<PAGE>
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, 1998
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.)
437 MADISON AVE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 328-2100
(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 7, 1998:
CLASS OUTSTANDING PAR VALUE SHARES OUTSTANDING
----------------- --------- ------------------
Common Stock..............................$.01 13,996,573
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<PAGE>
MEDALLION FINANCIAL CORP.
FORM 10-Q
JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Basis of Preparation ....................................................................... 3
Medallion Financial Corp. Consolidated Balance Sheets
at June 30, 1998 and December 31, 1997............................................. 4
Medallion Financial Corp. Consolidated Statement of Operations
for the three and six months ended June 30, 1998 and 1997.......................... 5
Medallion Financial Corp. Consolidated Statement of Cash
Flows for the three and six months ended June 30, 1998 and 1997.................... 6
Notes to Consolidated Financial Statements............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................................. 14
General................................................................................ 14
Consolidated Results of Operations (for the three months
ended June 30, 1998 and 1997)...................................................... 18
Consolidated Results of Operations (for the six months ended
June 30, 1998 and 1997).............................................................. 22
Asset/Liability Management............................................................. 26
Liquidity and Capital Resources........................................................ 27
Investment Considerations.............................................................. 28
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......................................... 31
Item 6. Exhibits and Reports on Form 8-K............................................................ 32
SIGNATURES ................................................................................... 34
</TABLE>
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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 29, 1996 in connection with the closing
of its initial public offering (the "Offering") and the simultaneous
acquisitions (the "1996 Acquisitions") of Medallion Funding Corp. ("MFC"),
Edwards Capital Company, Transportation Capital Corp. ("TCC") and
Medallion Taxi Media, Inc. ("Taxi"). 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 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").
The financial information included in this report reflects the
acquisition of Capital Dimensions, Inc. ("CDI"), which occurred on June 16,
1998. The acquisition was accounted for as a pooling of interests and,
accordingly, the information included in the accompanying financial statements
and notes presents the combined financial position and the results of operations
of the Company and CDI as if they had operated as a combined entity for all
periods presented. The financial information 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, 1998 and the related statements of
operations, stockholders' equity and cash flows for the three and six months
ending June 30, 1998 and 1997. Item 1 also sets forth the consolidated balance
sheet of the Company as of December 31, 1997. 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, 1998 and 1997.
The consolidated balance sheet of the Company as of June 30, 1998, the
related statements of operations, stockholders' equity and cash flows for the
three and six months ended June 30, 1998 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, 1998 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 Company's Annual Report on Form 10K for the fiscal year ended December
31, 1997.
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<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited) (Restated
See Note 2)
<S> <C> <C>
ASSETS
Investments :
Medallion loans $ 266,765,841 $ 225,961,249
Commercial installment loans 97,738,028 87,293,197
------------- --------------
Net investments 364,503,869 313,254,446
Investment in unconsolidated subsidiary 1,482,872 1,140,424
------------- --------------
Total investments 365,986,741 314,394,870
Cash 6,426,985 6,666,613
Accrued interest receivable 4,236,661 3,237,840
Receivable from sale of loans 5,073,805 2,862,981
Fixed assets, net 1,111,673 356,206
Goodwill, net 7,608,127 6,082,515
Servicing fee receivable 1,968,815 1,617,415
Other assets 4,621,936 4,675,204
------------- ------------
Total assets $ 397,034,743 $ 339,893,644
============== =============
LIABILITIES
Accounts payable $4,245,608 $ 7,377,222
Dividends payable - 3,594,402
Accrued interest payable 1,844,840 871,194
Notes payable to banks and demand notes 124,700,000 137,750,000
Commercial paper 70,497,389 -
SBA debentures payable 41,590,000 39,770,000
------------- ------------
Total liabilities 242,877,837 189,362,818
------------- ------------
Negative goodwill, net 1,434,116 1,795,316
------------ ------------
Commitments and contingencies (Note 6)
SHAREHOLDERS' EQUITY (Note 1)
Preferred Stock (1,000,000 shares of $.01 par - -
value stock authorized-none outstanding)
Common stock (15,000,000 shares of $.01 par value stock
authorized -13,996,573 and 13,908,916 shares outstanding
at June 30, 1998 and December 31, 1997, respectively) 139,966 139,089
Capital in excess of par value 143,500,787 143,065,650
Accumulated undistributed income 9,082,037 5,530,771
------------ ------------
Total shareholders' equity 152,722,790 148,735,510
Total liabilities and shareholders' equity $ 397,034,743 $ 339,893,644
============= ==============
Number of common shares and common share equivalents 14,195,427 14,062,318
============= ==============
Net asset value per share $10.76 $10.58
====== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Investment income:
Interest income on investments $ 8,793,956 $ 5,844,570 $ 17,442,115 $ 11,513,834
Interest income on s/t investments 90,540 56,678 167,637 112,678
--------------- ------------- --------------- --------------
Total investment income 8,884,496 5,901,248 17,609,752 11,626,512
--------------- -------------- -------------- --------------
Interest expense:
Notes payable to banks 3,096,964 1,572,433 5,750,183 3,458,758
SBA debentures 778,867 696,918 1,557,803 1,433,245
--------------- -------------- -------------- --------------
Total interest expense 3,875,831 2,269,351 7,307,986 4,892,003
Net interest income 5,008,665 3,631,897 10,301,766 6,734,509
--------------- -------------- -------------- --------------
Non-interest income:
Equity in earnings of unconsolidated subsidiary 187,058 27,849 342,448 32,802
Accretion of negative goodwill 180,600 180,600 361,200 361,200
Gain on sale of loans 477,000 - 1,157,934 -
Other income 294,012 182,171 588,538 437,981
--------------- -------------- -------------- --------------
Total non-interest income 1,138,670 390,620 2,450,120 831,983
--------------- -------------- -------------- --------------
Expenses:
Administrative and advisory fees 60,058 57,135 16,562 113,892
Professional fees 83,458 137,004 296,779 308,003
Salaries and benefits 1,486,337 431,517 2,711,092 999,534
Other operating expenses 1,042,961 602,310 2,021,380 1,087,816
Amortization of goodwill 123,800 105,060 240,419 210,120
Merger related expenses 1,494,491 - 1,494,491 -
--------------- --------------- -------------- --------------
Total expenses 4,291,105 1,333,026 6,880,723 2,719,365
--------------- -------------- -------------- ---------------
Net investment income 1,856,230 2,689,491 5,911,163 4,847,127
--------------- -------------- -------------- --------------
Net realized gain on investments 1,003,339 314,398 1,026,741 1,804,398
Change in net unrealized depreciation 50,000 56,344 222,402 (125,956)
Income tax benefit (provision) 57,666 (256,000) 38,566 (932,000)
--------------- -------------- -------------- --------------
Net increase in net assets resulting from $ 2,967,235 $ 2,804,233 $ 7,158,757 $ 5,593,569
operations =============== ============== ============= =============
Net increase in net assets resulting from
operations per common share
Basic $ 0.21 $ 0.25 $ 0.51 $ 0.54
======= ======= ======= =======
Diluted $ 0.21 $ 0.24 $ 0.51 $ 0.53
======= ======= ======= =======
Weighted average common shares outstanding:
Basic Average Shares 13,942,732 11,402,524 13,926,520 10,316,430
=========== =========== =========== ===========
Diluted Average Shares 14,143,452 11,558,856 14,125,374 10,483,159
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated)
<S> <C> <C>
Net increase in net assets resulting from operations $ 7,158,757 $ 5,593,569
Adjustments to reconcile net increase in net assets resulting from operations
to net cash provided by (used for) operating activities:
Depreciation and amortization 120,254 64,089
Increase in equity in earnings of unconsolidated subsidiary (342,448) (32,802)
Change in unrealized depreciation 240,419 25,000
Amortization of goodwill 240,419 210,120
Increase in accrued interest receivable (865,529) (459,712)
Increase in other assets (195,181) (1,474,675)
Decrease in accounts payable and accrued expenses (3,306,614) 1,953,921
Increase in receivable from sale of loans (2,210,824) -
Increase in servicing fee receivable (351,400) -
Accretion of negative goodwill (361,200) (361,200)
Increase (decrease) in accrued interest payable 856,564 (263,033)
------------ -----------------
Net cash provided by (used for) operating activities 742,798 5,254,977
------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of investments (119,562,691) (75,106,942)
Proceeds from sales and maturities of investments 85,058,930 32,586,718
Payment for purchase of VG1, VGII & VOC (11,963,072) -
Capital expenditures (817,103)
------------- -
Net cash provided by (used for) investing activities (47,283,936) (42,520,224)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (Payments of) notes payable to banks (13,050,000) (34,300,000)
Proceeds from issuance of commercial paper 70,497,389 -
Proceeds from (Payment of) SBA debentures (4,380,000) 1,238,082
Proceeds from exercise of stock options 436,014 -
Proceeds from sale of common stock - 74,248,959
Payment of declared dividends to current stockholders (7,201,893) (3,547,500)
-------------- --------------
Net cash provided by (used for) financing activities 46,301,510 37,639,541
-------------- --------------
NET INCREASE (DECREASE) IN CASH (239,628) 374,294
CASH beginning of period 6,666,613 6,099,512
------------- --------------
CASH end of period $ 6,426,985 $ 6,473,806
============== ==============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 6,451,422 $ 5,155,036
============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-6-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(1) FORMATION OF MEDALLION FINANCIAL CORP.
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 "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 Offering. These costs were recorded, net of $200,000 payable
by Tri-Magna and its subsidiaries in accordance with the Merger Agreement. In
parallel with the Offering, 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 collectively, the ("1996 Acquisitions") (see Note 3). 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. In accordance with the Merger
Agreement dated December 21, 1995 between the Company and Tri-Magna, MFC and
Taxi, formerly subsidiaries of Tri-Magna, became wholly-owned subsidiaries of
the Company.
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, Medallion Media, Inc. ("Media"), successor to Taxi,
operates a taxicab rooftop advertising business. The Company decided to
merge all of the assets and liabilities of Edwards and TCC into MFC subject to
the approval of the SBA. As of June 30, 1998, the Company is awaiting such
approval from the SBA.
(2) ACQUISITIONS
On October 31, 1997, the Company consummated the purchase of
substantially all of the assets and liabilities of Business Lenders, Inc.
through the Company's wholly owned subsidiary, BLI Acquisition Co., LLC. In
connection with the transaction, BLI Acquisition Co., LLC was renamed Business
Lenders, LLC ("Business Lenders"). Business Lenders is licensed by the SBA under
its section 7a program.
In connection with the 1996 Acquisitions and the Business Lenders
Acquisition, the Company received the approval under the 1940 Act from the
Securities and Exchange Commission, as well as approval from the Small Business
Administration ("SBA").
-7-
<PAGE>
On June 16, 1998, the Company completed the acquisition of Capital Dimensions,
Inc. ("CDI"), an SSBIC lender, headquartered in Minneapolis, MN. CDI was
subsequently renamed Medallion Capital, Inc. ("Medallion Capital"). The Company
issued 1,112,677 shares of its common stock for the outstanding shares of CDI;
common stock by exchanging 0.59615 shares of its common stock for each
outstanding share of CDI. The transaction was accounted for as a tax-free
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended, and was treated under the pooling of interests method of accounting.
Under this method, the historical book values of the assets and liabilities of
CDI, as reported in it's balance sheet are carried over onto the Company's
consolidated balance sheet, and no goodwill or other intangible assets are
created. The following tables set forth the results of operations of CDI and
the Company for the three and six months ended June 30, 1998 and are included in
the accompanying consolidated statement of operations.
<TABLE>
<CAPTION>
(Dollars in thousands, except shares and per share
amounts)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 The Company CDI Combined
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Total Investment Income $ 8,300 $ 584 $ 8,884
Net increase in net assets from operations $ 1,853 $1,114 $ 2,967
Net increase in net assets from operations per share
Basic $ .14 $ 1.05 $ .21
Diluted $ .14 $ .98 $ .21
FOR THE THREE MONTHS ENDED JUNE 30, 1997 The Company CDI Combined
- -------------------------------------------------------------------------
Total Investment Income $ 5,285 $ 616 $ 5,901
Net increase in net assets from operations $ 2,457 $ 347 $ 2,804
Net increase in net assets from operations per share
Basic $ .24 $ .34 $ .25
Diluted $ .24 $ .31 $ .24
FOR THE SIX MONTHS ENDED JUNE 30, 1998 The Company CDI Combined
- -------------------------------------------------------------------------
Total Investment Income $16,322 $1,288 $17,610
Net increase in net assets from operations $ 5,692 $1,467 $ 7,159
Net increase in net assets from operations per share
Basic $ .44 $ 1.40 $ .51
Diluted $ .44 $ 1.29 $ .51
FOR THE SIX MONTHS ENDED JUNE 30, 1997 The Company CDI Combined
- -------------------------------------------------------------------------
Total Investment Income $10,171 $1,456 $11,627
Net increase in net assets from operations $ 4,256 $1,338 $ 5,594
Net increase in net assets from operations per share
Basic $ .46 $ 1.34 $ .54
Diluted $ .45 $ 1.20 $ .53
</TABLE>
On May 27, 1998, the Company completed the acquisition of certain assets and
assumption of certain liabilities of VGI, VGII and Venture Opportunities Corp.,
an SBIC lender headquartered in New York City, for an aggregate purchase price
of $11,963,072. This acquisition was accounted for under the purchase method of
accounting. Included in the purchase price was certain premiums paid totaling
$1,545,000, which represented goodwill and the signing of ten year non-compete
agreements with certain individuals associated with the former companies.
In conjunction with the acquisitions, liabilities were assumed as follows:
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<PAGE>
VGI, VGII AND VENTURE OPPORTUNITIES CORP
-------------------------------------------------------------
Fair value of assets acquired $ 18,455,155
Cash paid 11,963,072
-------------
Liabilities assumed $ 6,492,083
============
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The 1996 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
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
$2,433,717 and $2,233,717 on total investments of $364,503,869 and $313,254,446
at June 30, 1998 and December 31, 1997, respectively, of which $1,522,417
existed at the date of the Company's 1996 Acquisitions. The Board of Directors
has determined that this valuation approximates fair value.
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". SFAS
No. 128 establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock. The Company has applied the provisions of SFAS No. 128 retroactively to
all periods presented. The dilutive effect of potential common shares in 1997
and 1998, consisting of outstanding stock options is determined using the
treasury method in accordance with SFAS No. 128. Basic and fully diluted EPS for
the three and six months ended June 30, 1998 and 1997 are as follows:
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<PAGE>
(Dollars in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997
- ---------------------------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Amount Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 2,967 $ 2,804
Basic EPS:
Income available to 2,967 13,942,732 $ .21 2,804 11,402,524 $ .25
common stockholders
Effect of dilutive options
Stock options 200,720 156,332
Diluted EPS:
Income available to 2,967 14,143,452 $ .21 2,804 11,558,856 $ .24
common stockholders
SIX MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997
- --------------------------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Amount Amount
- --------------------------------------------------------------------------------------------------------------
Net Income $ 7,159 $ 5,594
Basic EPS:
Income available to 7,159 13,926,520 $ .51 5,594 10,316,430 $ .54
common stockholders
Effect of dilutive options
Stock options 198,854 166,729
Diluted EPS:
Income available to 7,159 14,125,374 $ .51 5,594 10,483,159 $ .53
common stockholders
</TABLE>
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which is to become effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 established standards for
reporting and display of comprehensive income and its components. Comprehensive
income is the total of net income and all other non-owner changes in equity.
Reclassification of financial statements of earlier periods presented for
comparative purposes is required. The Company has adopted this statement and it
does not have a significant impact on the Company's financial position or
results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". The
new standard establishes new guidelines regarding the disclosure requirements
for business segments. The Company is required to adopt the new standard in its
1998 year end financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes new standards regarding accounting and reporting requirements
for derivative instruments and hedging activities. The new standard is effective
for fiscal years beginning after June 15, 1999. The Company is presently
studying the effect of the new pronouncement and, as required, expects to adopt
SFAS No. 133 beginning January 1, 2000. As of June 30, 1998, the Company
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<PAGE>
did not own any derivative instruments.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5). SOP 98-5 requires the costs of start-up activities,
including organization costs, to be expensed as incurred. The Company is
presently studying the effect of the new pronouncement and, as required, expects
to adopt SOP 98-5 beginning January 1, 1999.
(4) 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 the balance sheets as of June 30, 1998
and December 31, 1997 and unaudited statement of operations for the three and
six months ended June 30, 1998 and 1997:
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
Cash $ 822,370 $ 594,377
Accounts receivable 1,009,886 700,392
Equipment, net 1,541,062 1,422,284
Other 397,621 533,541
----------- ------------
Total assets $3,770,939 $3,250,594
=========== ============
Notes payable to parent $1,584,788 1,555,637
Accounts payable and accrued expenses 182,680 283,915
Federal income taxes payable 412,000 162,000
----------- ------------
Total liabilities 2,179,468 2,001,552
Equity 1,001,000 1,001,000
Retained earnings 590,471 248,042
----------- ------------
Total equity 1,591,471 1,249,042
----------- ------------
Total liabilities and shareholders' equity $3,770,939 $3,250,594
========== ==========
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
STATEMENT OF OPERATIONS 1998 1997 1998 1997
----------------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Advertising revenue $ 1,515,316 $ 540,104 $ 2,972,326 $ 991,160
Cost of service 535,432 237,986 1,071,275 416,573
------------- ------------ ------------ -------------
Gross margin 979,884 302,118 1,901,051 574,587
Other operating expenses 642,826 274,269 1,308,622 541,785
-------------- ------------- ----------- ------------
Income before taxes 337,058 27,849 592,429 32,802
Income taxes 150,000 - 250,000 -
-------------- -------------- ----------- ------------
Net income $ 187,058 $ 27,849 $ 342,429 $ 32,802
============== ============== =========== ===========
</TABLE>
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<PAGE>
(5) DEBT
The table below summarizes the various debt agreements the Company had
outstanding at June 30, 1998 and December 31, 1997:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Notes payable to banks:
Total facilities $228,000,000 $228,000,000
Maturity of facilities 7/98-6/99 1/98-6/99
Total amounts outstanding $ 124,700,000 $ 137,750,000
============== =============
SBA debentures payable $ 41,590,000 $ 39,770,000
============= =============
Maturity 9/00-9/04 6/98-9/04
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, 1998.
(6) COMMERCIAL PAPER
On March 13, 1998, MFC entered into a commercial paper agreement with
Salomon Smith Barney to sell up to an aggregate principal amount of $195 million
in secured commercial paper through private placements pursuant to Section 4(2)
of the Securities Act of 1933. Amounts outstanding at any time under the program
are limited by certain covenants, including a requirement that MFC retain an
investment grade rating from at least two of the four rating agencies, and
borrowing base calculations set forth in MFC's syndicated credit facilities,
which act as backup to the commercial paper program on a pari passu basis. The
commercial paper program has no specified maturity and may be terminated by the
Company at any time. As of June 30, 1998, MFC had $70,497,389 outstanding at a
weighted average interest rate of 6.16%
(7) SUBSEQUENT EVENTS
On August 5, 1998, MFC declared a dividend payable to the Company in
the amount of $225 per share payable on August 6, 1998 (aggregating $1,498,275),
Edwards declared a dividend payable to the Company in the amount of $4,450 per
share payable on August 6, 1998 (aggregating $445,000) and TCC declared a
dividend payable to the Company in the amount of $1,840 per share payable on
August 6, 1998 (aggregating $184,000). With the proceeds of these dividends, on
August 5, 1998 the Company declared a dividend in the amount of $0.30 per share
(aggregating $4,198,972) payable on August 27, 1998 to the stockholders of
record on August 17, 1998.
On July 31, 1998, the company entered into a revolving credit agreement
with certain banks in the amount of $57.5 million that matures on July 30, 1999.
The agreement contains certain financial ratios and covenants that the Company's
believes it was in compliance with on July 31, 1998.
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<PAGE>
On August 5, 1998, the Company entered into an option agreement to
purchase for cash substantially all of the operations and assets, and certain
liabilities of New Orleans-based Taxi Ads, LLC, which is the leading provider of
taxi top advertising in New Orleans. Taxi Ads also has a strong presence in San
Diego and Philadelphia. Taxi Ads currently provides advertising on 2,177
displays on 853 taxis.
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<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 and the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997. 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. All amounts have been
restated to include the historical amounts for Medallion Capital, Inc. (formerly
Capital Dimensions, Inc.)
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 secured credit facilities with bank syndicates, secured
commercial paper and 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.
In addition, through its Medallion Capital subsidiary, the Company
invests in minority owned small businesses in selected industries. Medallion
Capital's investments are typically in the form of secured debt instruments with
fixed interest rates accompanied by warrants to purchase equity interest for a
nominal exercise price (such warrants constituting "Equity Investments").
Interest income is earned on the debt investments. Realized gains (losses) on
investments are recognized when investments are sold and represent the
difference between the proceeds received from the disposition of portfolio
assets and the cost of such portfolio assets. In addition, changes in unrealized
appreciation (depreciation) of investments is recorded and represents the net
change in the estimated fair values of the portfolio assets at the end of the
period as compared with their estimated fair values at the beginning of the
period or the cost of such portfolio assets, if purchased during the period.
Generally, "realized gains (losses) on investments" and "changes in unrealized
appreciation (depreciation) of investments" are inversely related. When an
appreciated asset is sold to realize a gain, a decrease in unrealized
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<PAGE>
appreciation occurs when the gain associated with the asset (if previously
recognized as an unrealized gain) is transferred from the "unrealized" to the
"realized" category. Conversely, when a loss previously recognized as an
unrealized loss is realized by the sale or other disposition of a depreciated
portfolio asset, the reclassification of the loss from "unrealized" to
"realized" causes an increase in net unrealized appreciation and an increase in
realized loss.
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, 1997 JUNE 30, 1998
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 9.28% $225,961,249 72.1% 9.07% $266,765,841 72.8%
Commercial Installment Loan Portfolio 12.74 79,803,197 25.5% 12.71 90,517,503 25.2%
Equity Investments 7,490,000 2.4% 7,220,525 2.0%
------------- --------- --------------- ---------
Total Portfolio 10.20% $313,254,446 100.0% 10.00% $364,503,868 100.0%
============ ===== ============== =========
</TABLE>
The weighted average yield e.o.p./1/ of the Medallion Loan portfolio
decreased 21 basis points from 9.28% at December 31, 1997 to 9.07% at June 30,
1998. Medallion Loans constituted 72.1% of the total portfolio of $313.3 million
at December 31, 1997 and 72.8% of the total portfolio of $364.5 million at June
30, 1998. The decrease in the average yield on Medallion Loans was caused by a
reduction in loan yields due to lower long-term interest rates and competition.
To offset the resulting decline in investment income, the Company increased the
origination of loans with shorter interest rate maturity dates, thereby reducing
the Company's interest rate risk exposure. The Company believes that this time
period 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. As a result of this decline in the Medallion Loan
portfolio yield, the weighted average yield e.o.p. of the entire portfolio
decreased 20 basis points from 10.20% at December 31, 1997 to 10.0% at June 30,
1998.
The Company had been shifting the portfolio mix toward a higher
percentage of Commercial Installment Loans, which historically have had a yield
of approximately 300 basis points higher than the Company's Medallion Loans and
250 to 600 basis points higher than the Prime Rate; however, the Company was
able to grow the Medallion Loan portfolio faster than anticipated. The weighted
average yield e.o.p. of the Commercial Installment Loan portfolio decreased
three basis points from 12.74% at December 31, 1997 to 12.71% at June 30, 1998.
Although the percentage of the entire portfolio composed of Commercial
Installment Loans decreased from 25.5% at December 31, 1997 to 25.3% at June 30,
1998, the actual outstanding balances increased from $79.8 million at December
31,1997 to $90.5 million at June 30, 1998.
- ----------------------
/1/ e.o.p. or "end of period," indicates that a calculation is made at the date
indicated rather than for the period then ended.
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<PAGE>
The Company intends to try to increase both the percentage of Commercial
Installment Loans in the total portfolio and the number of floating rate loan
originations.
Equity Investments represented 2.4% and 2.0% of the Company's entire
portfolio at December 31, 1997 and June 30, 1998, respectively.
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, secured commercial paper and, to a lesser
degree, fixed-rate, long-term debentures issued to or guaranteed by the SBA. In
recent years, the Company has reduced its reliance on SBA financing and
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 Small Business Investment Act of 1958, as amended (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 secured bank debt and secured commercial paper 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 as the Company issues more
commercial paper in lieu of bank debt and will thus permit an increase in the
size of the loan portfolio. At the present time commercial paper is generally
priced at approximately 60 basis points below the rate charged under the
Company's revolving credit facilities. At December 31, 1997 and June 30, 1998,
short-term LIBOR-based debt constituted 72.7% and 51.4% of total debt,
respectively. At June 30, 1998, commercial paper constituted 29.0% of total
debt. The Company began issuing commercial paper on March 16, 1998.
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 secured commercial paper, and (iii) the
ratio of LIBOR-based debt to SBA financing. The Company incurs LIBOR-based debt
for terms generally ranging from 1-180 days. The Company's debentures issued to
or guaranteed by the SBA typically have initial 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. decreased from 7.16% or 133 basis points
over the LIBOR Benchmark of 5.83% at December 31, 1997 to 6.59%, or 86 basis
points over the LIBOR Benchmark of 5.73% at June 30, 1998.
