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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] AMENDMENT NO. 1 AND RESTATEMENT OF ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to___________________
Commission file number 0-27812
MEDALLION FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE NO. 04-3291176
(State of Incorporation) (IRS Employer Identification No.)
205 EAST 42ND STREET, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(212) 682-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_].
The approximate aggregate market value of voting stock held by non-affiliates
of the Registrant as of March 20, 1997 was $100,465,000 based on the last
reported sale price of the Registrant's Common Stock on the Nasdaq National
Market as of the close of business on March 20, 1997. There were 8,250,000
shares of the Registrant's Common Stock outstanding as of March 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders to be held on June 5, 1997, which Definitive Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the Registrant's fiscal year-end of December 31, 1996, are
incorporated by reference into Part III of this Form 10-K.
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MEDALLION FINANCIAL CORP.
1996 FORM 10-K ANNUAL REPORT
Table of Contents
Page
----
PART I................................................................. 3
Item 1. Business of the Company.................................. 3
Item 2. Properties............................................... 22
Item 3. Legal Proceedings........................................ 22
Item 4. Submission of Matters to a Vote of Security Holders...... 22
PART II................................................................ 25
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters......................... 25
Item 6. Selected Financial Data.................................. 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 35
Item 8. Financial Statements and Supplementary Data.............. 48
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures................. 48
PART III 49
Item 10. Directors and Executive Officers of the Registrant....... 49
Item 11. Executive Compensation................................... 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 49
Item 13. Certain Relationships and Related Transactions........... 49
PART IV 49
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K..................................... 49
2
THIS AMENDMENT NO. 1 TO AND RESTATEMENT OF ANNUAL REPORT ON FORM 10-K OF
MEDALLION FINANCIAL CORP. AMENDS ITEMS 1, 6, 7 AND 8 OF AND RESTATES THE
REMAINDER OF THE ANNUAL REPORT ON FORM 10-K OF MEDALLION FINANCIAL CORP. FILED
WITH THE COMMISSION ON MARCH 31, 1997.
PART I
ITEM 1. BUSINESS OF THE COMPANY
GENERAL
Medallion Financial Corp. ("Medallion Financial") acquired on May 29, 1996 the
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specialty finance businesses conducted by Tri-Magna Corporation ("Tri-Magna"),
---------
Edwards Capital Company (collectively with its successor, Edwards Capital Corp.,
"Edwards") and Transportation Capital Corp. ("TCC" and, collectively with Tri-
---
Magna and Edwards, the "Founding Companies") as well as the taxicab rooftop
------------------
advertising business conducted by Tri-Magna. Tri-Magna had conducted its
specialty finance and taxicab rooftop advertising businesses through its wholly
owned subsidiaries, Medallion Funding Corp. ("MFC") and Medallion Media, Inc.
---
("Media"), respectively, and references herein to Tri-Magna include such
- -------
subsidiaries unless the context indicates otherwise. Prior to the closing of
the acquisitions of the Founding Companies (the "Acquisitions"), Medallion
------------
Financial had no operations. See "Business - Formation Transactions."
-----------------------------
UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES HEREIN TO THE
"COMPANY" INCLUDE MEDALLION FINANCIAL CORP. AND THE FOUNDING COMPANIES
COLLECTIVELY AND REFERENCES HEREIN TO "MEDALLION FINANCIAL" SHALL MEAN MEDALLION
FINANCIAL CORP. ALONE.
-----------------------------
The Company operates a specialty finance business and its principal focus is
the origination and servicing of loans financing the purchase of taxicab
medallions and related assets ("Medallion Loans"). As an adjunct to its finance
---------------
business, the Company also operates a taxicab rooftop advertising business. The
Company has been engaged in taxicab medallion lending since 1979 and has
developed a leading position in the industry. The Company also originates and
services commercial installment loans, financing small business in targeted
industries outside of the taxicab industry ("Commercial Installment Loans").
----------------------------
The Company intends to use the expertise it has developed in its areas of
concentration to further expand the range of financial products it offers as
well as the industries and geographic areas it services.
The Company believes its taxicab rooftop advertising business is one of the
largest providers in the nation of this segment of the out-of-home advertising
industry. At December 31, 1996, the Company had approximately 2,000 installed
taxicab rooftop advertising displays ("Displays"). The Company sells advertising
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space to advertising agencies and companies promoting products. Currently, the
Company provides such advertising in New York City, Philadelphia, Miami and
Boston and intends to expand to other major metropolitan areas.
Medallion Financial is a closed-end, non-diversified management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
--------
The investment objectives of the Company are to provide a high level of
distributable income, consistent with preservation of capital, as well as long-
term growth of net asset value. The Company is managed by its executive
officers under the supervision of its Board of Directors and has retained FMC
Advisers, Inc. ("FMC") as an investment adviser. The principals of FMC had
---
served as directors and executive officers of Tri-Magna and MFC
3
since inception of these businesses until their acquisition by the Company on
May 29, 1996. The Company has elected to be treated as a business development
company under the 1940 Act. In addition, it has elected to be treated for tax
purposes as a regulated investment company (a "RIC") under the Internal Revenue
---
Code of 1986, as amended (the "Code"). As a RIC, the Company will not be subject
----
to U.S. federal income tax on any investment company taxable income (which
includes, among other things, dividends and interest reduced by deductible
expenses) that it distributes to its stockholders if at least 90% of its
investment company taxable income for that taxable year is distributed. The
Company pays quarterly cash dividends to comply with this requirement.
Stockholders can elect to reinvest distributions. The Company's specialty
finance subsidiaries, MFC, TCC and Edwards (collectively the "RIC
---
Subsidiaries"), have also elected to be treated as RICs and distribute at least
- ------------
90% of their respective investment company taxable income to the Company. See
"Business of the Company - The Company's Operation as a RIC."
The following chart illustrates the organizational structure of the Company:
THE COMPANY
----------------------------------------------------
Medallion Financial Corp.
("Medallion Financial")
. RIC
. BDC
----------------------------------------------------
- --------------------------------------------------------------------------------
Medallion Funding Edwards Capital Transportation Medallion Taxi
Corp. Corp. Capital Corp. Media, Inc.
("MFC") ("Edwards") ("TCC") ("Media")
. RIC . RIC . RIC . Taxicab
. SBIC . SBIC .SBIC advertising
business
. C Corporation
- --------------------------------------------------------------------------------
- ------------------
. BDC Business Development Company under the 1940 Act ("BDC").
. RIC Regulated Investment Company under the Code.
. SBIC Small Business Investment Company registered
under the 1940 Act and licensed by the U.S.
Small Business Administration (the "SBA").
MFC and Media. Prior to their acquisition by the Company, MFC and Media
were wholly owned subsidiaries of Tri-Magna which merged into the Company in
connection with the closing of Medallion Financial's acquisition of MFC and
Media on May 29, 1996. Tri-Magna was a closed-end, management investment
company registered under the 1940 Act. Management of the Company had operated
Tri-Magna and its subsidiaries since they were organized. MFC was incorporated
in 1979 and is a closed-end, management investment company registered under the
1940 Act. Before the termination of the SBA's Specialized Small Business
Investment Company ("SSBIC") program in September 1996, MFC was the largest
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SSBIC in the nation. Following the termination of the SSBIC program, MFC was
converted to a Small Business Investment Company ("SBIC") under an agreement
----
with the SBA entered into in February 1997 (the "MFC Conversion Agreement").
------------------------
Operating primarily in New York City, MFC is a well established Medallion
lender and has diversified its operations by developing a division that
originates Commercial Installment Loans. As an
4
SSBIC, MFC was restricted to financing small business concerns owned and managed
by persons deemed to be socially or economically disadvantaged ("Disadvantaged
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Borrowers"). As an SBIC, MFC is permitted to lend to any small business meeting
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the size and eligibility requirements established by the SBA rather than only
small business concerns that are owned and managed by Disadvantaged Borrowers,
subject to certain restrictions contained in the MFC Conversion Agreement.
Accordingly, MFC now has a significantly larger borrower base and performs its
credit analyses based solely on economic criteria. Although Edwards and TCC are
also SBICs, unlike Edwards and TCC, MFC does not have SBA leverage outstanding
and it is not, therefore, subject to SBA restrictions on the amount of third-
party indebtedness it may incur. See "Business of the Company - Regulation of
the Company by the SBA." The Company is also currently exploring the possibility
of establishing a commercial paper program at MFC. The issuance of commercial
paper will be contingent upon MFC obtaining an investment grade rating, among
other conditions, and no assurance can be given that MFC will be able to
establish such a program.
Media, which was incorporated in 1994, provides taxicab rooftop advertising
and has initiated a plan to become a national provider of such advertising.
Media currently provides such advertising in New York City, Philadelphia, Miami
and Boston and intends to expand within its existing markets and enter other
major metropolitan markets. In furtherance of its expansion efforts, Media
acquired 450 additional installed Displays in connection with the acquisition of
the assets of See-Level Advertising, Inc. and See-Level Management, Inc. on July
25, 1996. In addition, on March 6, 1997 Media entered into an agreement with
The Metropolitan Taxi Board of Trade, Inc. (the "MTBOT") to provide advertising
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on over 1,800 New York City taxicabs owned by members of the MTBOT commencing on
September 22, 1997. The effect of this agreement will be to increase the number
of taxicabs Media currently has under contract in New York City from
approximately 1,700 to approximately 3,500. With this agreement, Media is the
leading taxicab rooftop advertiser in the city and one of the largest in the
nation.
Edwards Capital Corp. Edwards is a closed-end, management investment
company registered under the 1940 Act and is licensed as an SBIC by the SBA.
Operating almost exclusively in New York City, Edwards is a well-established
medallion lender. Edwards' predecessor, Edwards Capital Company, was organized
in 1979 and had operated as a privately held limited partnership from 1981 until
the Company acquired substantially all of its assets and assumed substantially
all of its liabilities on May 29, 1996 through Edwards which is registered as a
closed-end, management investment company under the 1940 Act.
Transportation Capital Corp. TCC is a closed-end, management investment
company registered under the 1940 Act. TCC is a well-established and
geographically diverse medallion lender with operations in Boston, Cambridge,
Chicago and New York City. TCC was incorporated in 1979 and prior to its
acquisition by the Company, was a wholly owned indirect subsidiary of Leucadia
National Corporation. Like MFC, TCC was licensed as an SSBIC before the
termination of the SSBIC program and is now licensed as an SBIC under the terms
of an agreement with the SBA entered into in February 1997 (the "TCC Conversion
--------------
Agreement"). Accordingly, like MFC, TCC is now permitted to make loans to
- ---------
borrowers other than Disadvantaged Borrowers, subject to certain restrictions
contained in the TCC Conversion Agreement. See "Business of the Company-
Regulation of the Company by the SBA." In the second quarter of 1997, the
Company intends to merge TCC into MFC to increase MFC's capital and simplify the
Company's corporate structure. See "Business of the Company - Sources of
Funds."
The Section 7(a) Loan Program. The Company intends to establish a new
subsidiary and has applied to the SBA for a license as a participating lender in
the SBA's Section 7(a) loan program (a "Participating Lender"). If the
--------------------
Company's application is successful, the Company would become eligible to make
loans guaranteed by the SBA to small businesses meeting certain size and other
eligibility requirements under the Small Business Investment Act of 1954, as
amended (the "SBIA") and SBA
----
5
regulations thereunder ("SBA Regulations"). If the Company's application to
----------------
become a Participating Lender is approved, the Company intends to form a wholly-
owned subsidiary organized as a Delaware limited liability company for the
purpose of conducting these activities. This subsidiary would make secured loans
to small businesses in principal amounts ranging from $10,000 to $1,000,000 with
terms up to 25 years. These loans would be made both on a guaranteed basis under
the SBA's Section 7(a) loan program and on an unguaranteed basis independent of
the Section 7(a) program. There can be no assurance that the Company will be
successful in its efforts to obtain licenses as a Participating Lender or, if
successful, that the SBA will guarantee loans originated by it.
GROSS LOAN PORTFOLIO SUMMARY DATA
The following table classifies the Company's loans outstanding as of
December 31, 1996:
Weighted
Number Average Maturity Balance
Type of Loans of Loans Interest Rate Date Outstanding
- ------------------------------- -------- -------------- ---------- ------------
New York City Medallion Loans.. 1,354 9.72% 1/97-12/15 $124,759,130
Other Medallion Loans.......... 277 12.51% 1/97-2/02 9,855,769
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All Medallion Loans......... 1,631 9.92% 1/97-12/15 134,614,899
Dry cleaners and laundromats... 599 13.70% 1/97-9/05 34,080,398
Other.......................... 140 12.67% 1/97-10/02 7,844,891
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Total....................... 2,370 10.80% 1/97-12/15 $176,540,188
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MEDALLION LENDING
Industry Overview
The New York City Market. A New York City taxicab medallion represents the
only license to operate a taxicab and accept street hails in New York City. As
reported by the TLC, individual (owner-driver) medallions currently sell for
approximately $190,000 and corporate medallions currently sell for approximately
$215,000. According to TLC data, over the past 20 years, medallions have
appreciated in value an average of 10.2% each year. The TLC estimates that in
1993 New York City taxicabs transported approximately 226 million people and
collected in excess of $1.0 billion in gross revenue. Taxicabs play a prominent
role in intra-Manhattan travel. According to the TLC, taxicabs transported
154.0% more passengers than Manhattan buses in 1993. In addition, taxicabs
provided 34.0% of all intra-Manhattan passenger trips taken in 1993 by subway,
bus, livery car or taxicab. Between 1977 and 1993, taxicab ridership for intra-
Manhattan travel increased by 42.0%, while citywide bus ridership declined by
40.0%. The Company believes that much of the popularity of taxicabs can be
attributed to the difficulty and expense Manhattan residents encounter in
maintaining a private automobile in Manhattan.
The number of taxicab medallions is limited by law and until recently no new
medallions had been issued since 1937. However, in January 1996, the New York
City Council passed a law authorizing the city to sell up to 400 additional
taxicab medallions. The first 133 of such medallions were sold in May 1996 and
an additional 133 were sold in October 1996 with the balance to be sold over the
next year. The Company believes that the auction has provided it with
additional opportunities because it has financed the purchase of a significant
number of the medallions sold at auction. As a result of the limited supply of
medallions, an active market for medallions has developed. TLC estimates
indicate that the total value of all New York City medallions exceeds $2.5
billion. The law limiting the number of medallions also stipulates that the
ownership for the 12,053 medallions outstanding at December 31, 1996 shall
remain divided into 5,086 owner-driver or individual medallions and 6,967 fleet
or corporate
6
medallions. Corporate medallions are more valuable because they can be
aggregated by businesses and leased to drivers.
Based upon TLC statistics, the Company estimates that from 1989 through 1993
the number of taxicab medallions sold each year ranged from approximately 500 to
850, divided roughly equally between corporate and individual medallions. The
purchase of a taxicab medallion is frequently financed with a loan and, in
addition, there is an active refinancing market for such loans. Assuming that
approximately 75.0% of the purchase price of corporate medallions and
approximately 75% of the purchase price of individual medallions are typically
financed, the dollar volume of New York City financing of medallion sales would
range from $72.0 million to $124.0 million a year. The Company believes that
the dollar volume of the refinancing market exceeds the dollar volume of
financing of medallion sales.
A prospective medallion owner must qualify under the medallion ownership
standards set and enforced by the TLC. These standards prohibit individuals
with criminal records from owning medallions, require that the funds used to
purchase medallions be derived from legitimate sources and mandate that taxicab
vehicles and meters meet TLC specifications. In addition, before the TLC will
approve a medallion transfer, the TLC requires a waiver from the seller's
insurer stating that there are no outstanding claims for personal injuries in
excess of insurance coverage. After the sale is approved, the owner's taxicab
is subject to quarterly TLC inspections.
The Boston and Cambridge Markets. The Company estimates that Boston
medallions currently sell for approximately $100,000. The number of Boston
medallions had been limited by law since 1930 to 1,525 medallions. In 1993,
however, the Massachusetts legislature authorized the Boston Hackney Carriage
Bureau, which regulates the issuance of new medallions, to issue 300 additional
medallions, but the Bureau has only issued 40 additional medallions which are
restricted to "wheelchair accessible" taxicabs. The Company estimates that the
total value of all Boston medallions and related assets is approximately $157.0
million. In addition, the Company estimates Cambridge medallions currently sell
for approximately $85,000. The number of Cambridge medallions has been limited
to 248 since 1945 by a Cambridge city ordinance; accordingly, the Company
estimates that the total value of all Cambridge medallions and related assets is
approximately $21.0 million.
The Chicago Market. Based on the Company's experience, Chicago medallions
currently sell for approximately $50,000. Pursuant to a 1988 municipal
ordinance, the number of outstanding medallions, which currently is capped at
5,500, has increased steadily from 4,600 in 1988 and will be increased to 5,700
in 1997. The ordinance has also required two major taxicab companies to forfeit
1,300 medallions from 1988 through 1997. The newly issued and forfeited
medallions have been reissued for nominal consideration to new owners by the
city through a lottery. The Company estimates that the total value of all
Chicago medallions and related assets is approximately $275.0 million.
Market Position
The Company has originated and serviced Medallion Loans since 1979 and has
established a leading position in this industry. The Company's management has a
long history of owning, managing and financing taxicab fleets, taxicab
medallions and corporate car services. Medallion Loans collateralized by New
York City taxicab medallions and related assets comprised 93.0% of the value of
the Company's Medallion Loan portfolio at December 31, 1996. The balance
consisted of Medallion Loans collateralized by Boston, Chicago, Cambridge,
Newark, Philadelphia and Hartford taxicab medallions. The Company believes that
there are significant growth opportunities in these and other metropolitan
markets nationwide.
7
Most New York City medallion transfers are handled through approximately 35
medallion brokers who are licensed by the TLC. In addition to brokering
medallions, these brokers also arrange TLC documentation, insurance, vehicles
and meters as well as financing. The Company has excellent relations with many
of the most active of these brokers and regularly receives referrals from them.
However, the Company receives most of its referrals from a small number of
brokers. The Company does not pay referral fees.
Loan Portfolio
Medallion Loans comprised approximately 76.3% of the Company's loan portfolio
at December 31, 1996. On that date, the Company had 1,631 Medallion Loans
outstanding ranging from $300 to $560,000 in principal amount outstanding with
an average principal amount outstanding of $83,000 and an aggregate principal
amount outstanding of $134.6 million. Substantially all of the Company's
Medallion Loans are made at fixed rates of interest in excess of the Prime Rate.
These loans generally require equal monthly payments covering accrued interest
and amortization of principal over a ten-year schedule subject to a balloon
payment of all outstanding principal after four years. More recently, the
Company has begun to originate loans with two to four year maturities.
Previously, the Company was not permitted to do so under SBA regulations.
Borrowers may prepay Medallion Loans upon payment of a fee of 90 days' interest.
The Company generally retains the Medallion Loans it originates. From inception
of its business through December 31, 1996, the period between the origination
and final payment of all Medallion Loans originated by MFC has been estimated by
the Company to be 29 months on a weighted average basis. The Company believes
that this weighted average time period varies to some extent as a function of
changes in interest rates because borrowers are more likely to exercise
prepayment rights in a decreasing interest rate environment when the interest
rate payable on the borrower's loan is high relative to prevailing interest
rates and are less likely to repay in a rising interest rate environment. At
December 31, 1996, substantially all of the Company's Medallion Loans were
secured by first security interests in taxicab medallions and related assets.
The Company originates Medallion Loans at an approximate average loan-to-value
ratio of 70.0%. The Company estimates that the average loan to value ratio of
all of the Company's Medallion Loans at December 31, 1996 was 54.0%, which the
Company believes is representative of its historical average loan to value
ratio. The Company has recourse against the direct and indirect owners of the
medallion through personal guarantees. Although personal guarantees increase
the commitment of borrowers to repay their loans, there can be no assurance that
the assets available under personal guarantees would, if required, be sufficient
to satisfy the obligations secured by such guarantees.
The Company believes that its Medallion Loan portfolio is of high credit
quality because medallions have generally increased in value and are easy to
repossess and resell in an active market. While loans in the portfolio of MFC
have been from time to time in arrears or default, MFC never experienced a loss
of principal on any of the $309.0 million in aggregate principal amount of
Medallion Loans it originated during the period from 1979 through December 31,
1996. In addition, from the date of the Acquisitions through the date of this
Report, Edwards and TCC have not lost any principal on the loans that were
outstanding during this time. In the event of defaults by borrowers, the
medallions collateralizing such loans have been seized and, when such loans have
not been brought current, readily sold in the active market for medallions at
prices at or in excess of the amounts due.
COMMERCIAL INSTALLMENT LOANS
Overview
MFC began Commercial Installment Loan operations in 1987 to diversify its
loan portfolio which, prior to that time, consisted almost entirely of Medallion
Loans. MFC chose to concentrate these operations on originating loans secured
by retail dry cleaning and coin operated laundromat equipment because of certain
characteristics similar to medallion lending that make these industries
attractive candidates for profitable lending. These factors include the
following (i) relatively high fixed rates of interest ranging from approximately
500 to 700 basis points over the prevailing Prime Rate at the time of
origination, (ii) low historical repossession rates, (iii) vendor recourse, (iv)
significant equity investments by borrowers, (v) an active market for
repossessed equipment,
8
(vi) a small average loan size of $60,000 and (vii) collateral service life that
is frequently twice as long as the term of the loans. The Company estimates that
there are approximately 4,000 retail dry cleaners and approximately 3,000
laundromats in the New York City metropolitan area. Specialization in these
industries has permitted relatively low administrative costs because
documentation and terms of credit are standardized. Moreover, the consistency
among the loans has facilitated simplified credit review and portfolio analysis.
The Company believes that other niche industries with similar characteristics
will provide additional loan portfolio growth opportunities. Building on the
success of MFC's Commercial Installment Loan Operations, the Company has
continued to expand its lending activities in this area through Edwards, TCC and
Medallion Financial itself. Moreover, if the Company succeeds in its
application to become a Participating Lender under the SBA's Section 7(a) loan
program, the Company anticipates that a significant proportion of the assets of
the subsidiary formed for this purpose would be allocated to the origination of
Commercial Installment Loans.
Loan Portfolio
Commercial Installment Loans comprised 23.7% of the Company's loan portfolio
at December 31, 1996. These loans finance either the purchase of the equipment
and related assets necessary to open a new business or the purchase or
improvement of an existing business. The Company has originated Commercial
Installment Loans in principal amounts ranging from $5,000 to $725,000. These
loans are generally retained by the Company and typically have maturities
ranging from one to seven years. At December 31, 1996, there were 739
Commercial Installment Loans outstanding with a balance of $41.9 million. Loans
to dry cleaners and laundromats represented 81.0% of the aggregate principal
amount of Commercial Installment Loans outstanding at December 31, 1996. The
remaining Commercial Installment Loans are spread among other industries
including food service, private pay phone, radio broadcast and accounts
receivable financing.
The principal amount of the Company's originations of Commercial Installment
Loans has increased during the three years ended December 31, 1996. In 1996 the
Company originated 326 Commercial Installment Loans in the aggregate principal
amount of $38.2 million. The Company originated 350 Commercial Installment
Loans in 1995 in the aggregate principal amount of $24.7 million. The Company
originated 339 Commercial Installment Loans in 1994 in the aggregate principal
amount of $24.1 million, compared to 181 Commercial Installment Loans in the
aggregate principal amount of $17.2 million originated in 1993.
Commercial Installment Loans made by the Company typically require equal
monthly payments covering accrued interest and amortization of principal over a
four- to five-year term and generally can be prepaid with a fee of 90 days'
interest. At December 31, 1996, the Company's Commercial Installment Loans had
a weighted average interest rate of 13.51%. The term of, and interest rate
charged on, the Company's outstanding loans are subject to SBA Regulations.
Under SBA Regulations, the maximum rate of interest permitted on loans
originated by the Company is 19.0%. Unlike Medallion Loans, for which
competition precludes the Company from charging the maximum rate of interest
permitted under SBA Regulations, the Company is able to charge the maximum rate
on certain Commercial Installment Loans and anticipates that Medallion Financial
will be able to continue to charge in excess of the maximum rate since Medallion
Financial is not subject to regulation by the SBA. The weighted average rate of
interest on Commercial Installment Loans exceeded the weighted average rate of
interest on Medallion Loans by 359 basis points at December 31, 1996. The
Company believes that the increased yield on Commercial Installment Loans
compensate for their higher risk relative to Medallion Loans and further
illustrate the benefits of diversification.
