<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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,
November 8, 1999:
Class Outstanding Par Value Shares Outstanding
----------------- --------- ------------------
Common Stock................................. $.01 14,020,133
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-1-
<PAGE>
MEDALLION FINANCIAL CORP.
FORM 10-Q
September 30, 1999
INDEX
Page
----
PART I. Financial Information
Item 1. Basis of Preparation.............................................. 3
Medallion Financial Corp. Consolidated Balance Sheets
at September 30, 1999 and December 31, 1998.................... 4
Medallion Financial Corp. Consolidated Statement of Operations
for the three and nine months ended September 30, 1999 and 1998 5
Medallion Financial Corp. Consolidated Statement of Cash
Flows for the nine months ended September 30, 1999 and 1998.... 6
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 16
General.......................................................... 16
Consolidated Results of Operations (for the three months
ended September 30, 1999 and 1998)............................. 19
Consolidated Results of Operations (for the nine months
ended September 30, 1999 and 1998)............................. 23
Asset/Liability Management....................................... 27
Liquidity and Capital Resources.................................. 28
Investment Considerations........................................ 30
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 33
SIGNATURES ............................................................... 35
-2-
<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 ("Edwards"), Transportation Capital Corp. ("TCC") and
Medallion Taxi Media, Inc. ("Media"). Media and MFC were subsidiaries of Tri-
Magna Corporation ("Tri-Magna") which was merged into the Company. The
Company's acquisition of these businesses in connection with the 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 was subsequently renamed
Medallion Capital, Inc. The acquisition was completed on June 16, 1998 and was
accounted for as a pooling-of-interests and, accordingly, the information
included in the accompanying financial statements and notes thereto present 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 September 30, 1999 and the related statements of operations for
the three and nine months ended September 30, 1999 and cash flows for the nine
months ended September 30, 1999 and 1998. Item 1 also sets forth the
consolidated balance sheet of the Company as of December 31, 1998. 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 nine months ended September 30,
1999 and 1998.
The consolidated balance sheet of the Company as of September 30,
1999, the related statements of operations for the three and nine months ended
September 30, 1999, and cash flows for the nine months ended September 30, 1999
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 nine months ended September 30, 1999 are not
necessarily indicative of the results of operations for the full year or any
other interim period nor be indicative of future period performance. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form10-K for the
fiscal year ended December 31, 1998.
-3-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1999 and DECEMBER 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------------------------
<S> <C> <C>
(Unaudited)
ASSETS
Investments:
Medallion loans $286,229,032 $266,061,808
Commercial installment loans, net 151,805,758 106,422,835
Equity investments, net 14,675,127 11,579,329
------------ ------------
Net investments 452,709,917 384,063,972
Investment in and loans to unconsolidated subsidiary 4,384,658 5,033,661
------------ ------------
Total investments 457,094,575 389,097,633
Cash 3,368,784 6,027,596
Accrued interest receivable 4,086,787 3,640,301
Receivable from sale of loans 7,452,468 9,569,989
Servicing fee receivable 3,271,750 2,290,303
Fixed assets, net 1,803,654 1,662,973
Goodwill, net 6,393,743 6,706,879
Other assets 3,090,000 3,229,568
------------ ------------
Total assets $486,561,761 $422,225,242
============ ============
LIABILITIES
Accounts payable $ 14,050,846 $ 5,593,101
Dividends payable - 4,764,681
Accrued interest payable 1,938,020 2,308,229
Notes payable to banks and demand notes 120,750,000 115,600,000
Private placement debt 45,000,000 -
Commercial paper 138,296,832 103,081,785
SBA debentures payable 10,500,000 41,590,000
------------ ------------
Total liabilities $330,535,698 $272,937,796
Negative goodwill, net 531,116 1,072,916
Commitments and contingencies
SHAREHOLDER'S EQUITY
Preferred Stock (1,000,000 shares of $.01 par value
stock authorized-none outstanding) - -
Common stock (50,000,000 shares of $.01 par value
stock authorized - 14,020,133 and 14,013,768 shares
outstanding at September 30, 1999 and December 31,
1998, respectively) $ 140,201 $ 140,138
Capital in excess of par value 141,426,067 141,376,068
Accumulated undistributed income 13,928,679 6,698,324
------------ ------------
Total shareholder's equity 155,494,947 148,214,530
------------ ------------
Total liabilities and shareholder's equity $486,561,761 $422,225,242
============ ============
Number of common shares and common stock equivalents 14,115,744 14,143,537
Net asset value per share $11.02 $10.48
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
--------------------- ------------------ ----------------------- -----------------
Investment income:
<S> <C> <C> <C> <C>
Interest and dividend income on investments $10,718,656 $ 8,848,391 $30,775,348 $26,290,506
Interest income on short-term investments 58,645 93,372 216,694 261,009
----------- ----------- ----------- -----------
Total investment income 10,777,301 8,941,763 30,992,042 26,551,515
Interest expense:
Notes payable to banks and demand notes 1,998,434 2,027,737 5,808,713 6,865,979
Commercial paper 1,870,986 1,112,697 5,277,644 2,024,638
SBA debentures 419,953 794,886 1,865,366 2,352,689
Private placement debt 551,865 - 690,820 -
----------- ----------- ----------- -----------
Total interest expense 4,841,238 3,935,320 13,642,543 11,243,306
Net interest income 5,936,063 5,006,443 17,349,499 15,308,209
Non-interest income:
Equity in earnings of
unconsolidated subsidiary 138,632 480,561 439,104 823,009
Accretion of negative goodwill 180,600 180,600 541,800 541,800
Gain on sale of loans 787,508 407,369 2,231,032 1,565,944
Other income 476,501 419,114 1,569,557 1,007,652
----------- ----------- ----------- -----------
Total non-interest income 1,583,241 1,487,644 4,781,493 3,938,405
Expenses:
Administrative and advisory fees 60,259 64,630 185,247 181,192
Professional fees 525,088 184,794 1,369,191 481,573
Salaries and benefits 2,357,126 1,388,080 6,621,513 3,964,189
Rent expense 183,816 148,337 577,001 527,330
Other operating expenses 1,203,577 1,050,159 3,374,298 2,828,168
Amortization of goodwill 101,426 135,542 413,437 375,961
Prepayment penalty on SBA bond 87,792 - 165,064 -
Merger-related expenses - - - 1,494,491
----------- ----------- ----------- -----------
Total expenses 4,519,084 2,971,542 12,705,751 9,852,904
Net investment income 3,000,220 3,522,545 9,425,241 9,393,710
Net realized gains on investments 8,859,119 595,965 9,494,953 1,622,591
Change in unrealized appreciation
(depreciation), net (5,799,018) 41,890 (3,208,033) 264,292
Income tax benefit (provision) (147,350) 40,007 (209,663) 78,573
----------- ----------- ----------- -----------
Net increase in net assets
Resulting from operations $ 5,912,971 $ 4,200,407 $15,502,498 $11,359,166
=========== =========== =========== ===========
Net increase in net assets resulting from
Operations per common share
BASIC $0.42 $0.30 $1.11 $0.81
DILUTED $0.42 $0.30 $1.10 $0.81
Weighted average common shares outstanding:
Basic Average Shares 14,019,155 13,998,420 14,016,566 13,950,806
Diluted Average Shares 14,164,074 14,090,424 14,112,177 14,095,023
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-5-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
------------------------- -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net increase in net assets resulting from operations $ 15,502,498 $ 11,359,166
Adjustments to reconcile net increase in net assets resulting from
Operations to net cash provided by (used for) operating
activities:
Depreciation and amortization 448,420 241,808
Amortization of goodwill 413,437 375,961
Accretion of negative goodwill (541,800) (541,800)
Increase in equity in earnings of unconsolidated subsidiary (439,104) (823,009)
Decrease (increase) in receivable from unconsolidated subsidiary 1,088,107 (462,555)
Unrealized depreciation (appreciation), net 3,208,033 (264,292)
Net realized gain on investments (9,494,953) (1,622,591)
Increase in accrued interest receivable (446,486) (1,130,706)
Decrease (increase) in receivable from sale of loans 2,117,521 (4,855,560)
Increase in servicing fee receivable (981,447) (469,821)
Decrease in other assets 139,568 1,143,580
Increase (decrease) in accounts payable and accrued expenses 8,457,745 (1,367,334)
(Decrease) increase in accrued interest payable (370,209) 1,449,560
------------- -------------
Net cash provided by operating activities 19,101,330 3,032,407
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of investments (194,048,515) (157,331,497)
Proceeds from sales and maturities of investments 131,750,261 112,177,495
Payment for purchase of VGI, VGII and VOC - (11,963,072)
Capital expenditures (750,173) (1,284,620)
------------- -------------
Net cash used for investing activities (63,048,427) (58,401,694)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) notes payable to banks 5,150,000 (9,050,000)
Proceeds from private placement debt 45,000,000 -
Proceeds from issuance of commercial paper 35,215,047 78,634,452
Repayment of notes payable to the SBA (31,090,000) (4,380,000)
Proceeds from exercise of stock options 50,062 496,014
Payment of declared dividends to current stockholders (13,036,824) (11,401,927)
------------- -------------
Net cash provided by financing activities 41,288,285 54,298,539
------------- -------------
NET DECREASE IN CASH (2,658,812) (1,070,748)
CASH, beginning of period 6,027,596 7,076,613
CASH, end of period $ 3,368,784 $ 6,005,865
============= =============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 14,012,752 $ 9,676,664
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-6-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(1) Organization of Medallion Financial Corp. and Its Subsidiaries
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. In
connection with the Offering, the Company 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
Corporation and subsidiaries ("Tri-Magna") in accordance with the merger
agreement (the "Merger Agreement") dated December 21, 1995 between the Company
and Tri-Magna. 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 Transportation Capital Corp. ("TCC") (collectively,
the "1996 Acquisitions"). The assets acquired and liabilities assumed from
Edwards Capital Company were acquired and assumed by Edwards Capital Corporation
("Edwards"), a newly formed and wholly-owned subsidiary of the Company. As a
result of the merger with Tri-Magna in accordance with the Merger Agreement,
Medallion Funding Corp. ("MFC") and Medallion Taxi Media, Inc. ("Media"),
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 Small Business Administration ("SBA"). As an
adjunct to the Company's taxicab medallion finance business, Media 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 September 30, 1999, the Company merger was completed, and final
approval was granted by the SBA.
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. (the "Business
Lenders Acquisition"). In connection with the transaction, BLI Acquisition Co.,
LLC was renamed Business Lenders, LLC ("BLL"). BLL is licensed by the SBA under
its Section 7(a) program.
-7-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
In connection with the 1996 Acquisitions, the Company received the
Acquisition Order under the 1940 Act from the Commission. Approval from the
Connecticut State Department of Banking and the SBA was obtained for the
Business Lenders Acquisition.
On May 27, 1998, the Company completed the acquisition of certain assets and
assumption of certain liabilities of Venture Group I, Inc. ("VGI"), Venture
Group II, Inc. ("VGII") and Venture Opportunities Corp. ("VOC") an SBIC lender,
(hereinafter known as "VG Group"), headquartered in New York for an aggregate
purchase price of $18.5 million which included the assumption of $6.5 million in
liabilities. The purchase price was allocated to the assets based on their
estimated fair values and approximately $16.7 million were allocated to
investments. The excess of the purchase price over the fair value of the net
assets acquired (goodwill) was $1.2 million and is being amortized on a
straight-line basis over 15 years. These acquisitions were accounted for under
the purchase method of accounting. Accordingly, the results of operations for
these acquisitions have been included in the consolidated results of the Company
from the date of acquisition. Under this accounting method, the Company has
recorded as its cost the fair value of the acquired assets and liabilities
assumed. 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.
On June 16, 1998, the Company completed the merger with Capital Dimensions,
Inc. ("CDI"), a Specialized Business Investment Company ("SSBIC") lender,
headquartered in Minneapolis, Minnesota. CDI was subsequently renamed Medallion
Capital, Inc. ("Medallion Capital"). The charter was amended to convert
Medallion Capital to an SBIC. 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.
In September 1998, the Company created Medallion Business Credit LLC ("MBC")
as a wholly-owned subsidiary. MBC originates loans to small businesses for the
purpose of financing inventory and receivables.
(2) 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.
