-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NGizW18XnklyuyZPzOEaZUZ7qJ8kyZdHsu/DgAjGZ9oOsz4c18nTMsc5HXN91ZOO g0IrRVjZAGwdG8eZuunxiw== 0000927016-97-002331.txt : 20060822 0000927016-97-002331.hdr.sgml : 20060822 19970814120400 ACCESSION NUMBER: 0000927016-97-002331 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 DATE AS OF CHANGE: 20060822 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDALLION FINANCIAL CORP CENTRAL INDEX KEY: 0001000209 IRS NUMBER: 043291176 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 814-00188 FILM NUMBER: 97661108 BUSINESS ADDRESS: STREET 1: 437 MADISON AVE 38 TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2123282153 MAIL ADDRESS: STREET 1: 437 MADISON AVENUE STREET 2: 38TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 FORM 10-Q ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-27812 MEDALLION FINANCIAL CORP. (Exact name of registrant as specified in its charter) DELAWARE No. 04-3291176 (State of Incorporation) (IRS Employer Identification No.) 205 EAST 42ND STREET, NEW YORK, NEW YORK 10017 (Address of principal executive offices) (Zip Code) (212) 682-3300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of Common Stock outstanding at the latest practicable date, August 1, 1997: CLASS OUTSTANDING PAR VALUE SHARES OUTSTANDING Common Stock.......................... $.01 12,850,000 ================================================================================ MEDALLION FINANCIAL CORP. FORM 10-Q JUNE 30, 1997 INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Basis of Preparation.......................................... 3 Medallion Financial Corp. Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997.................. 4 Medallion Financial Corp. Consolidated Statement of Operations for the periods ended June 30, 1997 and 1996.... 5 Medallion Financial Corp. Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 1997........................................ 6 Medallion Financial Corp. Consolidated Statement of Cash Flows for the periods ended June 30, 1997 and 1996.... 7 Notes to Consolidated Financial Statements.................. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 13 General..................................................... 13 Consolidated Results of Operations (for the three months ended June 30, 1997).................................... 17 Consolidated Results of Operations (for the six months ended June 30, 1997).................................... 19 Asset/Liability Management.................................. 22 Liquidity and Capital Resources............................. 23 Investment Considerations................................... 25 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders......... 27 Item 6. Exhibits and Reports on Form 8-K............................ 28 Signatures............................................................ 29 -2- PART I FINANCIAL INFORMATION ITEM 1. BASIS OF PREPARATION Medallion Financial Corp. (the "Company") was incorporated in Delaware in 1995 and commenced operations on May 30, 1996 in connection with the closing of its initial public offering (the "Initial Offering") and simultaneous acquisition (the "Acquisitions") of Medallion Funding Corp. ("MFC"), Edwards Capital Company, Transportation Capital Corp. ("TCC") and Medallion Taxi Media, Inc. ("Media"). Media and MFC were subsidiaries of Tri-Magna Corporation ("Tri- Magna") which was merged into the Company. The Company's acquisition of these businesses in connection with the Initial Offering and the resulting two-tier structure were effected pursuant to an order of the Securities and Exchange Commission (the "Commission") (Release No. I.C. 21969, May 21, 1996) (the "Acquisition Order") and the approval of the U.S. Small Business Administration (the "SBA"). A detailed description of the Company, MFC, Edwards Capital Company, TCC and Media may be found in the Acquisition Order and the Company's Registration Statement (the "Registration Statement") on Form N-2 (File No. 333- 24877) filed in connection with the Company's recent follow-on public offering which was declared effective on May 12, 1997 (the "Follow-on Offering"). The financial information included in this report is divided into two sections. The first section, Item 1, includes the unaudited consolidated balance sheet of the Company as of June 30, 1997 and the related statements of operations, changes in stockholders' equity and cash flows for the six months ending June 30, 1997. Item 1 also sets forth the audited consolidated balance sheet of the Company as of December 31, 1996 and the related statements of operations and cash flows for the period from May 30, 1996 through June 30, 1996. The second section, Item 2, consists of Management's Discussion and Analysis of Financial Condition and Results of Operations and sets forth an analysis of the financial information included in Item 1 for the three and six months ended June 30, 1997. All references to shares and per share amounts in this report reflect a 12,500-for-one stock split effected on May 29, 1996. The consolidated balance sheet of the Company as of June 30, 1997, the related statements of operations, changes in stockholders' equity and cash flows for the six months ended June 30, 1997 and the related statements of operations and cash flows for the period from May 30, 1996 through June 30, 1996 included in Item 1 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of normal, recurring adjustments) necessary to summarize fairly the Company's financial position and results of operations. The results of operations for the three and six months ended June 30, 1997 and the period ended June 30, 1996 are not necessarily indicative of the results of operations for the full year or any other interim period. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Registration Statement. -3- MEDALLION FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996 AND JUNE 30, 1997
DECEMBER 31, JUNE 30, ------------- ------------- 1996 1997 ------------- ------------- (Unaudited) ASSETS Investments (Note 2) Medallion loans $134,614,899 $163,338,925 Commercial installment loans 41,925,289 51,659,237 ------------ ------------ Gross investments 176,540,188 214,998,162 Unrealized depreciation of investments (46,300) (71,300) ------------ ------------ Net investments 176,493,888 214,926,862 Investment in unconsolidated subsidiary (Note 3) 937,000 969,802 ------------ ------------ Total investments 177,430,888 215,896,664 Cash 1,664,603 2,049,806 Accrued interest receivable 1,696,584 1,969,907 Fixed assets, net 89,815 105,922 Goodwill, net (Note 2) 6,250,636 6,040,516 Other assets 2,491,974 3,488,741 ------------ ------------ Total assets $189,624,500 $229,551,556 ============ ============ LIABILITIES Accounts payable and accrued expenses $ 1,844,033 $ 3,168,954 Dividends payable 1,849,225 116,725 Accrued interest payable 1,086,247 801,497 Notes payable to banks and demand notes (Note 4) 96,450,000 62,150,000 SBA debentures payable (Note 4) 29,390,000 27,890,000 ------------ ------------ Total liabilities 130,619,505 94,127,176 ------------ ------------ Negative goodwill, net (Note 2) 2,517,716 2,156,516 ------------ ------------ Commitments and contingencies (Note 3) -- -- STOCKHOLDERS' EQUITY (Note 1) Preferred Stock (1,000,000 shares of $0.01 par value stock authorized - none outstanding) -- -- Common stock (15,000,000 shares of $0.01 par value stock authorized - 8,250,000 and 12,850,000 shares outstanding at December 31, 1996 and June 30,1997, respectively) 82,500 128,500 Capital in excess of par value 56,359,555 130,652,980 Accumulated undistributed income 45,224 2,486,384 ------------ ------------ Total stockholders' equity 56,487,279 133,267,864 ------------ ------------ Total liabilities and stockholders' equity $189,624,500 $229,551,556 ============ ============
See accompanying notes to unaudited consolidated financial statements. -4- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
PERIOD FROM MAY 30, 1996 THREE MONTHS ENDED SIX MONTHS ENDED THROUGH JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1996 ------------------- ----------------- ------------- Investment income: Interest income on investments $ 5,257,178 $10,142,441 $1,363,515 Interest income on treasury bills 28,326 28,326 29,184 ----------- ----------- ---------- Total investment income 5,285,504 10,170,767 1,392,699 ----------- ----------- ---------- Interest expense: Notes payable to banks 1,572,433 3,458,758 507,636 SBA debentures 523,249 1,065,576 191,580 ----------- ----------- ---------- Total interest expense 2,095,682 4,524,334 699,216 ----------- ----------- ---------- Net interest income 3,189,822 5,646,433 693,483 ----------- ----------- ---------- Non-interest income: Equity in earnings of unconsolidated subsidiary 27,849 32,802 28,938 Accretion of negative goodwill 180,600 361,200 64,369 Other income 182,171 437,981 57,874 ----------- ----------- ---------- Total non-interest income 390,620 831,983 151,181 ----------- ----------- ---------- Expenses: Administrative and advisory fees 57,135 113,892 -- Professional fees 137,004 305,303 77,653 Salaries and benefits 274,872 627,889 97,939 Other operating expenses 519,778 966,983 90,746 Amortization of goodwill 105,060 210,120 35,020 ----------- ----------- ---------- Total expenses 1,093,849 2,224,187 301,358 ----------- ----------- ---------- Net investment income 2,486,593 4,254,229 543,306 Change in net unrealized depreciation (25,000) (25,000) -- Net realized (loss) gain on (4,769) 26,931 -- investments ----------- ----------- ---------- Net increase in net assets resulting from operations $ 2,456,824 $ 4,256,160 $ 543,306 =========== =========== ========== Net increase in net assets resulting from operations per common share $0.24 $0.45 $0.07 =========== =========== ========== Weighted average shares and common share equivalents outstanding 10,446,646 9,372,695 8,250,000 =========== =========== ==========
See accompanying notes to unaudited consolidated financial statements. -5- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
SHARES OF COMMON CAPITAL IN ACCUMULATED COMMON STOCK STOCK $0.01 EXCESS OF UNDISTRIBUTED OUTSTANDING PAR VALUE PAR VALUE INCOME ----------- --------- --------- ------ Balance at December 31, 1996 (Note 1) 8,250,000 $ 82,500 $ 56,359,555 $ 45,224 Distributable net investment income -- -- -- 1,799,336 ---------- -------- ------------ ----------- Balance at March 31, 1997 8,250,000 82,500 56,359,555 1,844,560 Distributable net investment income -- -- -- 2,481,824 Dividends declared on common stock ($0.22 per share) -- -- -- (1,815,000) Change in unrealized depreciation -- -- -- (25,000) Issuance of common stock under offering (Note 1) 4,600,000 46,000 74,293,425 -- ---------- -------- ------------ ----------- Balance at June 30, 1997 12,850,000 $128,500 $130,652,980 $ 2,486,384 ========== ======== ============ ===========
See accompanying notes to unaudited consolidated financial statements. -6- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