Taxicab Rooftop Advertising. In addition to its Medallion Loan finance
business, the Company also conducts a taxicab rooftop advertising business
through Media, which began operations in November 1994. Media's revenue is
affected by the number of taxicab rooftop
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<PAGE>
advertising displays ("Displays") that it owns and the occupancy rate and
advertising rate of those Displays. At June 30, 1998, Media had approximately
3,890 installed Displays. 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 sale or foreclosure of a loan
and the cost basis of such loan or equity investments. 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 and other investments 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 or other investments as determined by the Company is reflected
in net unrealized depreciation or appreciation 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. 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 1996
Acquisitions since they did not in all cases follow that policy.
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<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
For the Three Months Ended June 30, 1997 and 1998.
Performance Summary. For the three months ended June 30, 1998, net
investment income has been positively impacted by the growth of the Loan
Portfolio and an increase realized gains from the sale of common and preferred
stock warrants, offset by a negative impact on spread, an increase in operating
expenses and the one time charge for merger related expenses. The gross spread
for the period was lower due to lower yields being realized on net investments
offset by a reduction in the Company's cost of funds resulting from a reduction
in the spread over LIBOR on the Company's revolving credit facilities and the
issuance of commercial paper.
Investment Income. Investment income increased $3.0 million or 50.6%
from $5.9 million for the three months ended June 30, 1997 to $8.9 million for
the three months ended June 30, 1998. The Company's investment income reflects
the positive impact of portfolio growth during the three months ended June 30,
1998. Total portfolio growth totaled $32.9 million or 9.0% from $331.6 million
at March 31, 1998 to $364.5 million at June 30, 1998 as compared to $32.3
million or 15.6% from $207.3 million at March 31, 1997 to $239.6 million at June
30, 1997. The average portfolio outstanding was $223.4 million, for the three
month period ended June 30, 1997, which produced investment income of $5.9
million at a weighted average interest rate of 10.46% compared to an average of
$352.5 million for the three-month period ended June 30, 1998, which produced
investment income of $8.9 million at a weighted average interest rate of 10.04%.
Loan originations net of participations increased by $17.2 million or
40.3% from $42.7 million for the three-month period ended June 30, 1997 to $59.9
million for the three-month period ended June 30, 1998. Not included in
originations for the three months ended June 30, 1998 are purchases of $16.9
million of loans acquired from VGI, VGII and Venture Opportunities Corp. The
originations were offset by prepayments, terminations and refinancings by the
Company aggregating $10.2 million for the three month period ended June 30, 1997
compared to $43.0 million for the three month period ended June 30, 1998.
Average yield e.o.p. of the entire portfolio decreased 75 basis points from
10.75% at June 30, 1997 to 10.00% at June 30, 1998. 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 and a decrease in the percentage of the portfolio composed of
higher yielding Commercial Installment Loans which historically have been
originated at a yield of approximately 300 basis points higher than Medallion
Loans and 250 to 600 basis points higher than the prevailing Prime Rate. The
average yield e.o.p. of the Medallion Loan portfolio decreased 57 basis points
from 9.64% at June 30, 1997 to 9.07% at June 30, 1998 and the average yield of
the Commercial Installment Loan portfolio decreased 43 basis points from 13.14%
at June 30, 1997 to 12.71% at June 30, 1998. The decline in the commercial
portfolio yield is the result of the acquisition and growth of the Business
Lenders portfolio of approximately $21.8 million of floating rate loans tied to
prime at an average yield of 11.05%. This purchase shifts the average yield on
commercial yields lower, however, interest rate exposure is mitigated by the
floating rate nature of these loans. The decrease in the average yield on
Medallion Loans was caused by a reduction in loan yields due to lower long-term
interest rates and competition. To offset the resulting decline in investment
income, the Company increased the origination of loans with shorter interest
rate maturity dates, thereby reducing the Company's interest rate risk exposure.
The decrease in average yield e.o.p. of the entire loan portfolio was offset in
part by the growth in the Medallion loan portfolio during the period. The
percentage of the portfolio composed of Commercial Installment Loans decreased
31.8% at June 30, 1997 to 25.2% at June 30, 1998. Although the Company continues
to pursue a shift in its portfolio mix towards higher yielding Commercial
Installment Loans, this shift reversed by higher than expected growth in the
Medallion Loan portfolio during the period.
Interest Expense. The Company's interest expense increased $1.6 million
or 70.8% from $2.3 million for the three months ended
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<PAGE>
June 30, 1997 to $3.9 million for the three months ended June 30, 1998. The
Company's average cost of funds e.o.p. decreased 71 basis points from 7.30% or
141 basis points over the LIBOR benchmark of 5.89% at June 30, 1997 to 6.59% or
86 basis points over the LIBOR benchmark of 5.73% at June 30, 1998. The decrease
in the average cost of funds e.o.p. was caused by a reduction in the premium to
LIBOR paid by the Company combined with a 26 basis point decrease in the LIBOR
benchmark. Also contributing to the decrease in cost of funds e.o.p. was the
Company's issuance of commercial paper, which at the present time is priced
approximately 60 basis points less than the Company's revolving credit
facilities. Average total borrowings increased $96.6 million or 78.2% from
$123.6 million for the three months ended June 30, 1997, which produced an
interest expense of $2.3 million at a weighted average interest rate of 7.34% to
$220.2 million for the three months ended June 30, 1998 which produced an
interest expense of $3.9 million at a weighted average interest rate of 7.04%.
The weighted average interest rates include commitment fees and amortization of
premiums on existing interest rate cap agreements as a reflection of total cost
of funds borrowed. The percentage of the Company's short-term LIBOR based
indebtedness and commercial paper increased as a percentage of total
indebtedness from 58.1% at June 30, 1997 to 80.4% at June 30, 1998.
Net Interest Income. Net interest income increased $1.4 million or
37.9% from $3.6 million for the three months ended June 30, 1997 to $5.0 million
for the three months ended June 30, 1998. Net interest income reflects the
positive impact of the portfolio growth during the three months ended June 30,
1998 offset by a decrease in the spread between average yield and average cost
of funds. The average spread between the average yield on the portfolio and the
average cost of funds decreased 12 basis points or 6.09% from 3.12% for the
three-month period ended June 30, 1997 to 3.00% for the three-month period ended
June 30, 1998.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $975,000 or 180.6% from $540,000 for the three months ended June 30,
1997 to $1,515,000 for the three months ended June 30, 1998. Display rental
costs increased $297,000 or 125.0% from $238,000 for the three months ended June
30, 1997 to $535,000 for the three months ended June 30, 1998. This resulted in
a gross margin of approximately $302,000 or 55.9% of advertising revenue for the
three months ended June 30, 1997 compared to $980,000 or 64.7% for the three
months ended June 30, 1998. The significant increase in advertising revenue and
display rental cost is directly related to the increase in Displays owned by
Media. The number of Displays owned by Media increased 1,890 or 94.5% from 2,000
at June 30, 1997 to 3,890 at June 30, 1998. Operating costs increased $369,000
or 134.4% from $274,000 for the three months ended June 30, 1997 to $643,000 for
the three months ended June 30, 1998. The increase in operating costs is a
reflection of the expansion of the Media operations. Income tax expense amounted
to $150,000 for the three months ended June 30, 1998. Media generated net income
of $28,000 for the three-month period ended June 30, 1997 compared to net income
of $187,000 for the three-month period ended June 30, 1998. The increase in net
income is primarily the result of increases in the number of Displays owned and
occupancy rates. Display occupancy increased from 65.5% for the three months
ended June 30, 1997 to 100% for the three months ended June 30, 1998. Net income
is recorded as equity in earnings or losses of unconsolidated subsidiary on the
Company's statement of operations.
Gain on sale of loans. The Company experienced a gain on the sale of
the guaranteed
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<PAGE>
portion of SBA 7a loans in the amount of $477,000 on loans sold amounting to $
5.1 million of the $8.9 million available during the three months ended June 30,
1998. There were no sales during the three months June 30, 1997. The Company
accounts for gains on sale of loans in accordance with SFAS No. 125 (Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities) and EIFT 88-11. Because of its limited experience with this
portfolio, the Company has assumed a 15% discount rate and a 15% prepayment
speed in calculating of the gains and excess servicing assets. Management will
continue to review industry data as well as its experience with the portfolio
and will adjust discount rates and prepayment speeds, if deemed appropriate.
Other Income. The Company's other income increased $112,000 or 61.4%
from $182,000 for the three months ended June 30, 1997 to $294,000 for the three
months ended June 30, 1998. 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's non-interest expenses increased
$3.0 million or 221.9% from $1.3 million for the three months ended June 30,
1997 to $4.3 million for the three months ended June 30, 1998. Included in
non-interest expenses for the three months ended June 30, 1998 are $1.5 million
of expenses related to the merger with Medallion Capital. Exclusive of these
expenses, non-interest expenses increased $1.5 million or 109.8% from $1.3
million for the three months ended June 30, 1997 to $2.8 million for the three
months ended June 30, 1998. Other operating expenses increased $441,000 or 73.2%
from $602,000 for the three months ended June 30, 1997 to $1,043,000 for the
three months ended June 30, 1998. Salaries and benefits increased $1,055,000 or
244.4% from $432,000 for the three months ended June 30, 1997 to $1,486,000 for
the three months ended June 30, 1998. Professional fees decreased $54,000 or
39.1% from $137,000 for the three months ended June 30, 1997 to $83,000 for the
three months ended June 30, 1998. Investment advisory fees increased $3,000 from
$57,000 for the three months ended June 30, 1997 to $60,000 for the three months
ended June 30, 1998. The operating expense ratio is computed as non-interest
expenses divided by average assets excluding the merger related expenses. The
operating expense ratio decreased to 2.8% for the three-month period ended June
30, 1998 from 3.9% for the three-month period ended June 30, 1997, on an
annualized basis. The increase in other operating expenses and salary expense is
principally the result of the acquisition of certain assets and operations of
Business Lenders LLC, which added 50 full time employees and the related
overhead of seven satellite offices principally around the eastern part of the
country, to the Company's non-interest expense for the three month period ended
June 30, 1998 compared to the three month period ended June 30, 1997. The
additional staff and lending offices should help to provide additional loan
growth for the Company.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill was $105,000 for the three months ended June 30, 1997
and $124,000 for the three months ended June 30, 1998, and relates to $6.5
million of goodwill generated in the acquisitions of Edwards and TCC. The
increase in amortization of goodwill is primarily related to the purchases of
assets of VGI, VGII and Venture Opportunities Corp. The goodwill resulting from
these acquisitions amounted to $1,545,000. The acquisition of certain assets and
operations of Business Lenders resulted in the addition of $200,000 of goodwill.
Goodwill is the amount by
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<PAGE>
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 Investment Income. Net investment income decreased $833,000 or
31.0% from $2.7 million for the three-month period ended June 30, 1997 to $1.8
million for the three months ended June 30, 1998. Exclusive of the merger
related expenses of $1.5 million, net investment income increased $661,000 or
24.6% from $2.7 million for the three months period ended June 30, 1997 to $3.4
million for the three months ended June 30, 1998. The increase was attributable
to the positive impact of portfolio growth offset by a decrease in the spread
between average yield and average cost of funds. Also included in the increase
was a realized gain of approximately $1.0 million from the sale of common and
preferred stock warrants in connection with the repayment of certain loans.
Change in Net Unrealized Depreciation. The change in net unrealized
depreciation decreased $6,000 from $56,000 for the three months ended June 30,
1997 to $50,000 for the three months ended June 30, 1998.
Net Realized Gain/Loss on Investments. The Company had an increase in
realized net gain on investments of $689,000 from $314,000 for the three months
ended June 30, 1997 to $1,003,000 for the three months ended June 30, 1998. The
increase in realized gains was the result of the sale of common and preferred
stock warrants in connection with the repayment of three loans.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations decreased $163,000 or 5.8% from $2.8
million for the three months ended June 30, 1997 to $3.0 for the three months
ended June 30, 1998. Exclusive of the merger related expenses $1.5 million, net
investment income increased $1.7 million or 59.1% from $2.8 million for the
three months ended June 30, 1997 to $4.5 million for the three months ended June
30, 1998. The increase was attributable to the positive impact of portfolio
growth offset by a decrease in the spread between average yield and average cost
of funds. Also included in the increase was a realized gain of approximately
$1.0 million from the sale of common and preferred stock warrants in connection
with the repayment of certain loans. Return on assets and return on equity for
the three months ended June 30, 1998, on an annualized basis, were 3.1% and
7.8%, respectively, compared to 6.3% and 13.6% for the three months ended June
30, 1997.
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CONSOLIDATED RESULTS OF OPERATIONS
For the Six Months Ended June 30, 1997 and 1998.
Performance Summary. For the six months ended June 30, 1998, net
investment income has been positively impacted by the growth of the Loan
Portfolio and an increase in realized gains from the sale of common and
preferred stock warrants, offset by a negative impact on spread, an increase in
operating expenses and the one time charge for merger related expenses. The
gross spread for the period was higher due mostly to the fact that slightly
lower average yields on net investments were more than offset by a reduction in
the Company's cost of funds resulting from a reduction in the spread over LIBOR
on the Company's secured revolving credit facilities and the issuance of secured
commercial paper.
Investment Income. Investment income increased $6.0 million or 51.5%
from $11.6 million for the six months ended June 30, 1997 to $17.6 million for
the six months ended June 30, 1998. The Company's investment income reflects the
positive impact of portfolio growth during the six months ended June 30, 1998.
Total portfolio growth totaled $51.2 million or 9.0% from $313.3 million at
December 31, 1997 to $364.5 million at June 30, 1998 as compared to $43.2
million or 15.6% from $196.4 million at December 31, 1996 to $239.6 million at
June 30, 1997. The average portfolio outstanding was $218.0 million, for the six
month period ended June 30, 1997, which produced investment income of $11.6
million at a weighted average interest rate of 10.56% compared to an average of
$338.9 million for the six-month period ended June 30, 1998, which produced
investment income of $17.6 million at a weighted average interest rate of
10.29%.
Loan originations net of participations increased by $32.9 million or
38.1% from $86.6 million for the six-month period ended June 30, 1997 to $119.5
million for the six-month period ended June 30, 1998. Not included in
originations for the six months ended June 30, 1998 are purchases of $16.9
million of loans acquired from VGI, VGII and Venture Opportunities Corp. The
originations were offset by prepayments, terminations and refinancings by the
Company aggregating $43.3 million for the six month period ended June 30, 1997
compared to $85.2 million for the six month period ended June 30, 1998. Average
yield e.o.p. of the entire portfolio decreased 75 basis points from 10.75% at
June 30, 1997 to 10.00% at June 30, 1998. 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 and a decrease in the percentage of the portfolio composed of higher
yielding Commercial Installment Loans which historically have been originated at
a yield of approximately 300 basis points higher than Medallion Loans and 250 to
600 basis points higher than the prevailing Prime Rate. The average yield e.o.p.
of the Medallion Loan portfolio decreased 57 basis points from 9.64% at June 30,
1997 to 9.07% at June 30, 1998 and the average yield of the Commercial
Installment Loan portfolio decreased 43 basis points from 13.14% at June 30,
1997 to 12.71% at June 30, 1998. The decline in the commercial portfolio yield
is the result of the acquisition and growth of the Business Lenders portfolio of
approximately $21.8 million of floating rate loans tied to prime at an average
yield of 11.05%. This purchase shifts the average yield on commercial yields
lower, however, interest rate exposure is mitigated by the floating rate nature
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<PAGE>
of these loans. The decrease in the average yield on Medallion Loans was caused
by a reduction in loan yields due to lower long-term interest rates and
competition. To offset the resulting decline in investment income, the Company
increased the origination of loans with shorter interest rate maturity dates,
thereby reducing the Company's interest rate risk exposure. The decrease in
average yield e.o.p. of the entire loan portfolio was offset in part by the
growth in the Medallion loan portfolio during the period. The percentage of the
portfolio composed of Commercial Installment Loans decreased 31.8% at June 30,
1997 to 25.2% at June 30, 1998. Although the Company continues to pursue a shift
in its portfolio mix towards higher yielding Commercial Installment Loans, this
shift slowed by higher than expected growth in the Medallion Loan portfolio
during the period.
Interest Expense. The Company's interest expense increased $2.4 million
or 49.4% from $4.9 million for the six months ended June 30, 1997 to $7.3
million for the six months ended June 30, 1998. The Company's average cost of
funds e.o.p. decreased 71 basis points from 7.30% or 141 basis points over the
LIBOR benchmark of 5.89% at June 30, 1997 to 6.59% or 86 basis points over the
LIBOR benchmark of 5.73% at June 30, 1998. The decrease in the average cost of
funds e.o.p. was caused by a reduction in the premium to LIBOR paid by the
Company combined with a 26 basis point increase in the LIBOR benchmark. Also
contributing to the decrease in cost of funds e.o.p. was the Company's issuance
of commercial paper, which at the present time is priced approximately 60 basis
points less than the Company's revolving credit facilities. Average total
borrowings increased $88.4 million or 74.5% from $131.7 million for the six
months ended June 30, 1997, which produced an interest expense of $4.9 million
at a weighted average interest rate 7.43% to $207.2 million for the six months
ended June 30, 1998 which produced an interest expense of $7.3 million at a
weighted average interest rate of 7.06%. The weighted average interest rates
include commitment fees and amortization of premiums on existing interest rate
cap agreements as a reflection of total cost of funds borrowed. The percentage
of the Company's short-term LIBOR based secured indebtedness which includes
secured commercial paper increased as a percentage of total indebtedness from
58.1% at June 30, 1997 to 80.4% at June 30, 1998.
Net Interest Income. Net interest income increased $3.6 million or
53.0% from $6.7 million for the six months ended June 30, 1997 to $10.3 million
for the six months ended June 30, 1998. Net interest income reflects the
positive impact of the portfolio growth during the six months ended June 30,
1998 coupled with a increase in the spread between average yield and average
cost of funds. The average spread between the average yield on the portfolio and
the average cost of funds increased 10 basis points or 3.2% from 3.13% for the
six-month period ended June 30, 1997 to 3.23% for the six-month period ended
June 30, 1998.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $1,981,000 or 199.9% from $991,000 for the six months ended June 30,
1997 to $2,972,000 for the six months ended June 30, 1998. Display rental costs
increased $655,000 or 157.2% from $416,000 for the six months ended June 30,
1997 to $1,071,000 for the six months ended June 30, 1998. This resulted in a
gross margin of approximately $575,000 or 58.0% of advertising revenue for the
six months ended June 30, 1997 compared to $1,901,000 or 64.0% for the six
months ended June 30, 1998. The significant increase in advertising revenue and
display rental cost is directly related to the increase in Displays owned by
Media. The number of Displays
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owned by Media increased 1,890 or 94.5% from 2,000 at June 30, 1997 to 3,890 at
June 30, 1998. Operating costs increased $767,000 or 141.5% from $542,000 for
the six months ended June 30, 1997 to $1,309,000 for the six months ended June
30, 1998. The increase in operating costs is a reflection of the expansion of
the Media operations. Income tax expense amounted to $250,000 for the six months
ended June 30, 1998. Media generated net income of $33,000 for the six month
period ended June 30, 1997 compared to net income of $342,000 for the six month
period ended June 30, 1998. The increase in net income is primarily the result
of increases in the number of Displays owned and occupancy rates. Display
occupancy increased from 65.5% for the six months ended June 30, 1997 to 100%
for the six months ended June 30, 1998. Net income is recorded as equity in
earnings or losses of unconsolidated subsidiary on the Company's statement of
operations as a result of increases in the number of Displays owned and
occupancy rates.
Gain on sale of loans. The Company experienced a gain on the sale of
the guaranteed portion of SBA 7a loans in the amount of $1.2 million on loans
sold amounting to $ 12.1 million of the $18.9 million available during the six
months ended June 30, 1998. There were no sales during the six months June 30,
1997. The Company accounts for gains on sale of loans in accordance with SFAS
No. 125 (Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities) and SOP 88-5 11. Because of its limited
experience with this portfolio, the Company has assumed a 15% discount rate and
a 15% prepayment speed in calculating of the gains and excess servicing assets.
Management will continue to review industry data as well as its experience with
the portfolio and will adjust discount rates and prepayment speeds, if deemed
appropriate.
Other Income. The Company's other income increased $151,000 or 34.4%
from $438,000 for the six months ended June 30, 1997 to $589,000 for the six
months ended June 30, 1998. 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's non-interest expenses increased
$4.2 million or 153.0% from $2.7 million for the six months ended June 30, 1997
to $6.9 million for the six months ended June 30, 1998. Included in non-interest
expenses for the six months ended June 30, 1998 are $1.5 million of expenses
related to the merger with Medallion Capital. Exclusive of these expenses,
non-interest expenses increased $2.7 million or 98.1% from $2.7 million for the
six months ended June 30, 1997 to $5.4 million for the six months ended June 30,
1998. Other operating expenses increased $934,000 or 85.8% from $1,088,000 for
the six months ended June 30, 1997 to $2,021,000 for the six months ended June
30, 1998. Salaries and benefits increased $1.7 million or 171.2% from $1.0
million for the six months ended June 30, 1997 to $2.8 million for the six
months ended June 30, 1998. Professional fees decreased $11,000 or 3.6% from
$308,000 for the six months ended June 30, 1997 to $297,000 for the six months
ended June 30, 1998. Investment advisory fees increased $3,000 from $114,000 for
the six months ended June 30, 1997 to $117,000 for the six months ended June 30,
1998. The operating expense ratio is computed as non-interest expenses divided
by average assets excluding the merger related expenses. The operating expense
ratio increased to 2.9% for the six-month period ended June 30, 1998 from 2.3%
for the six-month period ended June 30, 1997, on an annualized basis. The
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significant increase in other operating expenses and salary expense is
principally the result of the acquisition of certain assets and operations of
Business Lenders LLC, which added 50 full time employees and the related
overhead of seven satellite offices principally around the eastern part of the
country, to the Company's non-interest expense. The additional staff and lending
offices should help to provide additional loan growth for the Company.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill was $210,000 for the six months ended June 30, 1997 and
$240,000 for the six months ended June 30, 1998, and relates to $6.5 million of
goodwill generated in the acquisitions of Edwards and TCC. The increase in
amortization of goodwill is primarily related to the purchases of assets of VGI,
VGII and Venture Opportunities Corp. The goodwill resulting from these
acquisitions amounted to $1,545,000. The acquisition of Business Lenders LLC
resulted in the addition of $200,000 of goodwill. 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 Investment Income. Net investment income increased $1.0 million or
21.1% from $4.8 million for the six-month period ended June 30, 1997 to $5.9
million for the six months ended June 30, 1998. Exclusive of the merger related
expenses of $1.5 million, net investment income increased $2.5 million or 52.1%
from $4.8 million for the six months period ended June 30, 1997 to $7.4 million
for the six months ended June 30, 1998. The increase was attributable to the
positive impact of portfolio growth coupled with an increase in the spread
between average yield and average cost of funds. Also included in the increase
for the six month period ended June 30, 1998 was a realized gain of
approximately $1.0 million from the sale of common and preferred stock warrants
in connection with the repayment of certain loans compared to net realized gains
after taxes of $872,000 for the six month period ended June 30, 1997.
Change in Net Unrealized Depreciation/Appreciation. The change in net
unrealized appreciation increased $348,000 from a depreciation of $126,000 for
the six months ended June 30, 1997 to an appreciation $222,000 for the six
months ended June 30, 1998. The increase was the result of the increase in the
value of equity investments that the Company owns.
Net Realized Gain/Loss on Investments. The Company had an increase in
realized net gain on investments of $131,000 from net realized gains after taxes
of $872,000 for the six months ended June 30, 1997 to $1,003,000 for the six
months ended June 30, 1998. The increase in realized gains was the result of the
sale of common and preferred stock warrants in connection with the repayment of
several loans.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations increased $1.6 million or 28.0% from $5.6
million for the six months ended June 30, 1997 to $7.2 million for the six
months ended June 30, 1998. Exclusive of the merger related expenses $1.5
million, net investment income increased $3.1 million or 55.4% from $5.6 million
for the six months period ended June 30, 1997 to $8.7 million for the six months
ended June 30,
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<PAGE>
1998. The increase was attributable to the positive impact of portfolio growth
coupled with an increase in the spread between average yield and average cost of
funds. Also included in the increase was a realized gain of approximately $1.0
million from the sale of common and preferred stock warrants in connection with
the repayment of certain loans compared to net realized gains of after tax of
$874,000. Return on assets and return on equity for the six months ended June
30, 1998, on an annualized basis, were 4.7% and 11.5%, respectively, compared to
4.7% and 10.0% for the six months ended June 30, 1997.
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, secured commercial paper 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 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. The Company 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
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<PAGE>
variable-rate debt against increases in interest rates and by incurring fixed-
rate debt consisting primarily of subordinated SBA debentures. MFC has entered
into interest rate cap agreements to limit the Company's LIBO interest rate
exposure on MFC's revolving credit facility as summarized below:
LIBO EFFECTIVE MATURITY
AMOUNT RATE DATE DATE
------ ---- ---- ----
$10,000,000 7.0% 5/13/97 5/13/99
$20,000,000 7.0% 5/13/98 11/13/99
$20,000,000 6.5% 4/7/98 9/30/99
$20,000,000 7.0% 9/30/99 3/30/01
Total premiums 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 SBA debentures. The Company currently has outstanding SBA
debentures in the principal amount of $41.6 million with a weighted average rate
of interest of 7.32%. At June 30, 1998, these debentures constituted 17.1% of
the Company's total 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,
secured commercial paper, fixed rate, long-term 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, 1998, 52.7% of the Company's $236.8 million of debt
consisted of bank debt, substantially all of which was at variable effective
rates of interest with a weighted average rate of 6.60% or 190 basis points
below the Prime Rate, 29.8% or $70.5 million consisted of short-term commercial
paper at a weighted average interest rate of 6.16% and 17.6% or $41.6 million
consisted of SBA debentures with fixed rates of interest with a weighted average
rate of 7.32%. 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 MFC and Medallion
Capital which are already subject to certain 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 $32.8
million of debt was available at June 30, 1998 at variable effective rates of
interest averaging below the Prime Rate under the Company's $228.0 million bank
credit facilities.
