytes)x8x1000
----------------------------
Access speed in bps
5.6 Credits
o In the event MCI is unable to satisfy the HSFR
Transit Delay objective for two (2) consecutive
months, during the Service Term, Customer will
receive a credit equal to five percent (5%)
multiplied by the fixed rates for all Port and PVC
charges for the given month.
o In the event MCI in unable to satisfy the HSFR
Transit Delay objective for a third (3rd) consecutive
month, during the Service Term. Customer will receive
a credit equal to ten percent (10%) multiplied by the
fixed rates for all Port and PVC charges for the
given month.
o In the event MCI is unable to satisfy the HSFR
Transit Delay objective for a fourth (4th)
consecutive month, Customer will have the option to
discontinue MCI Service on the Service Element that
has failed to satisfy the HSFR MTTR objective and MCI
will reduce the Minimum Volume Requirement
<PAGE>
(MVR) by the amount of charges associated with the
discontinued Service Element.
6.0 Credit Limitation
In the event the customer experiences network or service
performance for HSFR at levels below stated MCI objectives for
Network Availability Time, MTTR, Network Transit Delay, or
HSFR Frame Delivery during the same month, customer shall only
be entitled to receive credits, if any, pursuant to one (1) of
the applicable credit sections.
The Morgan Group, Inc.
Exhibit 11 - Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
For Years Ended
December 31
1997 1996 1995
---------- ---------- ----------
Reconciliation of basic to diluted earnings per share:
<S> <C> <C> <C>
Net income (loss) $ 196 ($ 2,070) $ 2,269
Less preferred dividends -- -- 221
---------- ---------- ----------
Net income (loss) applicable to common stocks: $ 196 ($ 2,070) $ 2,048
========== ========== ==========
Class A Stock:
Dividends $ 114 $ 126 $ 113
Allocation of undistributed earnings 19 (1,241) 1,011
---------- ---------- ----------
Net income (loss) applicable to Class A stock-basic 133 (1,115) 1,124
Effect of reallocating undistributed earnings -- -- 13
---------- ---------- ----------
Net income (loss) applicable to Class A stock-diluted $ 133 ($ 1,115) $ 1,137
========== ========== ==========
Class B Stock:
Dividends $ 48 $ 48 $ 48
Allocation of undistributed earnings 15 (1,003) 876
---------- ---------- ----------
Net income (loss) applicable to Class B stock-basic 63 (955) 924
Effect of reallocating undistributed earnings -- -- (13)
---------- ---------- ----------
Net income (loss) applicable to Class B stock-diluted $ 63 ($ 955) $ 911
========== ========== ==========
Net income (loss) applicable to common stocks $ 196 ($ 2,070) $ 2,048
========== ========== ==========
Weighted average shares outstanding:
Class A stock:
Basic 1,456,690 1,484,242 1,382,548
Dilutive effect of stock options 6,494 2,030 4,742
Dilutive effect of warrants -- -- 35,155
---------- ---------- ----------
Diluted 1,463,184 1,486,272 1,422,445
Class B stock-basic and diluted 1,200,000 1,200,000 1,200,000
========== ========== ==========
Class A basic EPS $ 0.09 ($ 0.76) $ 0.81
Class B basic EPS $ 0.05 ($ 0.80) $ 0.77
Class A diluted EPS $ 0.09 ($ 0.76) $ 0.79
Class B diluted EPS $ 0.05 ($ 0.80) $ 0.77
</TABLE>
The Morgan Group, Inc.
(Delaware)
100% 100%
Morgan Drive Away, Inc. Interstate Indemnity Company
(Indiana) (Vermont)
100%
TDI, Inc.
(Indiana)
Subsidiaries of Morgan Drive Away, Inc.
100% 100%
MDA Corporation Morgan Finance, Inc.
(Oregon) (Indiana)
100%
Transporation Services Unlimited, Inc.
(Indiana)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
report dated February 5, 1996 in this Form 10-K and to the incorporation by
reference into The Morgan Group, Inc.'s previously filed Registration Statements
on Form S-8 (Registration Nos. 33-72996, 33-72998). It should be noted that we
have not audited any financial statements of The Morgan Group, Inc. subsequent
to December 31, 1995 or performed any audit procedures subsequent to the date of
our report.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois,
March 25, 1998
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-72996) pertaining to The Morgan Group, Inc. Incentive Stock Plan and
in the Registration Statement (Form S-8 No. 33-72998) pertaining to The Morgan
Group, Inc. 401(k) Profit Sharing Plan of our report dated March 4, 1997, except
for Note 4, as to which the date is March 25, 1998, with respect to the
consolidated financial statements of The Morgan Group, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Greensboro, North Carolina
March 25, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Regisrant's unaudited consolidated financial statements for the 12 months ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000906609
<NAME> The Morgan Group, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 380
<SECURITIES> 0
<RECEIVABLES> 13,545
<ALLOWANCES> 183
<INVENTORY> 0
<CURRENT-ASSETS> 17,749
<PP&E> 6,601
<DEPRECIATION> 2,286
<TOTAL-ASSETS> 32,746
<CURRENT-LIABILITIES> 15,620
<BONDS> 0
<COMMON> 41
0
0
<OTHER-SE> 12,724
<TOTAL-LIABILITY-AND-EQUITY> 32,746
<SALES> 146,154
<TOTAL-REVENUES> 146,154
<CGS> 133,732
<TOTAL-COSTS> 145,139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 719
<INCOME-PRETAX> 296
<INCOME-TAX> 100
<INCOME-CONTINUING> 196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 196
<EPS-PRIMARY-CLASS-A> .09
<EPS-DILUTED-CLASS-A> .09
<EPS-PRIMARY-CLASS-B> .05
<EPS-DILUTED-CLASS-B> .05
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 12 MONTHS ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000906609
<NAME> THE MORGAN GROUP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<CASH> 354
<SECURITIES> 954
<RECEIVABLES> 11,312
<ALLOWANCES> 59
<INVENTORY> 0
<CURRENT-ASSETS> 16,923
<PP&E> 5,626
<DEPRECIATION> 2,863
<TOTAL-ASSETS> 33,066
<CURRENT-LIABILITIES> 14,828
<BONDS> 0
<COMMON> 41
0
0
<OTHER-SE> 13,104
<TOTAL-LIABILITY-AND-EQUITY> 33,066
<SALES> 132,208
<TOTAL-REVENUES> 132,208
<CGS> 122,238
<TOTAL-COSTS> 135,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 352
<INCOME-PRETAX> (3,615)
<INCOME-TAX> (1,545)
<INCOME-CONTINUING> (2,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,070)
<EPS-PRIMARY-CLASS-A> (.76)
<EPS-DILUTED-CLASS-A> (.76)
<EPS-PRIMARY-CLASS-B> (.80)
<EPS-DILUTED-CLASS-B> (.80)
</TABLE>