PERIOD FROM MAY 30, SIX MONTHS ENDED 1996 THROUGH JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in net assets resulting from operations $ 4,256,160 $ 543,306 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used for) operating activities: Depreciation and amortization 32,420 4,000 Increase in equity in earnings (losses) of unconsolidated subsidiary (32,802) (28,938) Amortization of goodwill 210,120 35,020 Increase in unrealized depreciation 25,000 -- Decrease (increase) in accrued interest receivable (273,323) (105,121) Decrease (increase) in other assets (1,020,527) (684,361) Increase (decrease) in accounts payable and accrued expenses 1,324,921 (227,228) Accretion of negative goodwill (361,200) (64,369) Increase (decrease) in accrued interest payable (284,750) (380,548) ------------ ------------ Net cash provided by (used for) operating activities 3,876,019 (908,239) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Increase (decrease) in investments (73,544,942) (10,959,472) Proceeds from sales and maturities of investments 46,474,590 4,220,431 Repurchase of loan participations (11,387,622) -- Payment for purchase of Tri-Magna, net -- (11,848,283) Payment for purchase of Edwards -- (15,624,995) Payment for purchase of TCC, net -- (3,721,640) Capital expenditures (24,767) (38,030) ------------ ------------ Net cash provided by (used for) investing activities (38,482,741) (37,971,989) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to banks, net (34,300,000) (10,700,000) Repayment of SBA debentures (1,500,000) -- Proceeds from public offerings, net of expenses 74,339,425 56,147,056 Payment of declared dividends to current stockholders (3,547,500) -- ------------ ------------ Net cash provided by (used for) financing activities 34,991,925 45,447,056 ------------ ------------ NET INCREASE IN CASH 385,203 6,566,828 CASH beginning of period 1,664,603 2,000 ------------ ------------ CASH end of period $ 2,049,806 $ 6,568,828 ============ ============ SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 4,809,084 $ 1,079,764 ============ ============
See accompanying notes to unaudited consolidated financial statements. -7- MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) (1) ORGANIZATION AND STRUCTURE OF MEDALLION FINANCIAL CORP. The Company is a closed-end management investment company organized as a Delaware corporation in 1995. The Company has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the "1940 Act"). On May 29, 1996, the Company completed an initial public offering (the "Initial Offering") of its common stock, issued and sold 5,750,000 shares at $11.00 per share and split the existing 200 shares of common stock outstanding into 2,500,000 shares. All share and related amounts in the accompanying financial statements have been restated to reflect this stock split. Offering costs incurred by the Company in connection with the sale of shares totaling $7,102,944 were recorded as a reduction of capital upon completion of the Initial Offering. These costs were recorded, net of $200,000 payable between the Company and Tri-Magna in accordance with the merger agreement between the Company and Tri-Magna. In parallel with the Initial Offering, the Company completed the Acquisitions in which the Company merged with Tri-Magna; acquired substantially all of the assets and assumed certain liabilities of Edwards Capital Company, a limited partnership; and acquired all of the outstanding voting stock of TCC. The assets acquired and liabilities assumed from Edwards Capital Company, were acquired and assumed by Edwards Capital Corporation ("Edwards"), a newly formed and wholly-owned subsidiary of the Company. As a result of the merger with Tri-Magna in accordance with the Merger Agreement dated December 21, 1995 between the Company and Tri-Magna, MFC and Media, formerly subsidiaries of Tri-Magna, became wholly-owned subsidiaries of the Company. In connection with the Acquisitions, the Company has applied for and received the Acquisition Order under the 1940 Act from the Securities and Exchange Commission. The Company also received approval from the SBA for these transactions. MFC, Edwards and TCC are closed-end management investment companies registered under the 1940 Act and are each licensed as a small business investment company ("SBIC") by the SBA. As an adjunct to the Company's taxicab medallion finance business, Media operates a taxicab rooftop advertising business. Effective January 1, 1997, the Company decided to merge all of the assets and liabilities of Edwards and TCC into MFC subject to the approval of the SBA. The Company expects to complete the merger by the end of the third quarter of 1997. On May 16, 1997, the Company completed the Follow-on Offering and sold 4,600,000 shares at $17.25 per share. Offering costs incurred by the Company in connection with the sale of shares totaling $5,010,575 were recorded as a reduction of capital upon completion of the Follow-on Offering. -8- (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Acquisitions were accounted for under the purchase method of accounting. Under this accounting method, the Company has recorded as its cost the fair value of the acquired assets and assumed liabilities. The difference between the cost of acquired companies and the sum of the fair values of tangible and identifiable intangible assets less liabilities assumed was recorded as goodwill or negative goodwill. Deferred offering costs incurred by the Company in connection with the sale of shares were recorded as a reduction of capital upon completion of the Initial Offering. These costs were recorded net of $200,000 payable by Tri-Magna in accordance with the merger agreement between the Company and Tri-Magna. Under the 1940 Act and the Small Business Investment Act of 1958 and regulations thereunder (the "SBIA"), the Company's long-term loans are considered investments and are recorded at their fair value. Since no ready market exists for these loans, fair value is determined by the Board of Directors in good faith. In determining fair value, the Company and the Board of Directors take into consideration factors including the financial condition of the borrower, the adequacy of the collateral, and the relationships between market interest rates and portfolio interest rates and maturities. Loans are valued at cost less unrealized depreciation. Any change in the fair value of the Company's investments as determined by the Board of Directors is reflected in net unrealized depreciation of investments. Total unrealized depreciation was $1,568,717 and $1,593,717 on total investments of $176,493,888 and $214,926,862 at December 31, 1996 and June 30, 1997, respectively, of which $1,522,417 existed at the date of the Company's acquisitions. The Board of Directors have determined that this valuation approximates fair value. Net increase in net assets resulting from operations per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents consist primarily of dilutive outstanding stock options computed under the treasury stock method. On March 3, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." This statement establishes standards for the computation and presentation of earnings per share and applies to entities with publicly held common stock or potential common stock. This statement, which supersedes APB Opinion No. 15, is effective for financial statements for both interim and annual periods ending after December 15, 1997. Early adoption is not permitted. This statement when adopted, will require the restatement of all prior-period earnings per share data presented. Management expects that the adoption of this new statement will not have a material impact on the Company's previously disclosed earnings per share. (3) INVESTMENT IN UNCONSOLIDATED SUBSIDIARY The Company's investment in Media is accounted for under the equity method because as a non-investment company, Media cannot be consolidated with the Company which is an investment company under the 1940 Act. Financial information presented for Media includes -9- the balance sheet as of December 31, 1996 and June 30, 1997 and unaudited statement of operations for the three and six months ended June 30, 1997 and the period from May 30, 1996 through June 30, 1996:
DECEMBER 31, JUNE 30, BALANCE SHEET 1996 1997 - ------------- ------------ -------- (unaudited) Cash $ 79,827 $ -- Accounts receivable 307,303 324,065 Equipment, net 976,442 1,206,433 Other 330,839 245,617 ---------- ---------- Total assets $1,694,411 $1,776,115 ========== ========== Notes payable to parent $ 584,566 $ 532,316 Accrued expenses 64,516 165,668 ---------- ---------- Total liabilities 649,082 697,984 ========== ========== Equity 1,001,000 1,001,000 Retained earnings 44,329 77,131 ---------- ---------- Total equity 1,045,329 1,078,131 ---------- ---------- Total liabilities and shareholders equity $1,694,411 $1,776,115 ========== ==========
THREE MONTHS SIX MONTHS PERIOD STATEMENT ENDED ENDED ENDED OF OPERATIONS JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1996 - ------------- ------------- ------------- ------------- Advertising revenue $540,104 $991,160 $ 151,253 Cost of service 237,986 416,573 45,428 -------- -------- ---------- Gross margin 302,118 574,587 105,825 Other operating expenses 274,269 541,785 61,887 -------- -------- ---------- Income before taxes 27,849 32,802 43,938 Income taxes -- -- 15,000 -------- -------- ---------- Net Income $ 27,849 $ 32,802 $ 28,938 ======== ======== ==========
On March 6, 1997, Media entered into a five-year agreement with the Metropolitan Taxi Board of Trade, Inc. ("MTBOT") to provide rooftop advertising on New York City taxicabs affiliated with the MTBOT commencing on September 22, 1997. Although the terms of this agreement do not guarantee that Media will be able to place advertising on any minimum number of taxicabs, the Company believes that the effect of this agreement will be -10- to nearly double the total number of taxicabs that the Company has under contract for rooftop advertising in New York City, which currently stands at approximately 2,000 taxicabs. (4) DEBT The table below summarizes the various debt agreements the Company had outstanding at December 31, 1996 and June 30, 1997:
DECEMBER 31, 1996 JUNE 30, 1997 ----------------- ------------- Notes payable to banks: Total facilities $107,000,000 $149,500,000 Maturity of facilities 4/97-12/97 6/97-6/99 Total amounts outstanding $ 96,450,000 $ 62,150,000 ============ ============ SBA debentures payable $ 29,390,000 $ 27,890,000 ============ ============ Maturity 4/97-9/04 6/98-9/04
On April 1, 1997, Edwards paid upon maturity an SBA debenture in the principal amount of $1,500,000. On April 7, 1997, the Company increased the amount available under its revolving credit facility by $1,500,000. On June 27, 1997, MFC increased the amount available under its revolving credit facility by $20,000,000 and extended the maturity of the credit facility until June 30, 1999. Under the revolving credit agreement between MFC and its lenders, as amended, MFC is required to maintain minimum tangible net assets of $45,000,000 and certain financial ratios. The Company believes that MFC was in compliance with such requirements at June 30, 1997. (5) PRO FORMA RESULTS OF OPERATIONS The unaudited pro forma combined financial information for the three and six months ended June 30, 1996 is presented as follows assuming the formation of the Company and the Acquisitions described in Note 1 occurred on January 1, 1996: -11-
