<PAGE>
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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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- -------------
1996 1997
------------- -------------
(Unaudited)
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 30, 1996
THREE MONTHS ENDED SIX MONTHS ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1996
------------------- ----------------- -------------
<S> <C> <C> <C>
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
=========== =========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-5-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF COMMON CAPITAL IN ACCUMULATED
COMMON STOCK STOCK $0.01 EXCESS OF UNDISTRIBUTED
OUTSTANDING PAR VALUE PAR VALUE INCOME
----------- --------- --------- ------
<S> <C> <C> <C> <C>
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
========== ======== ============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-6-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD
FROM MAY 30,
SIX MONTHS ENDED 1996 THROUGH
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-7-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
BALANCE SHEET 1996 1997
- ------------- ------------ --------
(unaudited)
<S> <C> <C>
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
========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS PERIOD
STATEMENT ENDED ENDED ENDED
OF OPERATIONS JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1996
- ------------- ------------- ------------- -------------
<S> <C> <C> <C>
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
======== ======== ==========
</TABLE>
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
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<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
<S> <C> <C>
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
</TABLE>
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-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996
------------- -------------
<S> <C> <C>
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
</TABLE>
(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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
-------------------------------------------------------------------------
Weighted Percentage Weighted Percentage
Average Principal of Total Average Principal of Total
Yield Amounts Portfolio Yield Amounts Portfolio
--------- --------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
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%
============ ===== ============ =====
</TABLE>
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
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<PAGE>
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-
<PAGE>
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-
<PAGE>
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
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<PAGE>
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
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<PAGE>
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-
<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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:
<TABLE>
<CAPTION>
EFFECTIVE MATURITY
AMOUNT RATE DATE DATE
------------- ----- --------- --------
<S> <C> <C> <C>
$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
</TABLE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
The
Company MFC Edwards TCC Total
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
____________________
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<PAGE>
"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-
<PAGE>
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-
<PAGE>
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-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 215,967,964
<INVESTMENTS-AT-VALUE> 215,896,664
<RECEIVABLES> 1,969,907
<ASSETS-OTHER> 3,488,741
<OTHER-ITEMS-ASSETS> 8,196,244
<TOTAL-ASSETS> 229,551,556
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 94,127,176
<TOTAL-LIABILITIES> 94,127,176
<SENIOR-EQUITY> 128,500
<PAID-IN-CAPITAL-COMMON> 130,652,980
<SHARES-COMMON-STOCK> 12,850,000
<SHARES-COMMON-PRIOR> 8,250,000
<ACCUMULATED-NII-CURRENT> 2,486,384
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 71,300
<NET-ASSETS> 133,267,864
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,170,767
<OTHER-INCOME> 831,983
<EXPENSES-NET> 2,224,187
<NET-INVESTMENT-INCOME> 4,254,229
<REALIZED-GAINS-CURRENT> 26,931
<APPREC-INCREASE-CURRENT> 25,000
<NET-CHANGE-FROM-OPS> 4,256,160
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,815,000
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,600,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 76,780,585
<ACCUMULATED-NII-PRIOR> 543,306
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 112,500
<INTEREST-EXPENSE> 4,524,334
<GROSS-EXPENSE> 6,748,521
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