-8-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
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 appreciation/depreciation of investments. Total net
unrealized depreciation was $231,909 and $2,964,917 on total investments of
$452,709,917 and $384,063,972 at September 30, 1999 and December 31, 1998,
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 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 nine months
ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except shares and per share amounts)
Three months ended September 30, 1999 September 30, 1998
- ------------------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $5,913 $4,200
Basic EPS:
Income available to
common stockholders 5,913 14,019,155 $.42 4,200 13,998,420 $.30
Effect of dilutive
options
Stock options 144,919 92,004
Diluted EPS:
Income available to 5,913 14,164,074 $.42 4,200 14,090,424 $.30
common stockholders
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands, except shares and per share amounts)
Nine months ended September 30, 1999 September 30, 1998
- ------------------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $15,502 $11,359
Basic EPS:
</TABLE>
-9-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Income available to
common stockholders 15,502 14,016,566 $1.11 11,359 13,950,806 $.81
Effect of dilutive
options
Stock options 95,611 144,217
Diluted EPS:
Income available to 15,502 14,112,177 $1.10 11,359 14,095,023 $.81
common stockholders
</TABLE>
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. In June 1999, the Board issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." The new standard
defers the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company is presently studying the effect of the new pronouncement
and, as required, will adopt SFAS No. 133 beginning January 1, 2001.
(3) Merger
On June 16, 1998, the Company completed the merger with Capital Dimensions,
Inc. ("CDI"), a SSBIC lender, headquartered in Minneapolis, MN. CDI was
subsequently renamed Medallion Capital, Inc. ("Medallion Capital"). The Company
issued 0.59615 shares of its common stock for each outstanding share of CDI. A
total of 1,112,677 shares of the Company's common stock was issued as a result
of the merger, and each of CDI's outstanding stock options were converted to
purchase common shares of the Company. 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.
The following tables set forth the results of operations of CDI and the Company
for the nine months ended September 30, 1998 and are included in the
accompanying consolidated statement of operations.
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30, 1998 The Company CDI Combined
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Investment Income $24,545 $2,007 $26,552
Net increase in net assets from operations $ 8,993 $2,366 $11,359
</TABLE>
(4) Unrealized Appreciation (Depreciation) and Realized Gains (Losses) on
Investments
The change in unrealized appreciation (depreciation) on investments is the
amount by which the fair value estimated by the Company is greater (less) than
the cost basis of the
-10-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
investment portfolio. In addition, changes in unrealized appreciation
(depreciation) of investments are recorded and represent 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. Realized gains or
losses on investments consist of the excess of the procedds derived upon
foreclosure over the cost basis of a loan, write-offs of loans or assets
acquired in satisfaction of loans, net of recoveries, or sale of investments.
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
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. For the three and nine months ended September 30, 1999, gross
unrealized appreciation and depreciation and gross realized gains and losses
were as follows:
<TABLE>
<CAPTION>
Three months Nine months
Ended Ended
September 30, 1999 September 30, 1999
Increase in net unrealized appreciation
on investments:
<S> <C> <C>
Unrealized appreciation $ 3,361,616 $12,666,590
Unrealized depreciation (3,050,450) (9,426,779)
Realized gain (6,300,000) (6,809,795)
Realized loss 189,816 361,951
----------- -----------
Total $(5,799,018) $(3,208,033)
----------- -----------
Net realized gain on investments:
Realized gain $ 9,048,935 $ 9,856,904
Realized loss (189,816) (361,951)
----------- -----------
Total $ 8,859,119 $ 9,494,953
----------- -----------
</TABLE>
Unrealized appreciation for the three and nine months ended September
30, 1999, respectively relates primarily to the Company's investment in Radio
One, Inc. ("Radio One"). During May 1999, Radio One completed an initial public
offering of its stock. At September 30, 1999, the Company's investment in Radio
One consisted of 304,122 shares. The Company had certain restrictions as to the
time period over which this investment could be sold. These certain
restrictions expired during September 1999. Therefore, at September 30, 1999,
the Company valued the shares held at the per share market price of $41.50.
Realized gains for the quarter ended September 30, 1999 represent gains on the
sale of shares of Radio One.
(5) Investment in Unconsolidated Subsidiary
-11-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
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 September 30,
1999 (unaudited) and December 31, 1998 and unaudited statements of operations
for the three and nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Balance Sheet September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Cash $ 103,207 $1,381,893
Accounts receivable 2,426,238 2,614,842
Equipment, net 1,613,780 1,564,341
Goodwill 1,640,839 991,279
Other 715,794 571,058
--------------- ----------
Total assets $ 6,499,858 $7,123,413
=============== ==========
Notes payable to parent $ 1,604,740 $2,692,847
Accounts payable and accrued expenses 416,674 327,392
Other Liabilities and
income taxes payable 1,589,909 1,653,743
--------------- ----------
Total liabilities 3,611,323 4,673,982
Equity
Common Stock 1,001,000 1,001,000
Retained earnings 1,887,535 1,448,431
--------------- ----------
Total equity 2,888,535 2,449,431
Total liabilities and shareholders' equity $ 6,499,858 $7,123,413
=============== ==========
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Advertising revenue $2,542,441 $2,256,908 $7,357,591 $5,229,234
Cost of service 998,639 606,150 3,034,424 1,677,200
---------- ---------- ---------- ----------
Gross margin 1,543,802 1,650,758 4,323,167 3,552,034
Other operating expenses 1,312,748 870,377 3,629,499 2,179,025
---------- ---------- ---------- ----------
Income before taxes 231,054 780,381 693,668 1,373,009
Income tax provision (92,422) (300,000) (254,564) (550,000)
---------- ---------- ---------- ----------
Net income $ 138,632 $ 480,381 $ 439,104 $ 823,009
========== ========== ========== ==========
</TABLE>
During the quarter ended June 30, 1999, approximately $300,000 of
advertising revenue was deferred relating to taxicab rooftop advertising
displays ("Displays") displayed in
-12-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
new markets, pending the completion of appropriate documentation. The revenue
was subsequently recognized in the third quarter of 1999, as the documentation
was completed.
On February 2, 1999, Media purchased 100% of the common stock of
Transit Advertising Displays, Inc. ("TAD") for $848,500. TAD is a taxicab
rooftop advertising company headquartered in Washington, D.C. operating 1,300
installed Displays in the Baltimore, MD and Washington, D.C. areas. The purchase
was accounted for under the purchase method of accounting and the results of
operations are consolidated with those of Media. Included in the purchase price
was certain premiums paid totaling $712,701, which represented goodwill and is
being amortized over 15 years.
(6) Debt
The table below summarizes the various debt agreements the Company and
its subsidiaries had outstanding at September 30, 1999 and December 31, 1998:
September 30, 1999 December 31, 1998
------------------ -----------------
Notes payable to banks:
Total facilities $295,000,000 $252,500,000
Maturity of facilities 6/00-6/01 6/99-7/99
Total amounts outstanding $120,750,000 $115,600,000
============ ============
SBA debentures payable $ 10,500,000 $ 41,590,000
============ ============
Maturity date 3/06-6/07 9/00-6/07
Private placement debt $ 45,000,000 $ --
============ ============
Maturity date 6/04 --
Under the revolving credit agreement between MFC and its lenders, as
amended, MFC is required to maintain minimum tangible net assets of $65,000,000
and certain financial ratios. The Company believes that MFC was in compliance
with such requirements at September 30, 1999.
On June 1, 1999, MFC issued $22.5 million of senior secured notes (the
Notes) that mature on June 1, 2004. The Notes bear a fixed rate of interest of
7.2% and interest is paid quarterly in arrears. The Notes rank pari pasu with
the bank debt and commercial paper through inter-creditor agreements. On
September 1, 1999, the note-holders purchased an additional $22.5 million under
the same terms and conditions. The proceeds of the Notes were used to pre-pay
all the outstanding SBA debentures of MFC. Prepayment of some of these SBA
debentures caused MFC to incur penalties of approximately $88,000 and $165,000
for the three and nine months ended September 30, 1999, respectively.
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<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
On June 1, 1999, MFC extended its $195 million revolving credit facility
until June 30, 2001.
On June 29, 1999, Medallion Financial increased its revolving credit
facility to $100 million and extended the maturity until June 28, 2000.
(7) 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 nationally recognized
rating agencies, and borrowing base calculations as 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. On July 30, 1999, MFC
entered into a commercial paper dealer agreement with U.S. Bancorp. As of
September 30, 1999, MFC had approximately $138 million outstanding at a weighted
average interest rate of 5.76%.
(8) Segment Reporting
The Company has two reportable business segments, lending and taxicab
rooftop advertising. The lending segment originates and services secured
commercial loans. The taxicab rooftop advertising segment sells advertising
space to advertising agencies and companies in several major markets across the
United States. The segment is reported as an unconsolidated subsidiary,
Medallion Taxi Media, Inc. The accounting policies of the operating segments are
the same as those described in the summary of significant accounting policies.
For taxicab advertising, the increase in net assets resulting from
operations represents the Company's equity in net income from Media. Segment
assets for taxicab advertising represents the Company's investment in and loan
to Media.
<TABLE>
<CAPTION>
Nine months ended September 30, 1999 Taxicab
Lending Advertising Total
-------------------------------------------
<S> <C> <C> <C>
Net interest income
$ 17,349,499 $17,349,499
Depreciation and amortization 448,420 448,420
Income tax benefit (provision) (209,663) (209,663)
Net increase in net assets resulting
from operations 15,063,394 439,104 15,502,498
Segment assets 482,177,103 4,384,658 486,561,761
Capital expenditures 750,173 361,285 **
Nine months ended September 30, 1998 Taxicab
Lending Advertising Total
-------------------------------------------
</TABLE>
-14-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net interest income $ 15,308,209 $15,308,209
Depreciation and amortization 241,808 241,808
Income tax benefit (provision) 78,573 78,573
Net increase in net assets resulting
from operations 10,536,157 823,009 11,359,166
Segment assets 407,602,230 3,981,625 411,583,855
Capital expenditures 1,284,620 534,770 **
</TABLE>
** Capital expenditures for the Company are equal to expenditures for the
lending segment. Capital expenditures related to the taxicab advertising
segment are included in order to provide additional information.
(9) Subsequent Events
On November 4, 1999, MFC declared a dividend payable to the Company in the
amount of $400 per share payable on November 5, 1999 (aggregating $2,663,600)
and Medallion Capital declared a dividend payable to the Company in the amount
of $4.50 per share payable on November 5, 1999 (aggregating $8,398,971). With
the proceeds of these dividends, on November 4, 1999, the Company declared a
dividend in the amount of $0.32 per share (aggregating $4,486,443) payable on
December 1, 1999 to the shareholders of record on November 19, 1999.
-15-
<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, 1998. 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 of 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 an 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
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<PAGE>
investments" are inversely related. When an appreciated asset is sold to realize
a gain, a decrease in unrealized 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. 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, 1998 September 30, 1999
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 9.03% $266,061,808 69.0% 9.00% $286,229,032 63.2%
Commercial Installment Loan Portfolio 12.13% 106,422,835 28.0% 11.59% 151,805,758 33.5%
Equity Investments - 11,579,329 3.0% - 14,675,127 3.3%
------------ ------------ ------------ ------------ ------------ ------------
Total Portfolio 9.93% $384,063,972 100.0% 9.93% $452,709,917 100.0%
============ ============ ============ ============ ============ ============
</TABLE>
Yield Summary:
The weighted average yields e.o.p./1/. of the Medallion Loan portfolio
decreased 3 basis points to 9.00% at September 30, 1999. 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. The weighted average yields e.o.p. of the
Commercial Installment Loan portfolio decreased 54 basis points to 11.59% at
September 30, 1999 from 12.13% at December 31, 1998 due to an increase of
originations of adjustable rate loans tied to the prime rate which are issued at
lower rates than the fixed rate, longer term notes that were historically
originated. The weighted average yields e.o.p. of the entire portfolio remained
flat at 9.93% at September 30,1999 as compared to December 31, 1998 due to a
shift in the mix of the portfolio to the higher yielding Commercial Loans.
Portfolio Summary:
Medallion Loans constituted 63.2% of the total portfolio of $452.7
million at September 30, 1999 and 69.0% of the total portfolio of $384.1 million
at December 31, 1998. The Medallion Loan portfolio increased by $20.2 million
or 7.6%. The increase is due to growth in New York as well as, markets outside
New York such as Chicago, Newark and
- -----------------------
/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.
-17-
<PAGE>
Baltimore. The Commercial Installment loan portfolio comprised 33.5%, of the
total portfolio at September 30, 1999 compared to 28.0% at December 31, 1998.