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1996 JUNE 30, 1996 ------------- ------------- Investment income $4,091,000 $8,112,000 Net interest income 2,220,000 4,419,000 Net investment income 1,510,000 3,014,000 Net increase in net assets resulting from operations $1,526,000 $3,050,000 Earnings per share $ 0.18 $ 0.36 Pro forma weighted average Shares outstanding 8,250,000 8,250,000
(6) SUBSEQUENT EVENTS On July 31, 1997, MFC paid upon maturity the $2,000,000 term loan to a bank. On August 6, 1997, MFC declared a dividend payable to the Company in the amount of $300 per share payable on August 16, 1997 (aggregating $1,997,700), Edwards declared a dividend payable to the Company in the amount of $4,500 per share payable on August 16, 1997 (aggregating $450,000) and TCC declared a dividend payable to the Company in the amount of $3,000 per share payable on August 16, 1997 (aggregating $300,000). With the proceeds of these dividends, on August 6, 1997 the Company declared a dividend in the amount of $0.22 per share (aggregating $2,827,000) payable on August 28, 1997 to the stockholders of record on August 18, 1997. -12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in this section should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing in this Report on Form 10-Q. In addition, this Management's Discussion and Analysis contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are set forth below in the Investment Considerations section. GENERAL The Company's principal activity is the origination and servicing of loans secured by taxicab medallions ("Medallion Loans") and loans to small businesses secured by equipment and other suitable collateral ("Commercial Installment Loans"). The earnings of the Company depend primarily on its level of net interest income, which is the difference between interest earned on interest- earning assets consisting primarily of Medallion Loans and Commercial Installment Loans, and the interest paid on interest-bearing liabilities consisting primarily of credit facilities with bank syndicates and subordinated debentures issued to or guaranteed by the SBA. Net interest income is a function of the net interest rate spread, which is the difference between the average yield earned on interest-earning assets and the average interest rate paid on interest-bearing liabilities, as well as the average balance of interest-earning assets as compared to interest-bearing liabilities. Net interest income is affected by economic, regulatory and competitive factors that influence interest rates, loan demand and the availability of funding to finance the Company's lending activities. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets reprice on a different basis than its interest-bearing liabilities. On May 12, 1997, the Company's Registration Statement on Form N-2 was declared effective and the Company executed an underwriting agreement with certain underwriters providing for the public offering of 4,600,000 shares of the Company's Common Stock at a price to the public of $17.25 per share. The Follow-on Offering closed on May 16, 1997. The net proceeds to the Company from the offering, after deducting underwriting discounts and other offering expenses payable by the Company of $5.0 million was $74.3 million. The Company used the net proceeds to increase its loan portfolio, to repurchase loan participations that the Company previously sold to third parties and to reduce short-term LIBOR based debt. -13- Trend in Loan Portfolio Yield. The Company's investment income is driven by the principal amount of and yields on Medallion Loans and Commercial Installment Loans. The following table illustrates the Company's weighted average portfolio yield at the dates indicated:
December 31, 1996 June 30, 1997 ------------------------------------------------------------------------- Weighted Percentage Weighted Percentage Average Principal of Total Average Principal of Total Yield Amounts Portfolio Yield Amounts Portfolio --------- --------- ----------- -------- --------- ---------- Medallion Loan Portfolio 9.92% $134,614,899 76.3% 9.64% $163,338,925 76.0% Commercial Installment Loan Portfolio 13.51 41,925,289 23.7 13.44 51,659,237 24.0 ------------ ----- ------------ ----- Total Portfolio 10.80% $176,540,188 100.0% 10.55% $214,998,162 100.0% ============ ===== ============ =====
The weighted average yield e.o.p. of the Medallion Loan portfolio decreased 28 basis points from 9.92% at December 31, 1996 to 9.64% at June 30, 1997. Medallion Loans constituted 76.3% of the total portfolio of $176.5 million at December 31, 1996 and 76.0% of the total portfolio of $215.0 million at June 30, 1997. The yields on the Company's Medallion Loans have been in a long-term decline. During the six months ended June 30, 1997, the weighted average yield of the Medallion Loan portfolio has declined as the Company has increased the percentage of its Medallion Loan originations which are made to owners of large taxicab fleets. Such loans reprice more frequently than other Medallion Loans in the Company's portfolio, thereby reducing the Company's interest rate risk exposure. In addition, using a portion of the proceeds of the Follow-on Offering, the Company has repurchased approximately $11.4 million in such Medallion Loans to large taxicab fleet owners which the Company had previously participated out to other lenders. The weighted average yield e.o.p. of the Commercial Installment Loan portfolio decreased seven basis points from 13.51% at December 31, 1996 to 13.44% at June 30, 1997. As a result of the decline in the Medallion Loan portfolio yield, coupled with a decline in the Commercial Installment Loan portfolio yield, the weighted average yield e.o.p. of the entire portfolio decreased 25 basis points from 10.80% at December 31, 1996 to 10.55% at June 30, 1997. The decrease in the average yield of the entire portfolio has been offset in part by the strong growth in the total loan portfolio during the period, including growth in the Company's portfolio of Commercial Installment Loans, which historically have been originated at a yield of approximately 350 basis points higher than Medallion Loans and 500 to 700 basis points higher than the prevailing Prime Rate. Although the Company continues to shift its portfolio mix towards higher yielding Commercial Installment Loans, this shift was impacted by higher than expected growth in the Medallion Loan portfolio during the period. The percentage of the entire portfolio composed of Commercial Installment Loans increased slightly from 23.7%, or $41.9 million, at December 31, 1996 to 24.0%, or $51.7 million at June 30, 1997. The Company intends to continue to increase the percentage of Commercial Installment Loans in the total portfolio. Trend in Interest Expense. The Company's interest expense is driven by the interest rate payable on the Company's LIBOR-based short-term credit facilities with bank syndicates and, to a lesser degree, fixed-rate, long-term subordinated debentures issued to or guaranteed by the SBA. In recent years, the Company has reduced its reliance on SBA financing and -14- increased the relative proportion of bank debt to total liabilities. SBA financing can offer very attractive rates, but such financing is restricted in its application and its availability is uncertain. In addition, SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. Accordingly, the Company plans to continue to limit its use of SBA funding and will seek such funding only when advantageous, such as when SBA financing rates are particularly attractive, and to fund loans that qualify under the SBIA and SBA regulations through subsidiaries already subject to SBA restrictions. The Company believes that its transition to financing its operations primarily with short-term LIBOR-based bank debt has generally decreased its interest expense thus far, but has also increased the Company's exposure to the risk of increases in market interest rates which the Company attempts to mitigate with certain matching strategies. The Company also expects that net interest income should increase because bank debt is more readily available than SBA financing and will thus permit an increase in the size of the loan portfolio. At December 31, 1996 and June 30, 1997, short-term LIBOR-based debt constituted 75.1% and 67.0% of total debt, respectively. On March 26, 1997, the Federal Reserve System increased the federal-funds interest rate by 25 basis points and, as a result, the prevailing Prime Rate has increased by 25 basis points. If these increases lead to a trend of higher interest rates, net interest rate spread could decline at least until the Company is able to originate new loans at the higher prevailing interest rates. The Company's cost of funds is primarily driven by (i) the average maturity of debt issued by the Company, (ii) the premium to LIBOR paid by the Company on its LIBOR-based debt, and (iii) the ratio of LIBOR-based debt to SBA financing. The Company incurs LIBOR-based debt for terms generally ranging from 30-180 days. The Company's subordinated debentures issued to or guaranteed by the SBA typically have terms of ten years. The Company's cost of funds reflects fluctuations in LIBOR to a greater degree than in the past because LIBOR-based debt has come to represent a greater proportion of the Company's debt. The Company measures its cost of funds as its aggregate interest expense for all of its interest-bearing liabilities divided by the face amount of such liabilities. The Company analyzes its cost of funds in relation to the average of the 90- and 180-day LIBOR (the "LIBOR Benchmark"). The Company's average cost of funds e.o.p. increased from 7.11% or 153 basis points over the LIBOR Benchmark of 5.58% at December 31, 1996 to 7.30%, or 141 basis points over the LIBOR Benchmark of 5.89% at June 30, 1997. The increase in the Company's average cost of funds e.o.p. resulted primarily from the increase in the LIBOR benchmark of 31 basis points and increase in net borrowings during the period. Taxicab Rooftop Advertising. In connection with its Medallion Loan finance business, the Company also conducts a taxicab rooftop advertising business through Media. Media's revenue is affected by the number of taxicab rooftop advertising displays ("Displays") that it owns and the occupancy rate and advertising rate of those Displays. At June 30, 1997, Media had approximately 2,000 installed Displays. In addition, on March 6, 1997 Media entered into an agreement with the MTBOT to provide advertising on New York City taxicabs affiliated with the MTBOT commencing on September 22, 1997. Although the terms of this agreement do not guarantee that Media will be able to place advertising on any minimum number of taxicabs, the Company believes that the effect of this agreement will be to increase the number of taxicabs Media has under contract for rooftop advertising in New York City from approximately 2,000 currently to approximately 3,800. With this agreement, Media will -15- be the leading taxicab rooftop advertiser in New York City. The Company expects that Media will continue to expand its operations. Although Media is a wholly- owned subsidiary of the Company, its results of operations are not consolidated with the Company because Securities and Exchange Commission regulations prohibit the consolidation of non-investment companies, such