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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, 1998.
<TABLE>
<CAPTION>
MEDALLION
FINANCIAL MFC EDWARDS TCC BLLC CDI TOTAL
--------- --- ------- --- ---- --- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 77 $ 1,736 $ 552 $ 1,387 $ 81 $ 2,594 $6,427
Revolving lines of credit 25,000 195,000 8,000 -- -- -- 228,000
Amounts available 500 30,703(a) 1,600 -- -- -- 32,803(a)
Amounts outstanding 24,500 93,800 6.400 -- -- -- 124,700
Average interest rate 6.66% 6.56% 6.96% -- -- -- 6.60%
Maturity 7/98(b) 6/99 7/98 -- -- -- 7/98-6/99
Commercial paper
Amounts outstanding -- 70,497 -- -- -- -- 70,497
Average interest rate -- 6.16% -- -- -- -- 6.16%
Maturity -- 6/99 -- -- -- -- 6/99
SBA debentures -- 6,200 19,250 5,640 -- 10,500 41,590
Average interest rate -- 6.27% 7.58% 8.00% -- 7.08% 7.32%
Maturity -- 9/00-9/05 9/02-9/04 6/02 -- 3/06-6/07 9/00-9/07
Total cash and remaining amounts
available under credit facilities 577 32,439 2,152 1,387 81 2,594 39,230
Total debt outstanding $24,500 $170,497 $25,250 $5,640 $ - $ 10,500 $ 236,787
</TABLE>
(a) Commercial paper outstanding is deducted from revolving credit lines
available as the line of credit acts as a liquidity facility for the
commercial paper.
(b) On July 31, 1998, the Company entered into a $57.5 million revolving credit
facility maturing on July 30, 2000. This facility replaced the line of
credit maturing on July 31, 1998 for Medallion Financial Corp.
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.
Media funds its operations through internal cash flow and inter-company
debt. Media is not a RIC and, therefore, is able to retain earnings to finance
growth.
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.
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<PAGE>
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.
Risk Relating to Integration of CDI and Medallion. The realization of
certain benefits anticipated as a result of the acquisition of Medallion
Capital will depend in part on the integration of Medallion Capital's investment
portfolio and specialty finance business with the Company and the successful
inclusion of Medallion Capital's investment portfolio in the Company's financing
operations. There can be no assurance that Medallion Capital's business can be
operated profitably or integrated successfully into the Company's operations.
Such effects could have a material adverse effect on the financial results of
the Company.
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.
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.
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<PAGE>
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, approximately
47% of Media's taxicab rooftop advertising revenue is derived from tobacco
products advertising. Various federal, state and local government agencies,
including the U.S. Food and Drug Administration (the "FDA") have from, time to
time, proposed regulations restricting the sale and advertising of cigarette and
smokeless tobacco products. Additionally, various tobacco companies have
voluntarily proposed eliminating outdoor tobacco advertising in exchange for
immunity from class action suits. Accordingly, such regulations or voluntary
restrictions could have an adverse effect upon the taxicab rooftop advertising
business of the Company. The Company believes, however, that it could replace
some of the revenue which may be lost due to the loss of tobacco taxicab rooftop
advertising.
Year 2000. The Company is addressing the Year 2000 problem, which
concerns the inability of systems, primarily computer software programs, to
properly recognize and process date sensitive information relating to the year
2000 and beyond. The Company, in the ordinary course of business, has for
several years had several information system improvement initiatives underway.
These initiatives include the installation of new loan servicing software.
Management believes that such initiatives will adequately address the Year 2000
problem, although there can be no assurance in this regard. Costs related to new
information systems will be capitalized and amortized over their useful lives.
Management does not believe that the other costs associated with addressing the
Year 2000 problem will be material. The Company will continue to address the
Year 2000 issue in connection with its future acquisitions. The ability of third
parties with which the Company transacts business to adequately address their
Year 2000 issues is outside of the Company's control. Failure of such third
parties or the Company to adequately address their respective Year 2000 issues
could have a material adverse effect on the Company's financial condition or
results of operations.
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<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 June 11, 1998 (the
"Annual Meeting").
The Company's stockholders were asked to take the following actions at the
meeting:
(1) Elect three Class II Directors to serve until the 2001 annual meeting of
stockholders or until their successors shall otherwise be elected (the "Board
Proposal");
(2) Amend the Company's Restated Certificate of Incorporation to increase the
number of authorized shares of common stock therein (the "Charter Proposal");
(3) Approve certain amendments to the Company's 1996 Stock Option Plan to
increase the number of authorized shares of common stock reserved for issuance
thereunder (the "Incentive Plan Proposal");
(4) Approve the renewal of the sub-advisory agreement between the Company and
FMC Advisers, Inc. (the "Advisory Contract Proposal"); and
(5) Ratify the Board of Directors' selection of Arthur Andersen LLP to serve
as the Company's independent auditors for the fiscal year ending December 31,
1998 (the "Auditors Proposal").
With respect to the Board Proposal, the three individuals nominated for
director were elected by the affirmative vote of a majority of shares of
common stock present at the Annual Meeting.
The nominees and the votes received by each are as follows:
Votes cast for Withheld
-------------------------------------------------
Mario M. Cuomo 11,215,210 23,185
Frederick S. Hammer 11,215,210 23,185
Andrew M. Murstein 11,215,210 23,185
The Charter Proposal, Incentive Plan Proposal, Advisory Contract Proposal and
Auditors Proposal were also approved by affirmative vote of a majority of
shares of common stock present at the Annual Meeting. Each of the proposals
received the following votes:
Votes cast for Against Abstentions
------------------------------------------------
Charter Proposal 8,701,755 1,685,375 851,162
Incentive Plan Proposal 10,919,794 275,559 30,810
Advisory Contract Proposal 9,911,598 1,581,541 52,562
Auditors Proposal 11,204,803 6,154 27,430
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of March 6, 1998, by and among
Medallion Financial Corp., CD Merger Corp. and Capital Dimensions, Inc.
(Exhibits and Schedules thereto omitted). Filed herewith.
3.1 Medallion Financial Corp. Restated Certificate of Incorporation. Filed
as Exhibit 3.1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1996 and incorporated by reference
herein.
3.1.1 Certificate of Amendment of Medallion Financial Corp. Restated
Certificate of Incorporation. Filed herewith.
3.2 Medallion Financial Corp. Restated By-Laws. Filed as Exhibit b to the
Company's Registration Statement on Form K-2 (File No. 333-1670) and
incorporated by reference herein.
4.1 Debenture due April 1, 1997 in the amount of $1,500,000 issued by
Edwards Capital Company and payable to Chemical Bank as Trustee under
the Trust Agreement dated January 15, 1987 among the Trustee, the U.S.
Small Business Administration and SBIC Funding Corporation (the "Trust
Agreement"). Filed as Exhibit f.2 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
4.2 Debenture due September 1, 2002 in the amount of $3,500,000 issued by
Edwards Capital Company and payable to Chemical Bank as Trustee under
the Amended and Restated Trust Agreement dated March 1, 1990 among the
Trustee, the U.S. Small Business Administration and SBIC Funding
Corporation (the "Amended Trust Agreement"). Filed as Exhibit f.4 to
the Company's Registration Statement on Form N-2 (File No.
333-1670) and incorporated by reference herein.
4.3 Debenture due September 1, 2002 in the amount of $6,050,000 issued by
Edwards Capital Company and payable to Chemical Bank under the Amended
Trust Agreement. Filed as Exhibit f.5 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
4.4 Debenture due June 1, 2004 in the amount of $4,600,000 issued by
Edwards Capital Company and payable to Chemical Bank under the Amended
Trust Agreement. Filed as Exhibit f.6 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
4.5 Debenture due September 1, 2004 in the amount of $5,100,000 issued by
Edwards Capital Company and payable to Chemical Bank under the Amended
Trust Agreement. Filed as Exhibit f.7 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
-32-
<PAGE>
4.6 Letter Agreement, dated September 8, 1992, between the U.S. Small
Business Administration and Edwards Capital Company regarding limit on
incurrence of senior indebtedness, as amended on January 17, 1996.
Filed as Exhibit f.8 to the Company's Registration Statement on Form
N-2 (File No. 333-1670) and incorporated by reference herein. Letter
dated September 19, 1996 from the U.S. Small Business Administration to
Edwards Capital Corp. amending such Letter Agreement was filed as
Exhibit 4.7 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1996 and is incorporated by reference
herein.
4.7 Debenture due June 1, 2002 in the amount of $5,640,000 issued by
Transportation Capital Corp: and payable to Chemical Bank under the
Amended Trust Agreement. Filed as Exhibit f.10 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and incorporated
by reference herein.
10.1 Medallion Financial Corp. Amended and Restated 1996 Stock Option Plan.
Filed herewith.
27 Medallion Financial Corp. Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K.
There were no reports on Form 8-K were filed during the fiscal
quarter ended June 30, 1998.
-33-
<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 14, 1998 By: /s/ Daniel F. Baker
----------------------
Daniel F. Baker
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
-34-
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
DATED AS OF MARCH 6, 1998
BY AND AMONG
MEDALLION FINANCIAL CORP.,
CD MERGER CORP.,
AND
CAPITAL DIMENSIONS, INC.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. THE MERGER; EFFECT OF MERGER..................................... 1
Section 1.1. The Merger.................................................... 1
Section 1.2. Effective Time of the Merger.................................. 2
Section 1.3. Effects of Merger............................................. 2
ARTICLE II. THE SURVIVING CORPORATION....................................... 2
Section 2.1. Articles of Incorporation..................................... 2
Section 2.2. By-Laws....................................................... 2
Section 2.3. Officers and Directors........................................ 2
ARTICLE III. CONVERSION OF SHARES AND EXCHANGE OF STOCK OPTIONS............. 3
Section 3.1. Conversion of Shares.......................................... 3
Section 3.2. Appraisal Rights.............................................. 3
Section 3.3. Holdback Shares............................................... 4
Section 3.4. Parent to Make Certificates Available......................... 5
Section 3.5. Dividends; Transfer Taxes..................................... 6
Section 3.6. No Fractional Securities...................................... 6
Section 3.7. Assumption and Conversion of Company Stock Options............ 6
Section 3.8. Closing of Company Transfer Books............................. 8
Section 3.9. Stockholder Approval.......................................... 8
Section 3.10. Tax Treatment................................................ 8
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... 8
Section 4.1. Execution and Delivery........................................ 8
Section 4.2. Consents and Approvals........................................ 9
Section 4.3. No Breach..................................................... 9
Section 4.4. Organization, Standing and Authority.......................... 10
Section 4.5. Capitalization of the Company................................. 10
Section 4.6. Options and Other Stock Rights................................ 11
Section 4.7. Subsidiaries.................................................. 11
Section 4.8. Corporate Records............................................. 12
Section 4.9. Information in Disclosure Documents........................... 12
Section 4.10. SEC Documents; Financial Statements.......................... 12
Section 4.11. Liabilities.................................................. 13
Section 4.12. No Material Adverse Change................................... 14
Section 4.13. Compliance with Laws......................................... 14
Section 4.14. Permits...................................................... 14
Section 4.15. Actions and Proceedings...................................... 14
Section 4.16. Contracts and Other Agreements............................... 14
Section 4.17. Investment Portfolio......................................... 18
Section 4.18. Real Property................................................ 18
Section 4.19. Intellectual Property........................................ 20
Section 4.20. Receivables.................................................. 20
Section 4.21. Banking...................................................... 20
Section 4.22. Liens........................................................ 21
Section 4.23. Employee Benefit Plans....................................... 22
Section 4.24. Employee Relations
i
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Section 4.25. Insurance.................................................... 23
Section 4.26. Officers, Directors, Employees, Consultants.................. 23
Section 4.27. Transactions with Directors, Officers and Affiliates......... 24
Section 4.28. Operations of the Company.................................... 24
Section 4.29. Brokerage.................................................... 26
Section 4.30. Taxes........................................................ 26
Section 4.31. Execution and Validity of Employment Agreements.............. 27
Section 4.32. Environmental Laws........................................... 28
Section 4.33. Accounting Matters........................................... 29
Section 4.34. Company Action............................................... 29
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB................. 29
Section 5.1. Execution and Delivery........................................ 30
Section 5.2. Consents and Approvals........................................ 30
Section 5.3. No Breach..................................................... 30
Section 5.4. SEC Documents; Financial Statements........................... 31
Section 5.5. Shares of Parent Common Stock................................. 32
Section 5.6. Organization, Standing and Authority of Parent and Sub........ 32
Section 5.7. Capitalization................................................ 32
Section 5.8. Brokerage..................................................... 33
Section 5.9. Information in Disclosure Documents........................... 33
Section 5.10. No Material Adverse Change................................... 33
Section 5.11. Sub Action................................................... 34
ARTICLE VI. COVENANTS AND AGREEMENTS........................................ 34
Section 6.1. Conduct of Business........................................... 34
Section 6.2. Litigation Involving the Company.............................. 35
Section 6.3. Continued Effectiveness of Representations and Warranties of the
Parties................................................... 35
Section 6.4. Corporate Examinations and Investigations..................... 36
Section 6.5. Preparation of Company Restated Financial Statements.......... 37
Section 6.6. Registration Statement/Proxy Statement........................ 37
Section 6.7. Compliance with the Securities Act............................ 38
Section 6.8. Nasdaq Listing................................................ 38
Section 6.9. Acquisition Proposals......................................... 38
Section 6.10. No Shopping.................................................. 39
Section 6.11. Parent and Sub Approvals..................................... 39
Section 6.12. Company Approvals............................................ 39
Section 6.13. Distribution................................................. 39
Section 6.14. Expenses..................................................... 40
Section 6.15. Further Assurances........................................... 40
Section 6.16. Hart-Scott-Rodino............................................ 40
Section 6.17. SBA Approval................................................. 41
Section 6.18. Execution of Employment Agreements........................... 41
Section 6.19. Board Attendance Right....................................... 41
Section 6.20. Grant of Parent Stock Options................................ 41
Section 6.21. Employee Matters............................................. 41
Section 6.22. Compliance with Legal Requirements........................... 42
Section 6.23. Indemnification of Company Officers and Directors............ 42
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<PAGE>
ARTICLE VII. CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER....................................................... 42
Section 7.1. Company Stockholder Approval.................................. 42
Section 7.2. Listing of Shares............................................. 42
Section 7.3. Hart-Scott-Rodino............................................. 43
Section 7.4. Effectiveness of Registration Statement....................... 43
Section 7.5. SBA Approval.................................................. 43
Section 7.6. Litigation.................................................... 43
ARTICLE VIII. CONDITIONS PRECEDENT TO THE OBLIGATION OF PARENT AND SUB TO
EFFECT THE MERGER............................................ 43
Section 8.1. Representations and Covenants................................. 43
Section 8.2. Absence of Material Adverse Change............................ 44
Section 8.3. Receipt of Agreements......................................... 44
Section 8.4. Accountant's Letters.......................................... 44
Section 8.5. Dissenting Shares............................................. 45
Section 8.6. Opinions of Counsel to the Company............................ 45
Section 8.7. Tax Opinion................................................... 45
Section 8.8. Termination of Management Agreement........................... 45
Section 8.9. Amendment of Agreements With Holders of Company Stock Options. 45
Section 8.10. Closing Conditions........................................... 45
ARTICLE IX. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO EFFECT
THE MERGER.................................................. 45
Section 9.1. Representations and Covenants................................. 45
Section 9.2. Absence of Material Adverse Change............................ 46
Section 9.3. Receipt of Agreements......................................... 46
Section 9.4. Accountant's Letter........................................... 46
Section 9.5. Opinion of Counsel to Parent.................................. 46
Section 9.6. Tax Opinion................................................... 46
Section 9.7. Closing Conditions............................................ 47
ARTICLE X. CLOSING.......................................................... 47
ARTICLE XI. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION..... 47
Section 11.1. Survival of Representations and Warranties................... 47
Section 11.2. Indemnification by Company Stockholders...................... 47
ARTICLE XII. TERMINATION OF AGREEMENT....................................... 48
Section 12.1. Termination.................................................. 48
Section 12.2. Effect of Termination........................................ 49
Section 12.3. Termination Expenses......................................... 49
ARTICLE XIII. DEFINITIONS................................................... 50
Section 13.1. Definitions.................................................. 50
ARTICLE XIV. MISCELLANEOUS.................................................. 56
Section 14.1. Publicity.................................................... 56
Section 14.2. Notices...................................................... 56
Section 14.3. Entire Agreement............................................. 57
iii
<PAGE>
Section 14.4. Waivers and Amendments; Non Contractual Remedies;
Preservation of Remedies; Liability.......................... 57
Section 14.5. Governing Law................................................ 58
Section 14.6. Binding Effect; No Assignment................................ 58
Section 14.7. Third Party Beneficiaries.................................... 58
Section 14.8. Counterparts................................................. 58
Section 14.9. Exhibits and Schedules....................................... 58
Section 14.10. Headings.................................................... 59
Section 14.11. Submission to Jurisdiction; Venue........................... 59
Section 14.12. Specific Performance......................................... 59
Section 14.13. Severability................................................ 59
iv
<PAGE>
Exhibits
- --------
Exhibit A Articles of Incorporation of the Surviving Corporation
Exhibit B By-laws of the Surviving Corporation
Exhibit C Form of Holdback Escrow Agreement
Exhibit D Forms of Employment Agreements Entered into by each of the Named
Executives
Exhibit E Form of Opinion of Lindquist & Vennum P.L.L.P. as Counsel to the
Company
Exhibit F Form of Opinion of Willkie Farr & Gallagher as Counsel to Parent and
Sub
Exhibit G Form of Affiliate Letter
Company Disclosure Schedule
- ---------------------------
Section Description
- ------- -----------
4.4 Foreign Qualification; Organizational Documents
4.5 Stockholders; Option Holders
4.7 Subsidiary Qualification; Subsidiary Organizational Documents; Investments
4.12 No Material Adverse Change
4.13 Compliance with Laws
4.15 Actions and Proceedings
4.16 Contracts and Other Agreements
4.17 Loan Portfolio
4.18 Real Property
4.21 Bank Accounts
4.23 Employee Benefit Plans
4.25 Insurance
4.26 Officers, Directors, Employees, Consultants
4.27 Transactions with Directors, Officers and Affiliates
4.28 Subsequent Events
4.30 Tax Jurisdictions
Parent Disclosure Schedule
- --------------------------
Section Description
- ------- -----------
5.6 Parent and Sub Organizational Documents
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
March 6, 1998, is made by and among Medallion Financial Corp., a Delaware
corporation ("Parent"), CD Merger Corp., a Delaware corporation and a wholly
owned subsidiary of Parent ("Sub"), and Capital Dimensions, Inc., a Minnesota
corporation (the "Company"). Certain terms used in this Agreement are defined in
Article XIII.
W I T N E S S E T H:
WHEREAS, Parent and Sub desire to effect a business combination by
means of the merger of Sub with and into the Company;
WHEREAS, the Board of Directors of Parent and Sub and the
stockholder of Sub and the Board of Directors of the Company have approved the
merger of Sub with and into the Company (the "Merger"), upon the terms and
subject to the conditions set forth herein;
WHEREAS, for federal income tax purposes, it is intended that the
Merger qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger
shall be accounted for as a "pooling of interests".
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I.
The Merger; Effect of Merger
Section 1.1. The Merger. Upon the terms and subject to the
conditions of this Agreement and in accordance with the applicable provisions of
the Delaware General Corporation Law, as amended, and any rules and regulations
thereunder (the "Delaware Corporation Law") and the Minnesota Business
Corporation Act, as amended, and any rules and regulations thereunder (the
"Minnesota Corporation Law"), Sub shall be merged with and into the Company and
the separate existence of Sub shall thereupon cease. The name of the Company, as
the surviving corporation in the Merger (the "Surviving Corporation"), shall by
virtue of the Merger be changed to such name as Parent, in its sole discretion,
may choose and the Articles of Incorporation of the Company, as the Surviving
Corporation, shall be amended so as to be substantially in the form attached
hereto as Exhibit A.
<PAGE>
Section 1.2. Effective Time of the Merger. The Merger shall become
effective at such time as a properly executed Certificate of Merger or Articles
of Merger is duly filed with the Secretaries of State of Delaware and Minnesota,
which filing shall be made as soon as practicable following fulfillment or
waiver of the conditions set forth in Articles VII, VIII and IX hereof or such
later time as is specified in such filing (the "Effective Time").
Section 1.3. Effects of Merger.
(a) The Merger shall have the effects set forth in Section 259 of
the Delaware Corporation Law and Section 302A.641 of the Minnesota Corporation
Law.
(b) By virtue of the approval of the Merger by the holders of
Company Common Stock, the holders of all Company Common Stock immediately prior
to the Effective Time (collectively, the "Company Stockholders" or individually,
a "Company Stockholder"), whether or not such stockholder voted in favor of the
Merger, shall be deemed to have approved the terms and conditions of this
Agreement, including, but not limited to, Section 3.3 and Article XI of this
Agreement, and the terms of the Holdback Escrow Agreement, which provide for the
escrow of the Escrow Holdback Shares, the appointment of the Indemnification
Representative (as defined in the Holdback Escrow Agreement) and the
indemnification obligations of the Company Stockholders thereunder.
ARTICLE II.
The Surviving Corporation
Section 2.1. Articles of Incorporation. The Articles of
Incorporation of the Surviving Corporation shall be amended so as to be
substantially in the form attached hereto as Exhibit A after the Effective Time,
and thereafter may be amended in accordance with their terms and as provided by
the Minnesota Corporation Law, except as provided by Section 6.23 hereof.
Section 2.2. By-Laws. After the Effective Time, the by-laws of the
Surviving Corporation shall be amended so as to be substantially in the form
attached as Exhibit B, and thereafter may be amended in accordance with their
terms and as provided by the Minnesota Corporation Law.
Section 2.3. Officers and Directors. The officers of the Company and
the directors of Sub immediately prior to the Effective Time shall be the
officers and directors of the Surviving Corporation after the Effective Time, in
each case until their respective successors are duly elected and qualified.
2
<PAGE>
ARTICLE III.
Conversion of Shares and
Exchange of Stock Options
Section 3.1. Conversion of Shares.
(a) Subject to Sections 3.2 and 3.3 hereof, at the Effective Time,
by virtue of the Merger and without any action on the part of any Company
Stockholder:
(1) Conversion of Company Common Stock. Each outstanding share of
Company Common Stock shall be converted into that number of fully paid and
nonassessable shares of Parent Common Stock (or fraction thereof) equal to the
quotient obtained by dividing (to five places after the decimal point) (x)
$15.50 by (y) the average of the closing sale prices per share of Parent Common
Stock on the Nasdaq National Market for the 20 trading days which immediately
precede the Business Day immediately preceding the Closing Date (the
"Determination Period"); provided, however, that if such average exceeds $26.00,
the divisor shall be $26.00, and if such average is less than $23.50, the
divisor shall be $23.50. (such quotient, the "Exchange Ratio"). If at any time
after the commencement of the Determination Period, but prior to the Effective
Time, the outstanding shares of Parent Common Stock shall be changed into a
different number of shares or a different class by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares or
readjustment, or if a stock dividend thereon shall be declared with a record
date within such period, the Exchange Ratio shall be correspondingly adjusted.
(2) Cancellation of Company Treasury Stock. All shares of Company
Common Stock which are held in the treasury of the Company shall be canceled and
shall cease to exist.
(b) Each issued and outstanding share of capital stock of Sub
shall be converted into one validly issued, fully paid and nonassessable share
of common stock, par value $.01 per share, of the Surviving Corporation.
Section 3.2. Appraisal Rights. Notwithstanding anything in this
Agreement to the contrary, but only in the circumstances and to the extent
provided by the Minnesota Corporation Law, shares of Company Common Stock that
are outstanding immediately prior to the Effective Time and that are held by
Company Stockholders who were entitled to but did not vote such shares in favor
of the Merger and who shall have properly and timely delivered to the Company a
written demand for appraisal of their shares of Company Common Stock in
accordance with Sections 302A.471 and 302A.473 of the Minnesota Corporation Law
("Dissenting Shares") shall not be converted into the right to receive, or be
exchangeable for, shares of Parent Common Stock. Instead, the holders thereof
shall be entitled to payment
3
<PAGE>
of the fair value of such shares in accordance with the provisions of Sections
302A.471 and 302A.473 of the Minnesota Corporation Law; provided, however, that
(i) if any holder of Dissenting Shares shall subsequently withdraw his demand
for payment of the fair value of such Dissenting Shares or (ii) if any holder
fails to establish and perfect his entitlement to the relief provided in
Sections 302A.471 and 302A.473 of the Minnesota Corporation Law, the rights and
obligations of such holder to receive such fair value shall terminate, and such
Dissenting Shares shall thereupon be deemed to have been converted into the
right to receive, and to have become exchangeable for, as of the Effective Time,
shares of Parent Common Stock in accordance with Section 3.1(a) hereof. The
Company shall give Parent prompt notice of any demands received by the Company
for appraisal of Dissenting Shares, and Parent shall have the right to
participate in all negotiations and proceedings with respect to such demands.