The Commercial Loan portfolio grew by $45.4 million or 42.6% due to strong
growth in the mezzanine finance, SBA 7(a) program and asset-based lending
portfolios.
Equity Investments represented 3.3% and 3.0% of the Company's entire
portfolio at September 30, 1999 and December 31, 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 has offered attractive rates, however, 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 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 subject to SBA restrictions. As of September 30, 1999, the Company
has repaid the $31 million of SBA debentures which had a 7.38% rate of interest
that was to increase to 7.50% at MFC, ECC and TCC with $45 million of fixed
7.20% long term notes. Further, the Company believes that its transition to
financing 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 70 basis points below the
rate charged under the Company's revolving credit facilities. At September 30,
1999 and December 31, 1998, short-term LIBOR-based debt including commercial
paper constituted 82.4% and 84.0% of total debt, respectively. At September 30,
1999 and December 31, 1998, commercial paper constituted 44.0% and 39.6% of
total debt, respectively.
The Company's cost of funds is primarily driven by (i) the average
maturity of debt issued by the Company, (ii) the premium over 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 reflect 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
-18-
<PAGE>
LIBOR (the "LIBOR Benchmark"). The Company's average cost of funds e.o.p. at
September 30, 1999 was 6.27% or 107 basis points over the LIBOR Benchmark of
5.14% down from 6.42% or 121 basis points over the LIBOR Benchmark of 5.21% at
December 31, 1998.
Taxicab Advertising. In addition to its finance business, the
Company also operates a taxicab advertising business through Media, which began
operations in November 1994. Media's revenue is primarily affected by the number
of taxicab rooftop advertising Displays owned and occupied and the advertising
rate per Display. At September 30, 1999, Media had approximately 9,200
advertising units for sale of which 6,200 were rooftop displays and 3,000 were
trunk signs. Media will receive a fee for the advertising it sells on the trunk
signs which are owned and maintained by Yellow Cab Service Corp., the taxi
division of Coach U.S.A., based on a two-year agreement with them. As this
agreement was signed on September 30, 1999, revenue has not yet been recognized
for these trunk signs. Media is a wholly-owned subsidiary of the Company, its
results of operations are not consolidated with the Company because Commission
regulations prohibit the consolidation of non-investment companies with
investment companies.
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.
Consolidated Results of Operations
For the Three Months Ended September 30, 1999 and 1998.
Performance Summary. For the three months ended September 30, 1999,
net increase in net assets resulting from operations has been positively
impacted by the growth of the loan
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<PAGE>
portfolio, a decrease in the average cost of funds and an increase in realized
gains from the shares of stock held in an investment.
Investment Income. Investment income increased $1.8 million or 20.2%
to $10.8 million for the three months ended September 30, 1999 from $8.9 million
for the three months ended September 30, 1998. The Company's investment income
reflects the positive impact of portfolio growth. The average portfolio
outstanding was $441.2 million, for the third quarter of 1999, which produced
interest income of $10.8 million at a weighted average interest rate of 10.07%
compared to an average of $372.3 million for the third quarter of 1998, which
produced investment income of $8.9 million at a weighted average interest rate
of 9.76%.
Loan originations net of participations increased by $29.3 million or
75.5% to $67.1 million for the three month period ended September 30, 1999
compared to $37.8 million for the three month period ended September 30, 1998.
The originations were offset by prepayments, terminations and refinancings by
the Company aggregating $48.5 million in the third quarter of 1999 compared to
$26.3 million in the third quarter of 1998.
The weighted average yield e.o.p. of the entire portfolio decreased 3
basis points to 9.93% at September 30, 1999 from 9.96% at September 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 offset by an increase in the percentage of
the portfolio composed of higher yielding Commercial Installment Loans which
historically were 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
3 basis points to 9.00% at September 30, 1999 from 9.03% at September 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. The
average yield of the Commercial Installment Loan portfolio decreased 110 basis
points to 11.59% at September 30, 1999 from 12.69% at September 30, 1998. The
decline in the commercial portfolio yield is due in part to the drop in prime
rate as the quantity of floating rate loans tied to prime has increased as a
percentage of the Commercial portfolio. Thus, shifting the average yield on
commercial loans lower. In addition, the current interest rate environment is
such that the Company has increased the origination of loans with shorter
interest rate maturity dates, which are issued at a lower interest rate further
contributing to the decline in the portfolio yield. However, the shorter
maturity dates further reduces 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 Commercial loan portfolio during the period.
Interest Expense. The Company's interest expense increased $906,000
or 23.0% to $4.8 million for the three months ended September 30, 1999 from $3.9
million for the three months ended September 30, 1998. The Company's average
cost of funds e.o.p. decreased 24 basis points to 6.27% or 79 basis points over
the LIBOR benchmark of 5.48% at September 30, 1999 from 6.51% or 91 basis points
over the LIBOR benchmark of 5.60% at September 30, 1998. The decrease in the
average cost of funds e.o.p. was caused by reduction in the
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<PAGE>
premium to LIBOR paid combined with a 28 basis point decrease in the LIBOR
benchmark. Also contributing to the decrease in average cost of funds e.o.p. was
the Company's issuance of commercial paper, which at the present time is priced
approximately 70 basis points less than the Company's revolving credit
facilities. Average total borrowings increased $65.6 million or 27.0% from
$242.9 million for the three months ended September 30, 1998, which produced an
interest expense of $3.9 million at a weighted average interest rate of 6.48%,
to $308.5 million for the three months ended September 30, 1999, which produced
an interest expense of $4.8 million at a weighted average interest rate of
6.28%. 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 80.5% at September 30, 1998 to 82.4% at
September 30, 1999.
Net Interest Income. Net interest income increased $930,000 or 18.6%
to $5.9 million for the three months ended September 30, 1999 from $5.0 million
for the three months ended September 30, 1998. The increase in net interest
income is the result of the 51 basis point or 15.5% increase in the average
spread between the average yield on the portfolio and the average cost of funds
to 3.79% for the three-month period ended September 30, 1999 from 3.28% for the
three-month period ended September 30, 1998.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $285,000 or 12.4% to $2.5 million in the third quarter of 1999
compared to $2.3 million in the third quarter of 1998. Display rental costs
increased $392,000 or 64.8% for the quarter. Gross margin was $1.5 million or
60.0% of advertising revenue for the third quarter of 1999 compared to $1.65
million or 71.7% for the third quarter of 1998. The decrease in gross margin is
partly due to the loss of tobacco advertising contracts which contributed to an
81.4% occupancy rate in the third quarter of 1999 compared to 100% in 1998 and
an overall cost of sales increase resulting from an increase in the number of
Displays installed. The number of Displays owned by Media increased
approximately 1,400 or 29.2% to approximately 6,200 at September 30, 1999 from
approximately 4,800 at September 30, 1998. Operating costs increased $442,000 or
50.8% to $1.3 million in the third quarter of 1999 from $870,000 in the third
quarter of 1998. The increase in operating costs is reflects the expansion of
Media's operations primarily from the acquisition of Taxi Ads LLC and Transit
Advertising Displays Inc. which added a combined total of approximately 2000
tops in five new cities. The resulting net income for the third quarter of 1999
was $139,000 compared to net income of $480,000 in the third quarter of 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 portion of SBA 7(a) loans in the amount of $788,000 on loans sold
amounting to 14.6 million during the third quarter of 1999 compared to $407,000
on loans sold amounting to $6.9 million during the third quarter of 1998. The
increase of $381,000 is due to an increase in the volume of loans sold offset by
a slight decline in the premiums in the secondary market. The
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<PAGE>
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 EITF 88-11.
Other Income. The Company's other income increased $57,000 or 13.6%
to $476,000 for the three months ended September 30, 1999 from $419,000 for the
three months ended September 30, 1998. Other income was primarily derived from
late charges, prepayment fees and miscellaneous income. The increase in other
income is primarily due to an increase in fees collected in connection with
several refinancings completed during the quarter.
Non-Interest Expenses. The Company's non-interest expenses increased
$1.5 million or 50.0% to $4.5 million for the three months ended September 30,
1999 from $3.0 million for the three months ended September 30, 1998.
Professional fees increased $340,000 or 184.0% due to an increase in audit, tax
and legal fees paid and accrued for research related to acquisition candidates
as compared to the third quarter of 1998. The increase in salaries and benefits
of $969,000 or 69.8% in the third quarter of 1999 compared to the third quarter
of 1998 is the result of the effect of year-end raises, salaries of personnel
hired since September 30, 1998, and bonuses paid and accrued for in the quarter.
Other operating expenses increased $153,000 or 14.6% as compared to the third
quarter of 1998 due to expenditures related to a new loan accounting system.
Net Investment Income. Net investment income decreased $522,000 or
14.9% to $3.0 million in the third quarter of 1999 from $3.5 million in the
third quarter of 1998. The decrease is attributable to an increase in operating
expenses and the $342,000 decline in earnings of the unconsolidated Media
subsidiary.
Net Realized Gain on Investments. The Company had net realized gains
of $8.9 million for the three months ended September 30, 1999, an increase of
$8.3 million from net realized gains of $596,000 for the three months ended
September 30, 1998. The realized gains during the third quarter of 1999 were a
result of the sale of shares held in Radio One, Inc.
Change in Net Unrealized Appreciation (Depreciation). The change in
net unrealized depreciation increased $5.8 million for the three months ended
September 30, 1999 from $42,000 for the three months ended September 30, 1998.
The unrealized depreciation during the third quarter of 1999 resulted from a
$3.0 million of unrealized depreciation for additional loan loss reserve, offset
by $3.4 million in unrealized appreciation due to the shares held of Radio One,
Inc. at September 30, 1999 and a net decrease of $6.1 million of unrealized
appreciation resulting primarily from the sale of Radio One shares during the
third quarter of 1999 producing realized gains.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations increased $1.7 million or 40.5% to $5.9
million for the three months ended September 30, 1999 from $4.2 million for the
three months ended September 30, 1998. The increase was attributable to the
positive impact of portfolio growth, an increase in average spread between
average yield and average cost of funds and higher unrealized gains on
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<PAGE>
investments offset by an increase in operating expenses and a decline in
earnings from Media. Return on average assets and return on average equity for
the three months ended September 30, 1999, on an annualized basis, were 5.0% and
15.3%, respectively, compared to 4.4% and 11.0% for the three months ended
September 30, 1998.
Consolidated Results of Operations
For the Nine Months Ended September 30, 1998 and 1999.
Performance Summary. For the nine months ended September 30, 1999,
net increase in net assets resulting from operations has been positively
impacted by the growth of the loan portfolio, a increase in the spread of
average yield over average cost of funds and an increase in realized and
unrealized gains on an investment offset by an increase in operating expenses.
Investment Income. Investment income increased $4.4 million or 16.5%
from $26.6 million for the nine months ended September 30, 1998 to $31.0 million
for the nine months ended September 30, 1999. The Company's investment income
reflects the positive impact of portfolio growth and dividend income on equity
investments during the nine months ended September 30, 1999. Total portfolio
growth was $68.6 million or 17.9% from $384.1 million at December 31, 1998 to
$452.7 million at September 30, 1999 as compared to $63.3 million or 20.2% from
$313.3 million at December 31, 1997 to $376.6 million at September 30, 1998.
The average portfolio outstanding was $418.4 million for the nine month period
ended September 30, 1999, which produced interest income of $31.1 million at a
weighted average interest rate of 9.73% compared to an average of $346.5 million
for the nine month period ended September 30, 1998, which produced investment
income of $26.6 million at a weighted average interest rate of 10.41%.
Loan originations net of participations increased by $36.7 million or
23.3% from $157.3 million for the nine month period ended September 30, 1998 to
$194.0 million for the nine month period ended September 30, 1999. Not included
in originations for the nine months ended September 30, 1998 are purchases of
$16.9 million of loans acquired from VGI, VGII and VOC in May, 1998. The
originations were offset by prepayments, terminations and refinancings by the
Company aggregating $112.2 million for the nine month period ended September 30,
1998 compared to $131.8 million for the nine month period ended September 30,
1999.
Weighted average yield e.o.p. of the entire portfolio decreased 3
basis points from 9.96% at September 30, 1998 to 9.93% at September 30, 1999.
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 offset by an increase 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 3 basis points from 9.03% at September 30, 1998 to 9.00% at September
30, 1999. The decrease in the average yield on Medallion Loans was caused by a
reduction in loan yields due to loans being originated at lower interest rates
due to competition.