The Company generally originates Commercial Installment Loans at an
approximate average loan to value ratio of 70.0% and estimates that the average
loan to value ratio of all of the Company's Commercial Installment Loans at
December 31, 1996 was approximately 60.0%. Substantially all of the Company's
Commercial Installment Loans are collateralized by first security interests in
the assets being financed by the borrower. At December 31, 1996, 81.0% of the
aggregate principal outstanding in the Company's Commercial Installment Loan
portfolio was secured by first security interests in retail dry cleaning and
coin operated laundromat equipment and the balance, 19.0%, was secured by real
estate, food service equipment, radio broadcast licenses and other equipment. In
9
addition, the Company requires the principals of borrowers to personally
guarantee loans. Additional security is provided by equipment vendors, and at
December 31, 1996, approximately 40.0% of the aggregate principal amount of
Commercial Installment Loans outstanding was secured by full recourse guarantees
from equipment vendors and approximately 5.0% was secured by partial recourse
guarantees from equipment vendors. The Company's aggregate realized loss of
principal on loans secured by retail dry cleaning and coin operated laundromat
equipment originated to date is $111,000 or 0.15% of the approximately $72.1
million in principal amount of such loans originated to date.
MARKETING, ORIGINATION AND LOAN APPROVAL PROCESS
The Company employs six loan officers that originate Medallion Loans and
Commercial Installment Loans. The Company's loan officers regularly receive
referrals from medallion brokers and make use of an extensive referral network
in the retail dry cleaning and coin operated laundromat industry. Equipment
vendors are the single most important source of Commercial Installment Loan
referrals and the Company attributes its excellent relations with these vendors
in part to its success in financing the purchase of retail dry cleaning and coin
operated laundromat equipment.
Each loan application is individually reviewed through analysis of a number
of factors, including loan-to-value ratios, a review of the borrower's credit
history, public records, personal interviews, trade references and personal
inspection of the premises and TLC approval, if applicable. The Company also
requires each applicant to provide personal and corporate tax returns and
premises leases or property deeds. The Company's Credit Committee establishes
loan origination criteria. Loans that conform to such criteria may be processed
by a loan officer and non-conforming loans must be approved by three of the four
members of the Company's Credit Committee.
GROSS LOANS RECEIVABLE
The following table sets forth the Company's gross loans receivable:
December 31,
------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- --------------
(in thousands)
Loans Receivable
Medallion Financial.. $ 14,640 8%
Tri-Magna (MFC)...... $ 69,785 53% $ 82,014 57% $ 90,343 62% $ 96,956 64% 99,662 57
Edwards.............. 43,020 32 44,141 30 43,487 30 43,799 29 46,630 26
TCC.................. 20,192 15 18,074 13 10,981 8 9,797 7 15,608 9
Total.............. $132,997 100% $144,229 100% $144,811 100% $150,552 100% $176,540 100%
======== === ======== === ======== === ======== === ======== ===
During the year ended December 31, 1996, the Company originated over 1,000
loans in the aggregate principal amount of $88.1 million. For that period, the
Company's realized losses of principal were 0.06% of its loan portfolio. During
the year ended December 31, 1995, the Company originated loans in the aggregate
principal amount of $52.7 million. For that year, the Company's realized losses
of principal were less than 0.01% of its loan portfolio.
10
LOAN ACTIVITY
The following table sets forth the Company's loans originated, renewed and
repaid on a combined basis for the periods indicated:
Year Ended December 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(in thousands)
Loans originated................................ $ 61,357 $ 52,714 $ 88,070
Loan repayments (including renewals)............ (60,610) (46,983) (60,569)
Decrease (increase) in unrealized depreciation.. 871 195 9
Loans (written off) recovered, net.............. (166) 11 5
-------- -------- --------
Increase (decrease) in loans receivable-net..... 1,452 5,937 27,515
Loans receivable-net (beginning of period)...... 141,590 143,042 148,979
-------- -------- --------
Loans receivable-net (end of period)............ $143,042 $148,979 $176,494
======== ======== ========
DELINQUENCY AND LOAN LOSS EXPERIENCE
Under the Company's collection policy, when a borrower fails to make a
required monthly payment, the borrower is notified by mail after approximately
10 days, and a collection officer generally contacts the borrower if the payment
remains unpaid after 10 additional days. The Company generally follows a
practice of discontinuing the accrual of interest income on loans which are in
arrears as to interest payments for a period in excess of 90 days. The Company
delivers a default notice and begins foreclosure and liquidation proceedings
when management determines that pursuit of these remedies is the most
appropriate course of action in the circumstances.
At December 31, 1996, the Company had 88 loans with an aggregate
principal balance of $8.4 million, or 4.8% of the portfolio, for which accrued
interest and principal payments of $791,000 were delinquent for 90 days or more,
compared to 69 loans with an aggregate principal balance of $6.4 million or 4.3%
of the portfolio, for which accrued interest and principal payments of $512,000
were delinquent for 90 days or more at December 31, 1995. Of the 88 loans which
were delinquent at December 31, 1996, 55, in the aggregate principal amount of
$5.8 million, were Medallion Loans. The Company considers a loan to be
delinquent if the borrower fails to make payments for 10 days or more; however,
the Company may agree with a borrower that cannot make payments in accordance
with the original loan agreement to modify the payment terms of the loan. Based
upon the Company's assessment of its collateral position, the Company
anticipates that a substantial portion of the principal amount of its delinquent
loans would be collected upon foreclosure of such loans, if necessary. There can
be no assurance, however, that the collateral securing such loans will be
adequate in the event of foreclosure.
The Company monitors delinquent loans for possible exposure to loss.
In its analysis, the Company reviews various factors, including the value of the
collateral securing the loan and the borrower's prior payment history. Based
upon these factors and the Company's analysis of the yield and maturity of loans
in the portfolio relative to current and projected market interest rates, the
Company determines net unrealized depreciation of investments or the amount by
which the Company's estimate of the current realizable value of its portfolio is
below the cost basis thereof.
11
The following table sets forth the Company's unrealized depreciation
of investments and the loan loss experience on a combined basis:
Year Ended December 31,
--------------------------
1994 1995 1996
-------- ------- -------
(in thousands)
Balance, beginning of year........................ $2,639 $1,768 $1,573
Change in unrealized depreciation of investments.. (415) (145) (9)
Realized loan losses.............................. (200) (62) 0
Recoveries........................................ 33 12 5
Interest income received.......................... (289) -- --
------ ------ ------
Balance, end of year.............................. $1,768 $1,573 $1,569
====== ====== ======
CUSTODIAL SERVICES
Fleet Bank N.A. acts as the custodian of all of the Company's
portfolio assets pursuant to a Security Agreement dated March 27, 1992 between
MFC and Fleet Bank N.A. (formerly NatWest Bank N.A.), as amended.
TAXICAB ROOFTOP ADVERTISING
Media provides taxicab rooftop advertising which is a relatively
undeveloped segment of the out-of-home advertising industry. Out-of-home
advertising includes (i) traditional outdoor advertising, such as billboards and
posters, (ii) transit advertising, such as taxicabs, buses, bus shelters,
subway, commuter train and airport advertising and (iii) in-store point of sale
advertising. The Company entered this business in November 1994 with the
organization of Media and since that time the business has grown rapidly. In
July 1996 the Company acquired See-Level Advertising, Inc., a taxicab rooftop
advertising firm with 450 Displays in New York City. The Company intends to
continue to expand this business through internally generated growth and
additional acquisitions of taxicab rooftop advertising businesses. Under its
agreement with MTBOT, the Company will add an additional 1,800 taxicabs to the
number under contract in New York City beginning September 27, 1997.
The Company currently provides taxicab rooftop advertising in New York
City, Philadelphia, Miami and Boston and intends to expand its operations to
other major metropolitan areas. The Company's goal is to become the leading
national provider of taxicab rooftop advertising by establishing a presence in
several major U.S. metropolitan markets. The Company believes that no provider
currently operates nationwide. On December 31, 1996, the Company had
approximately 2,000 installed Displays.
Each Display is attached to the rooftop of a taxicab by the Company
and the Company also performs all ongoing Display maintenance and repair. The
Display remains the property of the Company. The Display serves as a platform
or frame for advertising copy which is preprinted on vinyl sheets with adhesive
backing and provided by the advertiser. The advertising copy adheres to the
Display and is illuminated whenever the taxicab is in operation. The vinyl
sheet is durable and is generally left on the Display for up to 90 days. The
advertising copy is replaced at the advertiser's discretion and cost when
advertising campaigns change. The standard size of the vinyl advertising copy,
14 inches high and 48 inches long, was designed to be proportionally similar to
"bulletins" or "billboards" to permit advertisers to conveniently translate
billboard copy to Display copy.
Generally, the Company enters into agreements with taxicab
associations, fleets or individuals to lease taxicab rooftop space for five-year
terms. The Company markets the Displays to companies promoting products,
advertising agencies and outdoor advertising buying agencies. Advertising
contracts
12
generally vary from 30 days to one year and provide for monthly
payments by the advertiser. The Company's advertising accounts have included
Cathay Pacific Airways Limited; Allied Domecq Retailing Limited; Ringling Bros.
Barnum & Bailey Combined Shows, Inc.; Young Men's Christian Association of
Greater New York; Luxottica Group S.P.A.; HBO; R. J. Reynolds Tobacco Company;
CBS, Inc.; NEC; NYNEX Corporation; Metro-Goldwyn-Mayer Inc.; and Brown &
Williamson Tobacco Corporation.
The Company believes the inherent in-motion nature of taxicabs and
their concentration and distribution throughout densely populated metropolitan
areas enhance their effectiveness as an advertising medium. Displays can be
placed throughout an area, effectively covering the population and providing
continuous exposure. Moreover, taxicab rooftop advertising is not zoned out of
any of the areas in New York City, such as Park Avenue and Central Park, where
stationary advertising is generally prohibited. Unlike other forms of transit
advertising in New York City such as buses, bus shelters and subway and commuter
train stations, which are prohibited from advertising tobacco products, taxicabs
are not restricted by New York City from advertising tobacco products. In
addition, the Company believes that taxicab rooftop advertising compares
favorably with other forms of outdoor advertising, which in general have among
the lowest cost-per-thousand impressions or "CPM", a standard measurement of
effectiveness among media, of all advertising media.
Currently, approximately 60% of the Company's taxicab rooftop
advertising revenue is derived from tobacco products advertising. In August
1996 President Clinton signed an executive order adopting rules proposed by the
U.S. Food and Drug Administration (the "FDA") restricting the sale and
---
advertising of cigarette and smokeless tobacco products. Although certain
advertising industry and tobacco industry organizations have filed lawsuits
challenging these rules and certain members of Congress have indicated that they
may sponsor legislation to prevent these rules from going into effect, there can
be no assurance that such lawsuits will be successful or that such legislation,
if proposed, will be adopted. Subject to the outcome of litigation or
legislative action, these rules would become effective in August 1997. The
Company believes that certain of these regulations which include provisions
prohibiting the placement of tobacco product advertising within 1,000 feet of
playgrounds and schools only apply to stationery advertising such as placards
and billboards and, accordingly, do not restrict taxicab rooftop advertising.
Certain other of these regulations, however, which limit tobacco products
advertising to a format consisting of black text on a white background and
require the inclusion of a statement which identifies the product as "a
nicotine-delivery device for persons over 18" apply to taxicab rooftop
advertising. Certain advertisers may be unwilling to advertise in this format;
accordingly, these restrictions, which become effective on August 28, 1997,
could have an adverse effect upon the taxicab rooftop advertising business of
the Company. The Company believes, however, it could replace some of the
revenue which may be lost due to the restrictions on taxicab rooftop advertising
imposed under these regulations.
SOURCES OF FUNDS
Overview
The Company funds its operations through credit facilities with bank
syndicates and, to a lesser degree, through fixed rate, long-term subordinated
debentures issued to or guaranteed by the SBA. The determination of funding
sources is established by the Company's management, based upon analysis of the
respective financial and other costs and burdens associated with funding
sources. SBA financing is generally subordinate to bank financing and offers
very attractive rates, for example currently as low as 8.08%, but such financing
is restricted in its application and its availability is uncertain. In
addition,
13
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 to
fund loans that qualify under SBA Regulations through Edwards and TCC which are
already subject to SBA restrictions. At December 31, 1996, 76.6% of the
Company's $125.8 million of debt consisted of bank debt, substantially all of
which was at variable effective rates of interest averaging below the Prime Rate
and 23.4% of the Company's debt consisted of subordinated SBA debentures, with
fixed rates of interest with a weighted average rate of 7.38%. An additional
$10.5 million of debt was available at December 31, 1996 at variable effective
rates of interest averaging below the Prime Rate under the Company's $105.0
million in bank credit facilities. On January 28, 1997 MFC increased the amount
available under its revolving credit facilities by $20.0 million and Medallion
Financial increased the amount available under its line of credit by $1.0
million on February 10, 1997.
The Company funds its fixed rate loans with variable rate bank debt
and fixed rate subordinated SBA debentures. The mismatch between maturities and
interest-rate sensitivities of these balance sheet items results in interest
rate risk. The Company seeks to manage its exposure to increases in market
rates of interest to an acceptable level by (i) purchasing interest rate caps to
hedge a portion of its variable rate debt against increases in interest rates,
(ii) incurring fixed-rate debt and (iii) originating adjustable rate loans.
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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management."
Medallion Financial
Medallion Financial has a $5.0 million revolving line of credit with a
bank. At December 31, 1996, $4.5 million was outstanding under this facility,
bearing interest at the rate of 6.84%. On February 10, 1997, Medallion Financial
increased the amount available under its line of credit by $1.0 million.
Edwards Funding
Edwards has a $15.0 million revolving line of credit with a bank
syndicate. At December 31, 1996, $12.5 million was outstanding under this
facility, bearing interest at the rate of 6.81%. Under an agreement with the
SBA, Edwards is restricted from borrowing more than $12.7 million in bank debt
without the prior approval of the SBA.
As an SBIC, Edwards is eligible to obtain low cost financing from the
SBA through the issuance of subordinated SBA debentures. Edwards has debentures
outstanding in the principal amount of $23.8 million and intends to seek to
issue additional subordinated SBA debentures. SBA Regulations limit the amount
of subordinated SBA debentures or "leverage" SBICs may issue. Generally, under
SBA Regulations, the maximum principal amount of subordinated SBA debentures
Edwards is permitted to issue is equal to 300% of its private or non-SBA paid-in
capital and paid-in surplus ("Leveragable Capital"). SBA Regulations generally
-------------------
also limit the aggregate amount of leverage SBICs under common control, such as
Edwards, MFC and TCC, have outstanding to no more than $90 million.
Accordingly, Edwards, MFC and TCC collectively may not issue subordinated SBA
debentures in an aggregate amount that exceeds $90 million and at December 31,
1996, the aggregate amount outstanding was $29.4 million. The interest rates
payable on outstanding subordinated SBA debentures at December 31, 1996 ranged
from 5.00% to 9.80% with a weighted average of 7.38%.
14
At December 31, 1996, Edwards had Leveragable Capital of $9.6 million
and had issued $23.8 million in principal amount of subordinated SBA debentures
that carry fixed rates of interest and have ten-year terms. These debentures
have maturities ranging from April 1, 1997 to September 1, 2004 and rates of
interest varying from 7.15% to 9.80% per annum. Subject to the limitations
discussed above, Edwards was eligible on December 31, 1996, to issue $4.9
million in aggregate principal amount of additional subordinated SBA debentures.
MFC Funding
MFC intends to rely on its bank credit facilities rather than on SBA
financing to fund its operations. MFC has a credit facility with a bank
syndicate consisting of an $85.0 million revolving line of credit and a $2.0
million term loan. Amounts outstanding under the revolving line of credit bear
interest at the agent bank's prime rate or, at MFC's option, a rate based on
LIBOR. At December 31, 1996, the average interest rate was 7.06% which was 119
basis points below the Prime Rate and 150 basis points above the 90-day LIBOR as
of such date. The revolving line of credit is secured by all of MFC's assets
and matures on June 30, 1997. As of December 31, 1996, there was an outstanding
balance of $77.6 million under the revolving line of credit. The term loan
bears interest at the rate of 7.50% and matures on July 31, 1997.
SBA financing is limited and so long as an SBIC has SBA financing
outstanding, the SBA restricts the amount of secured bank debt such SBIC may
have outstanding. As a result of these SBA limitations, debt financing from all
sources is effectively limited. To eliminate this funding cap, MFC has
repurchased all of its outstanding subordinated SBA debentures and preferred
stock and thereby terminated SBA limitations on the amount of secured bank debt
MFC can incur. The Company believes that MFC will be able to obtain more
funding from banks than it was able to obtain from the SBA and banks under SBA
limitations, and that this will permit MFC to more effectively expand its
operations.
The Company is also currently exploring the possibility of
establishing a commercial paper program at MFC as an additional source of
liquidity. The issuance of commercial paper will be contingent upon MFC
obtaining an investment grade rating, among other conditions, and in an effort
to secure this rating, the Company intends to merge TCC into MFC to increase
MFC's capital base. After the merger, MFC will hold TCC's debentures and
ordinarily this would result in the imposition of limitations on the amount of
third party bank debt that MFC could incur. MFC, however, intends to enter into
an agreement with the SBA permitting MFC to continue to incur an unlimited
amount of third party bank debt but providing that the debentures acquired by
MFC from TCC will be secured by Commercial Installment Loans on a pari passu
basis with the Company's third party bank debt. There can be no assurance that
the Company will be able to enter into such an agreement with the SBA on terms
acceptable to the Company or that MFC will be able to establish a commercial
paper program.
TCC Funding
Prior to its conversion to an SBIC on February 21, 1997, TCC was
eligible to obtain low cost financing from the SBA through the issuance of
subordinated SBA debentures and the issuance of non-voting cumulative preferred
stock to, or guaranteed by, the SBA. As of December 31, 1996, TCC had $5.6
million of subordinated SBA debentures outstanding and no preferred stock
outstanding. At December 31, 1996 the interest rate payable on subordinated SBA
debentures was 5.00%. As a result of an SBA subsidy program available to
SSBICs, the effective interest rate on subordinated debentures issued by TCC
prior to its conversion to an SBIC is 3.00% below the stated interest rate for
the first five
15
years such debentures are outstanding. As an SBIC, TCC is no longer eligible to
issue non-voting cumulative preferred stock. TCC is, however, still eligible to
obtain low cost financing from the SBA through the issuance of subordinated SBA
debentures and TCC intends to seek to issue additional subordinated SBA
debentures, but the interest on such debentures will not be subsidized by the
SBA. SBA Regulations limit the amount of subordinated SBA debentures or
"leverage" SBICs may issue and the "300% of leveragable capital" and the $90
million limit on the aggregate amount of leverage permitted for SBICs under
common control referred to above also apply. At December 31, 1996, the interest
rate payable on newly issued subordinated SBA debentures was 8.08%.
At December 31, 1996, TCC had Leveragable Capital of $7.5 million and
had issued $5.6 million in principal amount of subordinated SBA debentures that
have fixed rates of interest, ten-year terms and may be prepaid after five years
without penalty. The interest rate payable on these debentures is 5.00% per
annum and they mature on June 1, 2002. Future issuances of subordinated SBA
debentures by TCC, including any refinancing or rollover of currently
outstanding subordinated SBA debentures, are also limited by the SBA to the
aggregate amount of TCC's outstanding non-Medallion Loans and the aggregate
amount of non-Medallion Loans originated in connection with such financing. At
December 31, 1996, TCC had $9.1 million in principal amount of non-Medallion
Loans outstanding. Subject to the foregoing limitations, TCC was eligible on
December 31, 1996, to issue $16.8 million of additional subordinated SBA
debentures.
Preferred Stock Repurchase Agreements
MFC and TCC have repurchased all of their previously issued preferred
stock from the SBA for an aggregate price of $4.4 million, representing a
discount of 65% from the original aggregate issuance price of $12.6 million.
The repurchase price discount of $8.2 million reflects the below market 3%
dividend rate and the fact that the preferred stock was not subject to mandatory
redemption at any time. The repurchase has resulted in the termination of SBA
limits on the amount of secured bank debt MFC can incur and a realized gain in
retained earnings in the amount of the repurchase discount which will be
accreted to paid-in capital on a straight-line basis over 60 months, commencing
August 12, 1994. However, if MFC or TCC is liquidated or loses its SBA license
during the accretion period, the SBA will receive the remaining unaccreted
amount of the realized gain attributable to the subsidiary liquidating or losing
its license. At December 31, 1996, the aggregate remaining unaccreted amount of
the realized gain for MFC and TCC was $4.6 million.
THE COMPANY'S OPERATION AS A RIC
The Company has elected to be taxed as a RIC under Sections 851
through 855 under the Code. The Company intends, during this and subsequent
taxable years, to operate in a manner that permits it to satisfy the
requirements for taxation as a RIC under the applicable provisions of the Code,
but no assurance can be given that it will operate in a manner so as to qualify
or remain qualified. The sections of the Code relating to qualification and
operation as a RIC are highly technical and complex. The following sets forth
the material aspects of the Code sections that govern the federal income tax
treatment of a RIC and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations thereunder,
and administrative and judicial interpretations thereof.
In brief, if certain detailed conditions of the Code are met, business
development companies, such as the Company, that otherwise would be treated for
federal income tax purposes as corporations are
16
generally not taxed at the corporate level on their "investment company taxable
income" that is currently distributed to stockholders. This treatment
substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and stockholder levels) that generally results from the use of
corporate investment vehicles. A RIC is, however, generally subject to federal
income tax at regular corporate rates on undistributed investment company
taxable income.
Furthermore, in order to avoid a 4% nondeductible federal excise tax
on undistributed income and capital gains, the Company must distribute (or be
deemed to have distributed) by December 31 of each year at least 98% of its
ordinary income for such year, at least 98% of its capital gain net income
(which is the excess of its capital gain over its capital loss and is generally
computed on the basis of the one-year period ending on October 31 of such year)
and any amounts that were not distributed in the previous calendar year and on
which no income tax has been paid.
If the Company fails to qualify as a RIC in any year, it will be
subject to federal income tax as if it were a domestic corporation, and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. In this event, the Company could be subject to potentially
significant tax liabilities and the amount of cash available for distribution to
its stockholders could be reduced.
The Code defines the term "RIC" to include a domestic corporation that
has elected to be treated as a business development company under the 1940 Act
and meets certain requirements. These requirements include that (a) the company
derive at least 90% of its gross income for each taxable year from dividends,
interest, interest payments with respect to securities loans and gains from the
sale or other disposition of stocks or securities or foreign currencies, or
other income derived from its business of investing in such stocks, securities
or currencies; (b) the company derives less than 30% of its gross income for
each taxable year from the sale or other disposition of any of the following
that are held for less than three months: (i) stock or securities and (ii)
certain other financial interests (the "short-short test"); and (c) the company
diversifies its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the value of its total assets is represented by (A)
cash, and cash items (including receivables), U.S. Government securities and
securities of other RICs, and (B) other securities limited in respect of any one
issuer to an amount not greater in value than 5% of the value of the total
assets of the company and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of total
assets is invested in the securities (other than U.S. Government securities or
securities of other RICs) of any one issuer or two or of more issuers controlled
by the company and engaged in the same, similar or related trades or businesses.
The foregoing diversification requirements under the Code could restrict the
Company's expansion of its taxicab rooftop advertising business.
Furthermore, in order to qualify as a RIC under the Code, each taxable
year, a company also must distribute to its stockholders at least 90% of (a) its
investment company taxable income and (b) the excess of its tax-exempt interest
income over certain disallowed deductions.
Provided that the Company satisfies the above requirements, neither
the investment company taxable income it distributes to stockholders nor any net
capital gain that is distributed to stockholders should subject the Company to
federal income tax. Investment company taxable income and/or net capital gains
that are retained by the Company should be subject to federal income tax at
regular corporate income tax rates; provided, however, that to the extent that
the Company retains any net long-term capital gains, it may designate them as
"deemed distributions" and pay a tax thereon for the benefit of its
stockholders. The Company currently intends to continue to distribute to its
stockholders for each of its taxable years substantially all of its investment
company taxable income and may or may not distribute any capital gains.
17
If the Company acquires debt obligations that were originally issued
at a discount, or that bear interest rates that do not call for payments at
fixed rates (or certain "qualified variable rates") at regular intervals over
the life of the obligation, it will be required to include as interest income
each year a portion of the "original issue discount" that accrues over the life
of the obligation regardless of whether it receives the income, and it will be
obligated to make distributions accordingly. In this event, the Company may
borrow funds or sell assets to meet the distribution requirements. However,
under the 1940 Act, the Company will not be permitted to make distributions to
stockholders while senior securities are outstanding unless it meets certain
asset coverage requirements. If the Company is unable to make the required
distributions, it may fail to qualify as a RIC and may be subject to the
nondeductible 4% excise tax. Furthermore, the SBA restricts the distributions
that may be made to an amount equal to undistributed net realized earnings less
the allowance for unrealized loan losses (which in the case of the Company is
included in unrealized depreciation).