Prior to the Effective Time, the Company will not make any payment with respect
to, or settle or offer to settle, the demands of any Dissenting Shares without
the written consent of Parent. The Company shall comply with the notice
provisions of Section 302A.473 of the Minnesota Corporation Law.
Section 3.3. Holdback Shares.
(a) At the Effective Time, shares of Parent Common Stock
constituting ten percent (10%) of the aggregate number of shares of Parent
Common Stock into which each Company Stockholder's certificates of Company
Common Stock are convertible in the Merger pursuant to Section 3.1 hereof
(rounded down to the nearest whole number) (the "Escrow Holdback Shares") shall
be deposited in escrow with an escrow agent mutually agreeable to Parent and the
Company appointed prior to the Closing (the "Holdback Escrow Agent"), to be held
and administered in accordance with the terms and conditions of a Holdback
Escrow Agreement, in substantially the form attached hereto as Exhibit C (the
"Holdback Escrow Agreement"), against which Escrow Holdback Shares Parent or Sub
shall be entitled, in accordance with the terms of the Holdback Escrow
Agreement, to recover (i) Damages (as defined in the Holdback Escrow Agreement)
that may be suffered by Parent or Sub and that are indemnifiable under Section
11.2 (an "Escrow Claim Event") and (ii) any Cash Distributions (as defined in
the Holdback Escrow Agreement).
(b) Escrow Claim Events shall be made, and may be disputed, in
accordance with the terms and conditions of the Holdback Escrow Agreement. Upon
termination of the escrow, all shares of Parent Common Stock (and any cash)
remaining in escrow shall be released to the persons who immediately prior to
the Effective Time were holders of shares of Company Common Stock in accordance
with the terms of the Holdback Escrow Agreement.
4
<PAGE>
(c) Parent may, in its sole discretion, elect to waive the
provisions of this Section 3.3 at any time prior to the Effective Time.
Section 3.4. Parent to Make Certificates Available.
(a) Prior to the Closing, Parent shall select a person or persons to
act as exchange agent for the Merger (the "Exchange Agent"), which person or
persons shall be reasonably acceptable to the Company. On the Closing Date,
Parent shall deliver to the Exchange Agent, in trust for the benefit of the
Company Stockholders (other than Company Stockholders who hold Dissenting
Shares), a stock certificate (issued in the name of the Exchange Agent or its
nominee) representing the Share Consideration (other than the Escrow Holdback
Shares). As soon as reasonably practicable after the Effective Time but in no
event more than five Business Days after the Effective Time, Parent shall cause
the Exchange Agent to send a notice and a letter of transmittal to each Company
Stockholder advising such holder of the effectiveness of the Merger and the
procedure for surrendering to the Exchange Agent for cancellation such holder's
certificates representing Company Common Stock ("Certificates"), in exchange for
the Share Consideration. Each Company Stockholder will be entitled to receive,
upon surrender to the Exchange Agent for cancellation of one or more
Certificates, certificates representing the number of shares of Parent Common
Stock into which such shares are converted in the Merger (less the number of the
shares of Parent Common Stock constituting the Escrow Holdback Shares), without
consideration of fractional shares as provided in Section 3.6. Parent Common
Stock into which Company Common Stock shall be converted in the Merger shall be
deemed to have been issued at the Effective Time (the "Share Consideration"). In
the event that any Company Stockholder's Certificates have been lost, stolen or
destroyed, such Company Stockholder will be entitled to receive the Share
Consideration only after providing an affidavit of loss and indemnity bond, in
form satisfactory to the Exchange Agent.
(b) Any Company Stockholder who has not exchanged his Certificates
for Parent Common Stock in accordance with subsection (a) within six months
after the Effective Time shall have no further claim upon the Exchange Agent,
and shall thereafter look only to Parent and the Surviving Corporation for
payment in respect of his shares of Company Common Stock. Until so surrendered,
Certificates shall represent solely the right to receive the Share
Consideration. If any Certificates entitled to payment pursuant to Section 3.1
shall not have been surrendered for such payment prior to such date on which any
payment in respect thereof would otherwise escheat to or become the property of
any Governmental Entity, the shares of Company Common Stock represented thereby
shall, to the extent permitted by applicable law, be deemed to be canceled and
no money or other property will be due to the holder thereof.
5
<PAGE>
Section 3.5. Dividends; Transfer Taxes. No Distributions that are
declared or made with respect to Parent Common Stock will be paid to persons
entitled to receive certificates representing Parent Common Stock pursuant to
this Agreement until such persons surrender their Certificates. Upon such
surrender, there shall be paid to the person in whose name the certificates
representing such Parent Common Stock shall be issued Distributions which shall
have become payable with respect to such Parent Common Stock in respect of a
record date after the Effective Time. In no event shall the person entitled to
receive such Distributions be entitled to receive interest on such
Distributions. In the event that any certificates for any shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it shall be a
condition of such exchange that the Certificate or Certificates so surrendered
shall be properly endorsed or be otherwise in proper form for transfer
(including signature guarantee) and that the person requesting such exchange
shall pay to the Exchange Agent any transfer or other taxes required by reason
of the issuance of certificates for such shares of Parent Common Stock in a name
other than that of the registered holder of the Certificate surrendered, or
shall establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable. Notwithstanding the foregoing, neither the Exchange
Agent nor any party hereto shall be liable to a holder of shares of Company
Common Stock for any shares of Parent Common Stock or dividends thereon
delivered to a public official pursuant to any applicable escheat laws.
Section 3.6. No Fractional Securities. Notwithstanding any other
provision of this Agreement, no certificates or scrip for shares of common stock
representing less than one share of Parent Common Stock shall be issued upon the
surrender for exchange of Certificates pursuant to this Article III and no
Distribution that is declared or made with respect to Parent Common Stock, stock
split or interest shall relate to any fractional security, and such fractional
interests shall not entitle the owner thereof to vote or to any rights of a
security holder. Each holder of shares of Company Common Stock exchanged
pursuant to the Merger who would otherwise have been entitled to receive a
fraction of a share of Parent Common Stock (after taking into account all
Certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to (x) such fractional part of a share of
Parent Common Stock multiplied by (y) $15.50.
Section 3.7. Assumption and Conversion of Company Stock Options.
(a) As soon as reasonably practicable after the Effective Time and
subject to the approval of the Company Stock Option Conversion by the holders of
Parent Common Stock, Parent and the Company shall take all action necessary to
cause each issued and outstanding Company Stock Option to be assumed by
6
<PAGE>
Parent and converted without any action on the part of the holder thereof into
an option (a "New Parent Stock Option") to purchase Parent Common Stock (which
shall be an incentive stock option, to the maximum extent permissible under
Sections 422 and 424 of the Code), exercisable for a number of shares of Parent
Common Stock based on the Exchange Ratio (rounded down to the nearest whole
share), with a proportional adjustment of the exercise price (rounded up to the
nearest whole cent) of the new option so that the excess of the aggregate fair
market value of the shares subject to each New Parent Stock Option immediately
after such conversion over the aggregate exercise price of such new option is
equivalent to the excess of the fair market value of the shares subject to the
Company Stock Option immediately before such conversion over the aggregate
exercise price of such Company Stock Option, as required by Section 424(a)(1) of
the Code (i.e., if the Exchange Ratio were $24.75, a Company Stock Option to
purchase 10,000 shares of Company Common Stock at an exercise price of $4.00 per
share would become a New Parent Stock Option to purchase 6,262 shares of Parent
Common Stock at an exercise price of $6.39 per share). The holders of New Parent
Stock Options will not be given any additional benefits which such holders did
not have under the Company Stock Options, as required by Section 424(a)(2) of
the Code.
(b) Parent shall take all action necessary, in accordance with
applicable law and its Certificate of Incorporation and By-Laws, to present a
proposal regarding the conversion of Company Stock Options into New Parent Stock
Options in accordance with the provisions of this Section 3.7 (the "Company
Stock Option Conversion") to the holders of Parent Common Stock for their
approval at Parent's 1998 annual meeting of stockholders (now scheduled for June
1998). The Board of Directors of Parent has approved, and will recommend that
the holders of Parent Common Stock approve, the Company Stock Option Conversion.
In the event that the Company Stock Option Conversion is not approved by the
holders of Parent Common Stock at Parent's 1998 annual meeting of stockholders,
Parent shall cause the Company Stock Options to be exchanged for shares of
Parent Common Stock equal to their fair market value, as determined by an
investment banking firm mutually satisfactory to Parent and the Company. Any
shares of Parent Common Stock so exchanged shall be valued at the Exchange
Ratio.
(c) The Company shall not amend or modify any provision of the
Company's 1997 Stock Option Plan or the terms of any Company Stock Options
granted thereunder. From the date hereof to the Effective Time, the Company (i)
shall make no further grants under the Company's 1997 Stock Option Plan,
including automatic grants to non-employee directors of the Company and (ii)
shall not alter the terms and conditions of any outstanding Company Stock
Options. As soon as reasonably practicable after approval of the Company Stock
Option Conversion by the holders of Parent Common Stock, Parent shall deliver a
letter to each holder of a Company Stock Option not exercised
7
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prior to the Effective Time evidencing Parent's assumption of such option and
the right of the option holder to purchase the number of shares of Parent Common
Stock as determined under this Section 3.7 and Section 3.1. After the Effective
Time and subject to the approval of the Company Stock Option Conversion, the
Company's 1997 Stock Option Plan shall be continued in effect pursuant to its
terms by Parent subject to amendment, modification or termination as provided
therein, except that the Company's 1997 Stock Option Plan as so continued shall
relate only to the issuance of Parent Common Stock pursuant to New Parent Stock
Options as provided in this Section 3.7.
Section 3.8. Closing of Company Transfer Books. Immediately prior to
the Effective Time, the Company Common Stock transfer books shall be closed and
no transfer of Company Common Stock shall thereafter be made.
Section 3.9. Stockholder Approval. The Company shall take all action
necessary, in accordance with applicable law and its Articles of Incorporation
and By-Laws, to convene a special meeting of the holders of Company Common Stock
(the "Company Meeting") as promptly as practicable for the purpose of
considering and taking action upon this Agreement. The Board of Directors of the
Company has approved the Merger and adopted this Agreement and recommended that
holders of Company Common Stock vote in favor of and approve the Merger and the
adoption of this Agreement at the Company Meeting.
Section 3.10. Tax Treatment. The Merger is intended to constitute a
reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, and
Parent and the Company shall not report the transaction on any tax return in a
manner or take any action inconsistent therewith.
ARTICLE IV.
Representations and Warranties of the Company
The Company represents and warrants to Parent and Sub that, except
as set forth in the disclosure schedule attached hereto (the "Company Disclosure
Schedule"), which Company Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
IV and may be amended from time to time pursuant to the provisions hereof:
Section 4.1. Execution and Delivery. The Company has the corporate
power and authority to enter into this Agreement and each agreement, document or
instrument contemplated hereby or to be executed in connection herewith to which
the Company is a party (the "Company Documents") and, subject to approval of
this Agreement by the holders of the Company Common Stock, to carry out its
obligations hereunder and thereunder. The execution, delivery and performance of
this Agreement and the Company
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Documents and the consummation of the transactions contemplated hereby and
thereby have been duly and validly authorized by the Company's Board of
Directors. This Agreement constitutes the valid and binding obligation of the
Company and the Company Documents, when executed and delivered, will constitute
the valid and binding obligations of the Company, in each case enforceable in
accordance with their respective terms, except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought. Except for the
approval of the holders of a majority of the outstanding shares of Company
Common Stock, no other corporate proceedings on the part of the Company are
necessary after the date of this Agreement to authorize this Agreement and the
Company Documents and the transactions contemplated hereby and thereby.
Section 4.2. Consents and Approvals. The execution and delivery by
the Company of this Agreement and the Company Documents, the performance by the
Company of its obligations hereunder and thereunder, and the consummation by the
Company of the transactions contemplated hereby and thereby, as the case may be,
do not require the Company to obtain any consent, approval or action of, or make
any filing or registration with, or give any notice to, any person or any
Governmental Entity, other than (i) in connection, or in compliance, with the
provisions of the H-S-R Act and the Exchange Act, which will be duly obtained or
made, as the case may be, on or prior to the Closing, and will be in full force
and effect on the Closing Date, (ii) in the case of the performance by the
Company of its obligations hereunder and under the Company Documents and the
consummation by the Company of the transactions contemplated hereby and by the
Company Documents, the approval of the holders of the Company Common Stock as
specified in Section 4.1, (iii) the approval of the United States Small Business
Administration (the "SBA") and (iv) the filing of the Certificate of Merger or
Articles of Merger with the Secretaries of State of Delaware and Minnesota.
Section 4.3. No Breach. The execution, delivery and performance by
the Company of this Agreement and the Company Documents and the consummation by
the Company of the transactions contemplated hereby and thereby in accordance
with the terms and conditions hereof and thereof will not (i) violate any
provision of the Articles of Incorporation or By-Laws of the Company; (ii)
violate, conflict with or result in the breach of any of the terms of, result in
any modification of the effect of, otherwise give any other contracting party
the right to terminate, or constitute (or with notice or lapse of time or both,
constitute) a default under, any contract or other agreement or instrument to
which the Company is a party or by or to which the assets or properties of the
Company may be bound or subject; (iii) violate any order, judgment, injunction,
award or decree of any Governmental Entity against, or binding upon, or any
agreement
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with, or condition imposed by, any Governmental Entity, binding upon the
Company, or upon the securities, assets or business of the Company; (iv) violate
any statute, law or regulation of any jurisdiction as such statute, law or
regulation relates to the Company, or to the securities, assets or business of
the Company; (v) result in the creation or imposition of any lien or other
encumbrance or the acceleration of any indebtedness or other obligation of the
Company; or (vi) result in the breach of any of the terms or conditions of,
constitute a default under, or otherwise cause a violation of, any Permit of the
Company; except in the case of (ii) through (vi) above, for violations,
conflicts, breaches, defaults, modifications, impairments, liens or other
encumbrances that would not, individually or in the aggregate, have a material
adverse effect on the business, properties, assets, condition (financial or
otherwise), liabilities, operations or prospects of the Company, or adversely
affect the consummation of the transactions contemplated hereby (a "Company
Material Adverse Effect").
Section 4.4. Organization, Standing and Authority. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Minnesota and has all requisite corporate power and
authority to own, lease and operate its assets, properties and business and to
carry on its business as now being conducted or currently proposed to be
conducted. The Company is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of such activities make
such qualification necessary, except where the failure to so qualify would not,
individually or in the aggregate, have a Company Material Adverse Effect. All
such jurisdictions are set forth on Section 4.4 of the Company Disclosure
Schedule. The copies of the Articles of Incorporation and By-Laws of the Company
included as part of Section 4.4 of the Company Disclosure Schedule constitute
accurate and complete copies of such organizational instruments and accurately
reflect all amendments thereto through the date hereof.
Section 4.5. Capitalization of the Company. The authorized capital
stock of the Company consists of 9,000,000 shares of Company Common Stock and
1,000,000 shares of Company Preferred Stock. As of the date of this Agreement
there were 1,725,438 shares of Company Common Stock and no shares of Company
Preferred Stock outstanding. As of the date hereof, there are no bonds,
debentures, notes or other indebtedness having the right to vote on any matters
on which the Company's stockholders may vote issued or outstanding. Section 4.5
of the Company Disclosure Schedule sets forth a true and complete list as of the
date indicated of the holders of all (i) outstanding shares of Company Common
Stock and (ii) outstanding Company Stock Options, showing as to each such holder
the number of shares of Company Common Stock, or Company Stock Options so held,
such holder's mailing address and in the case of Company Stock Options, the
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date of grant, vesting schedule and exercise price of all such Company Stock
Options. All outstanding shares of Company Common Stock are duly authorized and
are validly issued, fully paid and nonassessable and free of preemptive rights.
Section 4.6. Options and Other Stock Rights. Except for Company
Stock Options to acquire 249,000 shares of the Company Common Stock, there is no
(i) outstanding option, warrant, call, unsatisfied preemptive right or other
agreement of any kind to purchase or otherwise to receive from the Company any
of the outstanding, authorized but unissued, unauthorized or treasury shares of
Company Common Stock, Company Preferred Stock or any other security of the
Company, (ii) outstanding security of any kind convertible into any security of
the Company, and (iii) outstanding contract or other agreement to purchase,
redeem or otherwise acquire any outstanding shares of Company Common Stock,
Company Preferred Stock or any other security of the Company.
Section 4.7. Subsidiaries.
(a) The Company does not have any direct or indirect Subsidiaries,
other than CDI-LP Holding, Inc. ("CDI-LP"). CDI-LP is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Minnesota and has all requisite corporate power and authority to own, lease
and operate its assets, properties and business and to carry on its business as
now being conducted or proposed to be conducted. CDI-LP is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of such activities make such qualification necessary, except where
the failure to so qualify would not, individually or in the aggregate, have a
Company Material Adverse Effect. All such jurisdictions are set forth on Section
4.7(a) of the Company Disclosure Schedule. The copies of the Articles of
Incorporation and By-Laws of CDI-LP included as part of Section 4.7(a) of the
Company Disclosure Schedule constitute accurate and complete copies of such
organizational instruments and accurately reflect all amendments thereto through
the date hereof.
(b) All the outstanding shares of capital stock of CDI-LP are duly
authorized, validly issued, fully paid and nonassessable and owned by the
Company free and clear of any liens, claims or encumbrances. CDI-LP has not
issued any securities in violation of any preemptive or similar rights and there
are no options, warrants, calls, rights or other securities, agreements or
commitments of any character obligating or committing CDI-LP or the Company to
issue, deliver or sell shares of CDI-LP's capital stock or debt securities, or
obligating CDI-LP or the Company to grant, extend or enter into any such option,
warrant, call or other such right, agreement or commitment.
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(c) As of the date hereof, except as listed in Section 4.7(c) or
Section 4.17 of the Company Disclosure Schedule, the Company has not made any
advances to or investments in, and does not own any securities of or other
interests in, any other person.
Section 4.8. Corporate Records. The Company has heretofore delivered
to Parent true and complete copies of the minute books of the Company and
CDI-LP, all as in effect on the date hereof, which books reflect all actions
taken at all meetings and consents in lieu of meetings of stockholders, and all
actions taken at all meetings and consents in lieu of meetings of the Company's
and CDI-LP's Board of Directors and all committees thereof, respectively.
Section 4.9. Information in Disclosure Documents. None of the
information with respect to the Company or its subsidiaries to be included in
(i) the joint prospectus/proxy statement of the Company and Parent (the "Proxy
Statement") required to be mailed to the stockholders of the Company and Parent
in connection with the Merger and (ii) the Registration Statement to be filed
with the Commission by Parent on Form N-14 under the Securities Act for the
purpose of registering the shares of Parent Common Stock to be issued in the
Merger (the "Registration Statement") will, in the case of the Proxy Statement
or any amendments or supplements thereto, at the time of the mailing of the
Proxy Statement and any amendments or supplements thereto, and at the time of
the Company Meeting, or, in the case of the Registration Statement, at the time
it becomes effective and at the Effective Date, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this provision shall not apply to statements or omissions in the
Registration Statement or Proxy Statement based upon information furnished by
Parent for use therein. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder. No representation or warranty made by the Company
contained in this Agreement and no statement contained in any certificate, list,
exhibit or other instrument specified in this Agreement, including without
limitation the Company Disclosure Schedule, as the same may be amended pursuant
to the provisions hereof, contains any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading.
Section 4.10. SEC Documents; Financial Statements.
(a) The Company has filed and will file with the SEC all forms,
reports, schedules, statements, exhibits and other documents (other than
registration statements on Form S-8 or
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reports on Form 11-K, in each case relating to employee benefit plans)
(collectively, the "Company SEC Documents") required to be filed on or before
the date hereof or the Closing Date, respectively, by it under the Securities
Act or the Exchange Act. The Company has furnished or made available to Parent
true and correct copies of all Company SEC Documents filed by the Company since
June 1, 1997 and will promptly furnish to Parent any other Company SEC Document
filed by or on behalf of the Company with the SEC from the date hereof to the
Closing Date. At the time filed, the Company SEC Documents filed by the Company
since June 1, 1997 (i) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading and (ii) complied in all material respects with
the applicable requirements of the Securities Act or Exchange Act, as the case
may be.
(b) The audited consolidated financial statements of the Company for
the three years ended June 30, 1997, together with the reports and opinions
thereon of Deloitte & Touche LLP and Lurie, Besikof, Lapidus & Co., LLP, and the
unaudited consolidated financial statements of the Company for the six months
ended December 31, 1997 (the "Company Interim Financial Statements"), which are
included in the Company SEC Documents and have previously been delivered to
Parent, are collectively referred to herein as the "Company Financial
Statements". The Company Financial Statements comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto; and fairly present, in all material
respects, on a consolidated basis, the financial position of the Company at, and
the results of its operations for, each of the periods then ended and were
prepared in conformity with GAAP applied on a consistent basis, except as
otherwise disclosed therein and, subject, in the case of the Company Interim
Financial Statements, to normal year-end adjustments, the absence of footnote
disclosures, and any other adjustments described therein.
Section 4.11. Liabilities.
(a) The Company does not have any direct or indirect liability,
contingent or otherwise, that is required by GAAP to be reflected or reserved
for on the financial statements of the Company (collectively, the
"Liabilities"), that was not adequately reflected or reserved against on the
Audited Financial Statements for the period ended June 30, 1997 or on the
Company Interim Financial Statements for the six-month period ended December 31,
1997, other than (i) liabilities incurred in the ordinary course of business
since January 1, 1998 consistent with past practices, or (ii) liabilities
permitted by this Agreement to be incurred in connection with the transactions
contemplated by this Agreement.
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(b) No payments are due to the SBA as a result of the transactions
contemplated hereby, including, without limitation, any accrued interest or
dividends resulting from the Company's previous repurchase of its 3% preferred
stock from the SBA.
Section 4.12. No Material Adverse Change. Except as disclosed in
Section 4.12 of the Company Disclosure Schedule, since June 30, 1997, there has
been no material adverse change in the management, assets, Liabilities,
properties, business, operations, financial condition, results of operations or
prospects of the Company.
Section 4.13. Compliance with Laws. Except as disclosed in Section
4.13 of the Company Disclosure Schedule, the Company is not in violation in any
material respect of any applicable order, judgment, injunction, award or decree,
law, ordinance or regulation or any other requirement of any Governmental Entity
applicable to the Company or any of its businesses. The Company has not received
notice that any such violation has been alleged or is being investigated.
Section 4.14. Permits. The Company has obtained all Permits that are
necessary for the ownership and conduct of its businesses as presently conducted
or currently proposed to be conducted, other than any Permits, the absence of
which would not, individually or in the aggregate, have a Company Material
Adverse Effect; such Permits are in full force and effect and are sufficient for
the ownership and conduct of such businesses as presently conducted or currently
proposed to be conducted; no material violations exist or have been recorded in
respect of any Permit; and no proceeding is pending or, to the knowledge of the
Company, threatened, that would suspend, revoke or limit any Permit.
Section 4.15. Actions and Proceedings. There are no outstanding
orders, judgments, injunctions, awards or decrees of any Governmental Entity
against or involving the Company or any of its directors, officers or employees
(in their capacities as such). Except as disclosed in Section 4.15 of the
Company Disclosure Schedule, as of the date of this Agreement there is no claim,
action, suit, litigation, legal, administrative or arbitration proceeding,
whether formal or informal (including, without limitation, any claim or notice
of intent to institute any matter), which is pending or, to the Company's
knowledge, threatened against or involving the Company or any of its directors,
officers or employees (in their capacities as such) or properties, capital stock
or assets.
Section 4.16. Contracts and Other Agreements.
(a) Section 4.16 of the Company Disclosure Schedule sets forth as of
the date of this Agreement each contract and other agreement as described below
(whether or not in writing) which is currently in effect (unless indicated
otherwise below)
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to which the Company is a party or by or to which its assets or properties are
bound, excluding agreements with portfolio companies included in the Company's
investment portfolio:
(i) contracts and other agreements with any current or former
officer, director, employee, consultant, agent or other
representative of the Company, other than pursuant to Plans
described in Section 4.23 of the Company Disclosure Schedule;
(ii) contracts and other agreements with any labor union or
association representing any employee;
(iii) contracts and other agreements for the purchase or sale of
equipment or services, which involve the receipt or payment by the
Company of an amount in excess of $2,000 per month (in the aggregate
in the case of any related series of contracts and other
agreements);
(iv) contracts and other agreements for the sale of any of the
assets or properties of the Company or for the grant to any person
of any preferential rights to purchase any of the assets or
properties of the Company, which involve the receipt or payment by
the Company of an amount in excess of $10,000 (in the aggregate in
the case of any related series of contracts and other agreements);
(v) contracts and other agreements calling for an aggregate
purchase price or payments in any one year of more than $10,000
payable by the Company in any one case (in the aggregate in the case
of any related series of contracts and other agreements);
(vi) contracts and other agreements, whether or not currently in
effect, relating to the acquisition by the Company of any business
of, or the disposition of any business involving the Company to, any
other person;
(vii) contracts relating to the disposition or acquisition of any
investment or of any interest in any person, which involved the
receipt or payment by the Company of an amount in excess of $10,000
(in the aggregate in the case of any related series of contracts and
other agreements);
(viii) joint venture and similar agreements which would involve
the receipt or
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payment by the Company of an amount in excess of $50,000 (in the
aggregate in the case of any related series of contracts or other
agreements);
(ix) contracts and other agreements, whether or not currently
in effect, under which the Company agreed to indemnify any party or
to share tax liability of any party, which could involve the payment
by the Company of an amount in excess of $10,000 (in the aggregate
in the case of any related series of contracts or other agreements);
(x) contracts and other agreements containing covenants of
the Company, or, to the Company's knowledge, its officers, directors
or employees, not to compete in or solicit employees in any line of
business or with any person in any geographical area or covenants of
any other person not to compete with or solicit employees from the
Company in any line of business or in any geographical area;
(xi) contracts and other agreements relating to the making of
any loan or other extension of credit by the Company or of any loan
by the Company to a stockholder, officer or director of the Company
or from a stockholder of the Company to the Company;
(xii) contracts and other agreements relating to the borrowing
of money by, or indebtedness of, the Company or the direct or
indirect guaranty by the Company of any obligation or indebtedness
of any other person or Governmental Entity (other than any accounts
receivable or accounts payable of the Company), including, without
limitation, any (a) agreement or arrangement relating to the
maintenance of compensating balances, (b) agreement or arrangement
with respect to lines of credit, (c) agreement to advance or supply
funds to any other person other than in the ordinary course of
business, (d) agreement to pay for property, products or services of
any other person even if such property, products or services are not
conveyed, delivered or rendered, (e) keep-well, make-whole or
maintenance of working capital or earnings or similar agreement, and
(f) guaranty with respect to any lease or other similar periodic
payments to be made by any such person;
(xiii) contracts and other agreements relating to the
provision by or to the Company of
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third party management or administration services, which involve the
receipt or payment by the Company of an amount in excess of $10,000
(in the aggregate in the case of any related series of contracts and
other agreements);
(xiv) each Lease and lease of personal property which
requires annual lease payments in excess of $10,000;
(xv) contracts and other agreements pursuant to which the
Company obtains or grants insurance or reinsurance;
(xvi) contracts and other agreements between the Company
and any Governmental Entity;
(xvii) contracts and other agreements which require
payments generated by a change in control of the Company;
(xviii) contracts and other agreements with any stockholder,
director or officer of the Company; and
(xix) contracts and other agreements, whether or not
currently in effect, relating to disposal of any controlled or
hazardous substance or waste.