as Media, with investment companies, such as the Company. Factors Affecting Net Assets. Factors which affect the Company's net assets include net realized gain/loss on investments and change in net unrealized depreciation of investments. Net realized gain/loss on investments is the difference between the proceeds derived upon foreclosure of a loan and the cost basis of such loan. Change in net unrealized depreciation of investments is the amount, if any, by which the Company's estimate of the fair market value of its loan portfolio is below the cost basis of the loan portfolio. Under the 1940 Act and the SBIA, the Company's loan portfolio must be recorded at fair market value or "marked to market." Unlike certain lending institutions, the Company is not permitted to establish reserves for loan losses, but adjusts quarterly the valuation of its loan portfolio to reflect the Company's estimate of the current realizable value of the loan portfolio. Since no ready market exists for the Company's loans, fair market value is subject to the good faith determination of the Company. In determining such value, the Company takes into consideration factors such as the financial condition of its borrowers, the adequacy of its collateral and the relationships between current and projected market rates of interest and portfolio rates of interest and maturities. Any change in the fair value of portfolio loans as determined by the Company is reflected in net unrealized depreciation of investments and affects net increase in net assets resulting from operations but has no impact on net investment income or distributable income. Therefore, if recent increases in prevailing interest rates lead to a trend of higher interest rates, net increase in net assets resulting from operations could decline. Upon the completion of the Acquisitions on May 29, 1996, the Company's loan portfolio was recorded on the balance sheet at fair market value, which included $1.5 million of net unrealized depreciation, as estimated by the Company in accordance with the 1940 Act and the purchase method of accounting. From December 31, 1996 through June 30, 1997, net unrealized depreciation of investments increased by $25,000. Application of the "marked to market" policy to the Company's loan portfolio could result in greater volatility in the Company's earnings than was the case for the businesses acquired in the Acquisitions since they did not in all cases follow that policy. Recent Commencement of Operations. The Company commenced operations in connection with the simultaneous closing of the Initial Offering and the Acquisitions on May 29, 1996. Prior to that date, the Company had no results of operations and each of Tri-Magna, Edwards and TCC had been operating independently of each other. The following discussion under the caption "Consolidated Results of Operations" sets forth an analysis of the Company's actual results of operations and assets and liabilities for the three and six months ended June 30, 1997. All period percentages involving income statement accounts have been annualized for discussion purposes. -16- CONSOLIDATED RESULTS OF OPERATIONS For the Three Months Ended June 30, 1997. Performance Summary. For the three months ended June 30, 1997, investment income has been positively impacted by the strong growth of the entire loan portfolio coupled with a slight increase in the percentage of the portfolio composed of higher yielding Commercial Installment Loans. Interest expense for the period reflected an increase in the LIBOR benchmark e.o.p. of 21 basis points, slightly offset by the repayment of amounts outstanding under the Company's revolving credit facilities. Strong portfolio growth offset by the decline in spread between the average yield on the entire portfolio and the average of costs of funds contributed to the $2.5 million of net investment income earned during the period. Investment Income. Investment income for the three months ended June 30, 1997 was $5.3 million. The Company's investment income reflects the positive impact of portfolio growth during the period. Total portfolio growth was $30.7 million or 16.7% from $184.3 million at March 31, 1997 to $215.0 million at June 30, 1997. The average portfolio outstanding during the three-month period ended June 30, 1997 was $199.7 million which produced investment income of $5.3 million at a weighted average interest rate of 10.62%. Gross loan originations net of participations during the three-month period ended June 30, 1997 was $29.5 million offset by prepayments, terminations and refinancings by the Company aggregating $10.2 million. In addition, during the three-month period ended June 30, 1997, the Company repurchased approximately $11.4 million in Medallion Loans previously participated out to other lenders. Average yield e.o.p. of the entire portfolio decreased fifteen basis points from 10.70% at March 31, 1997 to 10.55% at June 30, 1997. The decrease in the yield of the entire loan portfolio was caused by a decrease in the average yield on Medallion Loans, coupled with a decrease in the average yield on Commercial Installment Loans. The average yield e.o.p. of the Medallion Loan portfolio decreased eleven basis points from 9.75% at March 31, 1997 to 9.64% at June 30, 1997 and the average yield of the Commercial Installment Loan portfolio decreased ten basis points from 13.54% at March 31, 1997 to 13.44% at June 30, 1997. The decrease in the average yield on Medallion Loans was caused by the reduction of loan yields at Edwards and MFC, which have increased the percentage of their Medallion Loan originations which are made to owners of large taxicab fleets. Such loans reprice more frequently than other Medallion Loans in the Company's portfolio, thereby reducing the Company's interest rate risk exposure. Moreover, certain of the loans that the Company originates to large fleet owners are participated out to other lenders and the Company earns a 50 basis point servicing fee on such participations. The decrease in the average yield on the Commercial Installment Loan portfolio was due primarily to increased originations of loans with higher credit quality at lower yields. The decrease in average yield e.o.p. of the entire loan portfolio was offset in part by the strong growth in the total loan portfolio during the period, including growth in the Company's portfolio of Commercial Installment Loans, which historically have been originated at a yield of approximately 350 basis points higher than Medallion Loans and 500 to 700 basis points higher than the prevailing Prime Rate. The percentage of the portfolio composed of Commercial Installment Loans decreased from 25.1% at March 31, 1997 to 24.0% at June 30, 1997. Although the Company continues to shift its portfolio mix towards higher yielding Commercial Installment Loans, this shift was impacted by higher than expected growth in the -17- Medallion Loan portfolio during the period due in part to the Company's use of a portion of the proceeds from the Follow-on Offering to repurchase approximately $11.4 million in Medallion Loans to large taxicab fleet owners which the Company had previously participated out to other lenders. Interest Expense. The Company's interest expense was $2.1 million for the three months ended June 30, 1997. The Company's average cost of funds e.o.p. increased from 7.14% or 146 basis points over the LIBOR benchmark of 5.68% at March 31, 1997 to 7.30% or 141 basis points over the LIBOR benchmark of 5.89% at June 30, 1997. The increase in the average cost of funds e.o.p. was caused by a 21 basis point increase in the LIBOR benchmark. The Company's net borrowings at the end of the period, however, decreased by $45.7 million or 33.7% from $135.7 million at March 31, 1997 to $90.0 million at June 30, 1997. The decreased borrowings were the result of the use of proceeds from the Follow-on Offering to reduce short-term LIBOR based debt. The percentage of the Company's short-term LIBOR based indebtedness decreased as a percentage of total indebtedness from 76.4% at March 31, 1997 to 67.0% at June 30, 1997. Average borrowings during the three months ended June 30, 1997 were $112.9 million which produced an interest expense of $2.1 million at a weighted average interest rate of 7.44%. The weighted average interest rate of 7.44% includes commitment fees and amortization of premiums on existing interest rate cap agreements as a reflection of total cost of funds borrowed. Net Interest Income. Net interest income was $3.2 million for the three months ended June 30, 1997. Net interest income reflects the positive impact of the portfolio growth during the period. The average spread between the average yield on the portfolio and the average cost of funds during the three-month period ended June 30, 1997 was 3.18% which represented a 22 basis point decrease from average spread of 3.40% during the three-month period ended March 31, 1997. Equity in Earnings of Unconsolidated Subsidiary. For the three months ended June 30, 1997, Media generated advertising revenue of $540,000 and incurred Display rental costs of approximately $238,000, resulting in a gross margin of approximately $302,000 or 55.9% of advertising revenue. The number of Displays owned by Media were approximately 2,000 at June 30, 1997. For the three months ended June 30, 1997, operating expenses were $274,000 and Media generated net income of $28,000 which is recorded as equity in earnings of unconsolidated subsidiary on the Company's statement of operations. Display occupancy increased from 65.5% at March 31, 1997 to 87.8% at June 30, 1997. Other Income. The Company derived $182,000 in other income, or 0.09% of investments for the three months ended June 30, 1997. Other income was primarily derived from late charges, prepayment fees and miscellaneous income. Prepayment fees are heavily influenced by the level and volatility of interest rates and competition. Non-Interest Expenses. The Company had non-interest expenses of $1.0 million for the period. Approximately $275,000, or 27.5% of non-interest expenses, was related to salaries and benefits, $137,000, or 13.7%, consisted of professional fees, $57,000, or 5.7% consisted of investment advisory fees. The operating expense ratio was 1.86% for the three-month period ended June 30, 1997, on an annualized basis, reflecting consolidation of the -18- Company's operations, efficiencies of scale and elimination of redundant services, facilities and functions. The Company believes that operating expenses as a percentage of average assets will decline as the loan portfolio increases due to economies of scale. Amortization of Goodwill and Accretion of Negative Goodwill. The amortization of goodwill of $105,000 for the three months ended June 30, 1997 relates to $6.5 million of goodwill generated in the acquisitions of Edwards and TCC. Goodwill is the amount by which the cost of acquired businesses exceeds the fair value of the net assets acquired. Goodwill is being amortized on a straight-line basis over 15 years. Negative goodwill is the excess of fair market value of net assets of an acquired business over the cost basis of such business. Negative goodwill of $2.9 million was generated in the acquisition of Tri-Magna and is being amortized on a straight-line basis over four years. Net