As long as the Company qualifies as a RIC, distributions made to its
taxable domestic stockholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
them as ordinary income. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Company's actual net long-term capital gain for the taxable year)
without regard to the period for which the stockholder has held its stock.
Corporate stockholders however, are subject to tax on capital gain dividends at
the same rate as ordinary income. To the extent that the Company makes
distributions in excess of current and accumulated earnings and profits, these
distributions are treated first as a tax-free return of capital to the
stockholder, reducing the tax basis of a stockholder's Common Stock by the
amount of such distribution (but not below zero), with distributions in excess
of the stockholders's tax basis taxable as capital gains (if the Common Stock is
held as a capital asset). In addition, any dividends declared by the Company in
October, November or December of any year and payable to a stockholder of record
on a specific date in any such month shall be treated as both paid by the
Company and received by the stockholder on December 31 of such year, provided
that the dividend is actually paid by the Company during January of the
following calendar year. Stockholders may not include in their individual
income tax returns any net operating losses or capital losses of the Company.
If the Company chooses to retain and pay tax on any net capital gain
rather than distribute such gain to its stockholders, the Company will designate
such deemed distribution in a written notice to stockholders prior to the
expiration of 60 days after the close of the taxable year. Each stockholder
would then be treated for federal income tax purposes as if the Company had
distributed to such stockholder on the last day of its taxable year the
stockholder's pro rata share of the net long-term capital gain retained by the
Company and the stockholder had paid its pro rata share of the taxes paid by the
Company and reinvested the remainder in the Company.
In general, any loss upon a sale or exchange of Common Stock by a
stockholder who has held such stock for six months or less (after applying
certain holding period rules) will be treated as long-term capital loss, to the
extent of distributions from the Company required to be treated by such
stockholder as long-term capital gains.
THE COMPANY'S OPERATION AS A BDC
As a BDC, the Company is subject to regulation under the 1940 Act.
The 1940 Act contains prohibitions and restrictions relating to transactions
between investment companies and their affiliates, principal underwriters and
affiliates of those affiliates or underwriters. In addition, the 1940 Act
provides that the Company may not change the nature of its business so as to
cease to be, or to withdraw its
18
election as, a BDC unless so authorized by the vote of a "majority of the
Company's outstanding voting securities," as defined under the 1940 Act.
The Company is permitted, under specified conditions, to issue
multiple classes of indebtedness and one class of stock (collectively, "senior
securities," as defined under the 1940 Act) senior to the shares of Common Stock
if the Company's asset coverage of such indebtedness and all senior securities
is at least 200% immediately after each such issuance. Subordinated SBA
debentures guaranteed by or issued to the SBA by the RIC subsidiaries, are not
subject to this asset coverage test. In addition, while senior securities are
outstanding, provision must be made to prohibit the declaration of any dividend
or other distribution to stockholders (except stock dividends) or the repurchase
of such securities or shares unless the Company meets the applicable asset
coverage ratios at the time of the declaration of the dividend or distribution
or repurchase.
Under the 1940 Act, a BDC may not acquire any asset other than assets
of the type listed in Section 55(a) of the 1940 Act ("Qualifying Assets")
-----------------
unless, at the time the acquisition is made, certain Qualifying Assets represent
at least 70% of the value of the company's total assets. The principal
categories of Qualifying Assets relevant to the proposed business of the Company
are the following:
(1) Securities purchased in transactions not involving a public
offering from the issuer of such securities, which issuer is an
eligible portfolio company. An "eligible portfolio company" is
defined in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company other than an SBIC wholly-owned
by the BDC; and
(c) satisfies one or more of the following requirements:
(i) issuer does not have a class of securities with respect to
which a broker or dealer may extend margin credit; or
(ii) issuer is controlled by a BDC and the BDC has an
affiliated person serving as a director of issuer;
(iii) issuer has total assets of not more than $4 million and
capital and surplus (shareholders' equity less retained
earnings) of not less than $2.0 million, or such other
amounts as the Commission may establish by rule or
regulation; or
(iv) issuer meets such other requirements as the Commission may
establish from time to time by rule or regulation.
(2) Securities for which there is no public market and which are
purchased in transactions not involving a public offering from the
issuer of such securities where the issuer is an eligible
portfolio company which is controlled by the BDC.
(3) Securities received in exchange for or distributed on or with
respect to securities described in (1) or (2) above, or pursuant
to the exercise of options, warrants or rights relating to such
securities.
19
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of
investment.
In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments in
the types of securities described in (1) or (2) above. In order to count
securities as Qualifying Assets for the purpose of the 70% test, the BDC must
either control the issuer of the securities or must make available to the issuer
of the securities significant managerial assistance; except that, where the
business development company purchases such securities in conjunction with one
or more other persons acting together, one of the other persons in the group may
make available the required managerial assistance. The Company believes that
the common stock of MFC, Edwards, TCC and Media are Qualifying Assets.
REGULATION OF THE COMPANY BY THE SBA
Edwards is an SBIC and as explained in further detail below, MFC and
TCC were formerly SSBICs and were converted to SBICs under Conversion Agreements
entered into with the SBA in February 1997. The SBIA authorizes the
organization of SBICs as vehicles for providing equity capital, long term
financing and management assistance to small business concerns. A small
business concern, as defined in the SBIA and the SBA Regulations, is a business
that is independently owned and operated and which is not dominant in its field
of operation. In addition, at the end of each fiscal year, at least 20% of the
total amount of loans made since April 25, 1994 by each SBIC and SSBIC must be
made to a subclass of small business concerns that (i) have a net worth,
together with any affiliates, of $6.0 million or less and average annual net
income after U.S. federal income taxes for the preceding two years of $2.0
million or less (average annual net income is computed without the benefit of
any carryover loss), or (ii) satisfy alternative criteria under SBA Regulations
that focus on the industry in which the business is engaged and the number of
persons employed by the business or its gross revenues. SBA Regulations also
prohibit an SBIC from providing funds to a small business concern for certain
purposes, such as re-lending and reinvestment.
Prior to the enactment of the Small Business Programs Improvement Act
of 1996 (the "Improvement Act"), the SBIA authorized the organization of SSBICs
---------------
as vehicles for providing the same forms of assistance as SBICs provide to small
business concerns which are at least 50% owned and managed by persons whose
participation in the free enterprise system is hampered because of social or
economic disadvantages. Disadvantaged Borrowers include African Americans,
Asian Sub-Continent Americans, Eskimos, Hispanic Americans, Native Americans,
Vietnam War era veterans and other groups identified by the SBA. A small
business concern must either (i) have a tangible net worth, together with any
affiliates, of $18.0 million or less and an average annual net income after U.S.
federal income taxes for the preceding two years of $6.0 million or less
(average annual net income is computed without the benefit of any carryover
loss) or (ii) satisfy alternative criteria under the SBA Regulations that focus
on the industry in which the business is engaged and the number of persons
employed by the business or its gross revenues.
The Improvement Act, which became effective on September 30, 1996,
effectively terminated the SSBIC program by repealing the provisions of the SBIA
which authorized SSBICs. Following the enactment of the Improvement Act and
termination of the SSBIC program, the SBA established procedures for existing
SSBICs to convert to SBICs. In February 1997, MFC and TCC each entered into an
agreement with the SBA whereby MFC and TCC were converted to SBICs subject to
certain conditions imposed by the SBA. Under the MFC Conversion Agreement, MFC
is authorized to make loans to borrowers other than Disadvantaged Borrowers
provided that, at the time of such loan, MFC has
20
in its portfolio outstanding loans to Disadvantaged Borrowers with an aggregate
cost basis equal to or exceeding the value of the unamortized repurchase
discount under the preferred stock repurchase agreement between MFC and the SBA.
At December 31, 1996 the amount of such unamortized repurchase discount was $3.1
million and MFC had outstanding loans to Disadvantaged Borrowers with an
aggregate cost basis equal to $100.5 million. Likewise, under the TCC Conversion
Agreement, TCC is authorized to make loans to persons other than Disadvantaged
Borrowers provided that, at the time of such loan, TCC has in its portfolio
loans outstanding to Disadvantaged Borrowers with an aggregate cost basis equal
to the sum of (i) the principal amount of TCC's outstanding subordinated SBA
debentures which are subsidized by the SBA; (ii) the value of the unamortized
repurchase discount under the preferred stock repurchase agreement between TCC
and the SBA; and (iii) the amount of any unamortized preferred stock dividends
under the preferred stock purchase agreement. At December 31, 1996, (i) the
principal amount of TCC's outstanding subsidized SBA debentures was $5.6
million, (ii) the amount of the unamortized repurchase discount was $1.4
million, and (iii) the amount of unamortized preferred stock dividends was
$99,000, for a sum total of approximately $7.1 million. At December 31, 1996,
TCC had outstanding loans to Disadvantaged Borrowers with an aggregate cost
basis of $16.2 million.
Under current SBA Regulations and subject to local usury laws, the
maximum rate of interest that MFC, TCC or Edwards may charge may not exceed (i)
the higher of 19% and (ii) the sum of (a) the higher of (I) that company's
weighted average cost of qualified borrowings, as determined under SBA
Regulations, or (II) the current subordinated SBA debenture rate, plus (b) 11%,
rounded off to the next lower eighth of one percent. The maximum rate of
interest permitted on loans originated by the RIC Subsidiaries is 19%. At
December 31, 1996, the Company's outstanding Medallion Loans had a weighted
average rate of interest of 9.92% and outstanding Commercial Installment Loans
had a weighted average rate of interest of 13.51%. SBA Regulations also require
that each loan originated by SBICs have a term of between five years and 20
years; however, loans to Disadvantaged Borrowers may be for a minimum of four
years.
The SBA restricts the ability of SBICs to repurchase their capital
stock, to retire their subordinated SBA debentures and to lend money to their
officers, directors and employees or invest in affiliates thereof. The SBA also
prohibits, without prior SBA approval, a "change of control" or transfers which
would result in any person (or group of persons acting in concert) owning 10% or
more of any class of capital stock of an SBIC. A "change of control" is any
event which would result in the transfer of the power, direct or indirect, to
direct the management and policies of an SBIC, whether through ownership,
contractual arrangements or otherwise.
Under SBA Regulations, without prior SBA approval, loans by licensees
with outstanding SBA leverage to any single small business concern may not
exceed 20% of an SBIC's Leveragable Capital. Under the terms of their
respective Conversion Agreement, however, MFC and TCC are authorized to make
loans to Disadvantaged Borrowers in amounts not exceeding 30% of their
respective Leveragable Capital.
SBICs must invest funds that are not being used to make loans in
investments permitted under SBA Regulations. These permitted investments
include direct obligations of, or obligations guaranteed as to principal and
interest by, the government of the United States with a term of 15 months or
less and deposits maturing in one year or less issued by an institution insured
by the FDIC. The percentage of an SBIC's assets so invested will depend on,
among other things, loan demand, timing of equity infusions and SBA funding and
availability of funds under credit facilities.
SBICs may purchase voting securities of small business concerns in
accordance with SBA Regulations. SBA Regulations prohibit SBICs from
controlling a small business concern except where
21
necessary to protect an investment. SBA Regulations presume control when SBICs
purchase (i) 50% or more of the voting securities of a small business concern if
the small business concern has less than 50 stockholders or (ii) more than 20%
(and in certain situations up to 25%) of the voting securities of a small
business concern if the small business concern has 50 or more stockholders.
COMPETITION
Banks, credit unions and finance companies, some of which are SBICs,
compete with the Company in originating Medallion Loans and Commercial
Installment Loans. Finance subsidiaries of equipment manufacturers also compete
with the Company. Many of these competitors have greater resources than the
Company and certain competitors are subject to less restrictive regulations than
the Company. As a result, there can be no assurance that the Company will be
able to identify and complete the financing transactions that will permit it to
compete successfully. The Company's taxicab rooftop advertising business
competes with other taxicab rooftop advertisers as well as all segments of the
out-of-home advertising industry and other types of advertising media, including
cable and network television, radio, newspapers, magazines and direct mail
marketing. Many of these competitors have greater financial resources than the
Company and offer several forms of advertising as well as production facilities.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 33 employees.
The Company believes that its relations with all of its employees are good, but
that its future success will depend, in part, on its ability to continue to
recruit, retain and motivate qualified personnel at all levels.
ITEM 2. PROPERTIES
The Company leases approximately 7,400 square feet of office space in
a building located at 205 East 42nd Street, New York, New York.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
22
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
NAME AGE POSITION(S) HELD WITH THE COMPANY
- ------------------------- --- -------------------------------------
Alvin Murstein*....... 62 Chairman and Chief Executive Officer
Andrew Murstein*...... 32 President and Chief Operating Officer
Marie Russo*.......... 72 Senior Vice President and Secretary
Daniel F. Baker*...... 33 Treasurer and Chief Financial Officer
Michael Fanger*....... 39 Executive Vice President
Michael J. Kowalsky*.. 51 Executive Vice President
- ------------------
An asterisk (*) indicates an "interested person" as such term is
defined in (S) 2(a)(19) of the 1940 Act.
Each officer's term extends until the first meeting of the Board of
Directors following the next annual meeting of stockholders and until a
successor is elected and qualified.
Alvin Murstein has been Chairman of the Board of Directors of
Medallion Financial since its founding in 1995 and has been Chief Executive
Officer of Medallion Financial since February 1996. Mr. Murstein has also been
Chairman of the Board of Directors and Chief Executive Officer of MFC since its
founding in 1979 and of Media since its founding in 1994. Mr. Murstein has been
Chairman of the Board of Directors and Chief Executive Officer of Edwards and
TCC since June 1996. He served as Chairman of the Board of Directors and Chief
Executive Officer of Tri-Magna from its founding in 1989 until its acquisition
by the Company in May 1996. Mr. Murstein received a B.A. and an M.B.A. from New
York University and has been an executive in the taxicab industry for over 40
years. Mr. Murstein has served on the Board of Directors of the Strober
Organization, Inc., a building supply company, since 1988. Alvin Murstein is
the father of Andrew Murstein.
Andrew Murstein has been President of Medallion Financial since its
inception in 1995, Chief Operating Officer of Medallion Financial since February
1996 and President of Media from inception. Mr. Murstein has also been a
Director of MFC, Edwards and TCC since May 1996. He served as Tri-Magna's
Director of New Business Development from 1994 until the acquisition of Tri-
Magna by the Company in May 1996. Mr. Murstein received a B.A. in economics,
cum laude, from Tufts University and an M.B.A. in finance from New York
University. Mr. Murstein serves on the New York City Private Industry Council.
Andrew Murstein is the son of Alvin Murstein and the son-in-law of Mr. Rudnick,
and is the third generation of his family to be active in the taxicab industry.
Marie Russo has been Senior Vice President and Secretary of Medallion
Financial since February 1996. Ms. Russo has also been Senior Vice President
and Secretary of MFC, Edwards and TCC since June 1996. Ms. Russo served as Vice
President of Operations of Tri-Magna from 1989 until its acquisition by the
Company in May 1996. From 1989 to 1996 she was Vice President of MFC and from
1983 to 1986 she was Controller of MFC. Ms. Russo received a B.S. in accounting
from Hunter College.
Daniel F. Baker has been Treasurer and Chief Financial Officer of
Medallion Financial since February 1996. Mr. Baker has also been Treasurer and
Chief Financial Officer of MFC, Edwards, TCC and Media since June 1996. Mr.
Baker also served as Tri-Magna's Vice President of Finance from 1992 until its
acquisition by the Company in May 1996. From 1989 through 1991, he was
Controller of Tri-
23
Magna and from 1988 through 1991 he was Controller of MFC. Prior to joining MFC,
Mr. Baker was employed by Arthur Andersen & Co. Mr. Baker received a B.S. in
accounting from Husson College.
Michael Fanger has been Executive Vice President of Medallion
Financial since February 1996 and President of TCC since June 1996. Mr. Fanger
has also been Executive Vice President of MFC and Senior Vice President of
Edwards since June 1996. He served as Tri-Magna's Vice President of Commercial
Lending from its inception until its acquisition by the Company in May 1996.
Prior to joining MFC, Mr. Fanger was a Vice President, Commercial Lending at
Shawmut Bank, N.A. Mr. Fanger received a B.A. from Colby College.
Michael J. Kowalsky has been Executive Vice President of the Company
since May 1996. Mr. Kowalsky has been President of MFC and Edwards since June
1996. He also served as Chief Operating Officer of Edwards from 1992 until June
1996. Prior to joining Edwards in 1990, Mr. Kowalsky was a Senior Vice
President at General Cigar Co. Inc., a cigar manufacturing company. Mr.
Kowalsky received a B.A. and M.A. in economics from the University of Kentucky
and an M.B.A. from the New York University Graduate School of Business.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on May 23, 1996 in the
Nasdaq National Market System under the symbol "TAXI." As of March 31, 1997,
there were approximately 650 holders of record of the Company's Common Stock.
The following table sets forth for the fiscal periods indicated, the
range of high and low closing prices for the Company's Common Stock on the
Nasdaq National Market System.
HIGH LOW
YEAR ENDED DECEMBER 31, 1996
Third Quarter Ended September 30, 1996 $15 $10
Fourth Quarter Ended December 31, 1996 $15 1/4 $12 1/8
On November 26, 1996 the Company paid its first quarterly cash dividend of
$0.20 per share to holders of record of the Company's Common Stock on November
12, 1996. On January 30, 1997 the Company paid its second quarterly dividend of
$0.21 per share to stockholders of record on December 30, 1996. The Company
currently anticipates that it will continue to pay quarterly cash dividends on
its Common Stock. There can be no assurance, however, that the Company will
have sufficient earnings to pay such dividends, if any, in the future.
ITEM 6. SELECTED FINANCIAL DATA
On May 29, 1996, Medallion Financial acquired each of the Founding
Companies. Prior to this acquisition, each of the Founding Companies had been
operating independently of each other and Medallion Financial had no operations.
Accordingly, the following Selected Financial Data is comprised of two major
sections.
The first section, Consolidated Selected Financial Data, presents
consolidated audited financial data of the Company for the period commencing May
30, 1996 and ending December 31, 1996 and is derived from the actual financial
position and results of operation of the Company as set forth in the audited
Consolidated Financial Statements of the Company included as Item 8 in this
Report on Form 10-K.
The second section of the following discussion presents the Historical
Selected Financial Data of each of the Founding Companies. The Historical
Selected Financial Data for the fiscal years ended December 31, 1995 and 1994
and the period ended May 29, 1996, have been derived from audited financial
statements included in this Report on Form 10-K. The Historical Selected
Financial Data for Edwards and TCC have been reclassified to permit a
presentation that is consistent with the investment company status they acquired
upon completion of the Acquisitions. The Historical Selected Financial Data for
the fiscal years ended December 31, 1992 for Edwards and 1993 for each of the
Founding Companies have been derived from their respective audited financial
statements not included in this Report on Form 10-K. The Historical Selected
Financial Data for the fiscal year ended December 31, 1992 for Tri-Magna and TCC
have been derived from their respective unaudited financial statements not
included in this Report on Form 10-K. These unaudited financial statements have
been prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments,
25
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial position and results of operations of the Founding Companies
for the period presented.
The Selected Financial Data provided herein should be read in conjunction
with the financial statements of Medallion Financial, Tri-Magna, Edwards and
TCC, including the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Report on Form
10-K.
26
MEDALLION FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL DATA
FOR THE PERIOD MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
THREE MONTHS ENDED
MAY 30 TO ---------------------------------- MAY 30 TO
JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996
----------- ------------------- -------------- -------------
(unaudited) (unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA (in thousands except per share amounts)
Investment income............................................ $ 1,392 $ 4,264 $ 4,756 $ 10,412
Interest expense............................................. 699 2,100 2,209 5,008
-------- -------- -------- --------
Net interest income.......................................... 693 2,164 2,547 5,404
Equity in earnings (losses) of
unconsolidated subsidiary(1)............................... 29 (23) (69) (63)
Other income................................................. 58 234 119 411
Accretion of negative goodwill............................... 64 181 176 421
Operating expenses........................................... (266) (932) (1,033) (2,231)
Amortization of goodwill..................................... ( 35) (101) (123) (259)
-------- -------- -------- --------
Net investment income........................................ 543 1,523 1,617 3,683
Realized gain on investments, net............................ -- 26 58 84
Change in unrealized depreciation of investments(2).......... -- -- (46) (46)
-------- -------- -------- --------
Net increase in net assets resulting from operations(3)...... $ 543 $ 1,549 $ 1,629 $ 3,721
======== ======== ======== ========
Net increase in net assets resulting from operations
per share (3).............................................. $ 0.07 $ 0.19 $ 0.20 $ 0.45
======== ======== ======== ========
Dividends declared per share................................. $ 0.00 $ 0.20 $ 0.21 $ 0.41
======== ======== ======== ========
MAY 30, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
-------- -------- -------- --------
BALANCE SHEET DATA (IN THOUSANDS) (unaudited) (unaudited) (unaudited)
Investments
Medallion Loans.......................................... $116,398 $121,720 $125,039 $134,615
Commercial Installment Loans............................. 33,046 34,463 36,766 41,925
Unrealized depreciation of investments....................... -- -- -- (46)
-------- -------- -------- --------
Investments, net of unrealized depreciation of investments... 149,444 156,183 161,805 176,494
Total assets................................................. 184,938 173,001 174,584 189,625
Notes payable and demand notes............................... 90,400 79,700 81,300 96,450
Subordinated SBA debentures.................................. 30,590 30,421 29,263 29,390
Total liabilities............................................ 125,877 113,284 113,649 130,619
Total stockholders' equity................................... 56,122 56,692 58,241 56,487
DECEMBER 31,
1996
--------
SELECTED FINANCIAL RATIOS AND OTHER DATA (unaudited)
Return on assets(4)(5)....................................................................................... 3.36%
Return on equity(5)(6)....................................................................................... 11.29
Average yield, e.o.p.(7)..................................................................................... 10.80
Average cost of funds, e.o.p.(8)............................................................................. 7.11
Spread, e.o.p.(9)............................................................................................ 3.69
Other income ratio(5)(10).................................................................................... 0.40
Operating expense ratio(5)(11)............................................................................... 2.02
Medallion Loans as a percentage of investments............................................................... 76.25
Commercial Installment Loans as a percentage of investments.................................................. 23.75
Investments to assets........................................................................................ 93.08
Equity to assets............................................................................................. 29.79
Debt to equity............................................................................................... 222.76
SBA debt to total debt....................................................................................... 23.36
27
MEDIA (1)
MAY 30 TO JULY 1 TO OCTOBER 1 TO MAY 30 TO
JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996
----------- -------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA
Advertising revenue........... $151,253 $452,943 $491,150 $1,095,346
Cost of services.............. 45,228 215,846 238,061 499,135
-------- -------- -------- ----------
Gross margin.................. 106,025 237,097 253,089 596,211
Other operating expenses...... 71,886 272,295 315,030 659,211
-------- -------- -------- ----------
Income (losses) before taxes.. 34,139 (35,198) (61,941) (63,000)
Income taxes.................. 5,000 (12,500) 7,500 --
-------- -------- -------- ----------
Net income (loss)............. $ 29,139 $(22,698) $(69,441) $ (63,000)
======== ======== ======== ==========
__________________________
(1) Equity in earnings (losses) of unconsolidated subsidiary represents the
net income (loss) for the period indicated from the Company's investment
in Media.
(2) Change in unrealized depreciation of investments represents the (increase)
decrease for the period in the unrealized depreciation applied against the
Company's investments to state them at fair value.
(3) Net increase in net assets resulting from operations is the sum of net
investment income, net realized gains or losses on investments and the
change in unrealized gains or losses on investments.
(4) Return on assets represents net increase in net assets resulting from
operations, for the period indicated, divided by total assets at December
31, 1996.
(5) Selected financial ratios have been annualized for the period from May 30,
1996 to December 31, 1996.
(6) Return on equity represents net increase in net assets resulting from
operations, for the period indicated, divided by total stockholders'
equity at December 31, 1996.
(7) Average yield, e.o.p. represents the end of period weighted average
interest rate on investments at the date indicated.
(8) Average cost of funds, e.o.p. represents the end of period weighted
average interest rate on debt at the date indicated.
(9) Spread, e.o.p. represents average yield, e.o.p. less average cost of
funds, e.o.p.
(10) Other income ratio represents other income, for the period indicated,
divided by investments at December 31, 1996.
(11) Operating expense ratio represents operating expenses, for the period
indicated, divided by total assets at December 31, 1996.