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<PAGE>
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 average yield of the Commercial
Installment Loan portfolio decreased 110 basis points from 12.69% at September
30, 1998 to 11.59% at September 30, 1999. The decline in the commercial
portfolio yield is the result of the decrease in prime rate and the increase in
the number of loans tied to prime. This shifts the average yield on commercial
yields lower, however, interest rate exposure is mitigated by the floating rate
nature of these loans. The percentage of the portfolio composed of Commercial
Installment Loans increased from 24.4% at September 30, 1998 to 33.5% at
September 30, 1999. The Company continues to pursue a shift in its portfolio mix
towards higher yielding Commercial Installment Loans.
Interest Expense. The Company's interest expense increased $2.4
million or 21.4% from $11.2 million for the nine months ended September 30, 1998
to $13.6 million for the nine months ended September 30, 1999. The Company's
average cost of funds e.o.p. decreased 24 basis points from 6.51% or 91 basis
points over the LIBOR benchmark of 5.60% at September 30, 1998 to 6.27% or 79
basis points over the LIBOR benchmark of 5.48% at September 30, 1999. 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 12 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 70 basis points less than the Company's revolving credit
facilities. Average total borrowings increased $74.2 million or 34.8% from
$213.2 million for the nine months ended September 30, 1998, which produced an
interest expense of $11.2 million at a weighted average interest rate of 7.03%
to $287.4 million for the nine months ended September 30, 1999 which produced an
interest expense of $13.6 million at a weighted average interest rate of 6.33%.
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 80.5% at September 30, 1998 to 82.4% at
September 30, 1999.
Net Interest Income. Net interest income increased $2.0 million or
13.1% from $15.3 million for the nine months ended September 30, 1998 to $17.3
million for the nine months ended September 30, 1999. Net interest income
reflects the positive impact of the portfolio growth during the nine months
ended September 30, 1999 coupled with an 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 2 basis points or 0.6%
from 3.38% for the nine month period ended September 30, 1998 to 3.40% for the
nine month period ended September 30, 1999.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $2.1 million or 40.4% from $5.2 million for the nine months ended
September 30, 1998 to $7.3 million for the nine months ended September 30, 1999.
Display rental costs increased $1.3 million or 76.5% from $1.7 million for the
nine months ended September 30, 1998 to $3.0 million for the nine months ended
September 30, 1999. This resulted in a gross margin of
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approximately $3.6 million or 69.2% of advertising revenue for the nine months
ended September 30, 1998 compared to $4.3 million or 58.9% for the nine months
ended September 30, 1999. The decrease in gross margin is partly due to the loss
of tobacco advertising contracts which contributed to an 82.6% occupancy rate in
the nine months ended September 30, 1999 compared to 100% in 1998 and an overall
cost of sales increase resulting from an increase in the number of Displays
installed. The number of Displays owned by Media increased 29.2% from 4,800 at
September 30, 1998 to 6,200 at September 30, 1999. Operating costs increased
$1.4 million or 63.6% from $2.2 million for the nine months ended September 30,
1998 to $3.6 million for the nine months ended September 30, 1999. The increase
in operating costs reflects the expansion of Media's operations primarily from
the acquisition of Taxi Ads LLC and Transit Advertising Displays Inc. which
added a combined total of approximately 2000 tops in five new cities. Media
generated net income of $823,000 for the nine-month period ended September 30,
1998 compared to net income of $439,000 for the nine-month period ended
September 30, 1999. Net income is recorded as equity in earnings or losses of
the 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 portion of SBA 7(a) loans in the amount of $2.2 million on $37.1
million loans sold during the nine months ended September 30, 1999 as compared
to a gain of $1.6 million on $19.0 million of loans sold during the nine months
ended September 30, 1998. 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.
Other Income. The Company's other income increased $562,000 or 56.2%
from $1.0 million for the nine months ended September 30, 1998 to $1.6 million
for the nine months ended September 30, 1999. 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
$2.8 million or 28.3% from $9.9 million for the nine months ended September 30,
1998 to $12.7 million for the nine months ended September 30, 1999. Included in
non-interest expenses for the nine months ended September 30, 1998 are $1.5
million of expenses related to the merger with Medallion Capital. Exclusive of
these expenses, non-interest expenses increased $4.3 million or 51.2% from $8.4
million for the nine months ended September 30, 1998 to $12.7 million for the
nine months ended September 30, 1999. Other operating expenses increased
$546,000 or 19.5% from $2.8 million for the nine months ended September 30, 1998
to $3.4 for the nine months ended September 30, 1999 primarily due to costs
associated with the installation of a new loan accounting program. Salaries and
benefits increased $2.6 million or 65.0% from $4.0 million for the nine months
ended September 30, 1998 to $6.6 million for the nine months ended September 30,
1999 is the result of the effect of year-end raises, salaries of personnel hired
since September 30, 1998, and bonuses paid and accrued for in the period.
Professional fees increased $888,000 or 184.2% from $482,000 for the nine months
ended
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<PAGE>
September 30, 1998 to $1.4 million for the nine months ended September 30, 1999
due to higher audit fees incurred to restate prior year financials in connection
with the pooling-of-interest and fees paid and accrued for research related to
acquisition candidates. Investment advisory fees increased $4,000 from $181,000
for the nine months ended September 30, 1998 to $185,000 for the nine months
ended September 30, 1999.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill was $376,000 for the nine months ended September 30,
1998 and $413,000 for the nine months ended September 30, 1999, 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 VOC. 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 remained relatively flat
at $9.4 million for the nine months ended September 30, 1999 as compared to the
nine months ended September 31, 1998. Exclusive of the merger-related expenses
of $1.5 million, net investment income decreased $1.5 million or 13.8% from
$10.9 million for the nine months period ended September 30, 1998 to $9.4
million for the nine months ended September 30, 1999. The decrease is
attributable to a faster decline in the average yield a compared to the decline
in the cost of funds together with an increase in operating expenses and a
decline in the earnings from Media.
Net Realized Gain/Loss on Investments. The Company had an increase in
net realized gain on investments of $7.9 million from net realized gains of $1.6
million for the nine months ended September 30, 1998 to $9.5 million for the
nine months ended September 30, 1999. The increase was the result of gains
realized from the sale of Radio One stock during the period.
Change in Net Unrealized Depreciation/Appreciation. The change in net
unrealized depreciation was $3.2 million for the nine months ended September 30,
1999 as compared to a net appreciation of $264,000 for the same period.The
unrealized depreciation resulted from a $9.4 million of unrealized depreciation
for additional loan loss reserve, offset by $12.7 million in unrealized
appreciation due to the shares held of Radio One, Inc. at September 30, 1999 and
a net decrease of $6.5 million of unrealized appreciation primarily due to the
sale of Radio One shares during the third quarter of 1999 resulting in realized
gains.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations increased $4.1 million or 36.0% from $11.4
million for the nine months ended September 30, 1998 to $15.5 million for the
nine months ended September 30,
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<PAGE>
1999. Exclusive of the merger-related expenses $1.5 million, net increase in net
assets resulting from operations increased $2.6 million or 20.2% from $12.9
million for the nine months period ended September 30, 1998 to $15.5 million for
the nine months ended September 30, 1999. 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. Return on assets and return on
equity for the nine months ended September 30, 1999, on an annualized basis,
were 4.5% and 13.6%, respectively, compared to 4.0% and 10.0% for the nine
months ended September 30, 1998.
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.
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<PAGE>
The Company seeks to manage the exposure of the balance of the
portfolio to increases in market interest rates by entering into interest rate
cap agreements to hedge a portion of its variable-rate debt against increases in
interest rates and by incurring fixed-rate debt consisting primarily of
subordinated SBA debentures. 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% 5/13/98 11/13/99
$20,000,000 6.5% 4/7/98 9/30/99
$20,000,000 6.5% 4/9/98 3/30/01
$10,000,000 6.5% 7/6/99 7/6/01
$10,000,000 6.5% 7/6/00 7/6/01
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 $10.5 million with a weighted average rate
of interest of 7.08%. At September 30, 1999, these debentures constituted 3.3%
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 September 30, 1999, the Company's total debt
outstanding was $314.5 million at a weighted average interest rate of 6.27%. Of
the total debt outstanding, $120.7 million or 38.4% consisted of bank debt,
substantially all of which was at variable effective rates of interest with a
weighted average rate of 6.43% or 182 basis points below the Prime Rate, 44.0%
or $138.3 million consisted of short-term commercial paper at a weighted average
interest rate of 5.76%, 3.3% or $10.5 million consisted of SBA debentures with
fixed rates of interest with a weighted average rate of 7.08% and 14.3% or $45.0
million consisted of private placement debt with a weighted average interest
rate of 7.20%. The Company is eligible to seek SBA
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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 $36.0 million of debt was available at September 30,
1999 at variable effective rates of interest averaging below the Prime Rate
under the Company's $295.0 million bank credit facilities.
The following table illustrates the Company's and each of the
subsidiaries' sources of available funds and amounts outstanding under credit
facilities at September 30, 1999:
<TABLE>
<CAPTION>
Medallion
Financial MFC BLLC MCI MBC Total
--------- --- ---- --- --- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 250 $ 1,786 $ 318 $488 $527 $ 3,369
Revolving lines of credit 100,000 195,000 -- -- -- 295,000
Amounts available 28,400 7,553 -- -- -- 35,953*
Amounts outstanding 71,600 49,150 -- -- -- 120,750
Average interest rate 6.47% 6.38% -- -- -- 6.43%
Maturity 6/00 6/01 -- -- -- 6/00-6/01
Commercial paper
Amounts outstanding -- 138,297 -- -- -- 138,297
Average interest rate -- 5.76% -- -- -- 5.76%
Maturity -- 6/01 -- -- -- 6/01
SBA debentures -- -- -- 10,500 -- 10,500
Average interest rate -- -- -- 7.08% -- 7.08%
Maturity -- -- -- -- 3/06-6/07
3/06-6/07
Bonds -- 45,000 -- -- -- 45,000
Average interest rate -- 7.20% -- -- -- 7.20%
Maturity -- 6/04 -- -- -- 6/04
Total cash and remaining amounts
available under credit 28,650 9,339 318 488 527 39,322
facilities
Total debt outstanding $71,600 $232,447 $ - $ -- $314,547
$10,500
</TABLE>
* Note 1) Commercial paper outstanding is deducted from revolving credit lines
available as the line of credit acts as a liquidity facility for the commercial
paper.
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.
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Investment Considerations
The following are certain of the factors which could affect the
Company's future results. They should be considered in connection with
evaluating forward-looking statements contained in this Management's Discussion
and Analysis and elsewhere in this Report and otherwise made by or on behalf of
the Company since these factors, among others, could cause actual results and
conditions to differ materially from those projected in these forward-looking
statements.
Interest Rate Spread. The Company's net interest income is largely
dependent upon achieving a positive interest rate spread and other factors.
Leverage. The Company's use of leverage poses certain risks for
holders of the Common Stock, including the possibility of higher volatility of
both the net asset value of the Company and the market price of the Common Stock
and, therefore, an increase in the speculative character of the Common Stock.
Availability of Funds. The Company has a continuing need for capital
to finance its lending activities. The Company funds its operations through
credit facilities with bank syndicates and, to a lesser degree, through
subordinated SBA debentures. Reductions in the availability of funds from banks
and under SBA programs on terms favorable to the Company could have a material
adverse effect on the Company. Because the Company distributes to its
shareholders at least 90% of its investment company taxable income, such
earnings are not available to fund loan originations.
Risk Relating to Integration of CDI and Medallion. The realization of
certain benefits anticipated as a result of the acquisition of Medallion Capital
(formerly CDI) 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.
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<PAGE>
Taxicab Industry Regulation. Every city in which the Company
originates Medallion Loans, and most other major cities in the United States,
limit the supply of taxicab medallions. In many markets, regulation results in
supply restrictions which, in turn, support the value of medallions;
consequently, actions which loosen such restrictions and result in the issuance
of additional medallions into a market could decrease the value of medallions in
that market and, therefore, the collateral securing the Company's then
outstanding Medallion Loans, if any, in that market. The Company is unable to
forecast with any degree of certainty whether any potential increases in the
supply of medallions will occur. In New York City, and in other markets where
the Company originates Medallion Loans, taxicab fares are generally set by
government agencies, whereas expenses associated with operating taxicabs are
largely unregulated. As a consequence, in the short term, the ability of
taxicab operators to recoup increases in expenses is limited. Escalating
expenses, therefore, can render taxicab operation less profitable and make it
more difficult for borrowers to service loans from the Company and could
potentially adversely affect the value of the Company's collateral.