(c) There have been delivered to Parent prior to the date hereof
true and complete copies of all of the contracts and other agreements set forth
in Section 4.16 of the Company Disclosure Schedule. Each such contract and other
agreement is valid, in full force and effect and binding upon the Company and,
to the Company's knowledge, the other parties thereto in accordance with its
terms, and the Company is not in default in any material respect under any of
them and the Company has no knowledge of any threat of cancellation or
termination thereunder, nor will the consummation of the transactions
contemplated by this Agreement result in a default under any such contract or
other agreement or the right to terminate such contract or other agreement. No
Permits or other documents or agreements with, or issued by or filed with, any
person, have been granted to any other person that provide the right to use any
real or tangible personal property comprising any portion of the assets of the
Company. The Company is not a party to any contract, commitment, arrangement or
agreement which would, following the Closing, restrain or restrict Parent or any
affiliate of Parent, from operating the business of the Company in the manner in
which it is currently operated.
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Section 4.17. Investment Portfolio.
(a) The Company's investment portfolio was acquired in the ordinary
course of business, and a true and complete list of the investments in such
portfolio, as of the date hereof, with information included thereon as to the
principal terms of, interest rate, and maturity date thereof, and type and value
of collateral thereon (if any), as of such date, is listed in Section 4.17 of
the Company Disclosure Schedule. Except as disclosed in Section 4.17 of the
Company Disclosure Schedule, none of the investments included in such portfolio
is in default in the payment of principal or interest or materially impaired. By
virtue of the preemption provisions contained in the Small Business Investment
Act of 1958, the loans included in the Company's investment portfolio need not
comply with the laws and regulations of each of the various states in which the
Company does business or in which the Company's borrowers are located.
(b) Section 4.17 of the Company Disclosure Schedule sets forth as of
the date of this Agreement each contract and other agreement between the Company
and the portfolio companies in which it has invested. Each such contract and
other agreement is valid, in full force and effect and binding upon the Company
and, to the Company's knowledge, the other parties thereto in accordance with
its terms, and the Company is not in default under any of them and the Company
has no knowledge of any threat of cancellation or termination thereunder, nor
will the consummation of the transactions contemplated by this Agreement result
in a default under any such contract or other agreement or the right to
terminate such contract or other agreement.
Section 4.18. Real Property.
(a) Section 4.18 of the Company Disclosure Schedule sets forth a
list and summary description of all leases, subleases, licenses, occupancy
agreements or other agreements, written and oral, together with any amendments
or modifications thereto (each a "Lease" and collectively, the "Leases") with
respect to (A) all real property leased by the Company (whether as lessor or
lessee and including those in the names of nominees or other entities) and used
or occupied in connection with the business of the Company (the "Leased Real
Property") and (B) all real property leased or subleased by the Company, as
lessor or sublessor, to third parties (such Section 4.18 of the Company
Disclosure Schedule to include the date of each Lease, the address of the
respective Leased Real Property, the amount of square feet of such Leased Real
Property, the Lease term commencement date, the Lease term expiration date, any
renewal options and any early termination provisions in each case with respect
to each portion of the Leased Real Property). The Company does not own any real
property.
(b) Each Lease is, with respect to the Company, in full force and
effect, and to the Company's knowledge, is in full
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force and effect with respect to each other party thereto. The Company has
performed all obligations required to be performed by it to date under, and is
not in default in respect of, any Lease, and no event has occurred which, with
due notice or lapse of time or both, would constitute such a default by the
Company. To the knowledge of the Company, there is no default asserted
thereunder by any other party thereto and there are no unasserted defaults. All
rentals and other payments due under each such Lease have been duly paid.
(c) The Company has not received any notice of any violation of any
applicable building, zoning, land use or other similar statutes, laws,
ordinances, regulations, permits or other requirements (including, without
limitation, the Americans with Disabilities Act) in respect of the Leased Real
Properties, which has not been heretofore remedied, and there does not exist any
such violations which, individually or in the aggregate, could have a Company
Material Adverse Effect. The Company has not received any notice that any
operations on or uses of the Leased Real Properties constitute non-conforming
uses under any applicable building, zoning, land use or other similar statutes,
laws, ordinances, regulations, permits or other requirements. The Company has no
knowledge of nor has received any notice (other than published notice not
actually received) of any pending or contemplated rezoning proceeding affecting
the Leased Real Properties.
(d) The Company has not received notice from any insurance carrier
regarding defects or inadequacies in the Leased Real Properties, which, if not
corrected, would result in termination of the Company's insurance coverage
therefor or an increase in the cost thereof.
(e) To the knowledge of the Company, there is no pending or
threatened: (i) condemnation of any part of the Leased Real Properties by any
Governmental Entity; (ii) special assessment against any part of the Leased Real
Properties; or (iii) litigation against the Company for breach of any
restrictive covenant affecting any part of the Leased Real Properties.
(f) The improvements at the Leased Real Properties are in good
condition and repair, ordinary wear and tear excepted, and have not suffered any
casualty or other damage which has not been repaired.
Section 4.19. Intellectual Property.
(a) The Company owns or otherwise possesses all rights as are
necessary to use, all patents (and applications therefor), patent disclosures,
trademarks, service marks, trade names, registered copyrights (and applications
therefor), inventions, discoveries, processes, know-how, systems, scientific,
technical, engineering and marketing data, software programs and codes (both
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source and object), formulae and techniques used in or necessary for the conduct
of its business (collectively, "Intellectual Property Rights").
(b) The Company has not received notice nor otherwise has reason to
know of any conflict or alleged conflict with the rights of others pertaining to
the Intellectual Property Rights. The Company's business, as presently
conducted, does not infringe upon or violate any intellectual property rights of
others. The Company has the unrestricted right to use, free and clear of any
rights or claims of others, all trade secrets, processes, customer lists and
other rights incident to its businesses as now conducted.
(c) The Company is not currently obligated or under any existing
liability to make royalty or other payments to any owner of, licensor of, or
other claimant to, any patent, trademark, service names, trade names,
copyrights, or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business as now conducted or otherwise. To
the Company's knowledge, no employee of the Company has violated any employment
agreement or proprietary information agreement which he had with a previous
employer or any patent policy of such employer, or is a party to or threatened
by any litigation concerning any patents, trademarks, trade secrets, service
names, trade names, copyrights, licenses and the like.
Section 4.20. Receivables . All accounts receivable and vendor
receivables reflected in the Company Interim Financial Statements, and all
accounts receivable and vendor receivables arising subsequent to December 31,
1997, represent bona fide transactions that have arisen in the ordinary course
of business, are valid and existing and represent moneys due. The Company has
made and will make adjustments to the carrying value of such receivables
reasonably considered adequate for receivables not collectible in the ordinary
course of its business in accordance with GAAP, consistently applied.
Section 4.21. Banking. Section 4.21 of the Company Disclosure
Schedule contains a complete list of all of the bank accounts and lines of
credit owned or used by the Company, and the names of all persons with authority
to withdraw funds from, or execute drafts or checks on, each such account.
Section 4.22. Liens. The Company has good and marketable title to
all of its respective assets and properties, in each case free and clear of any
lien or other encumbrance, except for (i) liens or other encumbrances securing
taxes, assessments, governmental charges or levies, or the claims of
materialmen, carriers, landlords and like persons, all of which are not yet
delinquent or which are being contested in good faith or (ii) liens or other
encumbrances of a character that do not detract from the value of the property
subject thereto or impair
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the use of or the access to the property subject thereto, or impair the
operation of the Company or detract from its business.
Section 4.23. Employee Benefit Plans.
(a) Section 4.23(a) of the Company Disclosure Schedule sets forth
all "employee benefit plans", as defined in Section 3(3) of ERISA, and all other
employee benefit arrangements or payroll practices, including, without
limitation, any such arrangements or payroll practices providing severance pay,
sick leave, vacation pay, salary continuation for disability, retirement
benefits, deferred compensation, bonus pay, incentive pay, stock options,
hospitalization insurance, medical insurance, life insurance, scholarships or
tuition reimbursements, maintained by the Company or to which the Company is
obligated to contribute thereunder for current or former employees of the
Company or to which the Company has contributed or has been obligated to
contribute thereunder within the six-year period preceding the date hereof. Each
of the employee benefit plans, practices and arrangements set forth in Section
4.23 of the Company Disclosure Schedule shall hereafter be referred to as a
"Plan" (or "Plans" as the context may require).
(b) None of the Plans is a "multiemployer plan," as defined in
Section 3(37) of ERISA or a "defined benefit plan," as defined in Section 3(35)
of ERISA.
(c) Each of the Plans that are intended to qualify under Section
401(a) of the Code, and the trusts maintained pursuant thereto, have been
determined to be exempt from federal income taxation under Section 501 of the
Code by the IRS (or remain within the remedial amendment period for obtaining an
initial determination of exemption from tax), and nothing has occurred with
respect to the operation of any such Plan which could cause the loss of such
qualification or exemption or the imposition of any liability, penalty or tax
under ERISA or the Code.
(d) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under the
Plans or by law to any funds or trusts established thereunder or in connection
therewith have been made by the due date thereof (including any valid
extensions), and all contributions for any period ending on or before the
Effective Time which are not yet due will have been paid or accrued on or prior
to the Effective Time.
(e) There has been no violation of ERISA, the Code or other
applicable law with respect to the filing of applicable reports, documents and
notices regarding the Plans with the Secretary of Labor or the Secretary of the
Treasury, or the furnishing of required reports, documents or notices to the
participants or beneficiaries of the Plans.
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(f) True, correct and complete copies of the following documents,
with respect to each of the Plans, have been delivered to Parent by the Company:
(i) all plans and related trust documents, and amendments thereto; (ii) the most
recent IRS Forms 5500; (iii) the last IRS determination letter; and (iv) summary
plan descriptions.
(g) There are no pending actions, claims or lawsuits which have been
asserted or instituted against the Plans, the assets of any of the trusts under
such plans or the plan sponsor or the plan administrator, or against any
fiduciary of the Plans with respect to the operation of such Plans (other than
routine benefit claims or actions seeking qualified domestic relations orders),
nor does the Company have knowledge of any threatened claim or lawsuit.
(h) The Plans have been maintained in accordance with their terms
and with all provisions of ERISA and the Code (including rules and regulations
thereunder) and other applicable federal and state laws and regulations, and
neither the Company nor any "party in interest" or "disqualified person" with
respect to the Plans has engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or 4975 of the Code that could result in
liability to the Company or Parent. No fiduciary has any liability for breach of
fiduciary duty or any other failure to act or comply in connection with the
administration or investment of the assets of any Plan.
(i) None of the Plans provide retiree life or retiree health
benefits except as may be required under applicable state law, Section 4980B of
the Code or Section 601 of ERISA or at the expense of the participant or the
participant's beneficiary. The Company have complied with the notice and health
care continuation requirements of Section 4980B of the Code and Sections 601
through 608 of ERISA.
(j) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment becoming due to any employee (current, former or retired) of the
Company, (ii) increase any benefits otherwise payable under any Plan or (iii)
result in the acceleration of the time of payment or vesting of any benefits
under any Plan, except for accelerated vesting of Company Stock Options.
Section 4.24. Employee Relations.
(a) The Company is in compliance with all laws regarding employment,
wages, hours, equal opportunity, collective bargaining and payment of social
security and other taxes. The Company is not engaged in any unfair labor
practice or discriminatory employment practice and no complaint of any such
practice against the Company has been filed or, to the Company's knowledge,
threatened to be filed with or by the National Labor
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Relations Board, the Equal Employment Opportunity Commission or any other
administrative agency, federal or state, that regulates labor or employment
practices, nor is any grievance filed or, to the Company's knowledge, threatened
to be filed, against the Company by any employee pursuant to any collective
bargaining or other employment agreement to which the Company is a party or is
bound. The Company is in compliance with all applicable foreign, federal, state
and local laws and regulations regarding occupational safety and health
standards, and has received no complaints from any foreign, federal, state or
local agency or regulatory body alleging violations of any such laws and
regulations.
(b) The employment of all persons employed by the Company is
terminable at will without any penalty or severance obligation of any kind on
the part of the employer. All sums due for employee compensation and benefits
and all vacation time owing to any employees of the Company have been duly and
adequately accrued on the accounting records of the Company. All employees of
the Company are either United States citizens or resident aliens specifically
authorized to engage in employment in the United States in accordance with all
applicable laws.
Section 4.25. Insurance. Section 4.25 of the Company Disclosure
Schedule sets forth a list of all policies or binders of errors and omissions,
fire, liability, product liability, workmen's compensation, vehicular and other
insurance held by or on behalf of the Company (collectively, the "Insurance
Policies"). Such Insurance Policies are in full force and effect and are in
amounts of a nature which are adequate and customary for the Company's business.
In addition, Section 4.25 of the Company Disclosure Schedule sets forth in
respect of the Insurance Policies (i) a description of occurrences reported
involving amounts in excess of $10,000 and (ii) the aggregate amount paid out
under each such policy during the period from January 1, 1995 through the date
hereof. There have been no disputes regarding denial or nonpayment of claims
under any Insurance Policy.
Section 4.26. Officers, Directors, Employees, Consultants. Section
4.26 of the Company Disclosure Schedule sets forth (i) the name of each officer
and director of the Company and the amount of compensation paid during fiscal
1997 and the amount reasonably expected to be paid during fiscal 1998, (ii) the
name of each other employee or class of employees of the Company who either (x)
received compensation in fiscal 1997 in excess of $50,000 or (y) is anticipated
to receive, based on current compensation levels, compensation in fiscal 1998 in
excess of $50,000, indicating the amount of such compensation for such persons
for fiscal 1997 and fiscal 1998; and (iii) a list of all employees employed by
the Company at January 1, 1998. The Company does not employ any person as a
consultant, whose employment cannot be terminated on not less than 30 days'
notice without penalty.
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Section 4.27. Transactions with Directors, Officers and Affiliates.
Except as disclosed in Section 4.27 of the Company Disclosure Schedule, since
January 1, 1996, there have been no transactions between the Company and any
director, officer, employee, stockholder or other affiliate of the Company or
loans, guarantees or pledges to, by or for the Company from, to, by or for any
of such persons in excess of $5,000. Since January 1, 1996, other than as
disclosed on Section 4.27 of the Company Disclosure Schedule, none of the
officers, directors or employees of the Company, or any spouse or relative of
any of such persons, has been a director or officer of, or has had any direct or
indirect interest in, any firm, corporation, association or business enterprise
which during such period has been a supplier, customer or sales agent of the
Company or has competed with or been engaged in any business of the kind being
conducted by the Company, except for an investment in less than 5% of the
outstanding equity of any such firm, corporation, association or business
enterprise, the equity of which is publicly traded.
Section 4.28. Operations of the Company. Except as disclosed in
Section 4.16 or 4.28 of the Company Disclosure Schedule and except as may result
from the transactions contemplated by this Agreement, since June 30, 1997, the
Company has not:
(i) amended its Certificate of Incorporation or by-laws or
merged with or into or consolidated with any other person,
subdivided or in any way reclassified any shares of its capital
stock or changed or agreed to change in any manner the rights of its
outstanding capital stock or the character of its business;
(ii) issued or sold or purchased, or issued options or rights
to subscribe to, or entered into any contracts or commitments to
issue or sell or purchase, any shares of its capital stock or any of
its bonds, notes, debentures or other evidences of indebtedness,
other than (x) options granted pursuant to the Company's 1997 Stock
Option Plan or (y) Company Common Stock issued upon exercise of
Company Stock Options;
(iii) entered into or amended any agreement with any labor
union or association representing any employee, or, except for Plans
referred to in Section 4.23 of the Company Disclosure Schedule, made
any wage or salary increase or bonus, or increase in any other
direct or indirect compensation, for or to any of its officers,
directors, employees, consultants, agents or other representatives
in excess of $10,000, or commitment or agreement to make or pay the
same;
(iv) declared or made any Distributions to any stockholder or
made any direct or indirect redemption,
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retirement, purchase or other acquisition of any shares of its
capital stock;
(v) made any change in its accounting methods or practices or
made any change in depreciation or amortization policies, except as
required by law or GAAP;
(vi) made any loan or advance to its stockholders or to any of
the directors, officers or employees of the Company, consultants,
agents or other representatives, or otherwise than in the ordinary
course of business made any other loan or advance;
(vii) except in the ordinary course of business consistent
with past practice, (A) entered into any Lease; (B) sold, abandoned
or made any other disposition of any of its assets or properties;
(C) granted or suffered any lien or other encumbrance on any of its
assets or properties; (D) entered into or amended any contract or
other agreement to which it is a party, or by or to which it or its
assets or properties are bound or subject which if existing on the
date hereof would need to be disclosed in Section 4.16 of the
Company Disclosure Schedule;
(viii) made or entered into any agreement to make any
acquisition of all or a substantial part of the assets, properties,
securities or business of any other person, other than investments
in portfolio companies identified on Section 4.17 of the Company
Disclosure Schedule;
(ix) paid, directly or indirectly, any of its Liabilities
before the same became due in accordance with its terms or otherwise
than in the ordinary course of business;
(x) terminated or failed to renew, or received any written
threat (that was not subsequently withdrawn) to terminate or fail to
renew, any contract or other agreement that is or was material to
the assets, liabilities, properties, business, operations, condition
(financial or otherwise), operations or prospects of the Company;
(xi) made any revaluation of any assets or write-down of the
value of any receivables of the Company in excess of $10,000, other
than revaluations of the Company's investment portfolio on a
quarterly basis consistent with past practice;
(xii) except in the ordinary course of business consistent
with past practice, accelerated the
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collection, or sale to third parties, of any receivables of the
Company, or delayed the payment of any payables of the Company;
(xiii) entered into any other contract or other agreement or
other transaction that obligates the Company to pay an amount in
excess of $10,000, which contract is not terminable by the Company
upon not more than 30 days' notice; or
(xiv) suffered any damage, destruction or loss, whether
covered by insurance or not, which has had or could have a Company
Material Adverse Effect.
Section 4.29. Brokerage. No broker, agent or finder has acted,
directly or indirectly, for the Company or, to the knowledge of the Company, any
of the Company Stockholders, nor has the Company or, to the knowledge of the
Company, any of the Company Stockholders, incurred any obligation to pay any
brokerage fee, agent's commission or finder's fee or other commission in
connection with the transactions contemplated by this Agreement.
Section 4.30. Taxes.
(a) The Company has duly and timely filed all federal, state, local,
foreign and other tax returns and reports required to be filed by it on or
before the date hereof, and has either (i) paid all Taxes of the Company due and
payable or (ii) has accrued on the consolidated balance sheet of the Company
included in the Company Interim Financial Statements previously furnished to
Parent (in accordance with GAAP applied on a basis consistent with that of prior
years) all Taxes required to be accrued by the Company on or before the date
hereof. All of such returns or reports are true, accurate and complete and
reflect the Tax liability in all material respects for which the Company could
be held responsible and all Taxes for which the Company could be held
responsible as shown on such returns or reports as due and payable have been
paid.
(b) The Company is not delinquent in the payment of any Taxes for
which the Company could be held responsible, nor has the Company requested any
extension of time within which to file any Tax return which return has not since
been filed, nor has the Company waived or tolled the running of any statute of
limitations with respect to any such Taxes.
(c) No deficiency for any Tax has been threatened, asserted or
assessed against the Company, and there are neither unresolved questions or
claims, nor proceedings or actions pending (including an audit of any tax return
filed by the Company with any federal, state, local or foreign taxing
authority), concerning either the Tax liability of the Company or
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the collection or assessment of any Tax for any period for which returns have
been filed or were due.
(d) The Company has delivered to Parent true and correct copies of
any filed tax returns (including information returns and Forms 1120) of the
Company which refer to any period of time from July 1, 1992, through the date of
this Agreement or to any event which occurred during that period of time. The
Company has not filed an election under Section 341(f) of the Code that is
applicable to the Company or any asset held by the Company. In addition, none of
the Company's debt is corporate acquisition indebtedness within the meaning of
Section 279 of the Code. The Company has not agreed, nor is required, to make
any adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise. The Company is not subject to or a member of any
joint venture, partnership or other arrangement or contract which is treated as
a partnership for federal income tax purposes. The Company has withheld and, if
due, paid all Taxes required to have been withheld and, if due, paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party. There are no pending claims or
assessments for Taxes payable by the Company. Neither the Company nor any of its
affiliates has been a United States real property holding corporation within the
meaning of Section 897(c)(2) of the Code during the applicable period specified
in Section 897(c)(1)(A)(ii) of the Code.
(e) Section 4.30 of the Company Disclosure Schedule lists each state
in which the Company is required to file Tax returns.
(f) Except as disclosed in Section 4.30 of the Company Disclosure
Schedule, the amount of the Company's earnings and profits, as defined for
purposes of Subchapter C of the Code, at the end of fiscal year 1997, is set
forth on, or can be determined from the information set forth in, the financial
statements of the Company for the year ended June 30, 1997 and/or the income tax
returns (including information returns and Forms 1120) of the Company through
the date hereof, furnished to Parent by the Company. It is not anticipated that
there will be any change in any such amount other than by virtue of the ordinary
conduct of the Company's business from June 30, 1997 through the date of the
Closing.
(g) The Company intends to elect regulated investment company status
under Subchapter M of the Code for its fiscal year ending June 30, 1998.
Section 4.31. Execution and Validity of Employment Agreements. The
Company is not a party to any contract, commitment, arrangement or agreement
which could, following the Closing, restrain or restrict the parties to the
Employment
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Agreements from performing their respective obligations thereunder.
Section 4.32. Environmental Laws.
(a) The Company (i) is in compliance in all respects with all
Environmental Laws; (ii) has obtained all necessary Environmental Permits, the
failure of which to obtain could have a Company Material Adverse Effect, all of
which are in full force and effect; and (iii) is in compliance with all terms
and conditions of such Environmental Permits.
(b) The Company has not violated or done any act which could give
rise to material liability under, and has not otherwise failed to act in a
manner which would expose it to material liability under, any Environmental Law.
No event has occurred which, upon the passage of time, the giving of notice, or
failure to act would reasonably be expected to give rise to material liability
to the Company under any Environmental Law.
(c) To the Company's knowledge, no Hazardous Material has been
released, spilled, discharged, dumped, disposed of, or otherwise come to be
located in, at or beneath any of the Leased Real Property or any properties or
assets formerly owned, operated or otherwise controlled by the Company and used
in the conduct of the Company's business (i) in violation of any Environmental
Law, or (ii) in such manner as would reasonably be expected to cause an
environmental liability of the Company.
(d) To the Company's knowledge, there have been and are no: (i)
aboveground or underground storage tanks; (ii) surface impoundments for
Hazardous Materials; (iii) wetlands as defined under Environmental Law or (iv)
asbestos containing materials or PCBs or PCB-containing equipment, located
within any portion of the Leased Real Property, which individually or in the
aggregate could have a Company Material Adverse Effect.
(e) No liens have been placed upon any Leased Real Property in
connection with any actual or alleged liability under any Environmental Law.
(f) (i) There is no pending or, to the knowledge of the Company,
threatened, claim, litigation or administrative proceeding against the Company
arising under any Environmental Law; (ii) the Company has no ongoing
negotiations with or agreements with any Governmental Entity relating to any
Remedial Action or other environmentally-related claim; (iii) the Company has
not submitted notice pursuant to Section 103 of CERCLA or analogous statute or
notice under any applicable Environmental Law reporting a release of a Hazardous
Material into the environment; and (iv) the Company has not received any notice,
claim, demand, suit or request for information from any Governmental Entity or
private entity with respect to any liability or alleged liability under any
Environmental Law, nor
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to the knowledge of the Company, has any other entity whose liability therefor,
in whole or in part, may be attributed to the Company, received such notice,
claim, demand, suit or request for information. Neither the Company, nor to the
Company's knowledge, any prior owner or operator of the Leased Real Property has
generated, disposed of, or arranged for the disposal of any Hazardous Material
except in compliance with Environmental Law.