28
SELECTED FINANCIAL DATA
TRI-MAGNA
(MFC, BUT NOT MEDIA, IS CONSOLIDATED WITH TRI-MAGNA)
YEAR ENDED DECEMBER 31, JANUARY 1 TO
--------------------------------------------- MAY 29,
1992 1993 1994 1995 1996
------------ ----------- -------- -------- ---------------
(unaudited) (dollars in thousands)
STATEMENT OF OPERATIONS DATA
Investment income..................................... $ 7,953 $ 8,333 $ 8,820 $ 9,803 $ 4,423
Interest expense...................................... 3,509 3,661 4,756 6,034 2,517
------- ------- ------- ------- -------
Net interest income................................... 4,444 4,672 4,064 3,769 1,906
Equity in earnings (losses) of unconsolidated
subsidiary(1)........................................ -- -- 18 126 (53)
Other income.......................................... 632 541 519 446 148
Total non-interest expense............................ 2,754 3,097 2,700 2,615 1,816
Dividends paid on minority interest................... 277 277 277 208 --
------- ------- ------- ------- -------
Net investment income................................. 2,045 1,839 1,624 1,518 185
Realized gain (loss) on investments, net.............. (223) (115) (22) 61 --
Change in unrealized depreciation of investments(2)... 125 (53) 58 (140) --
Net increase in net assets resulting from operations.. $ 1,947 $ 1,671 $ 1,660 $ 1,439 $ 185
======= ======= ======= ======= =======
SELECTED FINANCIAL RATIOS AND OTHER DATA(3)
Return on average assets(4)(5)........................ 2.81% 2.12% 1.88% 1.50% 1.86%
Return on average equity(5)(6)........................ 17.67 15.29 15.29 12.97 16.93
Interest rate spread
Average yield(5)(7).................................. 12.11 10.99 10.20 10.61 11.00
Average cost of funds(5)(8).......................... 7.44 6.09 7.00 8.26 7.56
Spread(9)............................................ 4.67 4.90 3.20 2.35 3.44
Other income to average assets(5)..................... 0.91 0.69 0.59 0.47 0.36
Non-interest expense to average assets(5)(10)......... 3.97 3.92 3.05 2.73 2.98
Weighted average assets............................... $69,401 $78,921 $88,414 $96,189 $99,197
Weighted average investments(11)...................... 65,673 75,790 86,496 92,433 96,479
Weighted average equity............................... 11,019 10,931 10,855 11,094 10,899
Weighted average debt................................. 47,160 60,160 67,955 73,063 79,912
DECEMBER 31,(3)
---------------------------------------- MAY 29,
1992 1993 1994 1995 1996(3)
------- ------- ------- ------- -------
Medallion Loans as a percentage of investments........ 81.0% 81.0% 72.4% 68.4% 67.9%
Commercial Installment Loans as a percentage
of investments...................................... 19.0 19.0 27.6 31.6 32.1
Investments to assets................................. 93.8 96.4 96.7 96.3 97.0
Equity to assets...................................... 15.0 12.9 11.8 17.4 16.7
Debt to equity(12).................................... 259 315 356 464 482
SBA debt to total debt................................ 23.8 19.8 17.5 -- --
29
TRI-MAGNA
DECEMBER 31,
-------------------------------------- MAY 29,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(unaudited)
(dollars in thousands)
BALANCE SHEET DATA
Investments
Medallion Loans............................... $56,460 $66,437 $65,424 $66,338 $64,934
Commercial Installment Loans.................. 13,325 15,577 24,918 30,619 31,598
Unrealized depreciation of investments.......... (775) (828) (770) (910) (910)
------- ------- ------- ------- -------
Investments, net of unrealized depreciation of
investments................................... 69,010 81,186 89,572 96,047 95,622
Total assets.................................... 73,603 84,239 92,590 99,788 98,605
Notes payable................................... 40,000 50,700 59,025 80,295 79,395
Subordinated SBA debentures..................... 12,500 12,500 12,500 -- --
Total liabilities............................... 53,341 64,171 72,480 82,474 82,116
Minority interest............................... 9,234 9,234 9,234 -- --
Total stockholders' equity...................... 11,027 10,834 10,876 17,314 16,489
MEDIA(1)
NOVEMBER 22 TO YEAR ENDED JANUARY 1 TO
DECEMBER 31, DECEMBER 31, MAY 29,
1994 1995 1996
-------------- ------------ -------------
STATEMENT OF OPERATIONS DATA
Advertising revenue........... $227,756 $1,542,013 $671,148
Cost of services.............. 83,341 483,721 283,891
-------- ---------- --------
Gross margin.................. 144,415 1,058,292 387,257
Other operating expenses...... 126,036 829,293 455,278
-------- ---------- --------
Income (losses) before taxes.. 18,379 228,999 (68,021)
Income taxes.................. -- 103,043 (14,999)
-------- ---------- --------
Net income (loss)............. $ 18,379 $ 125,956 $(53,022)
======== ========== ========
- ------------------
(1) Equity in earnings (losses) of unconsolidated subsidiary represents the net
income (loss) for the period earned by Tri-Magna from its investment in
Media.
(2) Change in unrealized depreciation of investments represents the (increase)
decrease for the period in the unrealized depreciation applied against Tri-
Magna's investments to state them at fair value.
(3) Unaudited.
(4) Return on average assets is calculated as the net increase in net assets
resulting from operations (excluding Merger Related Costs) divided by the
weighted average assets for the period.
(5) Selected financial ratios are annualized for the period from January 1,
1996 to May 29, 1996.
(6) Return on average equity is calculated as the net increase in net assets
resulting from operations (excluding Merger Related Costs) divided by the
weighted average equity for the period.
(7) Average yield is calculated as gross investment income for the period
divided by the weighted average investments for the period.
(8) Average cost of funds is calculated as interest expense for the period
divided by the weighted average debt for the period.
(9) Spread is calculated as the difference between average yield and average
cost of funds.
(10) Non-interest expense to average assets is calculated as the total non-
interest expense (excluding Merger Related Costs) divided by the weighted
average assets for the period.
(11) Investments consists of the Tri-Magna's loan portfolio and excludes cash
and cash equivalents and Tri-Magna's investment in Media.
(12) Debt to equity is defined as total debt divided by total stockholders
equity and minority interest.
30
EDWARDS
YEAR ENDED DECEMBER 31, JANUARY 1 TO
-------------------------------------- MAY 29,
1992 1993 1994 1995 1996
-------- -------- -------- -------- ---------------
(dollars in thousands)
STATEMENT OF OPERATIONS DATA
Investment income............................... $ 5,444 $ 4,955 $ 4,334 $ 4,317 $ 1,727
Interest expense................................ 2,873 2,741 2,765 2,748 1,098
------- ------- ------- ------- -------
Net interest income............................. 2,571 2,214 1,569 1,569 629
Other income.................................... 412 476 620 443 129
Total non-interest expense...................... 1,512 1,022 1,108 885 660
Income tax expense.............................. 73 51 21 40 16
------- ------- ------- ------- -------
Net investment income........................... 1,398 1,617 1,060 1,087 82
Realized gain (loss) on investments, net........ (13) -- -- -- --
------- ------- ------- ------- -------
Net increase in net assets resulting from
operations before extraordinary items......... 1,385 1,617 1,060 1,087 82
Extraordinary items(1).......................... -- -- (526) -- --
------- ------- ------- ------- -------
Net increase in net assets resulting
from operations............................... $ 1,385 $ 1,617 $ 534 $ 1,087 $ 82
======= ======= ======= ======= =======
SELECTED FINANCIAL RATIOS AND OTHER DATA(2)
Return on average assets(3)(4).................. 3.19% 3.60% 2.35% 2.42% 2.28%
Return on average partners' capital(4)(5)....... 16.47 17.51 11.69 12.29 11.38
Interest rate spread
Average yield(4)(6)........................ 13.10 11.51 10.06 9.92 9.40
Average cost of funds(4)(7)................ 8.14 7.97 7.97 7.96 7.54
Spread(8).................................. 4.96 3.54 2.09 1.96 1.86
Other income to average assets(4)............... 0.95 1.06 1.38 0.99 0.68
Non-interest expense to average assets(4)(9).... 3.48 2.27 2.46 1.98 1.63
Weighted average assets......................... $43,465 $44,953 $45,025 $44,829 $45,543
Weighted average investments(10)................ 41,567 43,047 43,074 43,508 44,103
Weighted average partners' capital.............. 8,409 9,235 9,064 8,846 9,112
Weighted average debt........................... 35,275 34,385 34,690 34,535 34,947
DECEMBER 31,(2)
------------------------------------- MAY 29,
1992 1993 1994 1995 1996(2)
------- ------- ------- ------- -------
Medallion Loans as a percentage of investments.. 98.3% 98.3% 98.3% 98.6% 98.7%
Commercial Installment Loans as a percentage
of investments................................ 1.7 1.7 1.7 1.4 1.3
Investments to assets........................... 96.7 97.0 97.5 97.1 96.7
Partners' capital to assets..................... 20.1 21.0 19.2 20.2 19.8
Debt to partners' capital(11)................... 382 365 408 382 385
SBA debt to total debt.......................... 73.2 71.6 71.4 71.7 71.2
31
EDWARDS
DECEMBER 31,
-------------------------------------- MAY 29,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(dollars in thousands)
BALANCE SHEET DATA
Investments
Medallion Loans......................... $42,301 $43,383 $42,740 $43,177 $43,921
Commercial Installment Loans............ 719 758 747 622 589
Unrealized depreciation of investments....... (50) (43) (20) (20) (20)
------- ------- ------- ------- -------
Investments, net of unrealized depreciation
of investments............................. 42,970 44,098 43,467 43,779 44,490
Total assets................................. 44,430 45,476 44,574 45,084 46,001
Notes payable and demand notes............... 9,125 9,900 10,000 9,850 10,100
Subordinated SBA debentures.................. 24,950 24,950 24,950 24,950 24,950
Total liabilities............................ 35,511 35,926 35,998 35,967 36,894
Total partners' capital...................... 8,919 9,551 8,576 9,117 9,107
- ------------------
(1) Edwards incurred a prepayment premium of $526,000 in connection with its
refinancing of $4.6 million and $5.1 million of subordinated SBA debentures
on June 29, 1994 and September 28, 1994, respectively.
(2) Unaudited.
(3) Return on average assets is calculated as the net increase in net assets
resulting from operations before extraordinary items (excluding legal fees
related to sale of assets) divided by the weighted average assets for
the period.
(4) Selected financial ratios are annualized for the period from January 1,
1996 to May 29, 1996.
(5) Return on average partners' capital is calculated as the net increase in
net assets resulting from operations before extraordinary items (excluding
legal fees related to sale of assets) divided by the weighted average
partners' capital for the period.
(6) Average yield is calculated as gross investment income for the period
divided by the weighted average investments for the period.
(7) Average cost of funds is calculated as interest expense for the period
divided by the weighted average debt for the period.
(8) Spread is calculated as the difference between average yield and average
cost of funds.
(9) Non-interest expense to average assets is calculated as the total
non-interest expense (excluding legal fees related to sale of assets)
divided by the weighted average assets for the period.
(10) Investments consists of Edwards' loan portfolio and excludes cash and cash
equivalents.
(11) Debt to partners' capital is defined as total debt divided by total
partners' capital.
32
TCC
YEAR ENDED DECEMBER 31, JANUARY 1 TO
--------------------------------------------- MAY 29,
1992 1993 1994 1995 1996
------------ ----------- -------- -------- -------------
(unaudited)
STATEMENT OF OPERATIONS DATA
Investment income.................................... $ 3,944 $ 3,110 $ 2,217 $ 1,836 $ 682
Interest expense..................................... 1,538 1,064 709 450 148
------- ------- ------- ------- -------
Net interest income.................................. 2,406 2,046 1,508 1,386 534
Total non-interest expense........................... 1,038 1,269 711 760 260
Income tax expense (benefit)(1)...................... 74 (983) 653 381 128
------- ------- ------- ------- -------
Net investment income, adjusted for taxes(2)......... 1,294 1,760 144 245 146
Realized gain (loss) on investments.................. (646) (69) (144) (50) 5
Change in unrealized depreciation of investments(3).. -- 232 790 335 30
------- ------- ------- ------- -------
Net increase (decrease) in net assets resulting
from operations.................................... $ 648 $ 1,923 $ 790 $ 530 $ 181
======= ======= ======= ======= =======
SELECTED FINANCIAL RATIOS AND OTHER DATA(4)
Return on average assets(5)(6)....................... 2.46% 8.36% 3.90% 2.91% 2.56%
Return on average common equity(6)(7)................ 14.73 33.84 11.22 6.74 5.23
Interest rate spread
Average yield(6)(8)............................. 15.90 15.77 13.86 13.58 12.95
Average cost of funds(6)(9)..................... 8.56 8.10 7.60 6.14 5.58
Spread(10)...................................... 7.34 7.67 6.26 7.44 7.37
Non-interest expense to average assets(6)............ 3.94 5.51 3.51 4.18 3.67
Weighted average assets.............................. $26,338 $23,011 $20,260 $18,183 $16,983
Weighted average investments(11)..................... 24,235 18,994 14,442 10,389 9,745
Weighted average common equity....................... 4,398 5,683 7,042 7,859 8,312
Weighted average debt................................ 17,967 13,133 9,330 7,330 6,368
DECEMBER 31,(4)
---------------------------------------- MAY 29,
1992 1993 1994 1995 1996(4)
------- ------- ------- ------- -------
Medallion Loans as a percentage of investments....... 81.6% 85.4% 80.1% 81.5% 76.0%
Commercial Installment Loans as a percentage
of investments..................................... 18.4 14.6 19.9 18.5 24.0
Loans to assets...................................... 74.4 75.6 52.8 52.6 56.3
Equity to assets..................................... 33.2 46.5 57.1 60.2 63.7
Debt to equity(12)................................... 192 107 73 64 53
SBA debt to total debt............................... 73.4 100.0 100.0 100.0 100.0
33
TCC
DECEMBER 31,
-------------------------------------------- MAY 29,
1992 1993 1994 1995 1996
------------ ----------- -------- -------- --------
(unaudited)
(dollars in thousands)
BALANCE SHEET DATA
Investments
Medallion Loans............................ $16,471 $15,433 $ 8,796 $ 7,988 $ 7,543
Commercial Installment Loans............... 3,721 2,641 2,185 1,808 2,381
Unrealized depreciation of investments.......... (2,000) (1,768) (978) (642) (612)
------- ------- ------- ------- -------
Investments, net of unrealized depreciation of
investments................................... 18,192 16,306 10,003 9,154 9,312
Cash and cash equivalents....................... 5,790 3,911 8,199 7,781 6,797
Total assets.................................... 24,453 21,569 18,951 17,416 16,551
Notes payable and demand notes.................. 4,132 -- -- -- --
SBA debentures.................................. 11,405 10,730 7,930 6,730 5,640
Total liabilities............................... 16,348 11,541 8,129 6,937 6,008
Total stockholders' equity...................... 8,105 10,028 10,822 10,479 10,543
- ---------------------
(1) Income tax expense (benefit) includes income tax provision (benefit) on
investment income, realized losses on investments and change in unrealized
depreciation of investments. See note (2).
(2) Net investment income has been adjusted by combining TCC's income tax
provision (benefit) in order to present TCC's financial statements on a
comparable basis to the other Founding Companies.
(3) Change in unrealized depreciation of investments represents the (increase)
decrease for the period in the unrealized depreciation applied against
TCC's investments to state them at fair value.
(4) Unaudited.
(5) Return on average assets is calculated as the net increase (decrease) in
net assets resulting from operations divided by the weighted average assets
for the period.
(6) Selected financial ratios are annualized for the period from January 1,
1996 to May 29, 1996.
(7) Return on average common equity is calculated as the net increase in net
assets resulting from operations divided by the weighted average equity for
the period.
(8) Average yield is calculated as gross investment income excluding interest
income on cash and cash equivalents for the period divided by the weighted
average investments for the period.
(9) Average cost of funds is calculated as interest expense for the period
divided by the weighted average debt for the period.
(10) Spread is calculated as the difference between average yield and average
cost of funds.
(11) Investments consists of TCC's loan portfolio and excludes cash and cash
equivalents.
(12) Debt to equity is defined as total debt divided by total stockholders
equity and minority interests.
34
ITEM 7. 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-K. In addition, this Management's Discussion and Analysis contains
forward-looking statements. These forward-looking statements are subject to the
inherent uncertainties in predicting future results and conditions. Certain
factors that could cause actual results and conditions to differ materially from
those projected in these forward-looking statements are set forth below in the
Investment Considerations section.
GENERAL
The Company's principal activity is the origination and servicing of Medallion
Loans and Commercial Installment Loans. The earnings of the Company depend
primarily on its level of net interest income, which is the difference between
interest earned on interest-earning assets consisting primarily of Medallion
Loans and Commercial Installment Loans, and the interest paid on interest-
bearing liabilities consisting primarily of credit facilities with bank
syndicates and subordinated debentures issued to or guaranteed by the SBA. Net
interest income is a function of the net interest rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average interest rate paid on interest-bearing liabilities, as well as the
average balance of interest-earning assets as compared to interest-bearing
liabilities. Net interest income is affected by economic, regulatory and
competitive factors that influence interest rates, loan demand and the
availability of funding to finance the Company's lending activities. The
Company, like other financial institutions, is subject to interest rate risk to
the degree that its interest-earning assets reprice on a different basis than
its interest-bearing liabilities.
Trend in Loan Portfolio Yield. The Company's investment income is driven by
the principal amount of and yields on Medallion Loans and Commercial Installment
Loans. The following table illustrates the Company's weighted average portfolio
yield at the dates indicated:
May 30, 1996 December 31, 1996
------------ -----------------
Weighted Percentage Weighted Percentage
Average Principal of Total Average Principal of Total
Yield Amounts Portfolio Yield Amounts Portfolio
--------- ------------ ----------- --------- ----------------- -----------
Medallion Loan Portfolio 9.84% $116,398,395 77.9% 9.92% $134,614,899 76.3%
Commercial Installment Loan Portfolio 13.42 33,045,702 22.1 13.51 41,925,289 23.7
------------ ------------
Total Portfolio 10.63 $149,444,097 100.0 10.80 $176,540,188 100.0
===== ============ ===== ============ =====
The weighted average yield e.o.p. of the Medallion Loan portfolio increased
eight basis points from 9.84% at May 30, 1996 to 9.92% at December 31, 1996.
Medallion Loans constituted 77.9% of the total portfolio of $149.4 million at
May 30, 1996 and 76.3% of the total portfolio of $176.5 million at December 31,
1996./1/ The yields on the Company's Medallion Loans have been in a long-term
decline. However, since December 31, 1994 the weighted average yield of the
Medallion Loan portfolio has stabilized and since the commencement of the
Company's operations following closing of the Acquisitions on May 29, 1996,
slightly increased, resulting in slight increases in the weighted average yield
of the entire portfolio. The weighted average yield e.o.p. of the entire
portfolio increased 17 basis points from 10.63% at May 30, 1996 to 10.80% at
December 31, 1996. The stabilization of the weighted average yield of the
Medallion Loan Portfolio is partially the result of stabilization in market
interest rates for Medallion Loans, which began in July 1994.
- --------------------
/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.
35
In addition, since December 1994, the weighted average yield of the
entire portfolio has increased as older, lower interest rate loans in the
portfolio have matured or been pre-paid and newer, higher interest rate loans
have constituted a greater proportion of the portfolio. From inception of its
business in 1979 through 1996, the period between the origination and final
payment of all Medallion Loans originated by MFC has been estimated by the
Company to be 29 months. The Company believes that this time period varies to
some extent as a function of changes in interest rates because borrowers are
more likely to exercise prepayment rights in a decreasing interest rate
environment when the interest rate payable on the borrower's loan is high
relative to prevailing interest rates and are less likely to prepay in a rising
interest rate environment. The Company has also increased the average yield of
the entire portfolio by shifting the portfolio mix toward a higher percentage of
Commercial Installment Loans, which historically have had a yield of
approximately 350 basis points higher than the Company's Medallion Loans and 500
to 700 basis points higher than the prevailing prime rate of interest charged by
major commercial banks (the "Prime Rate"). The weighted average yield e.o.p. of
the Commercial Installment Loan portfolio increased nine basis points from
13.42% at May 30, 1996 to 13.51% at December 31, 1996. In addition, the
percentage of the entire portfolio composed of Commercial Installment Loans
increased from 22.1%, or $33.0 million, at May 30, 1996 to 23.7%, or $41.9
million, at December 31, 1996. The Company intends to continue to increase the
percentage of Commercial Installment Loans in the total portfolio.
Trend in Interest Expense. The Company's interest expense is driven by the
interest rate payable on the Company's LIBOR-based short-term credit facilities
with bank syndicates and, to a lesser degree, fixed-rate, long-term subordinated
debentures issued to or guaranteed by the SBA. In recent years, the Company has
reduced its reliance on SBA financing and increased the relative proportion of
bank debt to total liabilities. SBA financing can offer very attractive rates,
but such financing is restricted in its application and its availability is
uncertain. In addition, SBA financing subjects its recipients to limits on the
amount of secured bank debt they may incur. Accordingly, the Company plans to
continue to limit its use of SBA funding and will seek such funding only when
advantageous, such as when SBA financing rates are particularly attractive, and
to fund loans that qualify under the SBIA and SBA Regulations through
subsidiaries already subject to SBA restrictions. The Company believes that its
transition to financing its operations primarily with short-term LIBOR-based
bank debt has generally decreased its interest expense thus far, but has also
increased the Company's exposure to the risk of increases in market interest
rates which the Company attempts to mitigate with certain matching strategies.
The Company also expects that net interest income should increase because bank
debt is more available than SBA financing and will thus permit an increase in
the size of the loan portfolio. At May 30, 1996 and December 31, 1996, short-
term LIBOR-based debt constituted 70.4% and 75.1% of total debt, respectively.
On March 26, 1997, the Federal Reserve System increased the federal-funds
interest rate by 25 basis points and, as a result, the prevailing Prime Rate has
generally increased by 25 basis points. If these increases lead to a trend of
higher interest rates, net interest rate spread could decline at least until the
Company is able to originate new loans at the higher prevailing interest
rates.
The Company's cost of funds is primarily driven by (i) the average maturity
of debt issued by the Company, (ii) the premium to LIBOR paid by the Company on
its LIBOR-based debt, and (iii) the ratio of LIBOR-based debt to SBA financing.
The Company incurs LIBOR-based debt for terms generally ranging from 30-180
days. The Company's subordinated debentures issued to or guaranteed by the SBA
typically have terms of ten years. The Company's cost of funds reflects
fluctuations in LIBOR to a greater degree than in the past because LIBOR-based
debt has come to represent a greater proportion of the Company's debt. The
percentage of the Company's total indebtedness composed of LIBOR-based
indebtedness has increased from 70.4% at May 30, 1996 to 75.1% at December 31,
1996.
36
The Company measures its cost of funds as its aggregate interest expense
for all of its interest-bearing liabilities divided by the face amount of such
liabilities. The Company analyzes its cost of funds in relation to the average
of the 90- and 180-day LIBOR (the "LIBOR Benchmark"). The Company's average
cost of funds e.o.p. increased from 7.09% or 162 basis points over the LIBOR
Benchmark of 5.47% at May 30, 1996 to 7.11%, or 153 basis points over the LIBOR
Benchmark of 5.58% at December 31, 1996.
Taxicab Rooftop Advertising. In connection with its Medallion Loan finance
business, the Company also conducts a taxicab rooftop advertising business
through Media, which began operations in November 1994. Media's revenue is
affected by the number of taxicab rooftop advertising displays ("Displays") that
it owns and the occupancy rate and advertising rate of those Displays. At
December 31, 1996, Media had approximately 2,000 installed Displays, 450 of
which were acquired in connection with the acquisition of the assets of See-
Level Advertising, Inc. and See Level Management, Inc. on July 25, 1996. In
addition, on March 6, 1997 Media entered into an agreement with the MTBOT to
provide advertising on over 1,800 New York City taxicabs affiliated with the
MTBOT commencing on September 22, 1997. The effect of that agreement will be to
increase the number of taxicabs Media has under contract for rooftop advertising
in New York City from approximately 1,700 currently to approximately 3,500.
With this agreement, Media is the leading taxicab rooftop advertiser in the
city. The Company expects that Media will continue to expand its operations.
Although Media is a wholly-owned subsidiary of the Company, its results of
operations are not consolidated with the Company because Securities and Exchange
Commission regulations prohibit the consolidation of non-investment companies,
such as Media, with investment companies, such as the Company.