Government Regulation of Tobacco Advertising. In 1998, approximately 58.7% of
Media's taxicab rooftop advertising revenue was 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. Effective March 31, 1999, under the Master Settlement
Agreement between tobacco manufactures and the attorneys general of various
states (including the states in which the Company conducts its outdoor
advertising business), the tobacco manufacturers eliminated general outdoor and
transit advertising of tobacco products. Accordingly, such restrictions may
have an adverse effect upon the taxicab rooftop advertising business of the
Company.
Year 2000. The Company is currently addressing the Year 2000 issue, 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 and an
update of the general ledger system. Such initiatives are expected to be Year
2000 compliant. The Company has implemented a five phase plan to remediate its
information technology ("IT") and non-IT systems: (1) compiling an inventory of
the company's computer hardware and software ("IT systems") and equipment ("non-
IT systems"); (2) identifying and verifying the Year 2000 readiness of third
parties; (3) assessing whether the systems can be remediated or must be
replaced; (4) remediating or replacing IT and non-IT systems; (5) testing the
remediated or replaced IT and non-IT systems. An inventory of IT and non-IT
systems was completed by December 31, 1998. The Company has received Year 2000
compliance letters from each of its major software vendors and its major office
systems vendors and is awaiting responses from additional parties. Phase three
is complete as of September 30, 1999. Planning for phases four and five began
in the first quarter of 1999. In the event that the new loan servicing software
system is not fully implemented by year-end, we have performed Year 2000
readiness tests on our existing systems. Our testing of critical systems was
completed with no failures noted that would have
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a material impact on the systems ability to meet its business function. Software
and operating system tests were conducted using fictitious transactions. Each
individual workstation was reviewed and any that were deemed non compliant were
replaced with new, Year 2000 compliant PC's. Further, all network servers were
successfully tested for Year 2000 compliance.
The Company estimates that the total cost involved in the Year 2000 project is
approximately $30,000. This excludes the costs related to new loan servicing
software and an update of the general ledger system. These costs will be
expenses as incurred, except for capitalizable hardware. The year 2000 project
is staffed with both external contractors and internal personnel. Approximately
$20,500 has been spent to date.
The Company believes that the Year 2000 project is on schedule and such
measures will adequately address the Year 2000 issues, although there can be no
assurance in this regard. Further, both the cost estimates and completion
timeframes are subject to change based on new circumstances that may arise. The
Company will continue to address the Year 2000 issue in connection with its
future acquisitions. The Company has determined that its key third party
vendors have either resolved their Year 2000 issues in a satisfactory and timely
manner, or in the event they fail to do so, the Company has determined the
magnitude of the adverse impact would be minimal on the Company's operations.
Management has sent Year 2000 compliance surveys to its third party vendors,
however, 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. At this point in time,
management is unable to quantify the potential loss due to failure of systems to
comply with the Year 2000 issues. The Company is continuing to develop a
contingency plan to address the potential for business disruption due to systems
failure or the failure of third parties to modify their systems in a timely
manner and that may have a material or adverse effect on the Company's
operations. The Year 2000 disclosure set forth above is a "Year 2000 statement"
as defined in the Year 2000 Information and Readiness Disclosure Act of 1998
(the "Year 2000 Act") and, to the extent the disclosure related to year 2000
processing of the Company or to products or services offered by the Company, is
also a "Year 2000 readiness disclosure" as defined in the Year 2000 Act.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Commercial Paper Dealer Agreement, dated as of July 30, 1999 between
Medallion Financial Corp., and U.S. Bancorp Investments, Inc.
27 Medallion Financial Corp. Financial Data Schedule. Filed herewith.
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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: November 15, 1999 By:/s/ Daniel F. Baker
-------------------
Daniel F. Baker
Chief Financial Officer
Signing on behalf of the registrant
and as principal financial and
accounting officer
-34-
<PAGE>
EXHIBIT 10.1
COMMERCIAL PAPER DEALER AGREEMENT
[4(2) Program]
This Commercial Paper Dealer Agreement (the "Agreement") dated as of July 30,
1999 between Medallion Funding Corp.as Issuer and U.S. Bancorp Investments,
Inc., as Dealer, concerning short-term promissory notes (the "Notes") to be
issued pursuant to an Issuing and Paying Agency Agreement dated as of March 13,
1998 between the Issuer and Bank of Montreal Trust Company, as Issuing and
Paying Agent. This Agreement sets forth the understandings between the Issuer
and the Dealer in connection with the sale by the Issuer of the Notes through
the Dealer.
Certain terms used in this Agreement are defined in Section 6 hereof.
The Addendum to this Agreement, and any Annexes or Exhibits described in this
Agreement or such Addendum, are hereby incorporated into this Agreement and made
fully a part hereof.
1. Offers, Sales and Resales of Notes.
1.1 While (i) the Issuer has and shall have no obligation to sell the
Notes to the Dealer or to permit the Dealer to arrange any sale of the
Notes for the account of the Issuer, and (ii) the Dealer has and shall
have no obligation to purchase the Notes from the Issuer or to arrange
any sale of the Notes for the account of the Issuer, the parties
hereto agree that in any case where the Dealer purchases Notes from
the Issuer, or arranges for the sale of Notes by the Issuer, such
Notes will be purchased or sold by the Dealer in reliance on the
representations, warranties, covenants and agreements of the Issuer
contained herein or made pursuant hereto and on the terms and
conditions and in the manner provided herein.
1.2 So long as this Agreement shall remain in effect, and in addition to
the limitations contained in Section 1.7 hereof, the Issuer shall not,
without the consent of the Dealer, offer, solicit or accept offers to
purchase, or sell, any Notes except (a) in transactions with one or
more dealers which may from time to time after the date hereof become
dealers with respect to the Notes by executing with the Issuer one or
more agreements which contain provisions substantially identical to
those contained in Section 1 of this Agreement, of which the Issuer
hereby undertakes to provide the Dealer prompt notice or (b) in
transactions with the other dealers listed on the Addendum hereto,
which are executing agreements with the Issuer which contain
provisions substantially identical to Section 1 of this Agreement
contemporaneously herewith or (c) with Smith Barney Inc. pursuant to
the Commercial Paper Dealer Agreement by and between Smith Barney
Inc. and the issuer dated March 13, 1998. In no event shall the
Issuer offer, solicit or accept offers to purchase, or sell, any Notes
directly on its own behalf in transactions with persons other than
broker-dealers as specifically permitted in this Section 1.2.
<PAGE>
1.3 The Notes shall be in a minimum denomination of $100,000 or integral
multiples of $1,000 in excess thereof, will bear such interest rates,
if interest bearing, or will be sold at such discount from their face
amounts, as shall be agreed upon by the Dealer and the Issuer, shall
have a maturity not exceeding 270 days from the date of issuance
(exclusive of days of grace) and shall not contain any provision for
extension, renewal or automatic "rollover."
1.4 The authentication and issuance of, and payment for, the Notes shall
be effected in accordance with the Issuing and Paying Agency
Agreement, and the Notes shall be either individual physical
certificates or book-entry notes evidenced by a Master Note registered
in the name of DTC or its nominee, in the form or forms annexed to the
Issuing and Paying Agency Agreement.
1.5 If the Issuer and the Dealer shall agree on the terms of the purchase
of any Note by the Dealer or the sale of any Notes arranged by the
Dealer (including, but not limited to, agreement with respect to the
date of issue, purchase price, principal amount, maturity and interest
rate (in the case of interest-bearing Notes) or discount thereof (in
the case of Notes issued on a discount basis), and appropriate
compensation for the Dealer's services hereunder) pursuant to this
Agreement, the Issuer shall cause such Note to be issued and delivered
in accordance with the terms of the Issuing and Paying Agency
Agreement and payment for such Note shall be made by the purchaser
thereof, either directly or through the Dealer, to the Issuing and
Paying Agent, for the account of the Issuer. Except as otherwise
agreed, in the event that the Dealer is acting as an agent and a
purchaser shall either fail to accept delivery of or make payment for
a Note on the date fixed for settlement, the Dealer shall promptly
notify the Issuer, and if the Dealer has theretofore paid the Issuer
for the Note, the Issuer will promptly return such funds to the Dealer
against its return of the Note to the Issuer, in the case of a
certificated Note, and upon notice of such failure in the case of a
book-entry Note. If such failure occurred for any reason other than
default by the Dealer, the Issuer shall reimburse the Dealer on an
equitable basis for the Dealer's loss of the use of such funds for the
period such funds were credited to the Issuer's account.
1.6 The Dealer and the Issuer hereby establish and agree to observe the
following procedures in connection with offers, sales and subsequent
resales or other transfers of the Notes;
(a) Offers and sales of the Notes by or through the Dealer shall be
made only to: (i) investors reasonably believed by the Dealer to
be Qualified Institutional Buyers, Institutional Accredited
Investors or Sophisticated Individual Accredited Investors and
(ii) non-bank fiduciaries or agents that will be purchasing Notes
for one or more accounts, each of which is reasonably believed by
the Dealer to be an Institutional Accredited Investor or
Sophisticated Individual Accredited Investor.
<PAGE>
(b) Resales and other transfers of the Notes by the holders thereof
shall be made only in accordance with the restrictions in the
legend described in clause (e) below.
(c) No general solicitation or general advertising shall be used in
connection with the offering of the Notes. Without limiting the
generality of the foregoing, without the prior written approval
of the Dealer, the Issuer shall not issue any press release or
place or publish any "tombstone" or other advertisement relating
to the Notes.
(d) No sale of Notes to any one purchaser shall be for less than
$250,000 principal or face amount, and no Note shall be issued in
a smaller principal or face amount. If the purchaser is a non-
bank fiduciary acting on behalf of others, each person for whom
such purchaser is acting must purchase at least $250,000
principal or face amount of Notes.
(e) Offers and sales of the Notes by the Issuer through the Dealer
acting as agent for the Issuer shall be made in accordance with
Rule 506 under the Securities Act, and shall be subject to the
restrictions described in the legend appearing on Exhibit A
hereto. A legend substantially to the effect of such Exhibit A
shall appear as part of the CP Memorandum used in connection with
offers and sales of Notes hereunder, as well as on each
individual certificate representing a Note and each Master Note
representing book-entry Notes offered and sold pursuant to this
Agreement.
(f) The Dealer shall furnish or shall have furnished to each
purchaser of Notes for which it has acted as the Dealer a copy of
the then-current CP Memorandum unless such purchaser has
previously received a copy of the CP Memorandum as then in
effect. The CP Memorandum shall expressly state that any person
to whom Notes are offered shall have an opportunity to ask
questions of, and receive information from, the Issuer and the
Dealer and shall provide the names, addresses and telephone
numbers of the persons from whom information regarding the Issuer
may be obtained.
(g) The Issuer agrees, for the benefit of the Dealer and each of the
holders and prospective purchasers from time to time of the Notes
that, if at any time the Issuer shall not be subject to Section
13 or 15(d) of the Exchange Act, the Issuer will furnish, upon
request and at its expense, to the Dealer and to holders and
prospective purchasers of Notes information required by Rule
144A(d)(4)(ii) in compliance with Rule 144A(d).
(h) In the event that any Note offered or to be offered by the Dealer
would be ineligible for resale under Rule 144A, the Issuer shall
immediately notify
<PAGE>
the Dealer (by telephone, confirmed in writing) of such fact and
shall promptly prepare and deliver to the Dealer an amendment or
supplement to the CP Memorandum describing the Notes that are
ineligible, the reason for such ineligibility and any other
relevant information relating thereto.
(i) The Issuer hereby agrees that, not later than 15 days after the
first sale of Notes as contemplated by this Agreement, it will
file with the SEC a notice on Form D in accordance with Rule 503
under the Securities Act and that it will thereafter file such
amendments to such notice as Rule 503 may require.