Realized Gain/Loss on Investments The Company realized a net loss on investments of $5,000 during the three months ended June 30, 1997. The loss was the result of the sale of a foreclosed laundromat of $8,000 offset by recoveries in the amount of $3,000 on certain loans secured by radio dispatch and broadcast equipment and other assets used in connection with livery taxicab services previously written off. Net Investment Income. Net investment income earned during the three-month period ended June 30, 1997 was $2.5 million reflecting the positive impact of portfolio growth. Net Increase in Net Assets Resulting from Operations. Net increase in net assets resulting from operations was $2.5 million for the three months ended June 30, 1997 and reflects portfolio growth. Return on assets and return on equity for the three months ended June 30, 1997, on an annualized basis, were 4.6% and 10.3%, respectively. CONSOLIDATED RESULTS OF OPERATIONS For the Six Months Ended June 30, 1997. Performance Summary. For the six months ended June 30, 1997, investment income has been positively impacted by the strong growth of the entire loan portfolio coupled with an increase in the percentage of the portfolio composed of higher yielding Commercial Installment Loans. Interest expense for the period reflected an increase in the LIBOR benchmark e.o.p. of 31 basis points, slightly offset by the repayment of amounts outstanding under the Company's revolving credit facilities. Strong portfolio growth offset by the decline in spread between the average yield on the entire portfolio and the average of costs of funds contributed to the $4.3 million of net investment income earned during the period. Investment Income. Investment income for the six months ended June 30, 1997 was $10.1 million. The Company's investment income reflects the positive impact of portfolio growth during the period. Total portfolio growth was $38.5 million or 21.8% from $176.5 million at December 31, 1996 to $215.0 million at June 30, 1997. The average portfolio outstanding during the six-month period ended June 30, 1997 was $191.9 million which produced investment income of $10.1 million at a weighted average interest rate of 10.53%. Gross loan originations net of participations during the six-month period ended June 30, 1997 -19- was $73.5 million offset by prepayments, terminations and refinancings by the Company aggregating $46.5 million. In addition, during the six-month period ended June 30, 1997 the Company repurchased approximately $11.4 million in Medallion Loans previously participated out to other lenders. Average yield e.o.p. of the entire portfolio decreased 25 basis points from 10.80% at December 31, 1996 to 10.55% at June 30, 1997. The decrease in the yield of the entire loan portfolio was caused by a decrease in the average yield on Medallion Loans coupled with a decrease in the average yield on Commercial Installment Loans. The average yield e.o.p. of the Medallion Loan portfolio decreased 28 basis points from 9.92% at December 31, 1996 to 9.64% at June 30, 1997 and the average yield of the Commercial Installment Loan portfolio decreased seven basis points from 13.51% at December 31, 1996 to 13.44% at June 30, 1997. The decrease in the average yield on Medallion Loans was caused by a reduction in loan yields at Edwards and MFC, which have increased the percentage of their Medallion Loan originations which are made to owners of large taxicab fleets. Such loans reprice more frequently than other Medallion Loans in the Company's portfolio, thereby reducing the Company's interest rate risk exposure. Moreover, certain of the loans that the Company originates to large fleet owners are participated out to other lenders and the Company earns a 50 basis point servicing fee on such participations. The decrease in the average yield on the Commercial Installment Loan portfolio was due to the increased origination of lower-yielding loans with higher credit quality during the latter three months of the period. The decrease in average yield e.o.p. of the entire loan portfolio was offset in part by the strong growth in the total loan portfolio during the period, including growth in the Company's portfolio of Commercial Installment Loans, which historically have been originated at a yield of approximately 350 basis points higher than Medallion Loans and 500 to 700 basis points higher than the prevailing Prime Rate. The percentage of the portfolio composed of Commercial Installment Loans increased from 23.7% at December 31, 1996 to 24.0% at June 30, 1997. Although the Company continues to shift its portfolio mix towards higher yielding Commercial Installment Loans, this shift was impacted by higher than expected growth in the Medallion Loan portfolio during the period due in part to the Company's use of a portion of the proceeds from the Follow-on Offering to repurchase approximately $11.4 million in Medallion Loans to large taxicab fleet owners which the Company had previously participated out to other lenders. Interest Expense. The Company's interest expense was $4.5 million for the six months ended June 30, 1997. The Company's average cost of funds e.o.p. increased from 7.11% or 153 basis points over the LIBOR benchmark of 5.58% at December 31, 1996 to 7.30% or 141 basis points over the LIBOR benchmark of 5.89% at June 30, 1997. The increase in the average cost of funds e.o.p. was caused by a 31 basis point increase in the LIBOR benchmark, which was moderated by the varying maturities of borrowings outstanding during the first half of the period. The Company's net borrowings at the end of the period, however, decreased by $35.8 million or 28.5% from $125.8 million at December 31, 1996 to $90.0 million at June 30, 1997. The decreased borrowings were the result of the use of proceeds from the Follow-on Offering to reduce short-term LIBOR based debt. The percentage of the Company's short-term LIBOR based indebtedness decreased as a percentage of total indebtedness from 75.1% at December 31, 1996 to 67.0% at June 30, 1997. Average borrowings during the six months ended June 30, 1997 were $121.8 million which produced an interest expense of $4.5 million at a weighted average interest rate of 7.39%. The weighted average interest rate of 7.39% includes commitment fees and amortization of -20- premiums on existing interest rate cap agreements as a reflection of total cost of funds borrowed. Net Interest Income. Net interest income was $5.6 million for the six months ended June 30, 1997. Net interest income reflects the positive impact of the portfolio growth coupled with a slight shift in the portfolio mix toward a higher percentage of Commercial Installment Loans during the period. The average spread between the average yield on the portfolio and the average cost of funds during the six-month period ended June 30, 1997 was 3.14%. Equity in Earnings of Unconsolidated Subsidiary. For the six months ended June 30, 1997, Media generated advertising revenue of $991,000 and incurred Display rental costs of approximately $417,000, resulting in a gross margin of approximately $575,000 or 57.9% of advertising revenue. The number of Displays owned by Media were approximately 2,000 at June 30, 1997. For the six months ended June 30, 1997, operating expenses were $542,000 and Media generated net income of $33,000 which is recorded as equity in earnings of unconsolidated subsidiary on the Company's statement of operations. Display occupancy increased from 64% at December 31, 1996 to 87.8% at June 30, 1997. Other Income. The Company derived $438,000 in other income, or 0.22% of investments for the six months ended June 30, 1997. Other income was primarily derived from late charges, prepayment fees and miscellaneous income. Prepayment fees are heavily influenced by the level and volatility of interest rates and competition. Non-Interest Expenses. The Company had non-interest expenses of $2.0 million for the period. Approximately $967,000, or 48.3% of non-interest expenses, was related to salaries and benefits, $305,000, or 15.3%, consisted of professional fees, $114,000, or 5.7% consisted of investment advisory fees. The operating expense ratio was 1.92% for the six-month period ended June 30, 1997, on an annualized basis, reflecting consolidation of the Company's operations, efficiencies of scale and elimination of redundant services, facilities and functions. The Company believes that operating expenses as a percentage of average assets will decline as the loan portfolio increases due to economies of scale. Amortization of Goodwill and Accretion of Negative Goodwill. The amortization of goodwill of $210,000 for the six months ended June 30, 1997 relates to $6.5 million of goodwill generated in the acquisitions of Edwards and TCC. Goodwill is the amount by which the cost of acquired businesses exceeds the fair value of the net assets acquired. Goodwill is being amortized on a straight-line basis over 15 years. Negative goodwill is the excess of fair market value of net assets of an acquired business over the cost basis of such business. Negative goodwill of $2.9 million was generated in the acquisition of Tri-Magna and is being amortized on a straight-line basis over four years. Net Realized Gain/Loss on Investments The Company realized a net gain on investments of $27,000 during the six months ended June 30, 1997. The gain was the result of the sale of foreclosed real estate previously written down for a gain of $28,000 and recoveries in the amount of $6,000 on certain loans secured by radio dispatch and broadcast -21- equipment and other assets used in connection with livery taxicab services previously written off, offset by a write off of $8,000 related to a foreclosure on a laundromat. Net Investment Income. Net investment income earned during the six-month period ended June 30, 1997 was $4.3 million reflecting the positive impact of portfolio growth. Net Increase in Net Assets Resulting from Operations. Net increase in net assets resulting from operations was $4.3 million for the six months ended June 30, 1997 and reflects portfolio growth. Return on assets and return on equity for the six months ended June 30, 1997, on an annualized basis, were 4.06% and 8.97%, respectively. ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity. The Company, like other financial institutions, is subject to interest rate risk to the extent its interest-earning assets (consisting of Medallion Loans and Commercial Installment Loans) reprice on a different basis over time in comparison to its interest-bearing liabilities (consisting primarily of credit facilities with bank syndicates and subordinated SBA debentures). A relative measure of interest rate risk can be derived from the Company's interest rate sensitivity gap. The interest rate sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities which mature and/or reprice within specified intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities and negative when the inverse situation exists. A relative measure of interest rate sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets. Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. The mismatch between maturities and interest rate sensitivities of the Company's interest-earning assets and interest-bearing liabilities results in interest rate risk. Abrupt increases in market rates of interest may have an adverse impact on the Company's earnings. Accordingly, if recent increases in prevailing interest rates caused by a 25 basis point increase in the federal-funds rate lead to a trend of higher interest rates, net interest rate spread could decline at least until the Company is able to originate new loans at the higher prevailing interest rates. The effect of changes in market rates of interest is mitigated by regular turnover of the portfolio. From inception of its business in 1979 through 1996, the period between the origination and final payments of all Medallion Loans originated by MFC is estimated by the Company to have been 29 months on a weighted average basis. Accordingly, the Company -22- anticipates that approximately 40% of the portfolio will mature or be prepaid each year. The Company believes that the average life of its loan portfolio varies to some extent as a function of changes in interest rates because borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment when the interest rate payable on the borrower's loan is high relative to prevailing interest rates and are less likely to prepay in a rising interest rate environment. The Company seeks to manage the exposure of the balance of the portfolio to increases in market interest rates by entering into interest rate cap agreements to hedge a portion of its variable-rate debt against increases in interest rates and by incurring fixed-rate debt consisting primarily of subordinated SBA debentures. The Company has entered into interest rate cap agreements to limit the Company's interest rate exposure as summarized below:
EFFECTIVE MATURITY AMOUNT RATE DATE DATE ------------- ----- --------- -------- $20,000,000 7.0% 11/16/95 11/16/97 $10,000,000 6.0% 4/21/97 4/21/98 $10,000,000 7.0% 5/13/97 5/13/99 $10,000,000 6.5% 5/13/97 5/13/98 7.0% 5/13/98 11/13/99
Total premiums of $195,500 paid under the agreements are being amortized over the respective terms of the agreements. In addition, the Company manages its exposure to increases in market rates of interest by incurring fixed rate indebtedness, such as subordinated SBA debentures. The Company currently has outstanding subordinated SBA debentures in the principal amount of $27.9 million with a weighted average rate of interest of 7.91%. At June 30, 1997, these debentures constituted 31.0% of the Company's aggregate outstanding indebtedness. The Company will seek to manage interest rate risk by evaluating and purchasing, if appropriate, additional derivatives, originating adjustable-rate loans, incurring fixed-rate indebtedness and revising, if appropriate, its overall level of asset and liability matching. Nevertheless, the Company accepts varying degrees of interest rate risk depending on market conditions and believes that the resulting asset/liability interest rate mismatch results in opportunities for higher net interest income. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity are credit facilities with bank syndicates, fixed rate, long-term subordinated debentures that are issued to or guaranteed by the SBA and loan amortization and prepayments. As a Regulated Investment Company ("RIC") under the Internal Revenue Code of 1986, as amended, the Company distributes at least 90% of its investment company taxable income; consequently, the Company primarily relies upon external sources of funds to finance growth. At June 30, 1997, 69.0% of the Company's $90.0 million of debt consisted of bank debt, substantially all of which was at variable effective rates of interest with a weighted average rate of 7.03% or 147 basis points below the -23- Prime Rate and 31.0% consisted of subordinated SBA debentures with fixed rates of interest with a weighted average rate of 7.91%. The Company is eligible to seek SBA funding but plans to continue to limit its use of SBA funding and will seek such funding only when advantageous, such as when SBA financing rates are particularly attractive, or to fund loans that qualify under SBA regulations through Edwards and TCC which are already subject to SBA restrictions. In the event that the Company seeks SBA funding, no assurance can be given that such funding will be obtained. In addition to possible additional SBA funding, an additional $87.4 million of debt was available at June 30, 1997 at variable effective rates of interest averaging below the Prime Rate under the Company's $147.5 million revolving credit facilities with banks. The following table illustrates the Company's and each of the subsidiaries' sources of available funds and amounts outstanding under credit facilities at June 30, 1997.
The Company MFC Edwards TCC Total ------- ------- ------- ------- ------- (dollars in thousands) Cash....................... $ 136 $ 1,365 $ 241 $ 308 $ 2,050 Revolving lines of credit.. 7,500 125,000 15,000 -- 147,500 Amounts available........ 4,800 76,650 5,900 -- 87,350 Amounts outstanding...... 2,700 48,350 9,100 -- 60,150 Average interest rate.... 6.97% 7.03% 6.98% -- 7.03% Maturity................. 12/97 6/99 6/97-9/97 -- 6/97-6/99 Term loans............... -- 2,000 -- -- 2,000(1) Interest rate............ -- 7.50% -- -- 7.50% Maturity................. -- 7/97 -- -- 7/97 SBA debentures........... -- -- 22,250 5,640 27,890 Average interest rate.... -- -- 7.88% 8.00% 7.91% Maturity................. -- -- 6/98-9/04 6/02 6/98-9/04 Total cash and remaining amounts available under credit facilities......... 4,936 78,015 6,141 308 89,400 Total debt outstanding..... $2,700 $50,350 $31,350 $5,640 $90,040
____________________ (1) On July 31, 1997, the Company's $2.0 million term loan matured and was paid in full. Loan amortization and prepayments also provide a source of funding for the Company. Prepayments on loans are influenced significantly by general interest rates, Medallion Loan market rates, economic conditions and competition. Medallion Loan prepayments have slowed since early 1994, initially because of increases, and then stabilization, in the level of interest rates and more recently because of an increase in the percentage of the Company's Medallion Loans which are refinanced with the Company rather than through other sources of financing. The Company makes limited use of SBA funding and will seek such funding only when advantageous. Since May 30, 1996, the Company has expanded its loan portfolio, reduced its level of SBA financing and increased its level of bank funding. While bank funding often carries higher interest rates than SBA funding, the Company believes that such higher rates will be offset by the increased volume of funding and loan originations which should result in increased net interest margin. -24- Media funds its operations through internal cash flow and intercompany debt. Media is not a RIC and, therefore, is able to retain earnings to finance growth. The Company believes that anticipated borrowings from the SBA and the increased amounts available under the Company's credit facility after repayment of a substantial portion of amounts outstanding thereunder from proceeds of the Company's Follow-on Offering and cash flow from operations (after distributions to stockholders) will be adequate to fund the continuing operations of the Company's loan portfolio and advertising business for the foreseeable future. In addition, in order to provide the funds necessary for the Company's expansion strategy, the Company expects to incur, from time to time, additional short- and long-term bank debt and (to the extent permitted and advantageous) to use SBA financing, and to issue, in public or private transactions, its equity and debt securities. The Company is currently exploring such external financing possibilities and MFC is exploring establishing a commercial paper program and money market loan program. The issuance of commercial paper and money market loans will be contingent upon MFC maintaining its investment grade rating, among other conditions, and no assurance can be given that MFC will be able to establish such a program. The availability and terms of any additional financing will depend upon market, regulatory and other conditions and there can be no assurance that such additional financing will be available on terms acceptable to the Company. INVESTMENT CONSIDERATIONS The following are certain of the factors which could affect the Company's future results. They should be considered in connection with evaluating forward- looking statements contained in this Management's Discussion and Analysis and elsewhere in this Report and otherwise made by or on behalf of the Company since these factors, among others, could cause actual results and conditions to differ materially from those projected in these forward-looking statements. Interest Rate Spread. The Company's net interest income is largely dependent upon achieving a positive interest rate spread and other factors. Leverage. The Company's use of leverage poses certain risks for holders of the Common Stock, including the possibility of higher volatility of both the net asset value of the Company and the market price of the Common Stock and, therefore, an increase in the speculative character of the Common Stock. Availability of Funds. The Company has a continuing need for capital to finance its lending activities. The Company funds its operations through credit facilities with bank syndicates and, to a lesser degree, through subordinated SBA debentures. Reductions in the availability of funds from banks and under SBA programs on terms favorable to the Company could have a material adverse effect on the Company. Because the Company distributes to its shareholders at least 90% of its investment company taxable income, such earnings are not available to fund loan originations. Industry and Geographic Concentration. A substantial portion of the Company's revenue is derived from operations in New York City and these operations are substantially focused in the area of financing New York City taxicab medallions and related assets. There can be no assurance that an economic downturn in New York City in general, or in the New York City taxicab industry in particular, would not have an adverse impact on the Company. -25- Reliance on Management. The success of the Company will be largely dependent upon the efforts of senior management. The death, incapacity or loss of the services of any of such individuals could have an adverse effect on the Company. Taxicab Industry Regulation. Every city in which the Company originates Medallion Loans, and most other major cities in the United States, limit the supply of taxicab medallions. In many markets, regulation results in supply restrictions which, in turn, support the value of medallions; consequently, actions which loosen such restrictions and result in the issuance of additional medallions into a market could decrease the value of medallions in that market and, therefore, the collateral securing the Company's then outstanding Medallion Loans, if any, in that market. The Company is unable to forecast with any degree of certainty whether any potential increases in the supply of medallions will occur. In New York City, and in other markets where the Company originates Medallion Loans, taxicab fares are generally set by government agencies, whereas expenses associated with