Factors Affecting Net Assets. Factors which affect the Company's net
assets include net realized gain/loss on investments and change in net
unrealized depreciation of investments. Net realized gain/loss on investments
is the difference between the proceeds derived upon foreclosure of a loan and
the cost basis of such loan. Change in net unrealized depreciation of
investments is the amount, if any, by which the Company's estimate of the fair
market value of its loan portfolio is below the cost basis of the loan
portfolio. Under the 1940 Act and the SBIA, the Company's loan portfolio must
be recorded at fair market value or "marked to market." Unlike certain lending
institutions, the Company is not permitted to establish reserves for loan
losses, but adjusts quarterly the valuation of its loan portfolio to reflect the
Company's estimate of the current realizable value of the loan portfolio. Since
no ready market exists for the Company's loans, fair market value is subject to
the good faith determination of the Company. In determining such value, the
Company takes into consideration factors such as the financial condition of its
borrowers, the adequacy of its collateral and the relationships between current
and projected market rates of interest and portfolio rates of interest and
maturities. Any change in the fair value of portfolio loans as determined by
the Company is reflected in net unrealized depreciation of investments and
affects net increase in net assets resulting from operations but has no impact
on net investment income or distributable income. Therefore, if recent
increases in prevailing interest rates lead to a trend of higher interest rates,
net increase in net assets resulting from operations could decline. Upon the
completion of the Acquisitions on May 29, 1996, the Company's loan portfolio was
recorded on the balance sheet at fair market value, which included $1.5 million
of net unrealized depreciation, as estimated by the Company in accordance with
the 1940 Act and the purchase method of accounting. From May 30, 1996 through
December 31, 1996 there was a $46,000 increase in net unrealized depreciation of
investments. Application of the "marked to market" policy to the Company's loan
portfolio could result in greater volatility in the Company's earnings than was
the case for the businesses acquired in the Acquisitions since they did not in
all cases follow that policy.
Recent Commencement of Operations. The Company commenced operations in
connection with the simultaneous closing of its initial public offering and the
Acquisitions on May 29, 1996. Prior to that date, the Company had no results of
operations and each of Medallion Financial, Tri-Magna, Edwards
37
and TCC had been operating independently of each other. The following discussion
under the caption "Consolidated Results of Operations" sets forth an analysis of
the Company's actual results of operations and assets and liabilities for the
period commencing May 30, 1996 and ending December 31, 1996. The historical
financial condition and results of operations of each of Tri-Magna, Edwards and
TCC for the period commencing January 1, 1996 and ending May 29, 1996 and the
years ended December 31, 1994 and 1995 are then discussed. All period
percentages involving income statement accounts have been annualized for
discussion purposes.
CONSOLIDATED RESULTS OF OPERATIONS
For the Period Commencing May 30, 1996 and Ending December 31, 1996.
Performance Summary. Since the Company's initial offering closed on May 29,
1996, investment income has been positively impacted by the strong growth of the
entire loan portfolio which was primarily driven by an increase in the
percentage of the portfolio composed of higher yielding Commercial Installment
Loans. Interest expense for the period reflected an increase in the LIBOR
benchmark e.o.p. of 11 basis points and growth in net borrowings offset by a
nine basis point decrease in the spread over LIBOR charged by the Company's
banks. The positive trend in the spread between the average yield on the entire
portfolio and the average of costs of funds contributed to the $3.7 million of
net investment income earned during the period.
Investment Income. Investment income for the period was $10.4 million.
The Company's investment income reflects the positive impact of portfolio growth
during the period. Total portfolio growth was $27.1 million or 18.1% from
$149.4 million at May 30, 1996 to $176.5 million at December 31, 1996.
Investment income also reflects the positive impact of increases in the average
yield of the entire portfolio. Average yield e.o.p. of the entire portfolio
increased 17 basis points from 10.63% at May 30, 1996 to 10.80% at December 31,
1996. The increase was caused by (i) a slight increase in the average yield on
Commercial Installment Loans and a shift in the portfolio mix toward a higher
percentage of Commercial Installment Loans which historically have been
originated at a yield of approximately 350 basis points higher than Medallion
Loans and 500 to 700 basis points higher than the prevailing Prime Rate, and
(ii) a slight increase in the average yield on Medallion Loans caused by
stabilization, after a sustained period of declines, in market rates for
Medallion Loans. The average yield e.o.p. of the Medallion Loan portfolio
increased eight basis points from 9.84% at May 30, 1996 to 9.92% at December 31,
1996 and the average yield of the Commercial Installment Loan portfolio
increased nine basis points from 13.42% at May 30, 1996 to 13.51% at December
31, 1996. The percentage of the portfolio composed of Commercial Installment
Loans increased from 22.1% at May 30, 1996 to 23.7% at December 31, 1996.
Interest Expense. The Company's interest expense was $5.0 million for the
period. The Company's average cost of funds e.o.p. increased from 7.09% or 162
basis points over the LIBOR Benchmark of 5.47% at May 30, 1996 to 7.11% or 153
basis points over the LIBOR Benchmark of 5.58% at December 31, 1996. The
increase in the average cost of funds e.o.p. was caused by an 11 basis point
increase in the LIBOR Benchmark, which was offset by a nine basis point decrease
in the spread over the LIBOR Benchmark charged by the Company's banks. The
Company's net borrowings increased $4.8 million or 4.0% from $121.0 million at
May 30, 1996 to $125.8 million at December 31, 1996. Interest expense also rose
due to increased commitment fees paid to banks to establish larger credit
facilities. The increased borrowings were incurred to fund portfolio growth and
all related to LIBOR-based indebtedness which increased as
38
a percentage of the Company's total indebtedness from 70.4% at May 30, 1996 to
75.1% at December 31, 1996.
Net Interest Income. Net interest income was $5.4 million for the period.
Net interest income reflects the positive impact of a 15 basis point increase in
spread e.o.p. which increased from 3.54% at May 30, 1996 to 3.69% at December
31, 1996. The increase reflects a 17 basis point increase from May 30, 1996 to
December 31, 1996 in the average yield e.o.p. of the entire portfolio offset by
a two basis point increase in the average cost of funds e.o.p. from May 30, 1996
to December 31, 1996.
Equity in Earnings of Unconsolidated Subsidiary. For the period, Media
generated advertising revenue of $1.1 million and incurred Display rental costs
of approximately $500,000, resulting in a gross margin of approximately $600,000
or 54.4% of advertising revenue. The number of Displays owned by Media increased
from 1,670 at May 30, 1996 to approximately 2,000 at December 31, 1996 as a
result of an acquisition in July 1996. For the period, operating expenses were
$659,000 and Media generated a net loss of $63,000 which is recorded as equity
in earnings or losses of unconsolidated subsidiary on the Company's statement of
operations. The loss primarily resulted from reduced Display occupancy rates and
the Company's decision to maintain goodwill with the taxicab owners from whom it
leases taxicab rooftop space by making lease payments to such owners for
unoccupied Displays that are not otherwise required. Display occupancy declined
from 73% at May 30, 1996 to 64% at December 31, 1996. The loss also resulted
from the write-off of accounts receivable in the amount of $64,000 due under an
advertising contract with a client which filed for bankruptcy protection and
costs associated with expansion into new markets.
Other Income. The Company derived $411,000 in other income, or 0.23% of
investments for the period. Other income was primarily derived from late
charges, prepayment fees and miscellaneous income. Prepayment fees are heavily
influenced by the level and volatility of interest rates and competition.
Non-Interest Expenses. The Company had non-interest expenses of $2.2
million for the period. Approximately $780,000, or 35.4% of non-interest
expenses, was related to salaries and benefits, $410,000, or 18.6%, consisted of
professional fees, $162,000, or 7.4% consisted of investment advisory fees. The
operating expense ratio was 2.02% from May 30, 1996 to December 31, 1996, on an
annualized basis, reflecting consolidation of the Company's operations,
efficiencies of scale and elimination of redundant services, facilities and
functions. The Company believes that operating expenses as a percentage of
average assets will decline as the loan portfolio increases due to economies of
scale.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill of $259,000 for the period relates to $6.5 million of
goodwill generated in the acquisitions of Edwards and TCC. Goodwill is the
amount by which the cost of acquired businesses exceeds the fair value of the
net assets acquired. Goodwill is being amortized on a straight-line basis over
15 years. Negative goodwill is the excess of fair market value of net assets of
an acquired business over the cost basis of such business. Negative goodwill of
$2.9 million was generated in the acquisition of Tri-Magna and is being
amortized on a straight-line basis over four years.
Net Realized Gain/Loss on Investments The Company realized a net gain on
investments of $84,000 during the period. The gain was the result of the sale
of securities underlying a warrant for a gain of $157,000 and recoveries in the
amount of $32,000 on certain radio loans previously written off, offset by the
write off of certain equipment loans in the amount of $105,000.
39
Net Investment Income. Net investment income earned during the period was
$3.7 million reflecting the positive impact of portfolio growth and slightly
improved portfolio yield.
Net Increase in Net Assets Resulting from Operations. Net increase in net
assets resulting from operations was $3.7 million for the period and reflects
portfolio growth and favorable spread e.o.p. Return on assets and return on
equity from May 30, 1996 to December 31, 1996, on an annualized basis, were
3.36% and 11.29%, respectively, for the period ending December 31, 1996.
TRI-MAGNA RESULTS OF OPERATIONS
For the Period from January 1, 1996 to May 29, 1996
Net Interest Income. Net interest income increased during the period due
to the higher average yield of the entire portfolio. The increased yield was
primarily driven by increases in the yields of the Medallion Loan and Commercial
Installment Loan portfolios during the period and an increase in the proportion
of the portfolio composed of Commercial Installment Loans. Interest expense
remained even during the period.
Equity in Earnings (Losses) of Unconsolidated Subsidiary. During the
period, Media generated a net loss of $53,000 which is recorded as equity in
earnings or losses of unconsolidated subsidiary on Tri-Magna's statement of
operations. The loss was in part due to an increase in expenses associated with
the opening of a maintenance facility and Media's expansion into other markets.
Other Income. Other income decreased during the period primarily due to
decreased income from the receipt of prepayment fees and late charges.
Non-interest Expense. Tri-Magna's non-interest expense increased during the
period primarily as a result of direct costs incurred in connection with the
merger of Tri-Magna and Medallion Financial.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. During the period, Tri-Magna did not incur any
realized gains or losses on investments and there was no change in net
unrealized deprecation of investments.
Comparison of the Years Ended December 31, 1994 and December 31, 1995
Net Interest Income. Net interest income decreased $295,000 or 7.3% from
$4.1 million for the year ended December 31, 1994 to $3.8 million for the year
ended December 31, 1995. The interest rate spread of 3.20% for the year ended
December 31, 1994 decreased 85 basis points to 2.35% for the year ended December
31, 1995. This decrease reflected a 126 basis point increase in the average
cost of funds offset by a 41 basis point increase in the average yield of the
portfolio during the period. Tri-Magna's investment income increased $983,000
or 11.1% from $8.8 million for the year ended December 31, 1994 to $9.8 million
for the year ended December 31, 1995. The increase in investment income was the
result of portfolio growth of $5.9 million or 6.8% from an average of $86.5
million for the year ended December 31, 1994 to an average of $92.4 million for
the year ended December 31, 1995. The increase in investment income was also
the result of an increase in the average yield of the portfolio which increased
41 basis points from 10.20% for the year ended December 31, 1994 to 10.61% for
the year ended December 31, 1995. Commercial Installment Loans represented
approximately 27.6% of the gross loan portfolio at December 31, 1994 and 31.6%
at December 31, 1995.
40
The increase in average yield was caused by both (i) a shift in the
portfolio mix toward a higher percentage of Commercial Installment Loans which
historically have had a yield of approximately 350 basis points higher than
Medallion Loans and (ii) an increase in the average interest rate on Medallion
Loans.
Tri-Magna's interest expense increased $1.2 million, or 26.9%, from $4.8
million for the year ended December 31, 1994 to $6.0 million for the year ended
December 31, 1995. The increase was in part the result of increased average net
borrowings of $5.1 million or 7.5% from $68.0 million for the year ended
December 31, 1994 to $73.1 million for the year ended December 31, 1995. The
increased borrowings were incurred to fund portfolio growth. Interest expense
also increased as the result of a 124 basis point increase in the average cost
of funds during the period from an average of 7.00% for the year ended December
31, 1994 to 8.26% for the year ended December 31, 1995. Tri-Magna's 126 basis
point increase in average cost of funds was driven by a 118 basis point increase
in the LIBOR Benchmark and an 8 basis point increase in the difference between
cost of funds and the LIBOR Benchmark. At December 31, 1994 and 1995, short-
term LIBOR-based debt constituted 78.7% and 91.0%, respectively, of total
liabilities. Tri-Magna negotiated an increase in the amount available under its
credit facilities from $65.0 million to $85.0 million to repay $12.5 million in
subordinated SBA debentures, repurchase preferred stock from the SBA and fund
portfolio growth.
Equity in Earnings of Unconsolidated Subsidiary. For the year ended
December 31, 1995, Media generated advertising revenue of $1.5 million and
incurred Display rental costs of $484,000, resulting in a gross margin of $1.0
million or 68.6% of advertising revenue. For the year ended December 31, 1995,
Media generated $126,000 in net income which is recorded as equity in earnings
of unconsolidated subsidiary on Tri-Magna's statement of operations and
represented 8.3% of Tri-Magna's net investment income. Media began active
operations in November 1994; accordingly, there were no corresponding operating
data for the year ended December 31, 1994. At December 31, 1995, Media had
1,670 Displays.
Other Income. Tri-Magna's other income decreased $73,000 or 14.1% from
$519,000 for the year ended December 31, 1994 to $446,000 for the year ended
December 31, 1995. This decrease was primarily caused by the receipt of fewer
prepayment fees due to an increase in market rates for Medallion Loans resulting
in decreased refinancing activity.
Non-interest Expense. Tri-Magna's non-interest expense decreased $85,000
or 3.1% from $2.7 million for the year ended December 31, 1994 to $2.6 million
for the year ended December 31, 1995. The decrease was primarily due to
reduction in profit sharing payments.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. For the year ended December 31, 1995, Tri-Magna
had a realized gain on investments of $61,000 as compared to a $22,000 loss on
investments for the year ended December 31, 1994. Tri-Magna's change in net
unrealized depreciation of investments increased $198,000 or 341.4% from $58,000
at December 31, 1994 to negative $140,000 at September 30, 1995 due to the
potential loan loss exposure associated with the increased proportion of
Commercial Installment Loans in the loan portfolio and overall portfolio growth.
41
EDWARDS HISTORICAL RESULTS OF OPERATIONS
For the Period from January 1, 1996 to May 29, 1996
Net Interest Income. Net interest income increased slightly over the
period because of portfolio growth of $711,000 or 2.0%. This increase in
interest income was partially offset by an increase in Edwards' interest expense
caused by an increase in bank debt of $250,000 or 2.5%.
Other Income. Other income decreased during the period primarily due to a
reduction in the receipt of prepayment fees and late charges.
Non-interest Expense. Edwards' non-interest expense increased during the
period as a result of an increase in professional fees related to the sale of
Edward's assets to Medallion Financial.
Net Realized Gain/Loss on Investments. During the period, Edwards did not
incur any realized gains or losses on investments because Edwards' portfolio
consists almost entirely of Medallion Loans.
Comparison of the Years Ended December 31, 1994 and December 31, 1995
Net Interest Income. Net interest income remained essentially unchanged at
$1.6 million for the years ended December 31, 1995 and December 31, 1994. The
interest rate spread of 2.09% for the year ended December 31, 1994 decreased 13
basis points to 1.96% for the year ended December 31, 1995. The decrease
reflected a 14 basis point decrease in the average yield of the loan portfolio
and a 1 basis point decrease in the average cost of funds during the period.
Edwards' investment income decreased $17,000 or 0.4% to $4.3 million for the
year ended December 31, 1995. The decrease in investment income was the result
of the decrease in the average yield of the portfolio which decreased 14 basis
points from 10.06% for the year ended December 31, 1994 to 9.92% for the year
ended December 31, 1995. The decrease in investment income was offset by
portfolio growth of $434,000 or 1.0% from an average of $43.1 million for the
year ended December 31, 1994 to an average of $43.5 million for the year ended
December 31, 1995.
Edwards' interest expense decreased $17,000 or 0.6% to $2.7 million for the
year ended December 31, 1995. The decrease in interest expense reflected a 1
basis point decrease in the average cost of funds during the period from an
average of 7.97% for the year ended December 31, 1994 to 7.96% for the year
ended December 31, 1995. The decrease was a result of the refinancings in June
1994 of $4.6 million and September 1994 of $5.1 million of subordinated SBA
debentures at a lower interest rate and a decrease in average net borrowing of
$155,000 or 0.5% from $34.7 million for the year ended December 31, 1994 to
$34.5 million for the year ended December 31, 1995. The foregoing were offset
by an increase in interest rates on bank debt. Edwards' 1 basis point decrease
in average cost of funds was driven by a 118 basis point increase in the LIBOR
Benchmark and a 119 basis point decrease in the difference between cost of funds
and the LIBOR Benchmark. The decrease in the difference between cost of funds
and the LIBOR Benchmark was primarily the result of a reduction in the weighted
average interest rate paid on subordinated SBA debentures caused by the
refinancing of $9.7 million of such debentures. Subordinated SBA debentures
represented 69.4% of total liabilities at December 31, 1994 and remained almost
unchanged at December 31, 1995. The balance of total liabilities is represented
primarily by LIBOR-based credit facilities with banks.
Other Income. Edwards' other income decreased $177,000 or 28.5% from
$620,000 for the year ended December 31, 1994 to $443,000 for the year ended
December 31, 1995. This decrease was primarily the result of decreased income
from servicing Medallion Loan participations. Gross loans
42
serviced by Edwards for third parties declined by $4.5 million from $44.3
million at December 31, 1994 to $39.8 million at December 31, 1995. Edwards
typically receives servicing fees which average 51 basis points of the principal
amount of each loan participation that it services. Other income also decreased
because of a reduction in the receipt of prepayment fees and late charges.
Non-interest Expense. Edwards' non-interest expense decreased $223,000 or
20.1% from $1.1 million for the year ended December 31, 1994 to $885,000 for the
year ended December 31, 1995. The reduction was primarily related to decreased
professional fees which were higher in 1994 primarily because of costs
associated with refinancing subordinated debentures.
Net Realized Gain/Loss on Investments. During the year ended December 31,
1994 and 1995 Edwards did not incur any realized gains or losses on investments
because Edwards' portfolio consists almost entirely of Medallion Loans.
Extraordinary Item. Edwards incurred a prepayment premium of $526,000 in
connection with its refinancing of $4.6 million and $5.1 million of subordinated
SBA debentures on June 29, 1994 and September 28, 1994, respectively.
TCC HISTORICAL RESULTS OF OPERATIONS
For the Period from January 1, 1996 to May 29, 1996
Net Interest Income. Net interest income increased during the period
primarily because of portfolio growth of $128,000 or 1.3%. Interest expense
decreased marginally during the period as a result of a decrease in the
principal amount of debentures payable to the SBA in the amount of $1,090,000.
The SBA debentures repaid by TCC had higher interest rates than the debentures
remaining outstanding.
Non-interest Expense. TCC's non-interest expense decreased slightly during
the period because of a reduction in operating overhead instituted in
anticipation of the acquisition by the Company.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. TCC realized a gain on investments of $5,000. Net
unrealized depreciation of investments decreased $30,000. These gains were a
result of an overall improvement in investment collateral value.
Comparison of the Years Ended December 31, 1994 and December 31, 1995
Net Interest Income. Net interest income decreased $122,000 or 8.1% from
$1.5 million for the year ended December 31, 1994 to $1.4 million for the year
ended December 31, 1995. The decrease was primarily due to loan portfolio
contraction in the amount of $1.2 million undertaken in connection with a change
in investment policy instituted by Leucadia in 1993. Under this change in
policy TCC substantially reduced Medallion Loan originations in New York City
where competition had decreased yields, and emphasized originations in Boston,
Cambridge, Chicago and Newark where yields were higher. The interest rate
spread of 6.26% for the year ended December 31, 1994 increased 118 basis points
to 7.44% for the year ended December 31, 1995. This spread increase reflected
primarily a reduction in higher interest rate subordinated SBA debentures,
resulting in a 146 basis point decrease in the average cost of funds for the
period offset by a 28 basis point decrease in the average yield of the
portfolio. TCC finances its portfolio with fixed-rate subordinated SBA
debentures rather than LIBOR-based bank debt. TCC's investment income decreased
$381,000 or 17.2% from $2.2 million for the year
43
ended December 31, 1994 to $1.8 million for the year ended December 31, 1995.
The decrease in investment income was the result of a $591,000 or 29.5% decrease
in interest earned on the loan portfolio which contracted $4.0 million or 27.8%
from an average of $14.4 million for the year ended December 31, 1994 to an
average of $10.4 million for the year ended December 31, 1995. In addition, the
average yield of the portfolio decreased 28 basis points from 13.86% for the
year ended December 31, 1994 to 13.58% for the year ended December 31, 1995. The
decrease in interest earned on the loan portfolio was offset by a $210,000 or
97.7% increase in interest income earned on treasury bills from $215,000 at
December 31, 1994 to $425,000 at December 31, 1995 attributable to an increase
in the weighted average interest rate on treasury bills which increased 156
basis points from 3.96% at December 31, 1994 to 5.52% at December 31, 1995.
TCC's interest expense decreased $259,000 or 36.5% from $709,000 for the
year ended December 31, 1994 to $450,000 for the year ended December 31, 1995.
The decrease was in part the result of a decrease in average net borrowing of
$2.0 million or 21.4% from $9.3 million for the year ended December 31, 1994 to
$7.3 million for the year ended December 31, 1995. This decrease was caused by
the repayment of subordinated SBA debentures in the amount of $1.2 million. TCC
repaid subordinated SBA debentures with higher average interest rates than the
debentures remaining outstanding; accordingly, interest expense also decreased
as the result of a 146 basis point decrease in the average cost of subordinated
SBA debentures outstanding from an average of 7.60% at December 31, 1994 to
6.14% at December 31, 1995.
Non-interest Expense. TCC's non-interest expense increased $49,000 or 6.9%
from $711,000 for the year ended December 31, 1994 to $760,000 for the year
ended December 31, 1995. The increase was primarily due to a $124,000 increase
in pension expense. In 1994, pension expense was reduced due to the merger of
the defined benefit pension plans of TCC and Leucadia. The increase in pension
expense was offset by a $75,000 reduction in operating expenses relating to a
reduction in rent and salaries associated with the contraction of the loan
portfolio.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. TCC realized a loss on investments of $50,000 for
the year ended December 31, 1995, and a $144,000 loss on investments for the
year ended December 31, 1994. TCC's change in unrealized depreciation of
investments decreased $455,000 or 57.6% from $790,000 at December 31, 1994 to
$335,000 at December 31, 1995 due to the reduction of potential loan loss
exposure corresponding to the contraction of the loan portfolio.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity. The Company, like other financial institutions,
is subject to interest rate risk to the extent its interest-earning assets
(consisting of Medallion Loans and Commercial Installment Loans) reprice on a
different basis over time in comparison to its interest-bearing liabilities
(consisting primarily of credit facilities with bank syndicates and subordinated
SBA debentures).
A relative measure of interest rate risk can be derived from the Company's
interest rate sensitivity gap. The interest rate sensitivity gap represents
the difference between interest-earning assets and interest-bearing
liabilities which mature and/or reprice within specified intervals of time.
The gap is considered to be positive when repriceable assets exceed
repriceable liabilities and negative when the inverse situation exists. A
relative measure of interest rate sensitivity is provided by the cumulative
difference between interest sensitive assets and interest sensitive
liabilities for a given time interval expressed as a percentage of total
assets.
The following schedule of principal payments sets forth at December 31, 1996
the amount of interest-earning assets and interest-bearing liabilities
maturing or repricing within the time periods indicated. The principal amount
of Medallion Loans and Commercial Installment Loans are assigned to the time
frames in which such principal amounts are contractually obligated to be paid.
The Company has not reflected an assumed annual prepayment rate for Medallion
Loans or Commercial Installment Loans in this table.
The Company's interest rate sensitive assets were $178.2 million and
interest rate sensitive liabilities were $125.8 million at December 31, 1996.
The one year cumulative interest rate gap was negative $75.9 million, or 42.6%
of interest rate sensitive assets.