1.7 The Issuer hereby represents and warrants to the Dealer, in connection
with offers, sales and resales of Notes, as follows:
(a) Issuer hereby confirms to the Dealer that (except as permitted by
Section 1.6(i)) within the preceding six months neither the
Issuer nor any person other than the Dealer or the other dealers
referred to in Section 1.2 hereof acting on behalf of the Issuer
has offered or sold any Notes, or any substantially similar
security of the Issuer (including, without limitation, medium-
term notes issued by the Issuer), to or solicited offers to buy
any such security form, any person other than the Dealer or the
other dealers referred to in Section 1.2 hereof. The Issuer also
agrees that (except as permitted by Section 1.6(i)), as long as
the Notes are being offered for sale by the Dealer and the other
dealers referred to in Section 1.2 hereof as contemplated hereby
and until at least six months after the offer of Notes hereunder
has been terminated, neither the Issuer nor any person other than
the Dealer or the other dealers referred to in Section 1.2 hereof
(except as contemplated by Section 1.2 hereof) will offer the
Notes or any substantially similar security of the Issuer for
sale to, or solicit offers to buy any such security from, any
person other than the Dealer or the other dealers referred to in
Section 1.2 hereof, it being understood that such agreement is
made with a view to bringing the offer and sale of the Notes
within the exemption provided by Section 4(2) of the Securities
Act and Rule 506 thereunder and shall survive any termination of
this Agreement. The Issuer hereby represents and warrants that
it has not taken or omitted to take, and will not take or omit to
take, any action that would cause the offering and sale of Notes
hereunder to be integrated with any other offering of securities,
whether such offering is made by the Issuer or some other party
or parties.
(b) The Issuer represents and agrees that the proceeds of the sale of
the Notes are not currently contemplated to be used for the
purpose of buying, carrying or trading securities within the
meaning of Regulation T and the interpretations thereunder by the
Board of Governors of the Federal Reserve System. In the event
that the Issuer determines to use such
<PAGE>
proceeds for the purpose of buying, carrying or trading
securities, whether in connection with an acquisition of another
company or otherwise, the Issuer shall give the Dealer at least
five business days' prior written notice to that effect. The
Issuer shall also give the Dealer prompt notice of the actual
date that it commences to purchase securities with the proceeds
of the Notes. Thereafter, in the event that the Dealer purchases
Notes as principal and does not resell such Notes on the day of
such purchase, to the extent necessary to comply with Regulation
T and the interpretations thereunder, the Dealer will sell such
Notes either (i) only to offerees it reasonably believes to be
QIBs or to QIBs it reasonably believes are acting for other QIBs,
in each case in accordance with Rule 144A or (ii) in a manner
which would not cause a violation of Regulation T and the
interpretations thereunder.
2. Representations and Warranties of Issuer.
The Issuer represents and warrants that:
2.1 The Issuer is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its
incorporation and has all the requisite power and authority to
execute, deliver and perform its obligations under the Notes,
this Agreement and the Issuing and Paying Agency Agreement.
2.2 This Agreement and the Issuing and Paying Agency Agreement have
been duly authorized, executed and delivered by the Issuer and
constitute legal, valid and binding obligations of the Issuer
enforceable against the Issuer in accordance with their terms,
subject to applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally, and subject, as to
enforceability, to general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at
law).
2.3 The Notes have been duly authorized, and when issued as provided
in the Issuing and Paying Agency Agreement, will be duly and
validly issued and will constitute legal, valid and binding
obligations of the Issuer enforceable against the Issuer in
accordance with their terms, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights
generally, and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought
in a proceeding in equity or at law).
2.4 The offer and sale of Notes in the manner contemplated hereby do
not require registration of the Notes under the Securities Act,
pursuant to the exemption from registration contained in Section
4(2) thereof and Regulation D thereunder, and no indenture in
respect of the Notes is
<PAGE>
required to be qualified under the Trust Indenture Act of 1939,
as amended.
2.5 The Notes will rank at least pari passu with all other unsecured
and unsubordinated indebtedness of the Issuer.
2.6 No consent or action of, or filing or registration with, any
governmental or public regulatory body or authority, including
the SEC, is required to authorize, or is otherwise required in
connection with the execution, delivery or performance of, this
Agreement, the Notes or the Issuing and Paying Agency Agreement,
except as may be required by the securities or Blue Sky laws of
the various states in connection with the offer and sale of the
Notes.
2.7 Neither the execution and delivery of this Agreement and the
Issuing and Paying Agency Agreement, nor the issuance of the
Notes in accordance with the Issuing and Paying Agency Agreement,
nor the fulfillment of or compliance with the terms and
provisions hereof or thereof by the Issuer, will (i) result in
the creation or imposition of any mortgage, lien, charge or
encumbrance of any nature whatsoever upon any of the properties
or assets of the Issuer other than in favor the holders of the
Notes and other persons secured by such lien, or (ii) violate or
result in a breach or a default under any of the terms of the
Issuer's charter documents or by-laws, any contract or instrument
to which the Issuer is a party or by which it or its property is
bound, or any law or regulation, or any order, writ, injunction
or decree of any court or government instrumentality, to which
the Issuer is subject or by which it or its property is bound,
which breach or default might have a material adverse effect on
the condition (financial or otherwise), operations or business
prospects of the Issuer or the ability of the Issuer to perform
its obligations under this Agreement, the Notes or the Issuing
and Paying Agency Agreement.
2.8 There is no litigation or governmental proceeding pending, or to
the knowledge of the Issuer threatened, against or affecting the
Issuer or any of its subsidiaries which might result in a
material adverse change in the condition (financial or
otherwise), operations or business prospects of the Issuer or the
ability of the Issuer to perform its obligations under this
Agreement, the Notes or the Issuing and Paying Agency Agreement.
2.9 Neither the CP Memorandum nor the Company Information contains
any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which
they were made, not misleading.
<PAGE>
2.10 Each (a) issuance of Notes by the Issuer hereunder and (b)
amendment or supplement of the CP Memorandum shall be deemed a
representation and warranty by the Issuer to the Dealer, as of
the date thereof, that, both before and after giving effect to
such issuance and after giving effect to such amendment or
supplement, (i) the representations and warranties given by the
Issuer set forth above in this Section 2 remain true and correct
on and as of such date as if made on and as of such date, (ii) in
the case of an issuance of Notes, the Notes being issued on such
date have been duly and validly issued and constitute legal,
valid and binding obligations of the Issuer, enforceable against
the Issuer in accordance with their terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought
in a proceeding in equity or at law) and (iii) in the case of an
issuance of Notes, since the date of the most recent CP
Memorandum, there has been no material adverse change in the
condition (financial or otherwise), operations or business
prospects of the Issuer which has not been disclosed to the
Dealer in writing.
3. Covenants and Agreements of Issuer.
The Issuer covenants and agrees that:
3.1 The Issuer will provide the Dealer written notice of any
amendment to, modification of or waivers with respect to, the
Notes or the Issuing and Paying Agency Agreement, including a
complete copy of any such amendment, modification or waiver.
3.2 The Issuer shall, whenever there shall occur any change in the
Issuer's condition (financial or otherwise), operations or
business prospects or any development or occurrence in relation
to the Issuer that would be material to holders of the Notes or
potential holders of the Notes (including any downgrading or
receipt of any notice of intended or potential downgrading or any
review for potential change in the rating accorded any of the
Issuer's securities by any nationally recognized statistical
rating organization which has published a rating of the Notes),
promptly, and in any event prior to any subsequent issuance of
Notes hereunder, notify the Dealer (by telephone, confirmed in
writing) of such change, development or occurrence.
3.3 The Issuer shall from time to time furnish to the Dealer such
information as the Dealer may reasonably request, including,
without limitation, any press releases or material provided by
the Issuer to any national securities exchange or rating agency,
regarding (i) the Issuer's operations and financial condition,
(ii) the due authorization and execution of the Notes and (iii)
the Issuer's ability to pay the Notes as they mature.
<PAGE>
3.4 The Issuer will take all such action as the Dealer may reasonably
request to ensure that each offer and each sale of the Notes will
comply with any applicable state Blue Sky laws; provided,
however, that the Issuer shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified
or subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject.
3.5 The Issuer will not be in default of any of its obligations
hereunder, under the Notes or under the Issuing and Paying Agency
Agreement, at any time that any of the Notes are outstanding.
3.6 The Issuer shall not issue Notes hereunder until the Dealer shall
have received (a) an opinion of counsel to the Issuer, addressed
to the Dealer, satisfactory in form and substance to the Dealer,
(b) a copy of the executed Issuing and Paying Agency Agreement as
then in effect, (c) a copy of resolutions adopted by the Board of
Directors of the Issuer, satisfactory in form and substance to
the Dealer and certified by the Secretary or similar officer of
the Issuer, authorizing execution and delivery by the Issuer of
this Agreement, the Issuing and Paying Agency Agreement and the
Notes and consummation by the Issuer of the transactions
contemplated hereby and thereby, (d) prior to the issuance of any
Notes represented by a book-entry note registered in the name of
DTC or its nominee, a copy of the executed Letter of
Representations among the Issuer, the Issuing and Paying Agent
and DTC and (e) such other certificates, opinions, letters and
documents as the Dealer shall have reasonably requested.
3.7 The Issuer shall reimburse the Dealer for all of the Dealer's
out-of-pocket expenses related to this Agreement, including
expenses incurred in connection with its preparation and
negotiation, and the transactions contemplated hereby (including,
but not limited to, the printing and distribution of the CP
Memorandum), and, if applicable, for the reasonable fees and
out-of-pocket expenses of the Dealer's counsel.
3.8 Without limiting any obligation of the Issuer pursuant to this
Agreement to provide the Dealer with credit and financial
information, the Issuer hereby acknowledges and agrees that the
Dealer may share the Company Information and any other
information or matters relating to the Issuer or the transactions
contemplated hereby with affiliates of the Dealer, including, but
not limited, to U.S. Bank, National Association, and that such
affiliates may likewise share information relating to the Issuer
or such transactions with the Dealer.
<PAGE>
3.9 The Issuer shall maintain one or more legally committed,
immediately available, unrestricted credit facilities, acceptable
to the Dealer, in an aggregate amount equal to or greater than
the aggregate amount of the Notes outstanding and having an
expiration date later than the last maturity date of any of the
Notes issued and outstanding.
4. Disclosure.
4.1 The CP Memorandum and its contents (other than the Dealer
Information) shall be the sole responsibility of the Issuer. The
CP Memorandum shall contain a statement expressly offering an
opportunity for each prospective purchaser to ask questions of,
and receive answers from, the Issuer concerning the offering of
Notes and to obtain relevant additional information which the
Issuer possesses or can acquire without unreasonable effort or
expense.
4.2 The Issuer agrees to promptly furnish the Dealer the Company
Information as it becomes available.
4.3 (a) The Issuer further agrees to notify the Dealer promptly upon
the occurrence of any event relating to or affecting the Issuer
that would cause the Company Information then in existence to
include an untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they
are made, not misleading.
(b) In the event that the Issuer gives the Dealer notice pursuant
to Section 4.3(a) and the Dealer notifies the Issuer that it then
has Notes it is holding in inventory, the Issuer agrees promptly
to supplement or amend the CP Memorandum so that the CP
Memorandum, as amended or supplemented, shall not contain an
untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading,
and the Issuer shall make such supplement or amendment available
to the Dealer.
(c) In the event that (i) the Issuer gives the Dealer notice
pursuant to Section 4.3(a), (ii) the Dealer does not notify the
Issuer that it is then holding Notes in inventory and (iii) the
Issuer chooses not to promptly amend or supplement the CP
Memorandum in the manner described in clause (b) above, then all
solicitations and sales of Notes shall be suspended until such
time as the Issuer has so amended or supplemented the CP
Memorandum, and made such amendment or supplement available to
the Dealer.
5. Indemnification and Contribution.
<PAGE>
5.1 The Issuer will indemnify and hold harmless the Dealer, each
individual, corporation, partnership, trust, association or other
entity controlling the Dealer, any affiliate of the Dealer or any
such controlling entity and their respective directors, officers,
employees, partners, incorporators, shareholders, servants,
trustees and agents (hereinafter the "Indemnitees") against any
and all liabilities, penalties, suits, causes of action, losses,
damages, claims, costs and expenses (including, without
limitation, fees and disbursements of counsel) or judgments of
whatever kind or nature (each a "Claim"), imposed upon, incurred
by or asserted against the Indemnitees arising out of or based
upon (i) any allegation that the CP Memorandum, the Company
Information or any information provided by the Issuer to the
Dealer included (as of any relevant time) or includes an untrue
statement of a material fact or omitted (as of any relevant time)
or omits to state any material fact necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading or (ii) arising out of or based
upon the breach by the Issuer of any agreement, covenant or
representation made in or pursuant to this Agreement. This
indemnification shall not apply to the extent that the Claim
arises out of or is based upon Dealer Information.
5.2 Provisions relating to claims made for indemnification under this
Section 5 are set forth on Exhibit B to this Agreement.