(g) The Company has not, and, to the knowledge of the Company, no
other entity whose liability therefor, in whole or in part, may be attributed to
the Company has, disposed of any Hazardous Material at any location which is
identified on the current or proposed (i) National Priorities List under 40
C.F.R. 300 Appendix B, (ii) CERCLIS list or (iii) the Leaking Underground
Storage Tank list or any analogous state list.
(h) The Company has provided to Parent all environmental studies and
reports pertaining to the Leased Real Property, the operations conducted thereon
and the Company made by or at the direction of the Company or otherwise in the
Company's possession.
Section 4.33. Accounting Matters. Neither the Company nor, to the
knowledge of the Company, any Company Stockholder or any affiliates thereof, has
taken or agreed to take any action that would prevent Parent from accounting for
the business combination to be effected by the Merger as a "pooling of
interests".
Section 4.34. Company Action. The Board of Directors of the Company
(at a meeting duly called and held) has by the requisite vote of all directors
present (a) determined that the Merger is advisable and fair and in the best
interests of the Company and its stockholders, (b) approved the Merger in
accordance with the provisions of Section 302A.613 of the Minnesota Corporation
Law and (c) recommended the approval of this Agreement and the Merger by the
holders of the Company Common Stock and directed that the Merger be submitted
for consideration by the Company's stockholders at the Company Meeting.
ARTICLE V.
Representations and Warranties of Parent and Sub
Parent and Sub represent and warrant to the Company that, except as
set forth in the disclosure schedule attached hereto (the "Parent Disclosure
Schedule"), which Parent Disclosure Schedule and shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
V:
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Section 5.1. Execution and Delivery. Each of Parent and Sub has the
corporate power and authority to enter into this Agreement and each agreement,
document or instrument contemplated hereby or to be delivered in connection
herewith to which such person is a party (the "Parent Documents") and to carry
out its respective obligations hereunder and thereunder. The execution, delivery
and performance by Parent and Sub of this Agreement and the Parent Documents to
which it is a party and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by the Board of Directors of Parent and
Sub, as applicable (and, in the case of this Agreement, by the Board of
Directors of Sub and by Parent as the sole stockholder of Sub). This Agreement
constitutes the valid and binding obligation of Parent and Sub and the Parent
Documents will constitute the valid and binding obligations of Parent and Sub,
when executed by such person, in each case, enforceable in accordance with their
respective terms, except as enforcement may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditors' rights generally
and except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. No other corporate proceedings on the part
of Parent or Sub are necessary to authorize this Agreement or the Parent
Documents and the transactions contemplated hereby and thereby.
Section 5.2. Consents and Approvals. The execution and delivery by
Parent and Sub of this Agreement and the Parent Documents to which such person
is a party, the performance by Parent and Sub of their respective obligations
hereunder and thereunder and the consummation by Parent and Sub of the
transactions contemplated hereby and thereby do not require Parent or Sub to
obtain any consent, approval or action of, or make any filing or registration
with or give any notice to, any Governmental Entity, other than (i) in
connection, or in compliance, with the provisions of the H-S-R Act, the
Securities Act, the Exchange Act and the corporation, securities or blue sky
laws or regulations of various states, all of which will be duly obtained or
made, as the case may be, on or prior to the Closing, and will be in full force
and effect on the Closing Date, (ii) the approval of the SBA, (iii) the filing
of the Certificate of Merger or Articles of Merger with the Secretaries of State
of Delaware and Minnesota and (iv) as to which the failure to so obtain, file or
register would not have a material adverse effect on the business, properties,
assets, condition (financial or otherwise), liabilities, or operations of Parent
and its Subsidiaries, taken as a whole, or prevent the consummation of the
transactions contemplated hereby (a "Parent Material Adverse Effect").
Section 5.3. No Breach. The execution, delivery and performance by
Parent and Sub of this Agreement and the Parent Documents to which it is a party
and the consummation of the transactions contemplated hereby and thereby in
accordance with
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the terms and conditions hereof and thereof will not (i) violate any provision
of the Certificate of Incorporation or By-Laws of Parent or Sub; (ii) violate,
conflict with or result in the breach of any of the terms of, result in any
modification of the effect of, otherwise give any other contracting party the
right to terminate, or constitute (or with notice or lapse of time or both,
constitute) a default under, any contract or other agreement or instrument to
which Parent or Sub is a party or by or to which the assets or properties of
Parent or Sub may be bound or subject; (iii) violate any order, judgment,
injunction, award or decree of any Governmental Entity against, or binding upon,
or any agreement with, or condition imposed by, any Governmental Entity, binding
upon Parent or Sub, or upon the securities, assets or business of Parent or Sub;
(iv) violate any statute, law or regulation of any jurisdiction as such statute,
law or regulation relates to Parent or Sub, or to the securities, assets or
business of Parent or Sub; (v) result in the creation or imposition of any lien
or other encumbrance or the acceleration of any indebtedness or other obligation
of Parent or Sub; or (vi) result in the breach of any of the terms or conditions
of, constitute a default under, or otherwise cause an impairment of, any Permit
of Parent or Sub; except in the case of (ii) through (vi) for violations,
conflicts, breaches, defaults, modifications, impairments, liens or other
encumbrances that would not, individually or in the aggregate, have a Parent
Material Adverse Effect.
Section 5.4. SEC Documents; Financial Statements.
(a) Parent has filed and will file with the SEC all forms, reports,
schedules, statements, exhibits and other documents (other than registration
statements on Form S-8 or reports on Form 11-K, in each case relating to
employee benefit plans) (collectively, the "Parent SEC Documents") required to
be filed on or before the date hereof or the Closing Date, respectively, by it
under the Securities Act or the Exchange Act. Parent has furnished or made
available to the Company true and correct copies of all Parent SEC Documents
filed by Parent since December 31, 1996 and will promptly furnish to the Company
any other Parent SEC Document filed by or on behalf of Parent with the SEC from
the date hereof to the Closing Date. At the time filed, the Parent SEC Documents
filed by Parent since December 31, 1996 (i) did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading and (ii) complied in
all material respects with the applicable requirements of the Securities Act or
Exchange Act, as the case may be.
(b) The audited consolidated financial statements of Parent for the
period from May 30, 1996 (commencement of operations) to December 31, 1996,
together with the report and opinion thereon of Arthur Andersen LLP, and the
unaudited
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consolidated financial statements of Parent for the nine months ended
September 30, 1997 (the "Parent Interim Financial Statements"), which are
included in the Parent SEC Documents and have previously been delivered to the
Company, are collectively referred to herein as the "Parent Financial
Statements". The Parent Financial Statements comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto; and fairly present, in all material
respects, on a consolidated basis, the financial position of Parent at, and the
results of its operations for, each of the periods then ended and were prepared
in conformity with GAAP applied on a consistent basis, except as otherwise
disclosed therein and, subject, in the case of the Parent Interim Financial
Statements, to normal year-end adjustments, the absence of footnote disclosures,
and any other adjustments described therein.
Section 5.5. Shares of Parent Common Stock. The shares of Parent
Common Stock will, when issued and delivered to the Company Stockholders
pursuant to Section 3.1(a), be duly authorized, validly issued, fully paid,
non-assessable, and free of all liens and other encumbrances of any kind or
nature whatsoever.
Section 5.6. Organization, Standing and Authority of Parent and Sub.
Each of Parent and Sub is a corporation duly organized, validly existing and in
good standing under the laws of Delaware, and has all requisite power and
authority to own, lease and operate its assets, properties and businesses and to
carry on its businesses as now being conducted or currently proposed to be
conducted. Parent is duly qualified as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of such activities make such
qualification necessary, except where the failure to so qualify would not,
individually or in the aggregate, have a Parent Material Adverse Effect. Sub has
not engaged in any business (other than certain organizational matters) since
the date of its incorporation. The copies of the Certificate of Incorporation
and By-Laws of Parent and Sub included as part of Section 5.6 of the Parent
Disclosure Schedule constitute accurate and complete copies of such
organizational instruments and accurately reflect all amendments thereto through
the date hereof.
Section 5.7. Capitalization.
(a) The authorized capital stock of Parent consists of 15,000,000
shares of Parent Common Stock and 1,000,000 shares of preferred stock, par value
$.01 per share. As of December 31, 1997, there were 12,880,296 shares of Parent
Common Stock and no shares of preferred stock outstanding and there have been no
material changes in such numbers through the date hereof. As of the date hereof,
there are no bonds, debentures, notes or other indebtedness having the right to
vote on any matters on which
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Parent's stockholders may vote issued or outstanding. All outstanding shares of
Parent Common Stock are duly authorized and are validly issued, fully paid and
nonassessable. Except for options to purchase Parent Common Stock outstanding
under Parent's 1996 Stock Option Plan and 1996 Non-Employee Directors Stock
Option Plan, each as amended to date, there are no options, warrants, calls or
other rights, agreements or commitments presently outstanding obligating Parent
to issue, deliver or sell shares of its capital stock or debt securities, or
obligating Parent to grant, extend or enter into any such option, warrant, call
or other such right, agreement or commitment.
(b) The authorized capital stock of Sub consists of 100 shares of
Sub Common Stock, all of which are duly authorized, validly issued, fully paid
and nonassessable.
Section 5.8. Brokerage. Except for Gelband & Company, Inc., no
broker, agent or finder has acted, directly or indirectly, for Parent or Sub.
Except for the fee due to Gelband & Company, Inc., Parent and Sub have not
incurred any obligation to pay any brokerage fees, agent's commissions or
finder's fee or commission in connection with the transactions contemplated by
this Agreement.
Section 5.9. Information in Disclosure Documents. None of the
information supplied by Parent or Sub for inclusion in the Registration
Statement and the Proxy Statement will, in the case of the Proxy Statement or
any amendments or supplements thereto, at the time of the mailing of the Proxy
Statement and any amendments or supplements thereto, or, in the case of the
Registration Statement, at the time it becomes effective and at the Effective
Date, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that this provision shall not apply to
statements or omissions in the Registration Statement or Proxy Statement based
upon information furnished by the Company for use therein. The Registration
Statement will comply as to form in all material respects with the provisions of
the Securities Act, and the rules and regulations promulgated thereunder. The
Proxy Statement will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder. No
representation or warranty made by Parent contained in this Agreement and no
statement contained in any certificate, list, exhibit or other instrument
specified in this Agreement, including without limitation the Parent Disclosure
Schedule, contains any untrue statement of a material fact or omits or will omit
to state a material fact necessary to make the statements contained therein, in
light of the circumstances under which they were made, not misleading.
Section 5.10. No Material Adverse Change. Since December 31, 1996,
there has been no material adverse change in
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the management, assets, liabilities, properties, business, operations, financial
condition or results of operations of Parent.
Section 5.11. Sub Action. The Board of Directors of Sub (at a
meeting duly called and held) has by the requisite vote of all directors present
approved the Merger in accordance with the provisions of Section 251 of the
Delaware Corporation Law.
ARTICLE VI.
Covenants and Agreements
Each of Parent, Sub and the Company (as applicable) covenant and
agree as follows:
Section 6.1. Conduct of Business. Prior to the Effective Date,
unless Parent shall otherwise agree in writing:
(a) The Company shall, and shall cause CDI-LP to, carry on their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted, and shall, and shall cause CDI-LP to,
use their best efforts to preserve intact their present business organizations,
keep available the services of their present officers and employees and preserve
their relationships with customers, suppliers and others having business
dealings with them to the end that their goodwill and on-going businesses shall
be unimpaired at the Effective Date, except such impairment as would not have a
Company Material Adverse Effect. The Company shall, and shall cause CDI-LP to,
(i) maintain insurance coverages and its books, accounts and records in the
usual manner consistent with prior practices; (ii) comply in all material
respects with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and CDI-LP; (iii) maintain and keep its properties and
equipment in good repair, working order and condition, ordinary wear and tear
excepted; and (iv) perform in all material respects its obligations under all
contracts and commitments to which it is a party or by which it is bound, in
each case other than where the failure to so maintain, comply or perform, either
individually or in the aggregate, would result in a Company Material Adverse
Effect.
(b) The Company shall not, and shall not permit CDI-LP to, undertake
any of the actions specified in Section 4.28.
(c) The Company shall not, nor shall it permit CDI-LP to, take or
cause to be taken any action, whether before or after the Effective Date, which
would disqualify the Merger as a "pooling of interests" for accounting purposes
or as a "reorganization" within the meaning of Section 368(a) of the Code.
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Section 6.2. Litigation Involving the Company. Prior to the Closing
Date, the Company shall notify Parent of any actions or proceedings of the type
required to be described in Sections 4.15, 4.30 or 4.32 that are threatened or
commenced against the Company, or against any officer or director, property or
asset of the Company, or with respect to the Company's affairs, promptly upon
the Company becoming aware thereof, and of any requests of the Company or, to
the knowledge of the Company, any Company Stockholder, for additional
information or documentary materials by any Governmental Entity in connection
with the transactions contemplated hereby promptly upon the Company becoming
aware thereof. As to compliance with such requests for such information, the
Company shall consult with and obtain the consent of Parent, which consent shall
not be withheld unreasonably; provided that such consent shall be unnecessary
where such information is required by law to be provided.
Section 6.3. Continued Effectiveness of Representations and
Warranties of the Parties. From the date hereof through the Closing Date, (a)
the Company shall use all reasonable efforts to conduct its affairs in such a
manner so that, except as otherwise contemplated or permitted by this Agreement,
the representations and warranties of the Company contained in Article IV shall
continue to be true and correct in all material respects (or in all respects in
the case of any representation or warranty which refers to a Company Material
Adverse Effect or otherwise includes a concept of materiality) on and as of the
Closing Date as if made on and as of the Closing Date, (i) except that any such
representations and warranties that are given as of a particular date and relate
solely to a particular date or period shall be true and correct in all material
respects (or in all respects in the case of any representation or warranty which
refers to a Company Material Adverse Effect or otherwise includes a concept of
materiality) as of such date or period, and (ii) in the case of Section 4.12
only, except for such changes with respect thereto (x) which are contemplated by
this Agreement or (y) which are attributable to the execution of this Agreement,
or the announcement or contemplation of the transactions proposed herein; (b)
Parent and Sub shall use their respective reasonable efforts to conduct their
affairs in such a manner so that, except as otherwise contemplated or permitted
by this Agreement, the representations and warranties contained in Article V
shall continue to be true and correct in all material respects (or in all
respects in the case of any representation or warranty which refers to a Parent
Material Adverse Effect or otherwise includes a concept of materiality) on and
as of the Closing Date as if made on and as of the Closing Date, (i) except that
any such representations and warranties that are given as of a particular date
and relate solely to a particular date or period shall be true and correct in
all material respects (or in all respects in the case of any representation or
warranty which refers to a Parent Material Adverse Effect or otherwise includes
a concept of materiality) as of such date or period, and (ii) in the case of
Section 5.10
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only, except for such changes with respect thereto (x) which are contemplated by
this Agreement or (y) which are attributable to the execution of this Agreement,
or the announcement or contemplation of the transactions proposed herein; (c)
the Company shall promptly notify Parent and Sub of any event, condition or
circumstance occurring from the date hereof through the Closing Date of which
the Company becomes aware that would cause any material revisions to the Company
Disclosure Schedule provided by the Company pursuant to this Agreement, or that
would constitute a violation or breach of this Agreement by the Company; and (d)
Parent and Sub shall promptly notify the Company of any event, condition or
circumstance occurring from the date hereof through the Closing Date of which it
becomes aware that would cause any material revisions to the Parent Disclosure
Schedule provided by Parent or Sub pursuant to this Agreement, or that would
constitute a violation or breach of this Agreement by Parent or Sub. No such
notification shall be deemed an amendment to the Disclosure Schedules to this
Agreement, except as otherwise provided by this Agreement.
Section 6.4. Corporate Examinations and Investigations.
(a) As promptly as practicable after the date hereof, but in no
event later than 10 days after the date hereof, the Company shall furnish copies
or make available to Parent all due diligence materials requested by Parent, its
legal counsel or accountants. The Company and CDI-LP shall afford to Parent and
to Parent's accountants, counsel and other representatives full access during
normal business hours (and at such other times as the parties may mutually
agree) throughout the period prior to the Effective Date to all of the Company's
and CDI-LP's properties, books, contracts, commitments, records and personnel
and, during such period, the Company shall furnish promptly to Parent all
information concerning its business (including any applications or notifications
made to or by any Governmental Entity), properties and personnel as Parent may
reasonably request. In addition, the Company shall promptly deliver to Parent
all regulatory reports that are filed with respect to the Company or CDI-LP and
any correspondence between the Company or CDI-LP on the one hand and any
regulatory agency on the other hand.
(b) Parent shall cooperate with the Company as the Company shall
reasonably request in connection with the Company's due diligence review of the
Parent, to the extent necessary to confirm the accuracy of Parent's and Sub's
representations and warranties.
(c) If this Agreement terminates, the parties hereto and their
respective affiliates shall keep confidential and shall not use or retain in any
manner any information or documents obtained from any other party concerning its
assets, liabilities, properties, business or operations, unless readily
ascertainable
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from public or published information or trade sources or already known or
subsequently developed by it independently of any investigation of any other
party, or received from a third party not under an obligation to such other
party to keep such information confidential.
Section 6.5. Preparation of Company Restated Financial Statements.
Promptly after the execution of this Agreement, the Company shall cause to be
prepared (i) the consolidated balance sheet of the Company and CDI-LP as of
December 31, 1997, together with the respective related consolidated statements
of income, shareholders' equity and cash flows for the 12 months ended December
31, 1997 and 1996 and (ii) the information required by Item 301 "Selected
Financial Data" of Regulation S-K of the SEC for the 12 months ended December
31, 1995 and 1994 (the "Company Restated Financial Statements"). The Company
Restated Financial Statements shall be prepared in accordance with GAAP applied
on a basis consistent with that used in, and in accordance with the same
accounting principles applied in, the preparation of the Company Financial
Statements and shall include all information and schedules as are required by
Regulation S-X of the SEC. The Company shall cause Deloitte & Touche LLP to
audit the Company Restated Financial Statements, other than the Selected
Financial Data for 1995 and 1994, and shall cause Deloitte & Touche LLP to
issue, on or prior to the Effective Date, an opinion containing no
qualifications or exceptions with respect to the scope of its audit or otherwise
on the Company Restated Financial Statements that such accountants have audited
the Company Restated Financial Statements in accordance with generally accepted
auditing standards and that the Company Restated Financial Statements were
prepared in accordance with GAAP. The Company shall cause the Company Restated
Financial Statements, together with the opinion of Deloitte & Touche LLP
referenced above, to be delivered to Parent on or prior to the Effective Date.
In connection with the preparation of Parent's securities law filings, Arthur
Andersen LLP shall have access to Deloitte & Touche LLP's work papers and
personnel.
Section 6.6. Registration Statement/Proxy Statement.
(a) As promptly as practicable after the execution of this
Agreement, the Company and Parent shall prepare and file with the SEC
preliminary proxy materials which shall constitute the preliminary Proxy
Statement and a preliminary prospectus with respect to the Parent Common Stock
to be issued in connection with the Merger. As promptly as practicable after
comments are received from the SEC with respect to the preliminary proxy
materials and after the furnishing by the Company and Parent of all information
required to be contained therein, the Company shall file with the SEC the
definitive Proxy Statement and Parent shall file with the SEC the definitive
Proxy Statement and the Registration Statement and Parent and the Company shall
use all reasonable efforts to cause the Registration Statement to become
effective as soon thereafter as practicable.
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(b) Parent and the Company shall make all necessary filings with
respect to the Exemptive Relief under the 1940 Act and shall use all reasonable
efforts to obtain required approvals and clearances with respect thereto.
Section 6.7. Compliance with the Securities Act.
(a) Prior to the Effective Date the Company shall cause to be
delivered to Parent an opinion (satisfactory to counsel for Parent) of Lindquist
& Vennum P.L.L.P., identifying all persons who were, in its opinion, at the time
of the Company Meeting convened in accordance with Section 3.9(a), "affiliates"
of the Company as that term is used in paragraphs (c) and (d) of Rule 145 under
the Securities Act (the "Affiliates").
(b) The Company shall use its best efforts to obtain a written
agreement from each person who is identified as a possible Affiliate in the
opinion referred to in clause (a) above, in the form previously approved by the
parties, that he or she will not offer to sell, sell or otherwise dispose of any
of the Parent Common Stock issued to him or her pursuant to the Merger, except
in compliance with Rule 145 or another exemption from the registration
requirements of the Securities Act. The Company shall deliver such written
agreements to Parent on or prior to the Effective Date. The Company shall use
its best efforts to cause each person who is identified as an Affiliate in such
opinion to deliver to Parent, on or prior to the earlier of (i) the mailing of
the Proxy Statement/Prospectus or (ii) the 30th day prior to the Effective Date,
a written agreement, in substantially the form attached hereto as Exhibit G,
that such Affiliate will not thereafter sell or in any other way reduce such
Affiliate's risk relative to any Parent Common Stock received in the Merger
(within the meaning of the SEC's Financial Reporting Release No. 1,
"Codification of Financing Reporting Policies, " ss. 201.01 (47 F.R. 21030)
(April 15, 1982)), until such time as financial results (including combined
sales and net income) covering at least 30 days of post-merger operations have
been published, except as permitted by Staff Accounting Bulletin No. 76 issued
by the SEC. As soon as is reasonably practicable but in no event later than 45
days after the end of the first fiscal quarter of Parent ending at least 30 days
after the Effective Date, Parent will publish results including at least 30 days
of combined operations of Parent and the Company as referred to in the written
agreements provided for by this Section 6.7(b).
Section 6.8. Nasdaq Listing. Parent shall use its best efforts
to list on the Nasdaq National Market, the Parent Common Stock to be issued
pursuant to the Merger.
Section 6.9. Acquisition Proposals. The Company will notify Parent
promptly if any inquiries or proposals are received by, any information is
requested from, or any negotiations or discussions are sought to be initiated or
continued with, the Company or, to the knowledge of the Company, any of the
Company
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Stockholders, in each case in connection with any acquisition, business
combination or purchase of all or any material portion of the assets of, or any
equity interest in, the Company, and will furnish to Parent a copy of any such
proposal received by any of them.
Section 6.10. No Shopping. Subject to the fiduciary duties of the
Board of Directors of the Company, as advised in writing by outside counsel,
prior to the earlier of (i) the Effective Time or (ii) the termination of this
Agreement, the Company shall not, directly or indirectly, through any officer,
director, employee, representative, agent, financial advisor or otherwise (x)
solicit, initiate or knowingly encourage (including by way of furnishing
information) inquiries or submission of proposals or offers from any person
relating to any sale of all or any portion of the assets, business, properties
of (other than immaterial or insubstantial assets), or any equity interest in,
the Company or any business combination with the Company, whether by merger,
consolidation, purchase of assets, tender offer, recapitalization, liquidation,
dissolution or otherwise or any other transaction, the consummation of which
would or could impede, interfere with, prevent or materially delay the Merger
(each, an "Acquisition Proposal") or (y) participate in any negotiation
regarding, or furnish to any other person any information with respect to, or
otherwise knowingly cooperate in any way with, or knowingly assist in,
facilitate or encourage, any effort or attempt by any other person to do or seek
to do any of the foregoing.
Section 6.11. Parent and Sub Approvals. Parent and Sub shall take
all reasonable steps necessary or appropriate to obtain as promptly as
practicable all necessary approvals, authorizations and consents of any person
or Governmental Entity required to be obtained by Parent and Sub to consummate
the transactions contemplated hereby, and will cooperate with the Company in
seeking to obtain all such approvals, authorizations and consents. Parent and
Sub shall use all reasonable efforts to provide such information to such
persons, bodies and authorities as such persons, bodies or authorities or the
Company may reasonably request.
Section 6.12. Company Approvals. The Company shall take all
reasonable steps necessary or appropriate to obtain as promptly as practicable
all necessary approvals, authorizations and consents of any third party or
Governmental Entity required to be obtained by the Company to consummate the
transactions contemplated hereby and will cooperate with Parent in seeking to
obtain all such approvals, authorizations and consents. The Company shall use
all reasonable efforts to provide such information to such persons, bodies and
authorities as such persons, bodies and authorities or Parent may reasonably
request.
Section 6.13. Distribution. The Company shall not declare, set
aside or pay any Distribution, including any
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Distribution relating to its C corporation accumulated earnings and profits,
prior to the Effective Time.
Section 6.14. Expenses . Except as otherwise specifically provided
herein, Parent, Sub and the Company shall bear their respective expenses
incurred in connection with the preparation, execution and performance of this
Agreement and the transactions contemplated hereby, including, without
limitation, all fees and expenses of investment bankers, agents,
representatives, counsel and accountants ("Transaction Expenses"). In any
action, suit or proceeding under or to enforce any provision of this Agreement,
the prevailing party shall be entitled to recover its reasonable attorney's fees
and other out-of-pocket expenses from the losing party.
Section 6.15. Further Assurances.
(a) Each of Parent, Sub and the Company shall execute such documents
and other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby. Each of Parent, Sub and the Company shall use all reasonable efforts to
cause all actions to effectuate the Closing for which such party is responsible
under this Agreement to be taken as promptly as practicable, including using all
reasonable efforts to obtain all necessary waivers, consents and approvals
(including, but not limited to, filings under the H-S-R Act and with all
applicable Governmental Entities) and to lift any injunction or other legal bar
to the Merger (and, in each case, to proceed with the Merger as expeditiously as
possible). Notwithstanding the foregoing, there shall be no action required to
be taken and no action will be taken in order to consummate and make effective
the transactions contemplated by this Agreement if such action, either alone or
together with another action, would result in a Company Material Adverse Effect
or a Parent Material Adverse Effect.