SCHEDULE OF PRINCIPAL PAYMENTS AS OF DECEMBER 31, 1996
MORE THAN 1 MORE THAN 2 MORE THAN 3 MORE THAN 5
LESS THAN AND LESS THAN AND LESS THAN AND LESS THAN AND LESS THAN
1 YEAR 2 YEARS 3 YEARS 5 YEARS 6 YEARS THEREAFTER TOTAL
--------- ------------- ------------- ------------- ------------- ---------- --------
(IN THOUSANDS)
Earning Assets
Medallion Loans and
Commercial Installment
Loans................. $ 20,406 $ 19,627 $ 32,353 $25,773 $27,692 $50,689 $176,540
Cash and cash
equivalents........... 1,665 -- -- -- -- -- 1,665
-------- -------- -------- ------- ------- ------- --------
Total.................. 22,071 19,627 32,353 25,773 27,692 50,689 178,205
-------- -------- -------- ------- ------- ------- ========
Liabilities
Revolving line of
credit................ 94,450 -- -- -- -- -- 94,450
Term loan.............. 2,000 -- -- -- -- -- 2,000
Subordinated SBA
debentures............ 1,500 3,000 -- -- 15,190 9,700 29,390
-------- -------- -------- ------- ------- ------- --------
Total.................. 97,950 3,000 -- -- 15,190 9,700 $125,840
-------- -------- -------- ------- ------- ------- ========
Interest rate gap....... $(75,879) $ 16,627 $ 32,353 $25,773 $12,502 $40,989
======== ======== ======== ======= ======= =======
Cumulative interest rate
gap.................... $(75,879) $(59,252) $(26,899) $(1,126) $11,376 $52,365
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
44
market rates of interest may have an adverse impact on the Company's earnings.
Accordingly, if recent increases in prevailing interest rates caused by a 25
basis point increase in the federal-funds rate lead to a trend of higher inerest
rates, net interest rate spread could decline at least until the Company is able
to originate new loans at the higher prevailing interest rates.
The effect of changes in market rates of interest is mitigated by regular
turnover of the portfolio. From inception of its business in 1979 through 1996,
the period between the origination and final payments of all Medallion Loans
originated by MFC is estimated by the Company to have been 29 months on a
weighted average basis. Accordingly, the Company anticipates that approximately
40% of the portfolio will mature or be prepaid each year. The Company believes
that the average life of its loan portfolio varies to some extent as a function
of changes in interest rates because borrowers are more likely to exercise
prepayment rights in a decreasing interest rate environment when the interest
rate payable on the borrower's loan is high relative to prevailing interest
rates and are less likely to prepay in a rising interest rate environment.
The Company seeks to manage the exposure of the balance of the portfolio to
increases in market interest rates by entering into interest rate cap agreements
to hedge a portion of its variable-rate debt against increases in interest rates
and by incurring fixed-rate debt consisting primarily of subordinated SBA
debentures. The Company has entered into interest rate cap agreements to limit
the Company's interest rate exposure to 7.5% on $20.0 million of its LIBOR-based
debt through April 7, 1997 and to 7.0% on an additional $20.0 million of its
LIBOR-based debt through November 16, 1997. At December 31, 1996, these caps
hedged 41.5% of the Company's LIBOR-based indebtedness. Prior to its expiration
on April 7, 1997, the Company intends to replace that cap with a new cap which
will limit the Company's interest rate exposure on $40.0 million of LIBOR-based
debt. With the purchase of that cap, the Company will have limited its exposure
on $60 million of debt. In addition, the Company manages its exposure to
increases in market rates of interest by incurring fixed rate indebtedness, such
as subordinated SBA debentures. The Company currently has outstanding
subordinated SBA debentures in the principal amount of $29.4 million with a
weighted average rate of interest of 7.38%. Of such debentures, 1.5 million
mature on April 1, 1997. At December 31, 1996, these debentures constituted
23.4% of the Company's indebtedness.
The Company will seek to manage interest rate risk by evaluating and
purchasing, if appropriate, additional derivatives, originating adjustable-rate
loans, incurring fixed-rate indebtedness and revising, if appropriate, its
overall level of asset and liability matching. Nevertheless, the Company
accepts varying degrees of interest rate risk depending on market conditions and
believes that the resulting asset/liability interest rate mismatch results in
opportunities for higher net interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity are credit facilities with bank syndicates,
fixed rate, long-term subordinated SBA debentures that are issued to or
guaranteed by the SBA and loan amortization and prepayments. As a RIC, 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 December 31, 1996, 76.6% of the Company's $125.8 million of
debt consisted of bank debt, substantially all of which was at variable
effective rates of interest with a weighted average rate of 7.03% or 122 basis
points below the Prime Rate and 23.4% consisted of subordinated SBA debentures
with fixed rates of interest with a weighted average rate of 7.38%. The Company
is eligible to seek SBA funding but plans to continue to limit its use of SBA
funding and will seek such funding only when advantageous, such as when SBA
financing rates are particularly attractive, or to fund loans that qualify under
SBA regulations through Edwards and TCC
45
which are already subject to SBA restrictions. In the event that the
Company seeks SBA funding, no assurance can be given that such funding will be
obtained. In addition to possible additional SBA funding, an additional $10.5
million of debt was available at December 31, 1996 at variable effective rates
of interest averaging below the Prime Rate under the Company's $105.0 million
bank credit facilities. The Company has observed a practice of minimizing
credit facility fees associated with the unused component of credit facilities
by keeping the unused component as small as possible and periodically increasing
the amounts available under such credit facilities only when necessary to fund
portfolio growth.
The following table illustrates the Company's and each of the subsidiaries'
sources of available funds and amounts outstanding under credit facilities at
December 31, 1996.
Medallion
Financial MFC Edwards TCC Total
------------ ---------- ------------- ------- --------------
(dollars in thousands)
Cash and cash equivalents............ $ 102 $ 676 $ 207 $ 680 $ 1,665
Revolving lines of credit............ 5,000(2) 85,000(3) 15,000 -- 105,000
Amounts available.................. 550 7,450 2,550 -- 10,550
Amounts outstanding................ 4,450 77,550 12,450 -- 94,450
Average interest rate............ 6.84% 7.06% 6.81% -- 7.03%
Maturity......................... 12/97 6/97 4/97-7/97 -- 4/97-12/97
Term loans........................... -- 2,000 -- 2,000
Interest rate.................... -- 7.50% -- -- 7.50%
Maturity......................... -- 7/97 -- -- 7/97
SBA debentures....................... -- -- 23,750(1) 5,640 29,390(1)
Average interest rate............ -- -- 7.95% 5.00% 7.38%
Maturity......................... -- -- 4/97-9/04 6/02 4/97-9/04
Total cash and remaining amounts
available under credit facilities.. 652 8,126 2,757 680 12,215(2)(3)
Total debt outstanding............... $4,450 $79,550 $ 36,200 $5,640 $ 125,840
- ----------------
(1) On April 1, 1997, 1.5 million of such debentures mature.
(2) On February 10, 1997, Medallion Financial increased the amount available
under its line of credit by $1.0 million.
(3) On January 28, 1997, MFC increased the amount available under its revolving
credit facility by $20.0 million.
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. At December 31, 1996, SBA financing represented 23.4% of total debt as
compared to 25.3% at May 30, 1996. While bank funding often carries higher
interest rates than SBA funding, the Company believes that such higher rates
will be offset
46
by the increased volume of funding and loan originations which should result in
increased net interest margin.
Media funds its operations through internal cash flow and intercompany
debt. Media is not a RIC and, therefore, is able to retain earnings to finance
growth.
The Company believes that anticipated borrowings from the SBA and under its
bank credit facilities and cash flow from operations (after distributions to
stockholders) will be adequate to fund the continuing operations of the
Company's loan portfolio and advertising business for the foreseeable future.
In addition, in order to provide the funds necessary for the Company's expansion
strategy, the Company expects to incur, from time to time, additional short- and
long-term bank debt and (to the extent permitted and advantageous) to use SBA
leverage, and to issue, in public or private transactions, its equity and debt
securities. The Company is currently exploring such external financing
possibilities and MFC is exploring establishing a commercial paper program. The
issuance of commercial paper will be contingent upon MFC obtaining an investment
grade rating, among other conditions, and no assurance can be given that MFC
will be able to establish such a program. The availability and terms of any
additional financing will depend upon market, regulatory and other conditions
and there can be no assurance that such additional financing will be available
on terms acceptable to the Company.
INVESTMENT CONSIDERATIONS
The following are certain of the factors which could affect the Company's
future results. They should be considered in connection with evaluating
forward-looking statements contained in this Management's Discussion and
Analysis and elsewhere in this Report and otherwise made by or on behalf of the
Company since these factors, among others, could cause actual results and
conditions to differ materially from those projected in these forward-looking
statements.
Interest Rate Spread. The Company's net interest income is largely
dependent upon achieving a positive interest rate spread and other factors.
Leverage. The Company's use of leverage poses certain risks for holders of
the Common Stock, including the possibility of higher volatility of both the net
asset value of the Company and the market price of the Common Stock and,
therefore, an increase in the speculative character of the Common Stock.
Availability of Funds. The Company has a continuing need for capital to
finance its lending activities. The Company funds its operations through credit
facilities with bank syndicates and, to a lesser degree, through subordinated
SBA debentures. Reductions in the availability of funds from banks and under
SBA programs on terms favorable to the Company could have a material adverse
effect on the Company. Because the Company distributes to its shareholders at
least 90% of its investment company taxable income, such earnings are not
available to fund loan originations.
Industry and Geographic Concentration. A substantial portion of the
Company's revenue is derived from operations in New York City and these
operations are substantially focused in the area of financing New York City
taxicab medallions and related assets. There can be no assurance that an
economic downturn in New York City in general, or in the New York City taxicab
industry in particular, would not have an adverse impact on the Company.
47
Reliance on Management. The success of the Company will be largely
dependent upon the efforts of senior management. The death, incapacity or loss
of the services of any of such individuals could have an adverse effect on the
Company.
Taxicab Industry Regulation. Every city in which the Company originates
Medallion Loans, and most other major cities in the United States, limit the
supply of taxicab medallions. In many markets, regulation results in supply
restrictions which, in turn, support the value of medallions; consequently,
actions which loosen such restrictions and result in the issuance of additional
medallions into a market could decrease the value of medallions in that market
and, therefore, the collateral securing the Company's then outstanding Medallion
Loans, if any, in that market. The Company is unable to forecast with any
degree of certainty whether any potential increases in the supply of medallions
will occur. In New York City, and in other markets where the Company originates
Medallion Loans, taxicab fares are generally set by government agencies, whereas
expenses associated with operating taxicabs are largely unregulated. As a
consequence, in the short term, the ability of taxicab operators to recoup
increases in expenses is limited. Escalating expenses, therefore, can render
taxicab operation less profitable and make it more difficult for borrowers to
service loans from the Company and could potentially adversely affect the value
of the Company's collateral.
Government Regulation of Tobacco Advertising. Currently, 60% of the
Company's taxicab rooftop advertising revenue is derived from tobacco products
advertising. In August 1996, President Clinton signed an executive order
adopting rules proposed by the FDA restricting the sale and advertising of
cigarette and smokeless tobacco products. Certain of these regulations which
include provisions prohibiting the placement of tobacco product advertising
within 1,000 feet of playgrounds and schools only apply to stationery
advertising such as placards and billboards and, accordingly, do not restrict
taxicab rooftop advertising. Certain other of these regulations, however, which
limit tobacco products advertising to a format consisting of black text on a
white background and require the inclusion of a statement which identifies the
product as "a nicotine-delivery device for persons over 18" apply to taxicab
rooftop advertising. Certain advertisers may be unwilling to advertise in this
format; accordingly, these restrictions, which become effective on August 28,
1997, could have an adverse effect upon the taxicab rooftop advertising business
of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in the response found under Item
14(A)(1) in this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I hereof and the remainder is incorporated
herein by reference from the discussion responsive thereto under the caption
"Election of Directors" in the Company's Proxy Statement relating to its Annual
Meeting of Stockholders scheduled for June 5, 1997 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Stock Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Certain Transactions" in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedules as listed in the
Index to Financial Statements are filed as part of this Annual Report on Form
10-K.
(B) REPORTS ON FORM 8-K
On June 11, 1996, the Company filed a current report on Form 8-K under Item
2 pertaining to the closing of the acquisitions of MFC, TCC, Media and the
assets of Edwards. No financial statement were filed as they were previously
reported in the Company's registration statement on Form N-2, as amended (No.
333-1670).
49
(C) EXHIBITS
The Exhibits filed as part of this Annual Report on Form 10-K are listed on
the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference.
50
MEDALLION FINANCIAL CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
MEDALLION FINANCIAL CORP.
Report of Arthur Andersen LLP, Independent Public Accountants............ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statement of Operations for the Period May 30, 1996
(Commencement of Operations) through December 31, 1996.................. F-4
Consolidated Statement of Shareholders' Equity for the Period
May 30, 1996 (Commencement of Operations) through December 31, 1996..... F-5
Consolidated Statement of Cash Flows for the Period May 30, 1996
(Commencement of Operations) through December 31, 1996.................. F-6
Notes to Consolidated Financial Statements............................... F-8
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP)
Report of Arthur Andersen LLP, Independent Public Accountants............ F-21
Report of Friedman, Alpren & Green LLP, Independent Public Accountants... F-22
Balance Sheets as of May 29, 1996 and December 31, 1995.................. F-23
Statements of Operations for the Period ended May 29, 1996
and the years ended December 31, 1995 and 1994.......................... F-24
Statements of Changes in Partners' Capital for the Period
Ended May 29, 1996 and the years ended December 31, 1995 and 1994....... F-25
Statements of Cash Flows for the Period Ended May 29, 1996 for
the years ended December 31, 1995 and 1994.............................. F-26
Notes to Financial Statements............................................ F-27
TRI-MAGNA CORPORATION AND SUBSIDIARIES
Report of Arthur Andersen LLP, Independent Public Accountants............ F-34
Consolidated Balance Sheets as of May 29, 1996 and December 31, 1995..... F-35
Statements of Operations for the Period Ended May 29, 1996
and the years ended December 31, 1995 and 1994.......................... F-36
Statements of Shareholders' Equity for the Period
Ended May 29, 1996 and the years ended December 31, 1995 and 1994....... F-37
Consolidated Statements of Cash Flows for the Period Ended
May 29, 1996 and the years ended December 31, 1995 and 1994............. F-38
Notes to Consolidated Financial Statements............................... F-39
TRANSPORTATION CAPITAL CORP.
Report of Arthur Andersen LLP, Independent Public Accountants............ F-50
Report of Coopers & Lybrand LLP, Independent Public Accountants.......... F-51
Sheets as of May 29, 1996 and December 31, 1995.......................... F-52
Statements of Operations for the Period Ended May 29, 1996
and the years ended December 31, 1995 and 1994.......................... F-53
Statements of Changes in Shareholders' Equity for Period
Ended May 29, 1996 and the years ended December 31, 1995 and 1994....... F-54
Statements of Cash Flows for the Period Ended May 29, 1996
and the years ended December 31, 1995 and 1994.......................... F-55
Notes to Financial Statements............................................ F-56
MEDALLION FINANCIAL CORP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Medallion Financial Corp.:
We have audited the accompanying consolidated balance sheets of Medallion
Financial Corp. (a Delaware Corporation) and Subsidiaries as of December 31,
1996 and 1995, including the consolidated schedule of investments as of December
31, 1996, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the period May 30, 1996 (commencement of
operations) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included the confirmation of loans receivable as of December 31, 1996
by correspondence with the borrowers. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As explained in Note 2, investments consist of loans valued at $176,493,888 (93%
of total assets) as of December 31, 1996, whose values have been estimated by
the Board of Directors in the absence of readily ascertainable market values.
However, because of the inherent uncertainty of valuation, the Board of
Directors' estimate of values may differ significantly from the values that
would have been used had a ready market for the loans existed, and the
differences could be material.
In our opinion, the consolidated balance sheets referred to above presents
fairly, in all material respects, the financial position of Medallion Financial
Corp. and Subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the period May 30, 1996 (commencement
of operations) to December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 19, 1997
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
-------------- -------------
1996 1995
-------------- -------------
ASSETS
Investments (Note 2)
Medallion loans $134,614,899 $ -
Commercial installment loans 41,925,289 -
------------ --------
Gross investments 176,540,188 -
Unrealized depreciation of
investments (46,300) -
------------ --------
Net investments 176,493,888 -
Investment in unconsolidated
subsidiary (Note 4) 937,000 -
------------ --------
Total investments $177,430,888 $ -
Cash 1,664,603 2,000
Accrued interest receivable 1,696,584 -
Fixed assets, net 89,815 -
Goodwill, net (Note 2) 6,250,636 -
Other assets 2,491,974 716,217
------------ --------
Total assets $189,624,500 $718,217
============ ========
LIABILITIES
Accounts payable and accrued expenses $ 1,844,033 $716,217
Dividends payable 1,849,225 -
Accrued interest payable 1,086,247 -
Notes payable to banks and demand
notes (Note 5) 96,450,000 -
SBA debentures payable (Note 6) 29,390,000 -
------------ --------
Total liabilities $130,619,505 $716,217
------------ --------
Negative goodwill, net (Note 2) 2,517,716 -
------------ --------
Commitments and contingencies (Note 8)
SHAREHOLDERS' EQUITY (Notes 1 and 10)
Preferred Stock (1,000,000 shares of
$.01 par value stock authorized - none
outstanding) $ - $ -
Common stock (15,000,000 shares of
$.01 par value stock authorized -
8,250,000 and 2,500,000 shares
outstanding at December 31, 1996
and 1995, respectively 82,500 25,000
Capital in excess of par value 56,359,555 (23,000)
Accumulated undistributed income 45,224 -
------------ --------
Total shareholders' equity 56,487,279 2,000
------------ --------
Total liabilities and shareholders' $189,624,500 $718,217
equity ============ ========
The accompanying notes are an integral part of these financial statements.
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
Investment income:
Interest income on investments $10,374,238
Interest income on treasury bills 37,603
-----------
Total investment income 10,411,841
-----------
Interest expense:
Notes payable to bank 3,631,746
SBA debentures 1,376,747
-----------
Total interest expense 5,008,493
-----------
Net interest income 5,403,348
-----------
Non-interest income:
Equity in losses of unconsolidated
subsidiary (63,000)
Accretion of negative goodwill 421,435
Other Income 410,991
-----------
Total non-interest income 769,426
-----------
Expenses:
Administration and advisory fees 161,886
Professional fees 410,420
Salaries and benefits 779,445
Other operating expenses 879,187
Amortization of goodwill 259,260
-----------
Total expenses 2,490,198
-----------
Net investment income 3,682,576
Increase in net unrealized
depreciation (46,300)
Net realized gain on investments 84,447
-----------
Net increase in net assets resulting
from operations $ 3,720,723
===========
Net increase in net assets resulting
from operations per common share $0.45
===========
Weighted average shares and common
share equivalents outstanding 8,276,250
===========
The accompanying notes are an integral part of these financial statements.
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
SHARES OF CAPITAL ACCUMULATED
COMMON STOCK COMMON STOCK IN EXCESS UNDISTRIBUTED
OUTSTANDING $.01 PAR VALUE OF PAR VALUE INCOME
------------------------------------------------------------
Balance at December 31, 1995 (Note 1) 2,500,000 $25,000 $ (23,000) $ -
Issuance of common stock under offering
(Note 1) 5,750,000 57,500 56,089,556 -
For the period from May 30, 1996 to
December 31, 1996:
Distributable net investment income - - - 3,767,023
Dividends declared on common stock
($0.41 per share) - - - (3,382,500)
SOP 93-2 Cumulative
reclassification (Note 10) - - 292,999 (292,999)
Change in unrealized depreciation - - - (46,300)
------------ -------------- ------------ -----------
Balance at December 31, 1996 8,250,000 $82,500 $56,359,555 $ 45,224
============ ============== ============ ===========
The accompanying notes are an integral part of these financial statements.
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting $ 3,720,723
from operations
Adjustments to reconcile net increase
in net assets resulting from
operations to net cash provided
by (used for) operating activities:
Depreciation and amortization 14,500
Increase in equity in earnings
(losses) of unconsolidated
subsidiary 63,000
Amortization of goodwill 259,260
Increase in unrealized depreciation 46,300
Decrease (increase) in accrued
interest receivable (301,310)
Decrease (increase) in other assets (1,933,829)
Increase (decrease) in accounts
payable and accrued expenses 371,503
Accretion of negative goodwill (421,435)
Increase (decrease) in accrued
interest payable (553,280)
------------
Net cash provided by (used
for) operating activities $ 1,265,432
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of loans (investments) $(71,419,455)
Proceeds from sales and maturities of
loans (investments) 44,323,364
Payment for purchase of Tri-Magna, net (11,848,283)
Payment for purchase of Edwards
Capital Company (15,624,995)
Payment for purchase of TCC, net (3,748,576)
Capital expenditures (89,928)
------------
Net cash provided by (used for)
investing activities $(58,407,873)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable to banks $ 6,050,000
Repayment of notes payable to SBA (1,200,000)
Payment of declared dividends to
former shareholders (542,012)
Payment of declared dividends to
present shareholders (1,650,000)
Proceeds from initial public
offering, net of expenses 56,147,056
------------
Net cash provided by (used for)
financing activities $ 58,805,044
------------
NET INCREASE (DECREASE) IN CASH $ 1,662,603
CASH, beginning of period 2,000
------------
CASH, end of period $ 1,664,603
============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 5,561,773
============
SUPPLEMENTAL INFORMATION OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Note received for exercise of warrant $ 157,000
============
The accompanying notes are an integral part of these financial statements.
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
In conjunction with the Acquisitions, liabilities were assumed as follows:
Tri-Magna Edwards Capital Company TCC
------------ ----------------------- -----------
Fair value of assets acquired, other
than cash $97,808,510 $51,356,894 $ 9,714,029
----------- ----------- -----------
Cash acquired 1,529,717 - 6,797,183
Cash paid 13,378,000 15,624,995 10,545,759
----------- ----------- -----------
Cash paid, net 11,848,283 15,624,995 3,748,576
----------- ----------- -----------
Negative goodwill 2,939,085 - -
----------- ----------- -----------
Liabilities assumed $83,021,142 $35,731,899 $ 5,965,453
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) FORMATION OF MEDALLION FINANCIAL CORP.
Medallion Financial Corp. (the Company) is a closed-end management investment
company organized as a Delaware corporation in 1995. The Company has elected to
be regulated as a business development company under the Investment Company Act
of 1940, as amended (the 1940 Act). On May 29, 1996, the Company completed an
initial public offering (the Offering) of its common stock, issued and sold
5,750,000 shares at $11.00 per share and split the existing 200 shares of common
stock outstanding into 2,500,000 shares. All share and related amounts in the
accompanying financial statements have been restated to reflect this stock
split. Offering costs incurred by the Company in connection with the sale of
shares totaling $7,102,944 were recorded as a reduction of capital upon
completion of the Offering. These costs were recorded, net of $200,000 payable
by Tri-Magna Corporation and subsidiaries (Tri-Magna) in accordance with the
Merger Agreement. In parallel with the Offering, the Company merged with Tri-
Magna; acquired substantially all of the assets and assumed certain liabilities
of Edwards Capital Company, a limited partnership; and acquired all of the
outstanding voting stock of Transportation Capital Corp. (TCC) (collectively,
the Acquisitions) (see Note 3). The assets acquired and liabilities assumed from
Edwards Capital Company, were acquired and assumed by Edwards Capital
Corporation (Edwards), a newly formed and wholly-owned subsidiary of the
Company. As a result of the merger with Tri-Magna in accordance with the Merger
Agreement dated December 21, 1995 between the Company and Tri-Magna , Medallion
Funding Corp. (MFC) and Medallion Taxi Media, Inc. (Media), formerly
subsidiaries of Tri-Magna, became wholly-owned subsidiaries of the Company. In
connection with the Acquisitions, the Company has applied for and received the
Acquisition Order under the 1940 Act from the Securities and Exchange
Commission. The Company also received approval from the Small Business
Administration (SBA) for these transactions.
Tri-Magna was a closed-end management investment company registered under the
1940 Act and was the sole shareholder of MFC and Media. MFC is a closed-end
management investment company registered under the 1940 Act and is licensed as a
specialized small business investment company (SSBIC) by the SBA. As an adjunct
to MFC's taxicab medallion finance business, Media operates a taxicab rooftop
advertising business.
Edwards is licensed as a small business investment company (SBIC) by the SBA
and is registered as a closed-end management investment company under the 1940
Act.
TCC, a wholly-owned subsidiary of the Company, is licensed as an SSBIC by the
SBA and is registered as a closed-end management investment company registered
under the 1940 Act.