5.3 In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this
Section 5 is held to be unavailable or insufficient to hold
harmless the Indemnitees, although applicable in accordance with
the terms of this Section 5, the Issuer shall contribute to the
aggregate costs incurred by the Dealer in connection with any
Claim in the proportion of the respective economic interests of
the Issuer and the Dealer; provided, however that such
contribution by the Issuer shall be in an amount such that the
aggregate costs incurred by the Dealer do not exceed the
aggregate of the commissions and fees earned by the Dealer
hereunder with respect to the issue or issues of Notes to which
such Claim relates. The respective economic interests shall be
calculated by reference to the aggregate proceeds to the Issuer
of the Notes issued hereunder and the aggregate commissions and
fees earned by the Dealer hereunder.
6. Definitions.
6.1 "Claim" shall have the meaning set forth in Section 5.1.
6.2 "Company Information" at any given time shall mean the CP
Memorandum together with, to the extent applicable, (i) the
Issuer's most
<PAGE>
recent report on Form 10-K filed with the SEC and each report on
Form 10-Q or 8-K filed by the Issuer with the SEC since the most
recent Form 10-K, (ii) the Issuer's most recent annual audited
financial statements and each interim financial statement or
report prepared subsequent thereto, if not included in item (i)
above, (iii) the Issuer's and its affiliates' other publicly
available recent reports, including, but not limited to, any
publicly available filings or reports provided to their
respective shareholders, (iv) any other information or disclosure
prepared pursuant to Section 4.3 hereof and (v) any information
prepared or approved by the Issuer for dissemination to investors
or potential investors in the Notes.
6.3 "CP Memorandum" shall mean offering materials prepared in
accordance with Section 4 (including materials referred to
therein or incorporated by reference therein) provided to
purchasers and prospective purchasers of the Notes, and shall
include amendments and supplements thereto which may be prepared
from time to time in accordance with this Agreement (other than
any amendment or supplement that has been completely superseded
by a later amendment or supplement).
6.4 "Dealer Information" shall mean material concerning the Dealer
provided by the Dealer in writing expressly for inclusion in the
CP Memorandum.
6.5 "DTC" shall mean The Depository Trust Company.
6.6 "Exchange Act" shall mean the U.S. Securities Exchange Act of
1934, as amended.
6.7 "Indemnitee" shall have the meaning set forth in Section 5.1.
6.8 "Institutional Accredited Investor" shall mean an institutional
investor that is an accredited investor within the meaning of
Rule 501 under the Securities Act and that has such knowledge and
experience in financial and business matters that it is capable
of evaluating and bearing the economic risk of an investment in
the Notes, including, but not limited to, a bank, as defined in
Section 3(a)(2) of the Securities Act, or a savings and loan
association or other institution, as defined in Section
3(a)(5)(A) of the Securities Act, whether acting in its
individual or fiduciary capacity.
6.9 "Issuing and Paying Agency Agreement" shall mean the issuing and
paying agency agreement described on the cover page of this
Agreement, as such agreement may be amended or supplemented from
time to time.
6.10 "Issuing and Paying Agent" shall mean the party designated as
such on the cover page of this Agreement, as issuing and paying
agent under the
<PAGE>
Issuing and Paying Agency Agreement, or any successor thereto in
accordance with the Issuing and Paying Agency Agreement.
6.11 "Non-bank fiduciary or agent" shall mean a fiduciary or agent
other than (a) a bank, as defined in Section 3(a)(2) of the
Securities Act, or (b) a savings and loan association, as defined
in Section 3(a)(5)(A) of the Securities Act.
6.12 "Qualified Institutional Buyer" shall have the meaning assigned
to that term in Rule 144A under the Securities Act.
6.13 "Rule 144A" shall mean Rule 144A under the Securities Act.
6.14 "Regulation D" shall mean Regulation D (Rules 501 et seq.) under
the Securities Act.
6.15 "SEC" shall mean the U.S. Securities and Exchange Commission.
6.16 "Securities Act" shall mean the U.S. Securities Act of 1933, as
amended.
6.17 "Sophisticated Individual Accredited Investor" shall mean an
individual who (a) is an accredited investor within the meaning
of Regulation D under the Securities Act and (b) based on his or
her pre-existing relationship with the Dealer, is reasonably
believed by the Dealer to be a sophisticated investor (i)
possessing such knowledge and experience (or represented by a
fiduciary or agent possessing such knowledge and experience) in
financial and business matters that he or she is capable of
evaluating and bearing the economic risk of an investment in the
Notes and (ii) having a net worth of at least $5 million.
7. General
7.1 Unless otherwise expressly provided herein, all notices under
this Agreement to parties hereto shall be in writing and shall be
effective when received at the address of the respective party
set forth as follows:
For the Issuer:
Address: 437 Madison Ave. 38th Floor
New York, NY 10022
Attention: Chief Financial Officer
Telephone: (212)328-2100
Fax number: (212)328-2121
For the Dealer:
<PAGE>
Address: 111 SW Fifth Ave., T-19
Portland, OR 97204
Attention: Michael Malmquist
Vice President
Telephone: (503)275-4131
Fax number: (503)275-3490
7.2 This Agreement shall be governed by and construed in accordance
with the laws of the State of Minnesota, without regard to its
conflict of laws provisions.
7.3 The Issuer agrees that any suit, action or proceeding brought by
the Issuer against the Dealer in connection with or arising out
of this Agreement or the Notes or the offer and sale of the Notes
shall be brought solely in the United States federal courts
located in Minnesota or the courts of the State of Minnesota
located in the City of Minneapolis. Each of the Dealer and the
Issuer waives its right to trial by jury in any suit, action or
proceeding with respect to this Agreement or the transactions
contemplated hereby.
7.4 This Agreement may be terminated, at any time, by the Issuer,
upon one business day's prior notice to such effect to the
Dealer, or by the Dealer upon one business day's prior notice to
such effect to the Issuer. Any such termination, however, shall
not affect the obligations of the Issuer under Sections 3.7, 5
and 7.3 hereof or the respective representations, warranties,
agreements, covenants, rights or responsibilities of the parties
made or arising prior to the termination of this Agreement.
7.5 This Agreement is not assignable by either party hereto without
the written consent of the other party; provided, however, that
the Dealer may assign its rights and obligations under this
Agreement to any affiliate of the Dealer.
7.6 This Agreement may be signed in any number of counterparts, each
of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
7.7 This Agreement is for the exclusive benefit of the parties
hereto, and their respective permitted successors and assigns
hereunder, and shall not be deemed to give any legal or equitable
right, remedy or claim to any other person whatsoever.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date and year first above written.
Medallion Funding Corp., as Issuer U.S. Bancorp Investments, Inc., as Dealer
By: /s/ Allen Greene By: /s/ Joe Baker
--------------------------------- --------------------------------------
Name: Allen Greene Name: Joe Baker
Title: Senior Executive Vice President Title: Senior Managing Director
By: /s/ Daniel F. Baker
---------------------------------
Name: Daniel F. Baker
Title: Chief Financial Officer
<PAGE>
Exhibit A
Form of Legend for CP Memorandum and Notes
THE NOTES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW, AND OFFERS AND SALES
THEREOF MAY BE MADE ONLY IN COMPLIANCE WITH AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
BY ITS ACCEPTANCE OF A NOTE, THE PURCHASER WILL BE DEEMED TO REPRESENT THAT IT
HAS BEEN AFFORDED AN OPPORTUNITY TO INVESTIGATE MATTERS RELATING TO THE ISSUER
AND THE NOTES, THAT IT IS NOT ACQUIRING SUCH NOTE WITH A VIEW TO ANY
DISTRIBUTION THEREOF AND THAT IT IS EITHER (a) AN INSTITUTIONAL INVESTOR OR
SOPHISTICATED INDIVIDUAL INVESTOR THAT IS AN ACCREDITED INVESTOR WITHIN THE
MEANING OF RULE 501(a) UNDER THE ACT AND WHICH, IN THE CASE OF AN INDIVIDUAL,
(i) POSSESSES SUCH KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS
THAT HE OR SHE IS CAPABLE OF EVALUATING AND BEARING THE ECONOMIC RISK OF AN
INVESTMENT IN THE NOTES AND (ii) HAS A NET WORTH OF AT LEAST $5 MILLION (AN
"INSTITUTIONAL ACCREDITED INVESTOR" OR "SOPHISTICATED INDIVIDUAL ACCREDITED
INVESTOR", RESPECTIVELY) AND THAT EITHER IS PURCHASING NOTES FOR ITS OWN
ACCOUNT, IS A U.S. BANK (AS DEFINED IN SECTION 3(a)(2) OF THE ACT) OR A SAVINGS
AND LOAN ASSOCIATION OR OTHER INSTITUTION (AS DEFINED IN SECTION 3(a)(5)(A) OF
THE ACT) ACTING IN ITS INDIVIDUAL OR FIDUCIARY CAPACITY OR IS A FIDUCIARY OR
AGENT (OTHER THAN A U.S. BANK OR SAVINGS AND LOAN) PURCHASING NOTES FOR ONE OR
MORE ACCOUNTS EACH OF WHICH IS SUCH AN INSTITUTIONAL ACCREDITED INVESTOR OR
SOPHISTICATED INDIVIDUAL ACCREDITED INVESTOR (i) WHICH ITSELF POSSESSES SUCH
KNOWLEDGE AND EXPERIENCE OR (ii) WITH RESPECT TO WHICH SUCH PURCHASER HAS SOLE
INVESTMENT DISCRETION; OR (B) A QUALIFIED INSTITUTIONAL BUYER ("QIB") WITHIN THE
MEANING OF RULE 144A UNDER THE ACT WHICH IS ACQUIRING NOTES FOR ITS OWN ACCOUNT
OR FOR ONE OR MORE ACCOUNTS, EACH OF WHICH IS A QIB AND WITH RESPECT TO EACH OF
WHICH THE PURCHASER HAS SOLE INVESTMENT DISCRETION; AND THE PURCHASER
ACKNOWLEDGES THAT IT IS AWARE THAT THE SELLER MAY RELY UPON THE EXEMPTION FROM
THE REGISTRATION PROVISIONS OF SECTION 5 OF THE ACT PROVIDED BY RULE 144A. BY
ITS ACCEPTANCE OF A NOTE, THE PURCHASER THEREOF SHALL ALSO BE DEEMED TO AGREE
THAT ANY RESALE OR OTHER TRANSFER THEREOF WILL BE MADE ONLY (A) IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE ACT, EITHER (1) TO THE ISSUER OR TO U.S.
BANCORP INVESTMENTS INC. OR ANOTHER PERSON DESIGNATED BY THE ISSUER AS A
PLACEMENT AGENT FOR THE NOTES (COLLECTIVELY, THE "PLACEMENT AGENTS"), NONE OF
WHICH SHALL HAVE ANY OBLIGATION TO ACQUIRE SUCH NOTE, (2) THROUGH A PLACEMENT
AGENT TO AN INSTITUTIONAL ACCREDITED INVESTOR, SOPHISTICATED INDIVIDUAL
<PAGE>
ACCREDITED INVESTOR OR A QIB, OR (3) TO A QIB IN A TRANSACTION THAT MEETS THE
REQUIREMENTS OF RULE 144A AND (B) IN MINIMUM AMOUNTS OF $100,000.
<PAGE>
Model Opinion of Counsel to Issuer
Set forth below are the operative provisions on which the Dealer will generally
expect a legal opinion. Parties should recognize that there may be additions
to the Dealer's opinion request, and variations as to the opinion language,
depending on the details of the transaction and the differing opinion practices
of law firms; it may also be necessary to split the opinion between two or more
counsel where no one counsel is in a position to opine as to all subjects or in
all relevant jurisdictions.
[Date]
[Name and Address of Dealer]
Ladies and Gentlemen:
We have acted as counsel to ___________, a ___________ corporation (the
"Company"), in connection with the proposed offering and sale by the Company in
the United States of commercial paper in the form of short-term promissory notes
(the "Notes").
In our capacity as such counsel, we have examined a specimen form of Note, an
executed copy of the Commercial Paper Dealer Agreement dated _________, ___ (the
"Agreement") between the Company and U.S. Bancorp Investments Inc. (the
"Dealer"), and the Issuing and Paying Agency Agreement dated _________, ___ (the
"Issuing and Paying Agency Agreement") between the Company and ___________, as
issuing and paying agent (the "Issuing and Paying Agent") as well as originals,
or copies certified or otherwise identified to our satisfaction, of such other
records and documents as we have deemed necessary as a basis for the opinions
expressed below. In such examination, we have assumed the genuineness of all
documents submitted to us as originals, and the conformity to the originals of
all documents submitted to us as copies.