(b) In case at any time after the Effective Time any further action
is necessary or desirable to carry out the purposes of this Agreement, the
proper officers and/or directors of Parent, the Company and the Surviving
Corporation shall take all such necessary action.
Section 6.16. Hart-Scott-Rodino. Each of the Company and Parent (i)
shall use their best efforts to file, and to cause their "ultimate parent
entities" to file, as soon as practicable a "Notification and Report Form For
Certain Mergers and Acquisitions" under the H-S-R Act with respect to the Merger
and the transactions contemplated hereby, (ii) shall take all other actions as
may be necessary, desirable or convenient to obtain the required approval under
the H-S-R Act and (iii) will comply at the earliest practicable date with any
request for additional information received by it from the FTC or Justice
pursuant to the H-S-R Act.
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Section 6.17. SBA Approval. Each of the Company and Parent (i) shall
use their best efforts, and shall take all actions as may be necessary,
desirable or convenient, to obtain the approval of the SBA with respect to the
Merger and the transactions contemplated hereby and (ii) will comply at the
earliest practicable date with any request for additional information received
by it from the SBA.
Section 6.18. Execution of Employment Agreements. Each of the Named
Executives shall execute and deliver an employment agreement as of the date
hereof, in substantially the forms attached hereto as Exhibit D (the "Employment
Agreements"), which Employment Agreements shall become effective as of the
Closing Date.
Section 6.19. Board Attendance Right. From and after the Effective
Date, for as long as any of Named Executives continue to be employed by the
Company, Parent shall permit a designee of the Named Executives, who must be one
of the Named Executives, (the "Management Designee") to attend all meetings of
Parent's Board of Directors. Parent shall provide notice of meetings of the
Board of Directors to the Management Designee at the same time and in the same
manner as it provides to the members of the Board of Directors. The Management
Designee will have no right to vote on any matters which may come before the
Board of Directors.
Section 6.20. Grant of Parent Stock Options. Parent agrees, subject
to the grant by the SEC of exemptive relief under the 1940 Act to permit Parent
to make grants of stock options to employees of its subsidiary companies (the
"Exemptive Relief"), to grant options to purchase 119,786 shares of Parent
Common Stock to employees of the Company at an exercise price of fair market
value of the Parent Common Stock on the date of grant with vesting of one-sixth
of each grant on each of the first six anniversaries of the date of grant.
Parent shall consult with the Named Executives in determining the allocation of
such options among the Company's employees.
Section 6.21. Employee Matters. (a) Parent shall take all actions
necessary or appropriate to permit the employees of the Company and CDI-LP on
the Effective Date to participate after the Effective Date in Parent's employee
benefit programs and to cause the Surviving Corporation to take all actions
necessary or appropriate to adopt Parent's employee benefit programs effective
as of the Effective Date. Parent will cause the Surviving Corporation to give
each employee of the Company and CDI-LP full credit for service with the Company
or its predecessor for purposes of eligibility to participate in, vesting and
payment of benefits under, and eligibility for any subsidized benefit provided
under (but not, except as provided in the preceding clause for purposes of
determining the amount of any benefit under), any Parent employee benefit plan.
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Section 6.22. Compliance with Legal Requirements.
(a) Immediately after the Merger, the Company shall hold at least
90% of the fair market value of its net assets and at least 70% of the fair
market value of its gross assets held immediately prior to the Merger.
(b) As soon as reasonably practicable after the Effective Time,
Parent shall file with the SEC a registration statement on Form S-8 (the "Form
S-8") with respect to each New Parent Stock Option. Subsequent to the Effective
Date, Parent will use its best efforts to keep the Form S-8 current and
effective under the Securities Act, to the extent required by law.
Section 6.23. Indemnification of Company Officers and Directors.
Parent agrees, for a period of six years following the Effective Time, not to
amend the indemnification provisions set forth in the Certificate of
Incorporation or By-Laws of the Surviving Corporation in a manner that would
adversely affect the rights of the Company's officers, directors and employees
to indemnification thereunder and agrees to cause the Surviving Corporation to
fulfill and honor such obligations to the maximum extent permitted by law;
provided, however, that nothing in this Section 6.23 shall prevent Parent from
effecting any merger, reorganization or consolidation of the Surviving
Corporation, provided that, Parent agrees to satisfy any amounts that would have
been payable by the Surviving Corporation (or any successor) and that were not
otherwise paid pursuant to the indemnification provisions set forth in the
Certificate of Incorporation or By-Laws of the Surviving Corporation for a
period commencing at the Effective Time and continuing six years thereafter.
ARTICLE VII.
Conditions Precedent to Each Party's Obligation
to Effect the Merger
The respective obligations of each party to effect the Merger shall
be subject to the satisfaction on or prior to the Closing of the following
conditions, any one or more of which may be waived by them, to the extent
permitted by law:
Section 7.1. Company Stockholder Approval. This Agreement and
the transactions contemplated hereby shall have been approved and adopted by
the requisite vote of the Company's stockholders.
Section 7.2. Listing of Shares. The shares of Parent Common Stock
issuable in the Merger shall have been approved for listing on the Nasdaq
National Market.
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Section 7.3. Hart-Scott-Rodino. All applicable waiting periods with
respect to any "Notification and Report Form For Certain Mergers and
Acquisitions" required to be filed by Parent, the Company or any of their
"ultimate parent entities" in compliance with the H-S-R Act in connection with
the transactions contemplated hereby shall have passed, or early termination of
such waiting periods shall have been granted.
Section 7.4. Effectiveness of Registration Statement. The
Registration Statement shall have become effective in accordance with the
provisions of the Securities Act. No stop order suspending the effectiveness of
the Registration Statement shall have been issued by the SEC and remain in
effect.
Section 7.5. SBA Approval. The SBA shall have approved the Merger,
this Agreement and the transactions contemplated hereby, including the waiver of
any payments due to the SBA as a result of the Company's previous repurchase of
its 3% preferred stock from the SBA and any accrued interest or dividends due to
the SBA as a result of the transactions contemplated hereby and any liens on the
Company's assets or properties in favor of the SBA.
Section 7.6. Litigation. No action, suit or proceeding shall have
been instituted and be continuing or be threatened by any Governmental Entity to
restrain, modify or prevent the carrying out of the transactions contemplated
hereby; no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal or
regulatory restraint or prohibition preventing the consummation of the Merger or
limiting or restricting Parent's conduct or operation of the business of the
Company after the Merger shall have been issued; no action, suit or proceeding
seeking any of the foregoing shall have been instituted by any third party that
has or is reasonably likely to materially impair the Company's or Parent's
ability to consummate the transactions contemplated hereby or have a Company
Material Adverse Effect.
ARTICLE VIII.
Conditions Precedent to the Obligation of
Parent and Sub to Effect the Merger
The obligation of Parent and Sub to effect the Merger shall be
subject to the satisfaction on or prior to the Closing of the following
additional conditions, any one or more of which may be waived by them, to the
extent permitted by law:
Section 8.1. Representations and Covenants. The representations and
warranties of the Company contained in this Agreement (including those contained
in the Company Disclosure Schedule, as the same may be amended from time to time
pursuant to the provisions hereof) shall be true and correct in all
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material respects (or in all respects in the case of any representation or
warranty which refers to a Company Material Adverse Effect or otherwise includes
a concept of materiality) on and as of the Closing Date with the same force and
effect as though made on and as of the Closing Date, (i) except that any such
representations and warranties that are given as of a particular date and relate
solely to a particular date or period shall be true and correct in all material
respects (or in all respects in the case of any representation or warranty which
refers to a Company Material Adverse Effect or otherwise includes a concept of
materiality) as of such date or period, and (ii) in the case of Section 4.12
only, except for such changes with respect thereto (x) which are contemplated by
this Agreement or (y) which are attributable to the execution of this Agreement,
or the announcement or contemplation of the transactions proposed herein. The
Company and the Company Stockholders who are parties to a Voting Agreement,
dated the date hereof (the "Voting Agreement"), shall have performed and
complied, respectively, in all material respects with all covenants and
agreements required by this Agreement and the Voting Agreement to be performed
or complied with by the Company or such Company Stockholders on or prior to the
Closing Date. The Company shall have delivered to Parent and Sub certificates,
dated the Closing Date, and signed by an Executive Officer of the Company to the
foregoing effect.
Section 8.2. Absence of Material Adverse Change. There shall have
been no material adverse change in the business, operations or financial
condition of the Company, except for such changes with respect thereto (x) which
are contemplated by this Agreement or (y) which are attributable to the
execution of this Agreement, or the announcement or contemplation of the
transactions proposed herein.
Section 8.3. Receipt of Agreements. On the date hereof, Parent shall
have received executed originals of (i) the Voting Agreement and (ii) the
Employment Agreements from each of the Named Executives. At the Closing, Parent
shall have received executed originals of the Holdback Escrow Agreement among
the Company, Parent, the Indemnification Representative, on behalf of the
Company Stockholders, and the other parties thereto.
Section 8.4. Accountant's Letters.
(a) Parent shall have received a letter from Arthur Andersen LLP
regarding the firm's concurrence with Parent management's conclusions as to the
appropriateness of pooling of interests accounting for the Merger under
Accounting Principles Board Opinion No. 16 if closed and consummated in
accordance with this Agreement.
(b) Parent shall have received a letter of Deloitte & Touche LLP,
the Company's independent auditors, dated a date within two Business Days before
the date on which the Registration Statement shall become effective and
addressed to
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Parent, in form and substance reasonably satisfactory to Parent and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement.
Section 8.5. Dissenting Shares. The number of shares of Company
Common Stock for which written demand for payment has been made pursuant to
Section 302A.473 of the Minnesota Corporation Law, shall not exceed 1% in the
aggregate, of the total number of shares of Company Common Stock outstanding
immediately before the Effective Time.
Section 8.6. Opinions of Counsel to the Company. Parent shall have
received the opinion of Lindquist & Vennum P.L.L.P., counsel to the Company,
dated the Closing Date, in substantially the form of Exhibit E.
Section 8.7. Tax Opinion. Parent shall have received a favorable
opinion of Willkie Farr & Gallagher, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and that the Company, Parent and Sub will each be
a party to that reorganization within the meaning of Section 368(b) of the Code.
Section 8.8. Termination of Management Agreement. The Company's
management agreement with Capital Dimensions Management Company, Inc. shall
have been terminated, with no resulting liability to the Company.
Section 8.9. Amendment of Agreements With Holders of Company Stock
Options. Each holder of Company Stock Options which provide for accelerated
vesting upon a change in control of the Company shall have executed an amendment
to his or her stock option agreement to delete such provisions thereof.
Section 8.10. Closing Conditions. Documentation or other information
shall have been received in a form reasonably satisfactory to Parent and Sub
which evidences that the conditions set forth in this Article VIII have been
satisfied.
ARTICLE IX.
Conditions Precedent to the Obligation of the
Company to Effect the Merger
The obligation of the Company to effect the Merger shall be subject
to the satisfaction on or prior to the Closing of the following additional
conditions, any one or more of which may be waived by the Company, to the extent
permitted by law:
Section 9.1. Representations and Covenants. The representations and
warranties of Parent and Sub contained in this Agreement shall be true and
correct in all material respects (or in all respects in the case of any
representation or warranty which refers to a Parent Material Adverse Effect or
that includes a concept of materiality) on and as of the Closing Date with the
same force and effect as though made on and as of the Closing Date, (i) except
that any such representations and warranties that are given as of a particular
date and relate solely to a particular date or period shall be true and correct
in all material respects
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(or in all respects in the case of any representation or warranty which refers
to a Parent Material Adverse Effect or that includes a concept of materiality)
as of such date or period, and (ii) in the case of Section 5.10 only, except for
such changes with respect thereto (x) which are contemplated by this Agreement
or (y) which are attributable to the execution of this Agreement, or the
announcement or contemplation of the transactions proposed herein. Parent and
Sub shall have performed and complied in all material respects with all
covenants and agreements required by this Agreement to be performed or complied
with by Parent or Sub on or prior to the Closing Date. Parent and Sub shall have
delivered to the Company certificates of an Executive Officer of Parent and Sub,
dated the Closing Date, to the foregoing effect.
Section 9.2. Absence of Material Adverse Change. There shall have
been no material adverse change in the business, operations or financial
condition of Parent and its Subsidiaries, taken as a whole, except for such
changes with respect thereto (x) which are contemplated by this Agreement or (y)
which are attributable to the execution of this Agreement or the announcement or
contemplation of the transactions proposed herein.
Section 9.3. Receipt of Agreements. On the date hereof, the
Company shall have received executed originals of the Employment Agreements
with the Named Executives.
Section 9.4. Accountant's Letter. The Company shall have received a
letter from Deloitte & Touche LLP indicating that Deloitte & Touche LLP has
performed certain specified procedures and nothing has come to such firm's
attention which would cause it to believe that matters exist which would
preclude Parent from accounting for the merger as a pooling of interests under
Accounting Principles Board Opinion No. 16 without consideration of the
Agreement and any actions contemplated thereby.
Section 9.5. Opinion of Counsel to Parent. The Company Stockholders
shall have received the opinion of Willkie Farr & Gallagher, counsel to Parent,
dated the date of the Closing, in substantially the form of Exhibit F.
Section 9.6. Tax Opinion. The Company shall have received a
favorable opinion of Lindquist & Vennum P.L.L.P., counsel to the Company, to the
effect that the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, and that the
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Company, Parent and Sub will each be a party to that reorganization within the
meaning of Section 368(b) of the Code.
Section 9.7. Closing Conditions. Documentation or other information
shall have been received in a form reasonably satisfactory to the Company which
evidences that the conditions set forth in this Article IX have been satisfied.
ARTICLE X.
Closing
The closing (the "Closing") of the transactions contemplated by this
Agreement shall take place at the offices of Willkie Farr & Gallagher, 153 East
53rd Street, New York, New York, at 10:00 a.m. local time on the Closing Date or
at such other time and place as the parties may mutually agree.
ARTICLE XI.
Survival of Representations and Warranties; Indemnification
Section 11.1. Survival of Representations and Warranties.
Notwithstanding any right of Parent and Sub to investigate fully the affairs of
the Company, or any right of the Company to investigate fully the accuracy of
the representations and warranties of Parent and Sub, and notwithstanding any
knowledge of facts determined or determinable by Parent, Sub or the Company, as
the case may be, pursuant to such investigation or right of investigation,
Parent, Sub and the Company, as the case may be, have the right to rely fully
upon the representations, warranties, covenants and agreements of the Company,
Parent and Sub, as the case may be, contained in this Agreement. The
representations and warranties of Parent, Sub and the Company and the covenants
to be performed by the Company prior to the Effective Time shall survive the
execution and delivery hereof and the Closing hereunder in accordance with the
applicable statute of limitations, provided, however, that the representation of
the Company contained in Section 4.33 hereof shall survive only until the
Effective Time.
Section 11.2. Indemnification by Company Stockholders.
(a) If the closing of the Merger shall occur, then, subject to the
provisions of this Section 11.2 and the Holdback Escrow Agreement, the Company
Stockholders shall indemnify, defend and hold harmless Parent and Sub, and each
other person, if any, who controls Parent and Sub within the meaning of the
Securities Act, from and against all Damages in accordance with the terms of,
subject to the limitations set forth in and as defined in, the Holdback Escrow
Agreement.
(b) Each Company Stockholder, by virtue of the Merger and this
Agreement, whether or not such holder voted in favor of
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the Merger, shall be bound by provisions of this Agreement and the Holdback
Escrow Agreement.
(c) In the event that Parent elects, pursuant to Section 3.3(c)
hereof, to waive the escrow arrangements contemplated hereby and by the Holdback
Escrow Agreement, then the indemnification provisions of Section 11.2(a) and (b)
hereof shall automatically be deemed waived and shall be of no force and effect.
ARTICLE XII.
Termination of Agreement
Section 12.1. Termination. This Agreement may be terminated
prior to the Closing as follows:
(a) by either Parent or the Company if the Merger shall not have
been consummated on or before June 30, 1998;
(b) by Parent, within 45 days of the date of this Agreement, if (x)
Parent's management concludes as a result of Parent's legal, business and
financial due diligence review of the Company that the Company's business,
properties, assets, condition (financial or otherwise), liabilities, operations
or prospects are not satisfactory or (y) Parent's Board of Directors concludes
as a result of Parent's legal, business and financial due diligence review of
the Company that (i) any representation or warranty made by the Company in this
Agreement is not true and correct in any material respect or (ii) the Company
has failed to disclose to Parent any information that could result in a Company
Material Adverse Effect and in each case such untruth or failure (A) is not
corrected in an amendment to the Company Disclosure Schedule delivered by the
Company to Parent pursuant to the provisions of the first sentence of Section
14.4 hereof or (B) is not cured within 15 days after notice thereof is given by
Parent to the Company; provided, however, that an amendment to the Company
Disclosure Schedule shall not constitute a cure under this clause (B);
(c) by the Company if any of the conditions specified in Article VII
or IX have not been met or waived by the Company at such time as any such
condition is no longer capable of satisfaction;
(d) by Parent if any of the conditions specified in Article VII or
VIII have not been met or waived by Parent at such time as any such condition is
no longer capable of satisfaction;
(e) by Parent if the Company or the Company Stockholders who are
parties to the Voting Agreement shall have breached any of their respective
obligations under Article VI of this Agreement or the Voting Agreement in any
material respect
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and such breach continues for a period of ten days after the receipt of notice
of the breach from Parent;
(f) by the Company if Parent or Sub shall have breached any of their
respective obligations under Article VI of this Agreement in any material
respect and such breach continues for a period of ten days after the receipt of
notice of the breach from the Company;
(g) by the Company if its Board of Directors, in the exercise of its
fiduciary duties, accepts an Acquisition Proposal; or
(h) at any time on or prior to the Closing Date, by mutual written
consent of Parent, Sub and the Company.
Section 12.2. Effect of Termination. If this Agreement is terminated
and the transactions contemplated hereby are not consummated as described above,
this Agreement shall become void and be of no further force and effect, except
for the provisions of this Agreement relating to the obligations of parties
under Sections 6.4(c) 6.14, 6.15, 12.2 and 12.3. None of the parties hereto
shall have any liability in respect to a termination of this Agreement prior to
Closing, except to the extent that termination results from the intentional,
willful or knowing violation of the representations, warranties, covenants or
agreements of such party under this Agreement and except as provided in Section
12.3 hereof.
Section 12.3. Termination Expenses.
(a) If this Agreement is terminated by Parent pursuant to the
provisions of Section 12.1(b)(y) or (1) pursuant to the provisions of Section
12.1(d) and (2) the representation made by the Company in Section 4.33 hereof
shall have been breached, the Company shall, within fifteen days of a written
demand by Parent, pay to Parent by wire transfer of immediately available funds
the lesser of $200,000 or the actual amount of Parent's Transaction Expenses.
(b) If this Agreement is terminated by the Company pursuant to the
provisions of Section 12.1(g) and a definitive agreement with respect to an
Acquisition Proposal is executed, or an Acquisition Proposal is consummated, at
or within 12 months of such Acquisition Proposal, then the Company shall, within
ten days of a written demand by Parent, pay to Parent by wire transfer of
immediately available funds an amount equal to $3,000,000.
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ARTICLE XIII.
Definitions
Section 14. Definitions. The following terms when used in this
Agreement shall have the following meanings:
"Acquisition Proposal" has the meaning set forth in Section 6.10.
"affiliate" (or "affiliates" as the context may require), with
respect to any person, means any other person controlling, controlled by or
under common control with such person.
"Affiliates" has the meaning set forth in Section 6.7(a).
"Agreement" has the meaning set forth in the preamble.
"Business Day" means any day other than a Saturday or a Sunday, or a
day on which banking institutions in the State of New York are obligated by law
or executive order to close.
"CDI-LP" has the meaning set forth in Section 4.7.
"CERCLA" shall mean the Comprehensive Environmental Response
Compensation and Liability Act, 42 U.S.C. ss.ss. 9601 et seq. as amended.
"Certificates" has the meaning set forth in Section 3.4(a).
"Closing" has the meaning set forth in Article X.
"Closing Date" means (a) the third Business Day following the day on
which the last of all conditions to the consummation of the transactions
contemplated hereby (other than conditions which contemplate only delivery or
filing of one or more documents contemporaneously with the Closing) have been
satisfied or waived, or (b) such other date as the parties hereto agree in
writing.
"Code" has the meaning set forth in the recitals.
"Company" has the meaning set forth in the preamble.
"Company Common Stock" means the common stock of the Company, no
par value per share.
"Company Disclosure Schedule" has the meaning set forth in the
preamble to Article IV.
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"Company Documents" has the meaning set forth in Section 4.1.
"Company Financial Statements" has the meaning set forth in
Section 4.10.
"Company Interim Financial Statements" has the meaning set forth
in Section 4.10.
"Company Material Adverse Effect" has the meaning set forth in
Section 4.3.
"Company Meeting" has the meaning set forth in Section 3.9(a).
"Company Preferred Stock" means the preferred stock of the
Company.
"Company Restated Financial Statements" has the meaning set forth
in Section 6.5.
"Company SEC Documents" has the meaning set forth in Section 4.10.
"Company Stock Option Conversion" has the meaning set forth in
Section 3.7(b).
"Company Stock Options" means the options to purchase Company Common
Stock issued under the Company's 1997 Stock Option Plan, as in effect on the
date hereof.
"Company Stockholders" has the meaning set forth in Section
1.3(b).
"contracts and other agreements" mean all contracts, agreements,
supply agreements, undertakings, indentures, notes, bonds, loans, instruments,
leases, mortgages, commitments or other binding arrangements.
"Delaware Corporation Law" has the meaning set forth in Section
1.1.
"Determination Period" has the meaning set forth in Section 3.1.
"Dissenting Shares" has the meaning set forth in Section 3.2.
"Distribution" means any distribution of cash, securities or
property on or in respect of the Company Common Stock, or Parent Common Stock,
as the case may be, whether as a dividend or otherwise.
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"Effective Time" has the meaning set forth in Section 1.2.
"Employment Agreements" has the meaning set forth in Section 6.18.
"Environmental Laws" means all federal, state, and local laws,
ordinances, rules, regulations, codes, duties under the common law or orders,
including, without limitation, any requirements imposed under any Permits,
licenses, judgments, decrees, agreements or recorded covenants, conditions,
restrictions or easements, the purpose of which is to protect the environment,
human health, safety or welfare, or which pertain to Hazardous Materials.
"Environmental Permits" shall mean all Permits, licenses, approvals,
authorizations, consents or registrations required under applicable
Environmental Laws in connection with the ownership, use and/or operation by the
Company of its properties.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Escrow Claim Event" has the meaning set forth in Section 3.3(a).
"Escrow Holdback Shares" has the meaning set forth in Section
3.3(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the regulations and rulings issued thereunder.
"Exchange Agent" has the meaning set forth in Section 3.4(a).
"Exchange Ratio" has the meaning set forth in Section 3.1(a)(1).
"Executive Officers" means, as to Parent and the Company,
respectively, its chairman of the board, its president, any vice president
(executive, senior or other), secretary, treasurer or chief financial officer,
if any, or any other officer or employee having supervisory responsibility for a
principal business function.
"Exemptive Relief" has the meaning set forth in Section 6.20.
"Form S-8" has the meaning set forth in Section 6.22.
"FTC" means the Federal Trade Commission or any successor agency
or department.
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"GAAP" means generally accepted accounting principles in the United
States of America from time to time in effect.
"Governmental Entities" means (a) any international, foreign,
federal, state, county, local or municipal government or administrative agency
or political subdivision thereof, (b) any governmental agency, authority, board,
bureau, commission, department or instrumentality, (c) any court or
administrative tribunal, (d) any non-governmental agency, tribunal or entity
that is vested by a governmental agency with applicable jurisdiction, or (e) any
arbitration tribunal or other non-governmental authority with applicable
jurisdiction.
"Hazardous Materials" means (i) any substance or material regulated
or identified under Environmental Laws; (ii) gasoline, diesel fuel or other
petroleum hydrocarbons, PCBs or asbestos; or (iii) any pollutant, toxic
substance, or contaminant.
"Holdback Escrow Agent" has the meaning set forth in Section
3.3(a).
"Holdback Escrow Agreement" has the meaning set forth in Section
3.3(a).
"H-S-R Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations promulgated thereunder.
"Insurance Policies" has the meaning set forth in Section 4.25.
"Intellectual Property Rights" has the meaning set forth in
Section 4.19(a).
"IRS" means the Internal Revenue Service or any successor agency
or department.
"Justice" means the Antitrust Division of the Department of
Justice or any successor agency or department.
"Leased Real Property" has the meaning set forth in Section
4.18(a).
"Leases" has the meaning set forth in Section 4.18(a).
"Liabilities" has the meaning set forth in Section 4.11.
"lien or other encumbrance" (or "liens or other encumbrances" or
"liens or other encumbrance" or "lien or other encumbrances" as the context may
require or any similar formulation) means any lien, claim, pledge, mortgage,
assessment, security interest, charge, option, right of first refusal,
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easement, servitude, adverse claim, transfer restriction under any stockholder
or similar agreement or other encumbrance of any kind.
"Management Designee" has the meaning set forth in Section 6.19.
"Merger" has the meaning set forth in the recitals.