(2) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company primarily engages, directly and/or through its principal
subsidiaries, in the business of making loans to small businesses and, to a
lesser degree, in the business of taxicab rooftop advertising. The Company
originates and services loans financing the purchase of taxicab medallions and
related assets (medallion loans). The Company also originates and services
commercial installment loans to small businesses in other targeted industries
(commercial installment loans). While medallion and commercial installment
loans are originated substantially in the metropolitan New York area, the
Company also finances medallion loans in the Boston, Cambridge, Massachusetts
and Chicago areas.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practices in the investment companies
industry. The preparation of financial statements in conformity with generally
accepted accounting principles require the Company to make estimates and
assumptions that affect the reporting and disclosure of assets and liabilities,
including those that are of a contingent nature, at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. The significant
accounting and reporting policies of the Company are summarized below:
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(2) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Medallion
Financial Corp. and its wholly-owned subsidiaries (except for Media) commencing
with the period from the closing of the Offering and Acquisitions to December
31, 1996. Prior to the Acquisitions, Medallion Financial Corp. had no
operations and each of the subsidiaries had been operating independently of each
other. All significant inter-company balances and transactions have been
eliminated. All references in the notes to the consolidated financial
statements for the period ended December 31, 1996 refer to the period from May
30, 1996 to December 31, 1996.
The Company's investment in Media is accounted for under the equity method. As
a non-investment company, Media cannot be consolidated with the Company, which
is an investment company under the 1940 Act. Refer to Note (4) for the
presentation of financial information for Media.
INVESTMENTS
The Company's loans, net of participations, are considered investments under
the 1940 Act and are recorded at fair value. Loans are valued at cost less
unrealized depreciation. Since no ready market exists for these loans, the fair
value is determined in good faith by the Board of Directors. In determining the
fair value, the Company and Board of Directors consider factors such as the
financial condition of the borrower, the adequacy of the collateral, individual
credit risks, historical loss experience and the relationships between current
and projected market rates and portfolio rates of interest and maturities.
The Company's investments consist primarily of long-term loans to persons
defined by SBA regulations as being socially or economically disadvantaged, or
to entities that are at least 50% owned by such persons. Approximately 76% of
the Company's loan portfolio at December 31, 1996 have arisen in connection with
the financing of taxicab medallions, taxicabs and related assets, substantially
all in the metropolitan New York area. These loans are secured by the
medallions, taxicabs and related assets and are personally guaranteed by the
borrowers, or in the case of corporations, personally guaranteed by the owners.
The remaining portion of the Company's portfolio represents loans to various
commercial enterprises, including dry cleaners, garages, gas stations and
laundromats. These loans are secured by various equipment and/or real estate
and are generally guaranteed by the owners, and in certain cases, by the
equipment dealers. These loans are made primarily in the metropolitan New York
City area.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of related loans. At December 31, 1996,
net deferred costs totaled $567,204. Amortization expense for the period ended
December 31, 1996 was $161,977.
Loans are placed on non-accrual status, with the reversal of all uncollected
accrued interest, when there is doubt as to the collectibility of interest or
principal or if loans are 90 days or more past due unless they are both fully
collateralized and in the process of collection. Interest received on non-
accrual loans is recognized as income when collected. At December 31, 1996,
total non-accrual loans were $2,450,702. For the period ended December 31, 1996,
the amount of interest income on non-accrual loans that would have been
recognized if the loans had been paying in accordance with their original terms
was $111,209.
The principal portion of loans serviced for others by the Company at December
31, 1996 amounted to approximately $60,160,000.
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(2) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
UNREALIZED DEPRECIATION AND REALIZED GAINS/LOSSES ON INVESTMENTS
The change in unrealized depreciation of investments is the amount by which
the fair value estimated by the Company is less than the cost basis of the loan
portfolio. Realized gains or losses on investments consist of the excess of the
proceeds derived upon foreclosure over the cost basis of a loan, write-offs of
loans or assets acquired in satisfaction of loans, net of recoveries. For the
period ended December 31, 1996, gross realized gains on investments were
$189,000 and gross realized losses on investments were $105,000 and the increase
in net unrealized depreciation was $46,300. Total unrealized depreciation was
$1,568,717 on total investments of $176,493,888 at December 31, 1996, of which
$1,522,417 existed at the date of the Company's acquisitions (see Note 3).
GOODWILL
Cost of purchased businesses in excess of the fair value of net assets
acquired ("goodwill) is being amortized on a straight-line basis over 15 years.
The excess of fair value of net assets over cost of business acquired ("negative
goodwill") is being accreted on a straight-line basis over approximately 4
years.
The Company reviews its goodwill and negative goodwill for events or changes
in circumstances that may indicate that the carrying amount of the assets may
not be recoverable, and if appropriate, reduces the carrying amount through a
charge to income.
FEDERAL INCOME TAXES
It is the Company's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies, which require the
Company to distribute at least 90% of its investment company taxable income to
its shareholders. Therefore, no provision for federal income taxes has been made
in the accompanying financial statements.
Media, as a non-investment company, has elected to be taxed as a regular
corporation. Refer to Note (4) for financial information for Media.
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE
Net increase in net assets resulting from operations per share is computed
using the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents consist primarily of dilutive
outstanding stock options computed under the treasury stock method.
RECENT ACCOUNTING DEVELOPMENTS
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of." This statement
requires a review for impairment of long-lived assets and certain identifiable
intangibles to be held and used by an entity whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. An impairment would be estimated if the sum of the expected future
cash flows to result from the use and eventual disposition of the asset is less
than the carrying amount of the asset. The adoption of this statement did not
have a significant impact on the Company's financial position or results of
operations.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which establishes a fair
value-based method of accounting for stock options and similar equity
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(2) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
instruments of employee stock compensation plans. This statement allows the
option of adopting the new fair value method or to measure compensation cost for
those plans using the current intrinsic value-based method as prescribed by
Accounting Principles Board Opinion No. 25 (APB Opinion No. 25), "Accounting for
Stock Issued to Employees." Under this statement, the use of intrinsic value-
based method, requires pro forma disclosure of net income and earnings per share
as if the fair value-based method had been adopted. The Company opted to adopt
the pro forma disclosure provisions of SFAS No. 123. See pro forma information
in Note (7).
On March 3, 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement establishes standards for the computation and presentation of earnings
per share and applies to entities with publicly held common stock or potential
common stock. The new statement which supersedes APB Opinion No. 15, is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption is not permitted. This statement when
adopted, will require the restatement of prior years' earnings per share.
Management expects that the adoption of this new statement will not have a
material impact on the Company's previously disclosed earnings per share.
(3) THE ACQUISITIONS
The Acquisitions were accounted for under the purchase method of accounting.
Under this accounting method, the Company has recorded as its cost the fair
value of the acquired assets and 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
or negative goodwill. The fair value of these assets and liabilities is
summarized as follows:
Tri-Magna Edwards Capital Company TCC
------------- ------------------------ ------------
Cash and cash equivalents $ 1,529,717 $ - $ 6,797,183
Investments * 95,621,617 44,510,149 9,312,331
Accrued interest receivable 870,073 406,817 118,583
Goodwill (Negative Goodwill) (2,939,085) 6,303,562 206,334
Other assets 1,316,820 136,366 76,781
Dividends payable (542,012) - (116,725)
Notes payable to banks (80,300,000) (10,100,000) -
Accounts payable and accrued expenses (1,360,570) - (69,660)
Accrued interest payable (818,560) (681,899) (139,068)
SBA debentures payable - (24,950,000) (5,640,000)
--------------- ------------- -----------
Total acquisition cost $ 13,378,000 $ 15,624,995 $10,545,759
=============== ============ ===========
*Net of unrealized depreciation of investments of $1,522,417.
The following unaudited proforma combined financial information for the years
ended December 31, 1996 and 1995 is presented as follows assuming the formation
of the Company and the Acquisitions described in Notes (1) and (3) had occurred
on January 1, 1996 or 1995, respectively:
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(3) THE ACQUISITIONS (CONTINUED)
Year ended December 31,
------------------------
1996 1995
----------- -----------
Investment Income $17,130,990 $15,679,763
Net interest income 9,129,366 8,209,057
Net investment income 6,153,461 5,719,331
Net increase in net assets resulting 6,227,027 5,925,731
from operations
Net increase in net assets resulting
from operations
per share $0.75 $0.72
Proforma weighted average share, and
common share
equivalents, outstanding 8,250,000 8,250,000
Such unaudited proforma combined financial information is not necessarily
indicative of the results of operations which would have actually been reported
had the Offering and Acquisition occurred on January 1, 1996 or 1995, nor does
it purport to represent the Company's future results of operations. The
proforma information also does not give effect to any anticipated benefits and
cost reductions nor future corporate costs that are not under contract, in
connection with the transactions.
(4) INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
The balance sheets at December 31, 1996 and 1995 for Media, are as follows:
DECEMBER 31,
----------------------
1996 1995
----------- ---------
Cash ...................... $ 79,827 $ -
Accounts receivable ....... 307,303 214,238
Equipment, net ............ 976,442 559,786
Other ..................... 330,839 55,720
---------- --------
Total Assets ....... $1,694,411 $829,744
========== ========
Notes payable ............ $ - $275,000
Notes payable parent ..... 584,566
Accrued expenses .......... 64,516 409,409
---------- --------
Total Liabilities .. 649,082 684,409
---------- --------
Equity .................... 1,001,000 1,000
Retained earnings ......... 44,329 144,335
---------- --------
Total equity ....... 1,045,329 145,335
---------- --------
Total Liabilities and Shareholders
equity .................. $1,694,411 $829,744
========== ========
The statements of operations of Media (1) for the period commencing with the
Company's acquisition of Media from May 30, 1996 to December 31, 1996; (2) for
the five month period ended May 29, 1996, (3) for the fiscal year ended December
31, 1995 and (4) for the period from inception (August 23, 1994) to December 31,
1994, respectively, are as follows:
SEVEN MONTHS ENDED FIVE MONTHS ENDED YEAR ENDED PERIOD ENDED
------------------- ------------------ ------------ ------------
DECEMBER 31, MAY 29, DECEMBER 31, DECEMBER 31,
------------------- ------------------ ------------ ------------
1996 1996 1995 1994
------------------- ------------------ ------------ ------------
STATEMENT OF OPERATIONS
-----------------------
Advertising revenue $1,095,346 $671,148 $1,542,013 $227,756
Cost of services 499,135 283,891 483,721 83,341
---------- -------- ---------- --------
Gross margin 596,211 387,257 1,058,292 144,415
Other operating expenses 659,211 455,278 829,293 126,036
---------- -------- ---------- --------
Income (loss) before taxes (63,000) (68,021) 228,999 18,379
Income taxes - (14,999) 103,043 -
---------- -------- ---------- --------
Net income (Loss) $ (63,000) $(53,022) $ 125,956 $ 18,379
========== ======== ========== ========
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(4) INVESTMENT IN UNCONSOLIDATED SUBSIDIARY (CONTINUED)
On July 25, 1996, Media purchased all of the assets of See-Level Management,
Inc. and See-Level Advertising, Inc. (consisting of 450 taxicab rooftop
advertising display units and certain contracts for advertising and fleet
rental) for $700,000. In addition, the owners of these entities entered into
noncompete and consulting agreements with Media for a period of 2.5 years.
During 1996 the Company contributed $1,000,000 in capital to Media to fund this
purchase.
(5) NOTES PAYABLE TO BANKS AND DEMAND NOTES
Short-term borrowings consisted of the following at:
DECEMBER 31,
--------------
DESCRIPTION 1996
----------- -----------
Revolving Credit Agreements.. $94,450,000
Term Loan Agreement ........ 2,000,000
-----------
Total ...................... $96,450,000
===========
Borrowings under these agreements are secured by all assets of the Company.
Revolving Credit Agreements
On March 27, 1992 (and as subsequently amended), MFC entered into a committed
revolving credit agreement (the Revolver) with a group of banks. MFC extended
the Revolver until June 30, 1997 at an aggregate credit commitment amount of
$85,000,000 pursuant to the Renewal and Extension Agreement dated June 28, 1996.
The Revolver may be extended annually thereafter upon the option of the
participating banks and acceptance by MFC. Should any participating bank not
extend its committed amount, the Revolver agreement provides that each bank
shall extend a term loan equal to its share of the principal amount outstanding
of the revolving credit note. Maturity of the term note shall be the earlier of
two years or any other date on which it becomes payable in accordance with the
Revolver agreement. Interest and principal payments are paid monthly. Interest
is calculated monthly at either the bank's prime rate or a rate based on the
adjusted London Interbank Offered Rate of interest (LIBOR) at the option of MFC.
Substantially all promissory notes evidencing MFC's investments are held by a
bank, as collateral agent under the agreement. MFC is required to pay an annual
facility fee of 1/4% on March 31, 1997 on the Revolver aggregate commitment.
Outstanding borrowings under the Revolver were $77,550,000 at December 31, 1996,
at weighted average interest rate of 7.1%. MFC is required under the Revolver to
maintain minimum tangible net assets of $19,000,000 and certain financial
ratios, as defined therein. The Revolver agreement contains other restrictive
covenants, including a limitation of $500,000 for capital expenditures. At
December 31, 1996, MFC was in compliance with all its terms.
Edwards has $15,000,000 in lines of credit with five banks. Interest is
charged at Edwards' option, at either the lenders' prime rate or at a rate based
on the adjusted LIBOR. The amount of borrowings outstanding under the lines of
credit was $12,450,000 at December 31, 1996, at a weighted average interest rate
of 6.8%. Edwards is required to maintain under a promissory note agreement with
two of the five banks, a minimum tangible net-worth of $8,750,000; a minimum
tangible net worth plus subordinated debt of $32,000,000 and certain financial
ratios, as defined therein. At December 31, 1996, Edwards was in compliance with
all its terms.
Under an agreement with the SBA, Edwards is restricted from borrowing more
than $12,700,000 in bank debt without the prior approval of the SBA. In
addition, all bank indebtedness is senior to SBA-guaranteed indebtedness
pursuant to the SBA rules and regulations.
On December 1, 1996, Medallion Financial Corp. entered into a revolving
credit agreement with a bank. The agreement provides for short-term borrowings
up to $5,000,000. The revolving credit borrowings, at the option of Medallion
Financial Corp. are at the bank's prime rate or at a rate based on the adjusted
LIBOR. Medallion Financial Corp. is required to pay a facility fee of 1/4% of
the commitment. Outstanding borrowings under this agreement was $4,450,000 at
December 31, 1996, at a weighted average interest rate of 6.84%.
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(5) NOTES PAYABLE TO BANKS AND DEMAND NOTES (CONTINUED)
The weighted average interest rate for the Company's outstanding borrowings at
December 31, 1996 was 6.9%. During the seven month period ended December 31,
1996, the Company's weighted average borrowings were $82,980,000 with a weighted
average interest rate of 7.5%. The maximum outstanding borrowings of the Company
were $94,550,000 at any month end in the seven month period ending December 31,
1996.
Term Loan Agreement
MFC has an existing term loan agreement (Term Loan) with a bank in the amount
of $2,000,000, all of which was outstanding at December 31, 1996. Interest
payments at a fixed rate of 7.5% are due quarterly. The weighted average
interest rate paid on such borrowings was 7.5%, during the seven month period
ended December 31, 1996. The Term Loan matures in July, 1997.
Interest Rate Cap Agreements
On April 7, 1995, MFC entered into three interest rate cap agreements to
reduce the impact of changes in interest rates on its floating rate long-term
debt. These agreements limit the Company's maximum LIBOR exposure on $20,000,000
of MFC's revolving credit facility to 7.5%. The premiums paid under these
agreements were $46,875, $31,000 and $46,687, respectively. The premiums have
been capitalized and are being amortized over the two-year term of the
agreements, which expires on April 7, 1997. The Company is exposed to credit
loss in the event of nonperformance by the counterparties on these interest rate
cap agreements. The Company does not anticipate nonperformance by any of these
parties.
On November 16, 1995, MFC entered into three additional interest rate cap
agreements to reduce the impact of changes in interest rates on its floating
rate long-term debt. These agreements limit the Company's maximum LIBOR exposure
on an additional $20,000,000 of its revolving credit facility to 7.0%. The
premiums paid under these agreements were $13,000, $25,000 and $12,500,
respectively. The premiums have been capitalized and are being amortized over
the two-year terms of the agreements, which expire on November 16, 1997. The
Company is exposed to credit loss in the event of nonperformance by the
counterparties on these interest rate cap agreements. The Company does not
anticipate nonperformance by any of these parties.
(6) SBA DEBENTURES PAYABLE
Outstanding subordinated debentures are as follows at December 31, 1996:
DUE DATE AMOUNT INTEREST RATE
----------------- ----------- --------------------------------
April 1, 1997 $ 1,500,000 8.95%
June 1, 1998 3,000,000 9.80
June 1, 2002 5,640,000 5.00 (until June 1, 1997 and 8.00%
September 1, 2002 3,500,000 7.15% thereafter)
September 1, 2002 6,050,000 7.15
June 1, 2004 4,600,000 7.80
September 1, 2004 5,100,000 8.20
-----------
$29,390,000
===========
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(6) SBA DEBENTURES PAYABLE (CONTINUED)
The SBA imposes certain restrictions, among others, including transfers of
stock and payments of dividends by its licensees, to which the Company is
subject.
(7) STOCK OPTIONS
The Company has a stock option plan (1996 Stock Option Plan) available to
grant both incentive and nonqualified stock options to employees. The 1996 Stock
Option Plan, which was approved by the Board of Directors and stockholders on
May 22, 1996, provides for the issuance of a maximum of 750,000 shares of common
stock of the Company. The Plan is administered by the Compensation Committee of
the Board of Directors. The option price per share may not be less than the
current market value of the Company's share of common stock on the date the
option is granted. The term and vesting periods of the options are determined by
the Compensation Committee, provided that the maximum term of an option may not
exceed a period of ten years.
A Non-Employee Director Stock Option Plan (the "Director Plan") was also
approved by the Board of Directors and stockholders on May 22, 1996 and by the
Securities and Exchange Commission on December 23, 1996. The Director Plan
provides for the issuance of a maximum of 100,000 shares of common stock of the
Company. The grants of stock options under the Director Plan are automatic as
provided in the Director Plan. The option price per share may not be less than
the current market value of the Company's share of common stock on the date the
option is granted Options granted under the Director Plan are exercisable
annually, as defined in the Director Plan. The term of the options may not
exceed five years. Under the Director Plan, 16,969 shares have been granted as
of December 31, 1996. The options outstanding have an exercie price of $13.75.
The Company records stock compensation in accordance with APB Opinion No. 25
(see Note 2). Had compensation cost for stock options been determined based on
the fair value at the date of grant for awards in 1996, consistent with the
provisions of SFAS No. 123, the Company's net increase in net assets resulting
from operations would have been reduced to the pro forma amounts indicated
below:
Seven month period ended
------------------------
December 31, 1996
-----------------
Net increase in net assets resulting from operations:
As reported $3,720,723
Pro Forma $3,696,480
Net increase in net assets resulting from
operations per share:
As reported $ 0.45
Pro Forma $ 0.45
The following table presents the activity for the stock option program under
the 1996 Stock Option Plan and Director Stock Option Plan for the year ended
December 31, 1996:
Weighted
Number Exercise Price Average
of Options Per Share Exercise Price
---------- -------------- --------------
Outstanding at December 31, 1995 - - -
Granted 218,389 $11.00-$14.375 $11.52
Canceled - - -
Exercised - - -
------- ------------- ------
Outstanding at December 31, 1996 218,389 $11.00-$14.375 $11.52
Options exercisable at
December 31, 1996 7,576 $ 11.00 $11.00
At December 31, 1996, 181,820 of the 218,389 options outstanding have an
exercise price of $11.00 with a weighted average remaining contractual life of
9.4 years. Of these options, 7,576 are exercisable at a weighted average
exercise price of $11.00. The remaining 36,569 options have exercise prices
ranging from $13.75 to $14.375 with a weighted average remaining contractual
life of 4.9 years. None of these options was exercisable at December 31, 1996.
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(7) STOCK OPTIONS (CONTINUED)
The weighted average fair value of options granted during the period ended
December 31, 1996 was $3.21 per share. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants during the period
ended December 31, 1996:
Risk-free interest rate 6.4%
Expected dividend yield 4.6%
Expected life in years 5.8
Expected volatility 36.7%
(8) COMMITMENTS AND CONTINGENCIES
In May 1996, the Company entered into a sub-advisory agreement (the Sub-
Advisory Agreement) with FMC Advisers, Inc. (FMC) in which FMC provides advisory
services to the Company. Under the Sub-Advisory Agreement, the Company pays FMC
a monthly fee for services rendered of $18,750. FMC will regularly consult with
management of the Company with respect to strategic decisions concerning
originations, credit quality assurance, development of financial products,
leverage, funding, geographic and product diversification, the repurchase of
participations, acquisitions, regulatory compliance and marketing. Unless
terminated earlier as described below, the Sub-Advisory Agreement will remain in
effect for a period of two years until May 1998. The term will continue from
year to year thereafter, if approved annually by (i) a majority of the Company's
noninterested directors and (ii) the Board of Directors, or by a majority of the
Company's outstanding voting securities, as defined in the 1940 Act. The Sub-
Advisory Agreement will be terminable without penalty to the Company on 60 days'
written notice by either party or by vote of a majority of the outstanding
voting securities of the Company, and will terminate if assigned by FMC. Two
trusts affiliated with two officers, directors and shareholders of the Company
have agreed to personally assure FMC of payment for the first 48 months of
service under the Sub-Advisory Agreement pursuant to an escrow arrangement under
which they have maintained in escrow common stock of the Company worth 200% of
the advisory fees remaining to be paid by the Company to FMC during the first 48
months of service under the Sub-Advisory Agreement, thereby assuring FMC of the
payment of $900,000 in advisory fees. Advisory fees incurred during the seven
month period ended December 31, 1996 were $131,250.
The Company has employment agreements with certain key officers for a term of
five years. Annually, the employment period will renew for a new five-year term
unless prior to the end of the first year, either the Company or the executive
provides notice to the other party of its intention not to extend the employment
period beyond the current five-year term. In the event of a change in control,
as defined, during the employment period, the agreements provide for severance
compensation to the executive in an amount equal to the balance of the salary,
bonus and value of fringe benefits which the executive would be entitled to
receive for the remainder of the employment period.
In the normal course of business, there are outstanding commitments and
contingent liabilities that are not reflected in the consolidated financial
statements. At December 31, 1996, the Company had unfunded loan commitments of
approximately $3,815,292, which bear interest at rates ranging from 8.75% to
16.0%.
The Company has operating lease agreements for its executive and general
offices expiring in December 1997, as amended. The existing leases call for an
aggregate annual rental of approximately $235,000, subject to certain escalation
clauses. Rent expense for the seven month period ended December 31, 1996 was
$165,002. The Company is currently in the process of evaluating various
alternatives for leased office space. Management does not expect that the
terms of a new lease will have a material impact on rent expense.
The Company and its subsidiaries become defendants to various legal
proceedings arising from the normal course of business. In the opinion of
management based upon the advice of legal counsel, there is no proceeding
pending, or to the knowledge of management threatened, which in the event of an
adverse decision, would result in a material adverse impact in the financial
condition or results of operations of the Company.
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(9) RELATED PARTY TRANSACTIONS
Two directors, officers and shareholders of Medallion Financial Corp. are also
directors of wholly-owned subsidiaries, MFC, Edwards, TCC and Media. Officer
salaries are set by the Board of Directors. Directors who are not officers
receive an annual fee of $10,000 plus a fee of $2,000 per meeting. Directors who
are members of the committees of the Board receive $1,000 for each meeting
attended. Total director fees and officer compensation were $37,542 and
$588,065, respectively, during the period ended December 31, 1996.
(10) SHAREHOLDERS' EQUITY
On May 29, 1996, the Company issued and sold 5,750,000 shares at $11.00 per
share in an Offering and split the existing 200 shares of common stock
outstanding into 2,500,000 shares. All references to the amount and number of
shares outstanding in the accompanying financial statements have been restated
to reflect the stock split. The proceeds from the Offering were used to purchase
all of the outstanding stock of Tri-Magna and TCC and acquire substantially all
of the assets and assume certain liabilities of Edwards Capital Company. Refer
to Notes (1) and (3) for a discussion of the Offering and the Acquisitions.
In 1995, MFC and TCC repurchased and retired all of their previously issued 3%
preferred stock from the SBA at a discount of 65% ($8,201,266) for an aggregate
price of $4,416,067, under the SBA preferred stock repurchase agreements. Under
the repurchase agreements, the SBA retains a liquidating interest in the amount
of the discount on the repurchase, which expires on a straight line basis over
five years or on a later date if an event of default, as defined in the
agreements, has occurred and such default has not been cured or waived. Upon the
occurrence of any event of default, the SBA's liquidating interest will become
fixed at the level immediately preceding the event of default and will not
accrete further until the default is cured or waived. In the event of MFC's or
TCC's liquidation, the unexpired portion ($4,580,561 at December 31, 1996) of
the liquidating interest becomes immediately payable to the SBA. The Company
does not anticipate the occurrence of an event that would result in any amount
being due to the SBA.