operating taxicabs are largely unregulated. As a consequence, in the short term, the ability of taxicab operators to recoup increases in expenses is limited. Escalating expenses, therefore, can render taxicab operation less profitable and make it more difficult for borrowers to service loans from the Company and could potentially adversely affect the value of the Company's collateral. Government Regulation of Tobacco Advertising. Currently, 35% of the Company's taxicab rooftop advertising revenue is derived from tobacco products advertising. In August 1996, President Clinton signed an executive order adopting rules proposed by the U.S. Food and Drug Administration (the "FDA") restricting the sale and advertising of cigarette and smokeless tobacco products. Certain of these regulations which include provisions prohibiting the placement of tobacco product advertising within 1,000 feet of playgrounds and schools only apply to stationery advertising such as placards and billboards and, accordingly, do not restrict taxicab rooftop advertising. Certain other of these regulations, however, which limit tobacco products advertising to a format consisting of black text on a white background and require the inclusion of a statement which identifies the product as "a nicotine-delivery device for persons over 18" apply to taxicab rooftop advertising. Certain advertisers may be unwilling to advertise in this format; accordingly, these restrictions, which become effective on August 28, 1997, could have an adverse effect upon the taxicab rooftop advertising business of the Company. On April 25, 1997, however, a federal district court in Greensboro, North Carolina ruled that the FDA does not have the authority to restrict such advertising. The FDA has indicated that it will appeal the decision. If the FDA is successful in its appeal, the Company believes that these restrictions could have an adverse effect upon the taxicab rooftop advertising business of the Company. In addition, in June 1997 several of the major tobacco companies in the U.S. and certain state attorneys general reached agreement on a proposed settlement of litigation between such parties. The terms of this proposed settlement include a ban on all outdoor advertising of tobacco products commencing nine months after finalization of the settlement. The settlement, however, is subject to several conditions, the most notable of which is the enactment of legislation by the federal government. At this time, it is uncertain when a definitive settlement will be reached, if at all, or what the terms of any such settlement will be. A reduction in taxicab rooftop advertising by the tobacco industry could cause an immediate reduction in the Company's taxicab rooftop advertising revenues and may simultaneously increase the Company's available inventory. An increase in available inventory could result in the Company reducing its rates or limiting its ability to raise rates for some period of time. If the tobacco litigation settlement were to be finalized in its current form and if the Company were unable to replace revenues from tobacco advertising with revenues from other sources, such settlement could have an adverse effect upon the Company's taxicab rooftop advertising business. -26- PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on Thursday, June 5, 1997. The following represents the results of the proposals submitted to a vote of the stockholders: Proposal to Elect Directors - --------------------------- The following persons were elected to the Company's Board of Directors for a term of office expiring at the Company's 2000 Annual Meeting of Stockholders: Votes Cast For Votes Withheld -------------- -------------- Stanley Kreitman 7,452,373 27,700 David L. Rudnick 7,451,623 28,450 There were no abstentions or broker non-votes with respect to this proposal. Proposal to Ratify and Approve Selection of Independent Public Accountants - -------------------------------------------------------------------------- The selection by the Company's Board of Directors of Arthur Andersen LLP as independent public accountants for the fiscal year ending December 31, 1997 was ratified and approved: Votes Cast For Votes Against Abstentions -------------- ------------- ----------- 7,450,348 1,775 27,950 There were no broker non-votes or votes withheld with respect to this proposal. -27- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.1 Letter Agreement dated April 18, 1997 between MFC and The Chase Manhattan Bank relating to an interest rate cap transaction in the amount of $10,000,000. 10.2 Letter Agreement dated May 9, 1997 between MFC and Fleet National Bank ("Fleet") relating to an interest rate cap transaction in the amount of $10,000,000. 10.3 Letter Agreement dated May 12, 1997 between MFC and Fleet relating to an interest rate cap transaction in the amount of $10,000,000. 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed. -28- MEDALLION FINANCIAL CORP. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDALLION FINANCIAL CORP. Date: August 12, 1997 By: /s/ Daniel F. Baker ---------------------------------- Daniel F. Baker Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) -29- EX-10.1 2 LETTER OF AGREEMENT BETWEEN MFC & FLEET NATL. BANK Exhibit 10.1 FLEET SERVICES CORPORATION May 12, 1997 Mr. Dan Baker Medallion Funding Corporation 205 East 42nd Street Suite 2020 New York, NY 10017 Re: Interest Rate Cap Transaction Dear Mr. Baker: The purpose of this letter agreement is to confirm the terms and conditions of the Interest Rate Cap Transaction entered into between Fleet National Bank and Medallion Funding Corporation on the Trade Date referred to below (the "Cap Transaction"). For the purpose hereof, Fleet National Bank is referred to as "Party A" and Medallion Funding Corporation is referred to as "Party B". The definitions and provisions contained in the 1991 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc.) are incorporated into this Confirmation. In the event of any inconsistency between those definitions and the provisions and this Confirmation, this Confirmation will govern. 1. The terms of the particular Cap Transaction to which this Confirmation relates are as follows: Notional Amount: USD 10,000,000.00 Trade Date: May 12, 1997 Effective Date: May 13, 1997 Termination Date: May 13, 1999, subject to adjustment in accordance with the Modified Following Business Day Convention. FIXED AMOUNTS: Fixed Rate Payer: PARTY B Fixed Amount: $36,000.00 Fixed Rate Payment Date: May 13, 1997, subject to adjustment in accordance with the Modified Following Business Day Convention. FLOATING AMOUNTS: Floating Rate Payer: PARTY A Cap Rate: 7.00% Floating Rate Payment Dates: The 13th of August, November, February and May of each year, commencing on August 13, 1997 and ending on the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Floating Rate for Initial Calculation Period: To Be Determined Floating Rate Option: USD-LIBOR-BBA Designated Maturity: Three Month Spread: None Floating Rate Day Count Fraction: Actual/360 Reset Dates: The first day of each Floating Rate Calculation Period. Method of Averaging: Not Applicable Compounding: Not Applicable Business Day: New York and London Governing Law: New York State Law (without reference to choice of law doctrine). Calculation Agent: Fleet National Bank -2- Account Details: Payments to Fleet: Please Debit Account: Fleet Bank, N.A. Medallion Funding Corporation A/C# 2189006536 Payments to Medallion Funding Corporation: Please Credit Account: Fleet Bank, N.A. Medallion Funding Corporation A/C# 2189006536 2. Party B shall deliver to Party A, at the time of its execution of this Confirmation, evidence of the specimen signature and incumbency of each person who is executing the Confirmation on Party B's behalf, unless such evidence has previously been supplied and remains true and in effect. 3. Each party has entered into this Cap Transaction solely in reliance on its own judgment. Neither party has any fiduciary obligation to the other party relating to this Cap Transaction. In addition, neither party has held itself out as advising, or has held out any of its employees or agents as having the authority to advise, the other party as to whether or not the other party should enter into this Cap Transaction, any subsequent actions relating to this Cap Transaction or any other matters relating to this Cap Transaction. Neither party shall have any responsibility or liability whatsoever in respect of any advice of this nature given, or views expressed, by it or any such persons to the other party relating to this Cap Transaction, whether or not such advice is given or such views are expressed at the request of the other party. Please confirm that the foregoing correctly sets forth the terms of our agreement by executing the copy of this Confirmation enclosed for that purpose and returning it to us via fax (617) 241-1894/1987 or mail to: Fleet Services Corporation Attn: Linda Marshall MAILSTOP: MAMLSFTTOP P.O. BOX 2197 BOSTON, MA 02106-2197 -3- We are delighted to have completed this transaction with you. If you have any questions regarding this confirmation please call Linda Marshall at (617) 241-1818. FLEET NATIONAL BANK By: /s/ E. Seavey Bowdoin --------------------- Name: E. Seavey Bowdoin, SVP Capital Markets Operations Accepted and confirmed as of the date first written above: Medallion Funding Corporation By: /s/ Daniel Baker ---------------- Authorized Signatory Name: Daniel Banker Title: Treasurer -4- EX-10.2 3 LETTER OF AGREEMENT BETWEEN MFC & FLEET Exhibit 10.2 FLEET SERVICES CORPORATION May 9, 1997 Mr. Dan Baker Medallion Funding Corporation 205 East 42nd Street Suite 2020 New York, NY 10017 Re: Interest Rate Cap Transaction Dear Mr. Baker: The purpose of this letter agreement is to confirm the terms and conditions of the Interest Rate Cap Transaction entered into between Fleet National Bank and Medallion Funding Corporation on the Trade Date referred to below (the "Cap Transaction"). For the purpose hereof, Fleet National Bank is referred to as "Party A" and Medallion Funding Corporation is referred to as "Party B". The definitions and provisions contained in the 1991 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc.) are incorporated into this Confirmation. In the event of any inconsistency between those definitions and the provisions and this Confirmation, this Confirmation will govern. 