Capitalized terms used herein without definition are used as defined in the
Agreement.
Based upon the foregoing, it is our opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the state of ________ and has all the
requisite power and authority to execute, deliver and perform its
obligations under the Notes, the Agreement and the Issuing and Paying
Agency Agreement.
2. Each of the Agreement and the Issuing and Paying Agency Agreement has
been duly authorized, executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms subject
to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally, and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law), and except as rights
under the Agreement to indemnity and contribution may be limited by
federal or state laws.
<PAGE>
3. The Notes have been duly authorized, and when issued as provided in
the Issuing and Paying Agency Agreement, will be duly and validly
issued and will constitute legal, valid and binding obligations of the
Company enforceable against the Company in accordance with their
terms, subject to applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally, and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
4. The issuance and sale of Notes under the circumstances contemplated by
the Agreement and the Issuing and Paying Agency Agreement do not
require registration of the Notes under the Securities Act, pursuant
to the exemption from registration contained in Section 4(2) thereof
and Regulation D thereunder and do not require compliance with any
provision of the Trust Indenture Act of 1939, as amended; and the
Notes will rank at least pari passu with all other unsecured and
unsubordinated indebtedness of the Issuer.
5. No consent or action of, or filing or registration with, any
governmental or public regulatory body or authority, including the
Securities and Exchange Commission, is required to authorize, or is
otherwise required in connection with the execution, delivery or
performance of, the Agreement, the Notes or the Issuing and Paying
Agency Agreement, except as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale
of the Notes.
6. Neither the execution and delivery of the Agreement and the Issuing
and Paying Agency Agreement, nor the issuance of the Notes in
accordance with the Issuing and Paying Agency Agreement, nor the
fulfillment of or compliance with the terms and provisions of either
thereof by the Company, will (i) result in the creation or imposition
of any mortgage, lien, charge or encumbrance of any nature whatsoever
upon any of the properties or assets of the Company, or (ii) violate
or result in a breach or default under any of the terms of the
Company's charter documents or by-laws, any contract or instrument to
which the Company is a party or by which it or its property is bound,
or any law or regulation, or any order, writ, injunction or decree of
any court or government instrumentality, to which the Company is
subject or by which it or its property is bound.
7. There is no litigation or governmental proceeding pending, or to the
knowledge of the Company threatened, against or affecting the Company
or any of its subsidiaries which might result in a material adverse
change in the condition (financial or otherwise), operations or
business prospects of the Company or the ability of the Company to
perform its obligations under the Agreement, the Notes or the Issuing
and Paying Agency Agreement.
8. The Company is not an "investment company" or an entity "controlled"
by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
<PAGE>
This opinion may be delivered to the Issuing and Paying Agent, each holder
from time to time of Notes and any nationally recognized rating agency (in
connection with the rating of the Notes), each of which may rely on this
opinion to the same extent as if such opinion were addressed to it.
Very truly yours,
<PAGE>
Exhibit B
Further Provisions Relating to Indemnification
(a) The Issuer agrees to reimburse each Indemnitee for all expenses (including
reasonable fees and disbursements of internal and external counsel) as they
are incurred by it in connection with investigating or defending any loss,
claim, damage, liability or action in respect of which indemnification may
be sought under Section 5 of the Agreement (whether or not it is a party to
any such proceedings).
(b) Promptly after receipt by an Indemnitee of notice of the existence of a
Claim, such Indemnitee will, if a claim in respect thereof is to be made
against the Issuer, notify the Issuer in writing of the existence thereof;
provided that (i) the omission so to notify the Issuer will not relieve the
Issuer from any liability which it may have hereunder unless and except to
the extent it did not otherwise learn of such Claim and such failure
results in the forfeiture by the Issuer of substantial rights and defenses,
and (ii) the omission so to notify the Issuer will not relieve it from
liability which it may have to an Indemnitee otherwise than on account of
this indemnity agreement. In case any such Claim is made against any
Indemnitee and it notifies the Issuer of the existence thereof, the Issuer
will be entitled to participate therein, and to the extent that it may
elect by written notice delivered to the Indemnitee, to assume the defense
thereof, with counsel reasonably satisfactory to such Indemnitee; provided
that if the defendants in any such Claim include both the Indemnitee and
the Issuer, and the Indemnitee shall have concluded that there may be legal
defenses available to it which are different from or additional to those
available to the Issuer, the Issuer shall not have the right to direct the
defense of such Claim on behalf of such Indemnitee, and the Indemnitee
shall have the right to select separate counsel to assert such legal
defenses on behalf of such Indemnitee. Upon receipt of notice from the
Issuer to such Indemnitee of the Issuer's election so to assume the defense
of such Claim and approval by the Indemnitee of counsel, the Issuer will
not be liable to such Indemnitee for expenses incurred thereafter by the
Indemnitee in connection with the defense thereof (other than reasonable
costs of investigation) unless (i) the Indemnitee shall have employed
separate counsel in connection with the assertion of legal defenses in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the Issuer shall not be liable for the expenses
of more than one separate counsel (in addition to any local counsel in the
jurisdiction in which any Claim is brought), approved by the Dealer,
representing the Indemnitee who is party to such Claim), (ii) the Issuer
shall not have employed counsel reasonably satisfactory to the Indemnitee
to represent the Indemnitee within a reasonable time after notice of
existence of the Claim or (iii) the Issuer has authorized in writing the
employment of counsel for the Indemnitee. The indemnity, reimbursement and
contribution obligations of the Issuer hereunder shall be in addition to
any other liability the Issuer may otherwise have to an Indemnitee and
shall be binding upon and inure to the benefit of any successors, assigns,
heirs and personal representatives of the Issuer and any Indemnitee. The
Issuer agrees that without the Dealer's prior written consent, it will not
settle, compromise or consent to the entry of any judgment in any Claim in
respect of which indemnification may be
<PAGE>
sought under the indemnification provision of the Agreement (whether or not
the Dealer or any other Indemnitee is an actual or potential party to such
Claim), unless such settlement, compromise or consent includes an
unconditional release of each Indemnitee from all liability arising out of
such Claim.
<PAGE>
Model Certificate as to Resolutions1
[Name of Issuer]
I, _____________, the [Assistant] Secretary of __________, a ________
corporation (the "Issuer"), do hereby certify, in connection with the issuance
and sale of short-term promissory notes under the Commercial Paper Dealer
Agreement dated _________, ____ (the "Agreement", the terms defined therein
being used herein as therein defined) between the Issuer and U.S. Bancorp
Investments Inc. (the "Dealer"), that:
1. The following resolution was duly adopted by the Board of Directors of the
Issuer [by unanimous written consent dated _______, ____] [at a meeting
thereof duly called and held on _________, ____, at which meeting a quorum
was present and acting throughout], and such resolution has not been
amended, modified or revoked and is in full force and effect on the date
hereof.
RESOLVED, that the Chairman of the Board, the President, the Executive Vice
President, any Vice President and the Treasurer of the Issuer be, and each
of them hereby is, individually authorized to: (i) borrow for the use and
benefit of the Issuer from time to time up to an aggregate of $_______ at
any one time outstanding through the issuance of commercial paper notes;
(ii) execute such commercial paper notes in the name and on behalf of the
Issuer and issue such notes in accordance with the Issuing and Paying
Agency Agreement referred to below; (iii) execute and deliver (A) a
Commercial Paper Dealer Agreement between the Issuer and _____________, as
Dealer, providing, among other things, for the sale of commercial paper
notes on behalf of the Issuer and the indemnification of the Dealer in
connection therewith, (B) an Issuing and Paying Agency Agreement between
the Issuer and ___________, as issuing and paying agent, and (C) a Letter
of Representations addressed to The Depository Trust Company; (iv) execute
and file with the Securities and Exchange Commission Form D and any and all
amendments thereto, as required by Section 1.6(j) of the Agreement2, (v)
delegate to any other officers or employees of the Issuer authority to give
instructions to the Dealer pursuant to the Agreement; and (vi) do such acts
and execute such other instruments and documents as may be necessary and
proper to effect the transactions contemplated hereby including (a)
amending documents referred to herein and (b) appointing additional dealers
and successors to any of the parties named.
- -----------------------
1This model certificate will serve as a guide for resolutions adopted by the
Issuer. Any resolutions actually adopted, regardless of form, should cover all
the substantive matters covered in this model, and a certificate substantially
to the effect of this model is required to be delivered to the Dealer under
Section 3.6(c) of the Agreement.
2Clause (iv) may be deleted in Section 1.6(j) is not part of the Agreement. See
paragraph 2 of the Addendum and the Guidance Note relating to Section 1.6
generally.
<PAGE>
2. Each of the Agreement and the Issuing and Paying Agency Agreement, as
executed and delivered by the Issuer, is substantially in the form thereof
approved by the Board of Directors and referred to in the resolution set
forth in paragraph 1 hereof.
IN WITNESS WHEREOF, I have signed this certificate the ___ day of ________, ___.
------------------------------
[Assistant] Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM 9/30/99 FORM
10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<INVESTMENTS-AT-COST> 0 0
<INVESTMENTS-AT-VALUE> 452,709,917 384,063,972
<RECEIVABLES> 14,811,005 15,500,593
<ASSETS-OTHER> 3,090,000 3,229,568
<OTHER-ITEMS-ASSETS> 15,950,839 19,431,109
<TOTAL-ASSETS> 486,561,761 422,225,242
<PAYABLE-FOR-SECURITIES> 0 0
<SENIOR-LONG-TERM-DEBT> 55,500,000 41,590,000
<OTHER-ITEMS-LIABILITIES> 275,566,814 232,420,712
<TOTAL-LIABILITIES> 331,066,814 274,010,712
<SENIOR-EQUITY> 140,201 140,138
<PAID-IN-CAPITAL-COMMON> 141,426,067 141,376,068
<SHARES-COMMON-STOCK> 14,020,133 14,013,768
<SHARES-COMMON-PRIOR> 14,013,768 13,908,916
<ACCUMULATED-NII-CURRENT> 13,928,679 6,698,324
<OVERDISTRIBUTION-NII> 0 0
<ACCUMULATED-NET-GAINS> 0 0
<OVERDISTRIBUTION-GAINS> 0 0
<ACCUM-APPREC-OR-DEPREC> 0 0
<NET-ASSETS> 155,494,947 148,214,530
<DIVIDEND-INCOME> 0 0
<INTEREST-INCOME> 10,777,301 8,941,763
<OTHER-INCOME> 1,583,241 1,487,644
<EXPENSES-NET> 9,507,672 6,866,855
<NET-INVESTMENT-INCOME> 2,852,870 3,562,552
<REALIZED-GAINS-CURRENT> 8,859,119 595,965
<APPREC-INCREASE-CURRENT> (5,799,018) 41,890
<NET-CHANGE-FROM-OPS> 5,912,971 4,200,407
<EQUALIZATION> 0 0
<DISTRIBUTIONS-OF-INCOME> 0 0
<DISTRIBUTIONS-OF-GAINS> 0 0
<DISTRIBUTIONS-OTHER> 0 0
<NUMBER-OF-SHARES-SOLD> 0 0
<NUMBER-OF-SHARES-REDEEMED> 0 0
<SHARES-REINVESTED> 0 0
<NET-CHANGE-IN-ASSETS> 0 0
<ACCUMULATED-NII-PRIOR> 6,698,324 5,530,771
<ACCUMULATED-GAINS-PRIOR> 0 0
<OVERDISTRIB-NII-PRIOR> 0 0
<OVERDIST-NET-GAINS-PRIOR> 0 0
<GROSS-ADVISORY-FEES> 0 0
<INTEREST-EXPENSE> 4,841,238 3,935,320
<GROSS-EXPENSE> 9,507,672 6,866,855
<AVERAGE-NET-ASSETS> 0 0
<PER-SHARE-NAV-BEGIN> 10.48 10.58
<PER-SHARE-NII> 0 0
<PER-SHARE-GAIN-APPREC> 0 0
<PER-SHARE-DIVIDEND> 0 0
<PER-SHARE-DISTRIBUTIONS> 0 0
<RETURNS-OF-CAPITAL> 0 0
<PER-SHARE-NAV-END> 11.02 10.48
<EXPENSE-RATIO> 0 0
</TABLE>