"Minnesota Corporation Law" has the meaning set forth in Section
1.1.
"Named Executive" means each of Thomas F. Hunt, Jr., Dean R.
Pickerell and Stephen A. Lewis.
"New Parent Stock Option" has the meaning set forth in Section
3.7.
"1940 Act" shall mean the Investment Company Act of 1940, as
amended, and the regulations and rulings issued thereunder.
"Parent" has the meaning set forth in the preamble.
"Parent Common Stock" means the common stock, par value $.01 per
share, of Parent.
"Parent Disclosure Schedule" has the meaning set forth in the
preamble to Article V.
"Parent Documents" has the meaning set forth in Section 5.1.
"Parent Financial Statements" has the meaning set forth in
Section 5.4.
"Parent Interim Financial Statements" has the meaning set forth
in Section 5.4.
"Parent Material Adverse Effect" has the meaning set forth in
Section 5.2.
"Parent SEC Documents" has the meaning set forth in Section 5.4.
"Permits" (or "Permit" as the context may require) mean all
licenses, permits, certificates, certificates of occupancy, orders, approvals,
registrations, authorizations, inspections, qualifications and filings with and
under all federal, state, local or foreign laws and Governmental Entities.
"person" (or "persons" as the context may require) means any
individual, corporation, partnership, firm, joint
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venture, association, joint-stock company, trust, unincorporated organization,
Governmental Entity or other entity.
"Plan" or "Plans" has the meaning set forth in Section 4.23(a).
"property" (or "properties" as the context may require) means real,
personal or mixed property, tangible or intangible.
"Proxy Statement" has the meaning set forth in Section 4.9.
"Receiving Party" has the meaning set forth in Section 14.1.
"Registration Statement" has the meaning set forth in Section 4.9.
"Releasing Party" has the meaning set forth in Section 14.1.
"Remedial Action" shall mean any action required to (i) clean up,
remove or treat Hazardous Materials; (ii) prevent a release or threat of release
of any Hazardous Material; (iii) perform pre-remedial studies, investigations or
post-remedial monitoring and care; (iv) cure a violation of Environmental Law or
(v) take corrective action under sections 3004(u), 3004(v) or 3008(h) of the
Resource Conservation Recovery Act, 42 U.S.C.
ss.ss. 6901 et seq. or analogous state law.
"SBA" has the meaning set forth in Section 4.2.
"SEC" means the Securities and Exchange Commission or any
successor agency or department.
"Securities Act" means the Securities Act of 1933, as amended, and
the regulations and rulings issued thereunder.
"Share Consideration" has the meaning set forth in Section 3.4(a).
"Sub" has the meaning set forth in the preamble hereof.
"Sub Common Stock" means the common stock, par value $.01 per share,
of Sub.
"Subsidiaries" (or "Subsidiary" as the context may require), means
each entity as to which a person, directly or indirectly, owns or has the power
to vote, or to exercise a controlling influence with respect to, 50% or more of
the securities of any class of such entity, the holders of which are ordinarily,
in the absence of contingencies, entitled to vote for the election of directors
(or persons performing similar functions) of such entity.
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"Surviving Corporation" has the meaning set forth in Section 1.1.
"Taxes" (or "Tax" as the context may require) means all federal,
state, county, local, foreign and other taxes (including, without limitation,
income, intangibles, premium, excise, sales, use, gross receipts, franchise, ad
valorem, severance, capital levy, transfer, employment and payroll-related, and
property taxes, import duties and other governmental charges and assessments),
and includes interest, additions to tax and penalties with respect thereto.
"Transaction Expenses" has the meaning set forth in Section 6.14.
"Voting Agreement" has the meaning set forth in Section 8.1.
ARTICLE XV.
Miscellaneous
Section 14.1. Publicity. So long as this Agreement is in effect,
prior to making a press release or other public statement with respect to the
transactions contemplated by this Agreement, any party (a "Releasing Party")
will consult with the other party (the "Receiving Party") and provide such other
party with a draft of such press release, except as may otherwise be required by
law or stock exchange regulations.
Section 14.2. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally, sent
by facsimile transmission or sent by certified, registered, express mail or
nationally recognized courier service, postage prepaid. Any such notice shall be
deemed given when so delivered personally or successfully sent by facsimile
transmission or, if mailed, five days after the date of deposit in the United
States mails, as follows:
(i).if to Parent or Sub to:
Medallion Financial Corp.
437 Madison Avenue
New York, NY 10022
Attention: Andrew Murstein, President
Telecopy No.: (212) 328-2125
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and
Medallion Financial Corp.
437 Madison Avenue
New York, NY 10022
Attention: Allen Greene, Chief Operating Officer
Telecopy No.: (212) 328-2125
with a concurrent copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Christopher E. Manno, Esq.
Telecopy No.: (212) 821-8111
(ii) if to the Company to:
Capital Dimensions, Inc.
7831 Glenroy Road, Suite 480
Minneapolis, MN 55439
Attention: Thomas F. Hunt, Jr., President
Telecopy No.:(612) 831-2945
with, prior to the Closing, a concurrent copy to:
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Attention: Richard D. McNeil, Esq.
Telecopy No.: (612) 371-3207
Any party may by notice given in accordance with this Section 14.2
to the other parties designate another address or person for receipt of notices
hereunder.
Section 14.3. Entire Agreement. This Agreement (including the
exhibits and schedules hereto) and the agreements contemplated hereby contain
the entire agreement among the parties with respect to the subject matter
hereof, and supersede all prior agreements, written or oral, with respect
thereto.
Section 14.4. Waivers and Amendments; Non Contractual Remedies;
Preservation of Remedies; Liability. This Agreement may be amended, superseded,
canceled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by each of the parties or, in the case of waiver, by
the party waiving compliance; provided, however, that the Company may amend the
Company Disclosure Schedule within 15 days of the date of this Agreement without
the consent of Parent. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof. Nor shall
any waiver on the part of any party of any such right, power or
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privilege, nor any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided are
cumulative and, except as provided (i) in Section 12.2 and (ii) if the Closing
occurs, in Section 11.2(a) and the Holdback Escrow Agreement, are not exclusive
of any rights or remedies that any party may otherwise have at law or in equity.
The rights and remedies of any party based upon, arising out of or otherwise in
respect of any inaccuracy in or breach of any representation, warranty, covenant
or agreement contained in this Agreement shall in no way be limited by the fact
that the act, omission, occurrence or other state of facts upon which any claim
of any such inaccuracy or breach is based may also be the subject matter of any
other representation, warranty, covenant or agreement contained in this
Agreement (or in any other agreement between the parties) as to which there is
no inaccuracy or breach. The limitations on claims set forth in this Section
14.4 and elsewhere in this Agreement (including Article XI) and in the Holdback
Escrow Agreement shall not apply in the case of fraud on the part of the
Company.
Section 14.5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
Section 14.6. Binding Effect; No Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns and heirs and legal representatives. Neither this
Agreement, nor any right hereunder, may be assigned by any party without the
prior written consent of the other party hereto.
Section 14.7. Third Party Beneficiaries. Except for Sections 3.7,
6.22(b) and 6.23, nothing in this Agreement is intended or shall be construed to
give any person, other than the parties hereto, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision contained
herein.
Section 14.8. Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a number
of copies hereof each signed by less than all, but together signed by all of the
parties hereto.
Section 14.9. Exhibits and Schedules. The exhibits and schedules
hereto are a part of this Agreement as if fully set forth herein. All references
herein to Articles, Sections, subsections, clauses, exhibits and schedules shall
be deemed references to such parts of this Agreement, unless the context shall
otherwise require.
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Section 14.10. Headings. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement.
Section 14.11. Submission to Jurisdiction; Venue. Any action or
proceeding against any party hereto with respect to this Agreement shall be
brought in the courts of the State of Delaware or of the United States for the
District of Delaware, and, by execution and delivery of this Agreement, each
party hereto hereby irrevocably accepts for itself and in respect of its
property, generally and unconditionally, the jurisdiction of the aforesaid
courts. Each party hereto irrevocably consents to the service of process at any
of the aforementioned courts in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth in Section 14.2, such service to become effective 30
days after such mailing. Nothing herein shall affect the right of any party
hereto to serve process on any other party hereto in any other manner permitted
by law. Each party hereto irrevocably waives any objection which it may now have
or hereafter have to the laying of venue of any of the aforesaid actions or
proceedings arising out of or in connection with this Agreement brought in the
courts referred to above and hereby further irrevocably waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum.
Section 14.12. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
Section 14.13. Severability. If any court of competent jurisdiction
determines that any provision of this Agreement is not enforceable in accordance
with its terms, then such provision shall be deemed to be modified so as to
apply such provision, as modified, to the protection of the legitimate interests
of the parties hereto to the fullest extent legally permissible and shall not
affect the validity or enforceability of the remaining provisions of this
Agreement.
[Signature Pages Follow.]
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
MEDALLION FINANCIAL CORP.
By: /s/ Andrew Murstein
_________________________
Name: Andrew Murstein
Title: President
CD MERGER CORP.
By: /s/ Andrew Murstein
_________________________
Name: Andrew Murstein
Title: President
CAPITAL DIMENSIONS, INC.
By: /s/ Thomas Hunt, Jr.
_________________________
Name: Thomas Hunt, Jr.
Title: President
<PAGE>
EXHIBIT 3.1.1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
MEDALLION FINANCIAL CORP.
Medallion Financial Corp., a corporation duly organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
I. The amendment to the Corporation's Restated Certificate of
Incorporation set forth below was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware and has
been approved at the annual meeting of the stockholders of the Corporation which
was duly called and held, upon notice in accordance with Section 222 of the
General Corporation Law of the State of Delaware, at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
II. Article "FOURTH" of the Corporation's Restated Certificate of
Incorporation is amended to read in its entirety as follows:
"FOURTH: The aggregate number of shares of all classes of stock which
the Corporation is authorized to issue is fifty-one million
(51,000,000) shares of which one million (1,000,000) shall be shares
of Preferred Stock, par value $.01 per share, (the "Preferred Stock")
---------------
and fifty million (50,000,000) shall be shares of Common Stock, par
value $.01 per share (the "Common Stock").
------------
Any action required or permitted to be taken by the holders of any
class or series of stock of the Corporation may be taken by written
consent or consents but only if such consent or consents are signed by
all holders of the class or series of stock entitled to vote on such
action.
SECTION 1. COMMON STOCK.
-------------
The powers, preferences, rights, qualifications, limitations and
restrictions relating to the Common Stock are as follows:
a. The Common Stock is junior to the Preferred Stock and is
subject to all the powers, rights, privileges, preferences and
priorities of the Preferred Stock designated
<PAGE>
herein or in any resolution or resolutions adopted by the Board of
Directors pursuant to authority expressly vested in it by the
provisions of SECTION 2 of this ARTICLE FOURTH.
b. The Common Stock shall have voting rights for the election of
directors and for all other purposes (subject to the powers, rights,
privileges, preferences and priorities of the Preferred Stock as
provided above), each holder of Common Stock being entitled to one
vote for each share thereof held by such holder, except as otherwise
required by law.
SECTION. 2 PREFERRED STOCK.
---------------
The Board of Directors is expressly authorized to provide for the
issuance of all or any part of the shares of the Preferred Stock in
one or more classes or series, and to fix for each such class or
series such voting powers, full or limited, or fractional, or no
voting powers, and such distinctive designations, preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions adopted by the
Board of Directors in its sole discretion providing for the issuance
of such class or series and as may be permitted by the Delaware
General Corporation Law including, without limitation, (i) whether
such shares shall be redeemable, and, if, so, the terms and conditions
of such redemption, whether for cash, property or rights, including
securities of any other corporation, and whether at the option of
either the Corporation or the holder or both, including the date or
dates or the event or events upon or after which they shall be
redeemable, and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates; (ii) whether such shares shall be entitled to
receive dividends (which may be cumulative or noncumulative) at such
rates, on such conditions, and at such times, and payable in
preference to, in such relation to, the dividends payable on any other
class or classes or any other series;
-2-
<PAGE>
(iii) the rights of such shares in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights of priority, if any, of payment of such
shares; (iv) whether such shares shall be convertible into, or
exchangeable for, shares of any other class or classes of stock, or of
any other series of the same or any other class or classes of stock,
whether at the option of either the Corporation or the holder or both,
and, if so, the terms and conditions of such conversion, including
provisions for adjustment of the conversion rate in such events as the
Board of Directors shall determine; (v) whether the class or series
shall have a sinking fund for the redemption or purchase of such
shares, and, if so, the terms and amount of such sinking fund; or (vi)
provisions as to any other voting, optional, and/or special or
relative rights, preferences, limitations, or restrictions; and (vii)
the number of shares and designation of such class or series.
SECTION. 3 SHARES ENTITLED TO MORE OR
--------------------------
LESS THAN ONE VOTE.
------------------
If any class or series of the Corporation's capital stock shall be
entitled to more or less than one vote per share, on any matter, every
reference in this Restated Certificate of Incorporation or in any
resolution or resolutions adopted by the Board of Directors pursuant
to authority expressly vested in it by the provisions of SECTION 2 of
this ARTICLE FOURTH with respect to the Preferred Stock or in any
relevant provision of law or in any rule or regulation, to a majority
or other proportion of stock shall be deemed to refer to such majority
or other proportion of the votes of such stock."
IN WITNESS WHEREOF, Medallion Financial Corp. has caused this Certificate
to be signed by Allen S. Greene, its authorized officer, this 30th day of June
1998.
BY: /s/ Allen S. Greene
______________________________
NAME: Allen S. Greene
TITLE: Senior Executive Vice
President and Chief
Operating OfficerABC
-3-
<PAGE>
EXHIBIT 10.1
MEDALLION FINANCIAL CORP.
Amended and Restated 1996 Stock Option Plan
The 1996 Stock Option Plan, amended and restated as of February 25, 1998
(the "Plan"), is intended to encourage ownership of Common Stock, $0.01 par
value (the "Stock") of Medallion Financial Corp. (the "Company") by officers and
employees of the Company and its affiliates so as to provide additional
incentives to promote the success of the Company and its affiliates through the
grant of Incentive Stock Options and Nonstatutory Stock Options (collectively,
as defined below, "Options").
1. Administration of the Plan.
--------------------------
The Plan shall be administered by the Board of Directors of the Company
(the "Board") or a committee of the Board (the entity administering the Plan
hereafter referred to as "Committee"). Within the limits of the Plan, the
Committee shall determine the individuals to whom, and the times at which,
Options shall be granted, the type of Option to be granted, the duration of each
Option, the price and method of payment for each Option, and the time or times
within which (during its term) all or portions of each Option may be exercised.
The Committee may establish such rules as it deems necessary for the proper
administration of the Plan, make such determinations and interpretations with
respect to the Plan and Options granted under it as may be necessary or
desirable and include such further provisions or conditions in Options granted
under the Plan as it deems advisable. To the extent permitted by law, the
Committee may delegate its authority under the Plan to other individuals;
provided, however, that Options granted to any person subject to Section 16 of
the Securities Exchange Act of 1934 (the "Exchange Act") shall be granted by the
Board or a committee of at least two members thereof, each of whom shall be a
"non-employee director" within the meaning of Rule 16b-3 of the Exchange Act.
In addition, to the degree that Options granted to any person are intended to
qualify as performance-based compensation within the meaning of Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code"), such Options
shall be granted by at least two members of the Board who are "outside
directors" within the meaning of Section 162(m) of the Code.
2. Shares Subject to the Plan.
--------------------------
(a) Number and Type of Shares. The aggregate number of shares of
-------------------------
Stock of the Company which may be optioned under the Plan is 1,500,000 shares.
In the event that the Committee in its discretion determines that any stock
dividend, split-up, combination or reclassification of shares, recapitalization
or other similar capital change affects the
<PAGE>
Stock such that adjustment is required in order to preserve the benefits or
potential benefits of the Plan or any Option granted under the Plan, the maximum
aggregate number and kind of shares or securities of the Company as to which
Options may be granted under the Plan and as to which Options then outstanding
shall be exercisable, and the option price of such Options, shall be
appropriately adjusted by the Committee (whose determination shall be
conclusive) so that the proportionate number of shares or other securities as to
which Options may be granted and the proportionate interest of holders of
outstanding Options shall be maintained as before the occurrence of such event.
(b) Effect of Certain Transactions. In the event of a consolidation
------------------------------
or merger of the Company with another corporation, or the sale or exchange of
all or substantially all of the assets of the Company, or a reorganization or
liquidation of the Company, each holder of an outstanding Option shall be
entitled to receive upon exercise and payment in accordance with the terms of
the Option the same shares, securities or property as he would have been
entitled to receive upon the occurrence of such event if he had been,
immediately prior to such event, the holder of the number of shares of Stock
purchasable under his Option; provided, however, that in lieu of the foregoing
the Board of Directors of the Company (the "Board") may upon written notice to
each holder of an outstanding Option provide that such Option shall terminate on
a date not less than 20 days after the date of such notice unless theretofore
exercised. In connection with such notice, the Board may in its discretion
accelerate or waive any deferred exercise period. Options granted under this
Plan may contain such provisions as the Committee shall approve permitting part
or all of such options to become exercisable without regard to any deferred
exercise period in the event of a change of control of the Company, as defined
by the Committee.
(c) Restoration of Shares. If any Option expires or is terminated
---------------------
unexercised or is forfeited for any reason, the shares subject to such Option,
to the extent of such expiration, termination or forfeiture, shall again be
available for granting Options under the Plan, subject, however, in the case of
Incentive Stock Options, to any requirements under the Code.
(d) Reservation of Shares. The Company shall at all times while the
---------------------
Plan is in force reserve such number of shares of Stock as will be sufficient to
satisfy the requirements of the Plan. Shares issued under the Plan may consist
in whole or in part of authorized but unissued shares or treasury shares.
3. Grant of Options; Eligible Persons.
----------------------------------
(a) Types of Options. Options may be granted under the Plan either
----------------
as incentive stock options ("Incentive Stock Options"), as defined in Section
422 of the Code or as Options which do not meet the requirements of Section 422
("Nonstatutory
-2-
<PAGE>
Stock Options"). Options may be granted from time to time by the Committee,
within the limits set forth in Sections 1 and 2 of the Plan, to all employees of
the Company or of any parent corporation or subsidiary corporation of the
Company (as defined in Sections 424(e) and (f), respectively, of the Code);
provided, however, that Options with respect to no more than 500,000 shares of
Stock may be granted to any individual in any single calendar year.
(b) Date of Grant. The date of grant for each Option shall be the
-------------
date on which it is approved by the Committee, or such later date as the
Committee may specify. No Incentive Stock Options shall be granted hereunder
after ten years from the date on which the Plan was approved by the Board.
(c) Automatic Awards. The Committee may provide for the automatic
----------------
award of an Option upon the delivery of shares to the Company in payment of an
Option for up to the number of shares so delivered.
4. Form of Options.
---------------
Options granted hereunder shall be evidenced by a writing delivered to the
optionee specifying the terms and conditions thereof and containing such other
terms and conditions not inconsistent with the provisions of the Plan as the
Committee considers necessary or advisable to achieve the purposes of the Plan
or comply with applicable tax and regulatory laws and accounting principles.
The form of such Options may vary among optionees.
5. Option Price.
------------
The price at which shares may from time to time be optioned shall be
determined by the Committee, provided that such price shall not be less than the
fair market value of the Stock on the date of granting as determined in good
faith by the Committee; and provided further that no Incentive Stock Option
shall be granted to any individual who is ineligible to be granted an Incentive
Stock Option because his ownership of stock of the Company or its parent or
subsidiary corporations exceeds the limitations set forth in Section 422(b)(6)
of the Code unless such option price is at least 110% of the fair market value
of the Stock on the date of grant.
To the extent permitted by law, the Committee may in its discretion permit
the option price to be paid in whole or in part by a note or in installments or
with shares of Stock of the Company or such other lawful consideration as the
Committee may determine; provided, however, that to the degree the option price
is paid through the delivery of Stock such Stock must be "mature" for purposes
of generally accepted accounting principles, i.e., (i) held by the optionee free
----
and clear for at least six months prior to the use thereof to pay part of an
option price, (ii)
-3-
<PAGE>
purchased by the optionee on the open market, or (iii) meeting any other
requirements for "mature" shares as may exist on the date of the use thereof to
pay part of an option price.
6. Term of Option and Dates of Exercise.
------------------------------------
(a) Exercisability. The Committee shall determine the term of all
--------------
Options, the time or times that Options are exercisable and whether they are
exercisable in installments, provided that the term of each Incentive Stock
Option granted under the Plan shall not exceed a period of ten years from the
date of its grant, and provided further that no Incentive Stock Option shall be
granted to any individual who is ineligible to be granted such Option because
his ownership of stock of the Company or its parent or subsidiary corporations
exceeds the limitations set forth in Section 422(b)(6) of the Code unless the
term of his Incentive Stock Option does not exceed a period of five years from
the date of its grant. In the absence of such determination, the Option shall
be exercisable at any time or from time to time, in whole or in part, during a
period of ten years from the date of its grant or, in the case of an Incentive
Stock Option, the maximum term of such Option.
(b) Effect of Disability, Death or Termination of Employment. The
--------------------------------------------------------
Committee shall determine the effect on an Option of the disability, death,
retirement or other termination of employment of an optionee and the extent to
which, and the period during which, the optionee, the optionee's estate, legal
representative, guardian, or beneficiary on death may exercise rights
thereunder. Any beneficiary on death shall be designated by the optionee, in
the manner determined by the Committee, to exercise rights of the optionee in
the case of the optionee's death. In the event no beneficiary is designated or
survives the optionee, the optionee's rights shall pass to the optionee's
estate, to the degree so allowed by the Committee.
(c) Other Conditions. The Committee may impose such conditions with
----------------
respect to the exercise of Options, including conditions relating to applicable
federal or state securities laws, as it considers necessary or advisable.
(d) Withholding. The optionee shall pay to the Company, or make
-----------
provision satisfactory to the Committee for payment of, any taxes required by
law to be withheld in respect of any Options under the Plan no later than the
date of the event creating the tax liability. In the Committee's discretion,
such tax obligations may be paid in whole or in part in shares of Stock,
including shares retained from the exercise of the Option creating the tax
obligation, valued at the fair market value of the Stock on the date of delivery
to the Company as determined in good faith by the Committee. The Company and
any parent corporation or subsidiary corporation of the Company (as defined in
Sections 424(e) and (f), respectively, of the Code) may, to the extent permitted
by law, deduct any such tax
-4-
<PAGE>
obligations from any payment of any kind otherwise due to the optionee.
(e) Amendment of Options. The Committee may amend, modify or
--------------------
terminate any outstanding Option, including substituting therefor another Option
of the same or different type, changing the date of exercise or realization and
converting an Incentive Stock Option to a Nonstatutory Stock Option, provided
that the optionee's consent to such action shall be required unless the
Committee determines that the action, taking into account any related action,
would not materially and adversely affect the optionee.
7. Non-transferability.
-------------------
Generally, an Option shall not be transferable, except by will or by the
laws of descent and distribution, or, in the case of Nonstatutory Stock Options,
to the extent consistent with qualifying for the exemption provided by Rule 16B-
3 under the Exchange Act, pursuant to a qualified domestic relations order, and
the Options shall be exercisable, during the holder's lifetime, only by him or
her or such permitted transferee.
8. No Right to Employment.
----------------------
No persons shall have any claim or right to be granted an Option, and the
grant of an Option shall not be construed as giving an optionee the right to
continued employment. The Company expressly reserves the right at any time to
dismiss an optionee free from any liability or claim under the Plan, except as
specifically provided in the applicable Option.
9. No Rights as a Shareholder.
--------------------------
Subject to the provisions of the applicable Option, no optionee or any
person claiming through an optionee shall have any rights as a shareholder with
respect to any shares of Stock to be distributed under the Plan until he or she
becomes the holder thereof.
10. Amendment or Termination.
------------------------
The Board may amend or terminate the Plan at any time, provided that no
amendment shall be made without stockholder approval if such approval is
necessary to comply with any applicable tax or regulatory requirement, including
any requirement for exemptive relief under Section 16(b) of the Exchange Act or
Section 162(m) of the Code, if compliance is so intended by the Committee.
11. Stockholder Approval.
--------------------
The Plan is subject to approval by the stockholders of the Company by the
affirmative vote of the holders of a majority of
-5-
<PAGE>
the shares of capital stock of the Company entitled to vote thereon and present
or represented at a meeting duly held in accordance with the laws of the State
of Delaware, or by any other action that would be given the same effect under
the laws of such jurisdiction, which action in either case shall be taken within
twelve (12) months from the date the Plan was adopted by the Board. In the event
such approval is not obtained, all Options granted under the Plan shall be void
and without effect.
12. Governing Law.
-------------
The provisions of the Plan shall be governed by and interpreted in
accordance with the laws of the State of Delaware, without reference to the
provisions of conflicts of law thereunder.
-6-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 6426985 6426985
<SECURITIES> 0 0
<RECEIVABLES> 365986741 365486741
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1111673 1111673
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 397034743 397034743
<CURRENT-LIABILITIES> 244311953 244311953
<BONDS> 0 0
0 0
0 0
<COMMON> 152722790 152722790
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 397034743 397034743
<SALES> 0 0
<TOTAL-REVENUES> 10023166 20059872
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4291105 6880123
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3875831 7307986
<INCOME-PRETAX> 2909569 7120191
<INCOME-TAX> (57666) (38566)
<INCOME-CONTINUING> 2967235 7158757
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2967235 7158757
<EPS-PRIMARY> .21 .51
<EPS-DILUTED> .21 .51
</TABLE>