1. The terms of the particular Cap Transaction to which this Confirmation relates are as follows: Notional Amount: USD 10,000,000.00 Trade Date: May 9, 1997 Effective Date: May 13, 1997 Termination Date: November 13, 1999, subject to adjustment in accordance with the Modified Following Business Day Convention. FIXED AMOUNTS: Fixed Rate Payer: PARTY B Fixed Amount: $74,000.00 Fixed Rate Payment Date: May 13, 1997, subject to adjustment in accordance with the Modified Following Business Day Convention. FLOATING AMOUNTS: Floating Rate Payer: PARTY A Cap Rate: 6.50% 5/13/97-5/13/98 7.00% 5/13/98-11/13/99 Floating Rate Payment Dates: The 13th of August, November, February and May of each year, commencing on August 13, 1997 and ending on the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Floating Rate for Initial Calculation Period: To Be Determined Floating Rate Option: USD-LIBOR-BBA Designated Maturity: Three Month Spread: None Floating Rate Day Count Fraction: Actual/360 Reset Dates: The first day of each Floating Rate Calculation Period. Method of Averaging: Not Applicable Compounding: Not Applicable Business Day: New York and London Governing Law: New York State Law (without reference to choice of law doctrine). Calculation Agent: Fleet National Bank -2- Account Details: Payments to Fleet: Please Debit Account: Fleet Bank, N.A. Medallion Funding Corporation A/C# 2189006536 Payments to Medallion Funding Corporation: Please Credit Account: Fleet Bank, N.A. Medallion Funding Corporation A/C# 2189006536 2. Party B shall deliver to Party A, at the time of its execution of this Confirmation, evidence of the specimen signature and incumbency of each person who is executing the Confirmation on Party B's behalf, unless such evidence has previously been supplied and remains true and in effect. 3. Each party has entered into this Cap Transaction solely in reliance on its own judgment. Neither party has any fiduciary obligation to the other party relating to this Cap Transaction. In addition, neither party has held itself out as advising, or has held out any of its employees or agents as having the authority to advise, the other party as to whether or not the other party should enter into this Cap Transaction, any subsequent actions relating to this Cap Transaction or any other matters relating to this Cap Transaction. Neither party shall have any responsibility or liability whatsoever in respect of any advice of this nature given, or views expressed, by it or any such persons to the other party relating to this Cap Transaction, whether or not such advice is given or such views are expressed at the request of the other party. Please confirm that the foregoing correctly sets forth the terms of our agreement by executing the copy of this Confirmation enclosed for that purpose and returning it to us via fax (617) 241-1894/1987 or mail to: Fleet Services Corporation Attn: Linda Marshall MAILSTOP: MAMLSFTTOP P.O. BOX 2197 BOSTON, MA 02106-2197 -3- We are delighted to have completed this transaction with you. If you have any questions regarding this confirmation please call Linda Marshall at (617) 241-1818. FLEET NATIONAL BANK By: /s/ Elizabeth Murray ----------------------------- Name: Elizabeth Murray Capital Markets Operations Accepted and confirmed as of the date first written above: Medallion Funding Corporation By: /s/ Daniel Baker ------------------------ Authorized Signatory Name: Daniel Baker Title: Treasurer -4- EX-10.3 4 LETTER OF AGREEMENT BETWEEN MFC & CHASE Exhibit 10.3 CHASE Dated: April 18, 1997 RATE CAP TRANSACTION Medallion Funding Corporation 205 East 42nd Street, Suite 2020 New York, New York 10017 Attn: Mr. Daniel Baker Fax: (212) 682-1668 RE: CHASE REFERENCE NO. IR6080 Ladies and Gentlemen: The purpose of this letter agreement is to set forth the terms and conditions of the rate cap transaction entered into between The Chase Manhattan Bank ("Chase") and Medallion Funding Corporation (the "Counterparty") on April 17, 1997 (the "Rate Cap Transaction"). In consideration of the payment of the sum of USD 35,000 (the "Premium") by the Counterparty to Chase at Chase's Account on April 21, 1997 and in consideration of the promise by Chase to make payments to the Counterparty in accordance with Section 2 hereof, the parties hereto agree as follows: 1. Definitions. The following terms shall have the following meanings: ----------- "Business Day" means any day which is both a New York Business Day and a London Business Day. "Calculation Period" means each period from and including one Payment Date (or, in the case of the initial Calculation Period, the Effective Date) to but excluding the next succeeding Payment Date (or, in the case of the final Calculation Period, the Termination Date). "Cap Rate" means 6.00 percent per annum. "Chase's Account" means the account of Chase at The Chase Manhattan Bank, Account No. 900-9-001364, Attention: Derivative Products. "Counterparty's Account" means the account of ___________________________ ___________________________. "Designated Maturity" means 3 months. "Effective Date" means April 21, 1997. "Floating Rate" means, with respect to a Reset Date within each Calculation Period, the rate determined by Chase to be (i) the per annum rate for deposits in U.S. dollars for a period of the Designated Maturity which appears on the Telerate Page 3750 Screen as of 11:00 a.m., London time, on the day that is two London Business Days prior to that Reset Date (rounded upwards, if necessary, to the nearest 1/100,000 of 1%); (ii) if such rate does not appear on the Telerate Page 3750 Screen, the Floating Rate with respect to that Reset Date shall be the arithmetic mean (rounded as aforesaid) of the offered quotations obtained by Chase from the Reference Banks for deposits in U.S. dollars to leading banks in the London interbank market as of approximately 11:00 a.m., London time, on the date that is two London Business Days prior to that Reset Date; or (iii) if fewer than two Reference Banks provide Chase with such quotations, the Floating Rate shall be the rate per annum which Chase determines to be the arithmetic mean (rounded as aforesaid) of the offered quotations which leading banks in New York City selected by Chase are quoting in the New York interbank market on that Reset Date for deposits in U.S. dollars to the Reference Banks or, if fewer than two such quotations are available, to leading European and Canadian Banks. "London Business Day" means any day on which banks are open for business in London and on which dealings in deposits in U.S. dollars are transacted in the London interbank market. "New York Business Day" means any day on which banks are not required or authorized by law to close in New York City. "Notional Principal Amount" means USD 10,000,000. "Payment Date" means the 21st day in July, October, January and April, commencing on July 21, 1997 and ending on the Termination Date, provided that if any such day is not a Business Day, such Payment Date shall be the next succeeding Business Day, except that if such Payment Date would then fall in the next calendar month, such Payment Date shall be the next preceding Business Day. "Reference Banks" means four major banks in the London interbank market selected by Chase. "Reset Date" means the first day of each Calculation Period. "Telerate Page 3750 Screen" means the display designated as "Page 3750" on the Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. Dollar deposits). "Termination Date" means April 21, 1998. 2. Payments. Chase agrees, subject to the payment by the Counterparty to -------- Chase of the Premium, to pay to the Counterparty on each Payment Date occurring on or prior to -2- the Termination Date, an amount equal to the product of (i) the amount by which the Floating Rate exceeds the Cap Rate with respect to the Calculation Period ending on or nearest such Payment Date, in each case as determined by Chase, (ii) the Notional Principal Amount and (iii) the actual number of days in that Calculation Period divided by 360. All payments to the Counterparty shall be made by deposit to the Counterparty's Account. All payments to Chase shall be made by deposit to Chase's Account. 3. Notices. Any notices hereunder (i) shall be in writing and hand- ------- delivered or sent by first-class mail, postage prepaid, return receipt requested, and shall be addressed to the intended recipient at its address set forth on the signature page hereof or at such other address as such party shall have last specified by notice to the other party and (ii) shall be effective (a) if delivered by hand or sent by overnight courier, on the day it is delivered, unless delivery is made after the close of business or on a day that is not a Business Day, in which case such notice will be effective on the next Business Day, or (b) if sent by certified or registered mail or the equivalent (return receipt requested), three Business Days after dispatch. 4. Governing Law. This letter agreement shall be governed by and ------------- construed in accordance with the laws of the State of New York. 5. Assignments. Neither party shall have the right to assign its rights ----------- or obligations under this letter agreement without the prior written consent of the other party. 6. Set-off Counterclaim. All payments under this letter agreement will be -------------------- made without set-off or counterclaim, except that each party will have the right to set-off, counterclaim or withhold payment in respect of any default by the other party under this letter agreement or under any other agreement between the parties. 7. Each Party's Reliance on its Own Judgment. Each party has entered into ----------------------------------------- this Rate Cap Transaction solely in reliance on its own judgment. Neither party has any fiduciary obligation to the other party relating to this Rate Cap Transaction. In addition, neither party has held itself out as advising, or has held out any of its employees or agents as having the authority to advise, the other party as to whether or not the other party should enter into this Rate Cap Transaction, any subsequent actions relating to this Rate Cap Transaction or any other matters relating to this Rate Cap Transaction. Neither party shall have any responsibility or liability whatsoever in respect of any advice of this nature given, or views expressed, by it or any of such persons to the other party relating to this Rate Cap Transaction, whether or not such advice is given or such views are expressed at the request of the other party. Please confirm that the foregoing correctly sets forth the terms and conditions or our agreement by responding within ten (10) Business Days by returning via facsimile an executed copy of this letter agreement to the attention of Tania Montes De Oca (fax no. (718) 242-9262; telephone no. (718) 242-2619). Duplicate hard copies of this letter agreement will be sent to you shortly. Upon receipt, please execute both copies and return one to Chase to the address indicated below. -3- Chase is pleased to have concluded this transaction with you. Very truly yours, THE CHASE MANHATTAN BANK By: /s/ Soumya Mahapatra -------------------- Name: Soumya Mahapatra Title: Operations Officer Address for Notices: 4 Chase Metro Tech, 17th Floor Brooklyn, NY 11245 Attention: Ms. Angela Barrow Facsimile No: 718-242-9262 ACCEPTED AND AGREED: MEDALLION FUNDING CORPORATION By: /s/ Daniel Baker ---------------- Name: Daniel Baker Title: Treasurer Address for Notices: Attention: Mr. Daniel Baker 205 East 42nd Street, Suite 2020 New York, New York 10017 -4- EX-27 5 FINANCIAL DATA SCHEDULE
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FINANCIAL STATEMENTS AT OR FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS ON FORM 10-Q. 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 215,967,964 215,896,664 1,969,907 3,488,741 8,196,244 229,551,556 0 0 94,127,176 94,127,176 128,500 130,652,980 12,850,000 8,250,000 2,486,384 0 0 0 71,300 133,267,864 0 10,170,767 831,983 2,224,187 4,254,229 26,931 25,000 4,256,160 0 1,815,000 0 0 4,600,000 0 0 76,780,585 543,306 0 0 0 112,500 4,524,334 6,748,521 0 0 0 0 0 0 0 0 0 0 0
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