In accordance with Statement of Position 93-2, ''Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies,'' $292,999 has been reclassified from
accumulated undistributed income to capital in excess of par value on the
accompanying consolidated balance sheet. This reclassification has no impact on
the Company's total shareholders' equity and is designed to present the
Company's capital accounts on a tax basis.
(11) OTHER OPERATING EXPENSES
The major components of other operating expenses for the period ended
December 31, 1996 were:
Office expenses $254,715
Insurance 254,440
Rent 165,002
Other 205,030
--------
$879,187
========
(12) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Investment Plan (the "401(k) Plan") which covers all
full and part-time employees of the Company who have attained the age of 21 and
have a minimum of one-half year of service. Under the 401(k) Plan, an employee
may elect to defer not less than 1% and no more than 15% of the total annual
compensation that would otherwise be paid to the employee, provided, however,
that employees' contributions may not exceed certain maximum amounts determined
under the Internal Revenue Code. Employee contributions are invested in various
mutual funds, according to the directions of the employee. The Company intends
to provide for employer matching contributions, at the discretion of the Board
of Directors, in 1997.
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, ''Disclosures About Fair Value of Financial Instruments,''
requires disclosure of fair value information about certain financial
instruments, whether assets, liabilities or off-balance sheet commitments, if
practicable. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments. Fair value estimates which
were derived from broker quotes cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument.
In addition, SFAS 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
(a) Investments As described in Note 2, the carrying amount of investments is
the estimated fair value of such investments.
(b) Notes payable to banks and demand notes-Due to the short-term nature of
these instruments, the carrying amount approximates fair value.
(c) Commitments to Extend Credit-The fair value of commitments to extend credit
is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also includes a consideration of the difference
between the current levels of interest rates and the committed rates. At
December 31, 1996, the estimated fair value of these off-balance sheet
instruments was not material.
(d) Interest Rate Cap Agreements-The fair value is estimated based on market
prices or dealer quotes. At December 31, 1996, the estimated fair value of
these off-balance sheet instruments was not material.
(e) Debentures Payable to SBA-The fair value of the debentures payable to SBA is
estimated based upon current market interest rates for similar debt.
DECEMBER 31, 1996
--------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
Financial Assets:
Investments................................. $176,493,888 $176,493,888
Cash........................................ 1,664,603 1,664,603
Financial Liabilities:
Notes payable to banks and demand notes..... 96,450,000 96,450,000
SBA debentures payable...................... 29,390,000 29,319,500
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(14) SUBSEQUENT EVENTS
On January 28, 1997, the Company increased the aggregate commitment of MFC's
Revolver from $85,000,000 to $105,000,000.
On February 11, 1997, the SBA approved an amendment to the charters of MFC and
TCC, converting these subsidiaries from an SSBIC to an SBIC. The conversion
eliminates the restriction for MFC and TCC to lend only to individuals as being
socially or economically disadvantaged, or to small business concerns that are
at least 50% owned by such persons as defined in the SBIA, subject to certain
restrictions.
Effective January 1, 1997, the Company decided to merge all of the assets and
liabilities of TCC into MFC subject to the approval of the SBA. The Company
expects to complete the merger by the end of the second quarter of 1997.
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
Number of Balance
Loans Outstanding Rate
----- ----------- ----
1 $ 60,754 5.000%
11 548,641 7.000-7.700
19 3,150,172 8.000-8.200
18 1,901,132 8.250
7 487,074 8.300
12 758,448 8.370
6 304,843 8.400-8.440
24 3,205,029 8.500
9 689,313 8.600
10 892,704 8.625
13 376,064 8.700
49 5,379,874 8.750
12 672,116 8.720
108 11,322,414 9.000
2 235,992 9.120
157 15,042,298 9.250
5 1,036,661 9.320-9.380
248 26,661,479 9.500
1 170,000 9.600
94 9,208,547 9.750
29 2,789,612 9.800-9.900
207 18,467,948 10.000
76 6,640,204 10.250
5 462,805 10.370-10.3750
47 4,855,909 10.500
30 2,592,974 10.750
1 50,983 10.900
164 10,290,809 11.000
17 1,483,897 11.250-11.900
107 5,910,504 12.000
11 1,014,949 12.500
3 351,109 12.750-12.950
254 10,113,883 13.000
4 633,040 13.250
56 2,914,663 13.500
5 128,772 13.550-13.750
166 8,044,479 14.000
11 176,089 14.050-14.300
36 3,064,635 14.500
11 354,145 14.750-14.950
262 11,806,060 15.000
11 610,583 15.200-15.250
9 590,210 15.500
8 511,816 15.750-15.950
15 745,357 16.000
5 160,939 16.500
4 202,387 16.640-16.950
1 24,750 17.000
3 193,142 18.000
6 205,193 19.000
----- ------------
Total 2,370 $177,495,401 10.800%
===== ---
Plus: Origination costs, net 567,204
------------
Investments at cost 178,062,605
Less: Unrealized depreciation on
investments (1,568,717)
------------
Investments at directors' valuation $176,493,888
============
The accompanying notes are an integral part of these financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Edwards Capital Company:
We have audited the accompanying balance sheet of Edwards Capital Company (a
New York limited partnership), including the schedule of loans as of May 29,
1996 and December 31, 1995, and the related statements of operations, changes in
partners' capital and cash flows for the five month period ended May 29, 1996
and the year ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As explained in Note 1, the financial statements include finance receivables
valued at $44,490,149 (97% of total assets) as of May 29, 1996 and at
$43,778,791 (97% of total assets) as of December 31, 1995, the values of which
have been estimated by the General Partner in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values that
would have been used had a ready market for the loans existed, and the
differences could be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Edwards Capital Company as of
May 29, 1996 and December 31, 1995 and, the results of its operations and its
cash flows for the five month period ended May 29, 1996 and year ended December
31, 1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 26, 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of
Edwards Capital Company:
We have audited the accompanying balance sheet of Edwards Capital Company (a
limited partnership) as of December 31, 1994, and the related statements of
operations, changes in partners' capital and cash flows for each of the two
years in the period ended December 31, 1994. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Edwards Capital Company as of
December 31, 1994, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
/s/ Friedman, Alpren & Green LLP
New York, New York
January 28, 1995
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
ASSETS
DECEMBER 31, MAY 29,
------------ ------------
1995 1996
------------ ------------
Cash .................................. $ 115,571 $ 437,886
Finance Receivables:
Medallions ........................... 43,177,063 43,920,609
Other, less allowance for doubtful
accounts of $20,000 in 1995 and 1996.. 601,728 569,540
Accrued Interest Receivable ........... 396,000 406,817
Deferred Financing Costs, net of
accumulated amortization of $176,967 in
1995 and $200,650 in 1996.............. 353,683 330,000
Property and Equipment, at cost, net
of accumulated depreciation and
amortization of $133,937 in 1995 and
$140,407 in 1996 ..................... 66,826 60,356
Prepaid Expenses and Other Assets ..... 373,116 275,681
----------- -----------
Total Assets ............................ $45,083,987 $46,000,889
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Bank Loans Payable .................... $ 9,850,000 $10,100,000
Subordinated Debentures Payable ....... 24,950,000 24,950,000
Accounts Payable and Accrued Expenses... 1,167,156 1,843,743
----------- -----------
35,967,156 36,893,743
Partners' Capital ..................... 9,116,831 9,107,146
----------- -----------
Total Liabilities and Partners'
Capital .............................. $45,083,987 $46,000,889
=========== ===========
The accompanying notes are an integral part of these financial statements.
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
YEARS ENDED PERIOD ENDED
----------------------- ------------
DECEMBER 31, MAY 29,
----------------------- ------------
1994 1995 1996
----------- ---------- ------------
Revenues:
Interest from finance receivables ..... $4,334,100 $4,316,669 $1,727,102
Other income .......................... 619,716 443,190 129,101
---------- ---------- ----------
Total Revenues ....................... 4,953,816 4,759,859 1,856,203
---------- ---------- ----------
Operating Expenses:
Interest on subordinated debentures ... 2,136,807 1,993,075 818,707
Interest on bank loans ................ 627,700 754,404 279,148
Salaries .............................. 351,715 354,041 123,244
Employee benefits ..................... 35,280 33,236 14,572
Payroll and other taxes ............... 28,576 28,266 14,467
Professional fees ..................... 393,513 204,071 41,437
Legal fees related to the sale of
assets ............................... - - 350,000
Rent .................................. 39,996 39,996 16,342
Office expense ........................ 45,082 42,762 15,204
Computer expense ...................... 48,859 44,642 14,903
Telephone ............................. 9,963 9,685 3,860
Entertainment ......................... 17,378 9,901 2,205
Amortization of deferred financing
costs ................................ 79,118 53,460 23,683
Processing and collection services .... 57,950 42,448 28,689
Depreciation and amortization ......... 22,586 18,292 6,470
New York City unincorporated business
tax .................................. 21,289 40,111 15,610
Reduction in allowance for doubtful
radio loans .......................... (23,415) - -
Sundry ................................ 1,511 4,496 5,847
---------- ---------- ----------
Total Operating Expenses ............. 3,893,908 3,672,886 1,774,388
---------- ---------- ----------
Income Before Extraordinary Charge ... 1,059,908 1,086,973 81,815
Extraordinary Charge -- Premium on
Prepayment of Subordinated Debentures .. 526,287 - -
---------- ---------- ----------
Net Income ........................... $ 533,621 $1,086,973 $ 81,815
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
PERIOD ENDED
-------------
YEARS ENDED DECEMBER 31, MAY 29,
--------------------------- -------------
1994 1995 1996
------------ ------------- -------------
Cumulative Capital Contributions .. $ 7,200,000 $7,200,000 $7,200,000
=========== ========== ==========
SBA Permanent Capital ............. $ 8,400,000 $8,400,000 $8,400,000
=========== ========== ==========
Balance, Beginning of Period ...... $ 9,550,947 $8,576,068 $9,116,831
Net income ..................... 533,621 1,086,973 81,815
Distributions --
General Partner ............. (16,000) - -
Limited Partners ............... (1,492,500) (546,210) (91,500)
----------- ---------- ----------
Balance, end of period ............ $ 8,576,068 $9,116,831 $9,107,146
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
YEARS ENDED PERIOD ENDED
---------------------------- -------------
DECEMBER 31, MAY 29,
---------------------------- -------------
1994 1995 1996
------------- ------------- -------------
Cash flows from operating activities:
Net income............................. $ 533,621 $ 1,086,973 $ 81,815
Adjustments to reconcile net income to
net cash provided by operating
activities --
Extraordinary charge.................. 526,287 - -
Amortization of deferred financing
costs................................ 79,118 53,460 23,683
Depreciation and amortization......... 22,586 18,292 6,470
Reduction in allowance for doubtful
radio loans.......................... (23,415) - -
Changes in assets and liabilities --
Accrued interest receivable.......... (339) (67,000) (10,817)
Prepaid expenses and other assets.... 91,806 (247,648) 97,435
Accounts payable and accrued
expenses............................ (21,710) 118,697 676,587
Deferred income...................... (5,332) - -
------------ ------------ -----------
Net cash provided by operating
activities......................... 1,202,622 962,774 875,173
Cash flows from investing activities:
Origination of new finance receivables. (15,573,645) (8,348,655) (2,764,191)
Repayments of finance receivables...... 16,228,136 8,036,706 2,052,833
Collection of notes receivable......... 272,546 - -
Purchase of property and equipment..... ( 5,041) (9,769) -
------------ ------------ -----------
Net cash (used in) provided by
investing activities............... 921,996 (321,718) (711,358)
Cash flows from financing activities:
Premium on prepayment of subordinated
debentures............................ (526,287) - -
Proceeds from bank loans............... 22,425,000 11,925,000 5,900,000
Principal payments of bank loans....... (22,325,000) (12,075,000) (5,650,000)
Deferred financing costs............... (254,625) - -
Distributions to partners --
General partner....................... (16,000) - -
Limited partners...................... (1,492,500) (546,210) (91,500)
------------ ------------ -----------
Net cash used in financing
activities......................... (2,189,412) (696,210) 158,500
------------ ------------ -----------
Net increase (decrease) in cash......... (64,794) (55,154) 322,315
Cash, beginning of period............... 235,519 170,725 115,571
------------ ------------ -----------
Cash, end of period..................... $ 170,725 $ 115,571 $ 437,886
============ ============ ===========
Supplemental disclosure of cash flow
information:
Interest paid.......................... $ 2,885,512 $ 2,699,890 $ 974,982
============ ============ ===========
New York City unincorporated business
tax................................... $ 27,939 $ 14,058 $ 15,448
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
MAY 29, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Edwards Capital Company (the Partnership) is organized under the laws of the
State of New York as a Small Business Investment Company, subject to the rules
and regulations of the Federal Small Business Administration (the SBA). The
Partnership's principal activity is the financing of loans collateralized by New
York City taxicab medallions.
The Partnership has one General Partner and six classes of limited partners.
Allocations of income or loss and cash distributions are based on formulas, as
set forth in the Partnership Agreement. The formulas utilize the average prime
rate for the year, net cash receipts, as defined, and the weighted average
capital for each class of partner.
On May 29, 1996, substantially all assets and certain liabilities of the
Partnership were acquired by Medallion Financial Corp., pursuant to an asset
purchase agreement dated February 21, 1996, for a purchase price of $15,624,995.
The balance sheet as of May 29, 1996 and statements of operations, changes in
partners' capital and cash flows for the period ended May 29, 1996 included the
accounts of the Partnership prior to the consummation of the sale to Medallion
Financial Corp. on May 29, 1996.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Finance Receivables and the Allowance for Doubtful Accounts
Finance receivables, net of participation sold to others and an allowance for
doubtful accounts, are stated at fair value. The fair value of such loans is
determined in good faith by the General Partner. The allowance for doubtful
accounts is maintained at a level that, in the General Partner's judgment, is
adequate to absorb losses inherent to the portfolio.
Finance receivables collateralized by New York City taxicab medallions are
considered fully collectible, as the value of the collateral is deemed
sufficient to assure full collection in the event of foreclosure. At December
31, 1995 and May 29, 1996, there is an allowance for doubtful accounts on
receivables collateralized by radio rights, as the value of the collateral on
certain loans is deemed insufficient.
The allowance is reviewed and adjusted periodically by the General Partner on
the basis of available information, including the fair value of the underlying
collateral; individual credit risks; past loss experience; the volume,
composition and growth of the portfolio; and current and projected financial and
economic conditions.
Interest is continued to be recognized as income on all finance receivables
that are past due, as to principal and interest, when the value of the
underlying collateral is deemed sufficient to assure full collection of the
principal and associated interest in the event of foreclosure. At December 31,
1995 and May 29, 1996, the value of the underlying collateral on finance
receivables was deemed adequate.
The principal amount of loans serviced for others at December 31, 1995 and May
29, 1996, amounted to approximately $30,995,006 and $ 34,084,479, respectively.
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Financing Costs
Costs incurred in connection with obtaining subordinated debenture financing
have been deferred and are being amortized on the effective interest rate method
over the terms of the loans.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed on an
accelerated method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the estimated useful life of the asset or, if
less, the life of the lease.
Origination Fees
Origination fees (included in other income) for loans are deferred and
amortized on a straight-line basis over the terms of the loans. At December 31,
1995, loan origination fees were fully amortized.
Income Taxes
The Partnership is not a taxpaying entity for income tax purposes, and
accordingly, no provision has been made for income taxes. The partners'
allocable shares of the Partnership's taxable income or loss are reportable on
their income tax returns. A provision is made for New York City unincorporated
business tax.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.
(2) FINANCE RECEIVABLES
Finance receivables are interest-bearing loans that are secured by mortgages
collateralized by New York City taxicab medallion rights, taxicabs or radio
group rights, and the personal guarantees of individuals or stockholders of
corporate borrowers.
Maximum original terms of finance receivables at December 31, 1995 and May 29,
1996 are as follows:
(ROUNDED TO 000'S)
DECEMBER 31, MAY 29,
------------ -----------
1995 1996
------------ -----------
60 months $42,307,000 $39,961,000
84 months 1,027,000 754,000
120 months 465,000 3,795,000
----------- -----------
$43,799,000 $44,510,000
=========== ===========
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(2) FINANCE RECEIVABLES (CONTINUED)
Contractual maturities of finance receivables at December 31, 1995 and May 29,
1996 are approximately as follows:
DECEMBER 31, 1995 MAY 29, 1996
----------------- ------------
1996 $ 2,623,000 $ 374,000
1997 4,482,000 993,000
1998 7,046,000 3,098,000
1999 15,329,000 13,582,000
2000 11,450,000 14,591,000
Thereafter 2,869,000 11,872,000
----------- -----------
$43,799,000 $44,510,000
=========== ===========
Actual maturities may differ, as loans are often paid in advance of their
maturities, and loans with participation sold to others contain subordinate
prepayment provisions. During the year ended December 31, 1995 and the period
ended May 29, 1996, the collections of loans and prepayments totaled
approximately $8,037,000 and $2,053,000, respectively.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1995 and May
29, 1996:
DECEMBER 31, MAY 29,
1995 1996
------------ ---------
Furniture and Equipment............ $162,700 $162,700
Leasehold Improvements............. 38,063 38,063
-------- --------
200,763 200,763
Less -- Accumulated
Depreciation and Amortization..... 133,937 140,407
-------- --------
$ 66,826 $ 60,356
======== ========
(4) BANK LOANS PAYABLE
The Partnership has lines of credit with four banks totaling $12,500,000, of
which $9,850,000 and $10,100,000 were drawn upon at December 31, 1995 and May
29, 1996, respectively. Interest is charged at the borrower's option, at either
the lender's prime rate or at a rate based on the adjusted London Inter-bank
Offered Rate (LIBOR). Under an agreement with the SBA, Edwards was restricted
from borrowing more than $11.5 million in bank debt without the prior approval
of the SBA.
The average amount of borrowings for the year ended December 31, 1995 and for
the period ended May 29, 1996 was $9,585,000 and $ 9,997,000, respectively.
The loans are secured by all of the Partnership's assets. Under an inter-
creditor agreement, all banks share in the collateral. In addition, all bank
indebtedness is senior to SBA-guaranteed indebtedness pursuant to SBA rules and
regulations.
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(5) SUBORDINATED DEBENTURES PAYABLE
Outstanding subordinated debentures, which are guaranteed by the SBA, are as
follows at December 31, 1995 and May 29, 1996:
INTEREST
---------
DUE DATE RATE AMOUNT
----------------- --------- -----------
September 1, 1996 8.75% $ 1,200,000
April 1, 1997 8.95 1,500,000
June 1, 1998 9.80 3,000,000
September 1, 2002 7.15 3,500,000
September 1, 2002 7.15 6,050,000
June 1, 2004 7.80 4,600,000
September 1, 2004 8.20 5,100,000
-----------
$24,950,000
===========
(6) RELATED PARTY TRANSACTIONS
The law firm of Herrick, Feinstein LLP provides legal services to the
Partnership and subleases office space to it under a lease that commenced on
June 1, 1992 and expires on April 30, 1997. The lease requires minimum annual
rental payments of $40,000 and additional rentals based on increases in real
estate taxes and operating expenses over base period amounts. It is cancelable
by the firm upon giving 60 days' notice. Certain principals of the firm are
limited partners of the Partnership and are shareholders of the corporate
General Partner of the Partnership.
Rent expense and legal fees paid and accrued to Herrick, Feinstein LLP for the
years ended December 31, 1994, 1995 and period ended May 29, 1996 are as
follows:
PERIOD ENDED
------------
YEARS ENDED DECEMBER 31, MAY 29,
------------------------- ------------
1994 1995 1996,
----------- ------------ ------------
Rent expense $ 39,996 $ 39,996 $16,342
Legal fees 288,985 92,501 9,926
-------- -------- -------
$328,981 $132,497 $26,268
======== ======== =======
During the year ended December 31, 1995 and the period ended May 29, 1996,
legal fees of $225,000 and $125,000, respectively were incurred and accrued to
Herrick, Feinstein in connection with the sale of assets by the Partnership to
Medallion Financial Corp. These costs were charged to operations on May 29,
1996.
(7) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, there are outstanding commitments and
contingent liabilities that are not reflected in the financial statements.
At December 31, 1995 and May 29, 1996, the Partnership had an operating lease
for office space which expires on April 30, 1997 (Note 6).
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
There are lawsuits pending against the Partnership in the normal course of
business. Based on its review of current litigation and discussions with legal
counsel, management does not expect that the resolution of such matters will
have a material adverse effect on the Partnership's financial condition or
results of operations.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of fair value information about certain financial instruments,
whether or not recognized on the balance sheet. In addition, SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Therefore, the aggregate fair value amounts presented
do not purport to represent and should not be considered representative of the
underlying market or franchise value of the Partnership. The methods and
assumptions used to estimate the fair value of each class of the financial
instruments are described below:
Finance Receivables -- As described in Note 1, the carrying amount of
finance receivables is the estimated fair value of such loans.
Subordinated Debentures Payable to SBA -- The fair value of the debentures
payable to SBA is estimated based upon current market interest rates for similar
debt.
Banks Loans Payable -- Due to the short-term nature of these instruments,
the carrying amount approximates fair value.
The carrying amounts and estimated fair values of the Partnership's financial
instruments are as follows:
MAY 29, 1996
----------------------------
CARRYING AMOUNT FAIR VALUE
--------------- -----------
Financial assets
Finance receivables. $44,490,149 $44,490,149
Financial liabilities
Subordinated debentures payable 24,950,000 24,950,000
Bank loans payable 10,100,000 10,100,000
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS
MAY 29, 1996
The distribution of loans at May 29, 1996 by rate of interest is as follows:
NUMBER BALANCE INTEREST
------ ------------- ---------
OF LOANS OUTSTANDING RATE
-------- ------------- ---------
9 $ 532,000 7.70%
5 200,000 8.00
2 300,988 8.20
12 800,000 8.25
13 722,000 8.38
6 239,000 8.40
5 214,473 8.44
4 184,000 8.50
4 161,200 8.60
13 375,000 8.70
15 974,750 8.75
9 507,500 8.88
51 3,485,039 9.00
2 239,768 9.13
15 2,028,924 9.25
2 265,658 9.39
83 8,876,722 9.60
3 789,656 9.63
62 7,584,689 9.75
3 214,887 9.80
1 18,125 9.88
19 2,602,540 9.90
50 6,464,952 10.00
29 3,636,894 10.25
4 476,062 10.38
6 618,236 10.50
9 736,561 11.00
2 185,620 11.25
2 295,394 11.50
2 144,062 11.75
2 363,586 12.00
1 2,033 12.50
2 117,611 13.25
1 36,910 13.50
1 58,196 13.55
1 12,966 14.00
2 44,147 15.00
--- -----------
452 $44,510,149 9.58%
===
Less: Allowance for
Doubtful Accounts on
Radio Loans........... (20,000)
-----------
$44,490,149
===========
EDWARDS CAPITAL COMPANY
========================
(A LIMITED PARTNERSHIP)
SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS
DECEMBER 31, 1995
The distribution of loans at December 31, 1995 by rate of interest is as
follows:
NUMBER BALANCE INTEREST
------ ------------ ---------
OF LOANS OUTSTANDING RATE
-------- ------------ ---------
1 $ 570,207 7.820%
17 1,132,000 8.250
6 239,000 8.300
8 392,000 8.375
7 515,461 8.440
4 200,000 8.490
14 475,750 8.500
4 161,200 8.600
2 368,000 8.750
1 605,265 8.780
9 507,500 8.875
49 2,729,873 9.000
12 746,361 9.125
15 1,957,713 9.250
2 280,012 9.385
65 6,982,190 9.500
6 447,920 9.600
3 793,091 9.625
52 7,336,160 9.750
2 168,256 9.800
15 1,858,397 9.900
49 6,225,055 10.000
41 5,241,320 10.250
5 600,951 10.375
10 862,401 10.500
2 122,266 10.750
12 862,662 11.000
3 191,531 11.250
2 297,291 11.500
4 256,300 11.750
6 373,899 12.000
1 4,110 12.500
2 125,942 13.250
1 36,910 13.500
1 58,196 13.550
1 14,831 14.000
2 11,874 14.500
2 46,896 15.000
--- ----------- ------
438 $43,798,791 9.695%
===
Less Allowance for
Doubtful Accounts on
Radio Loans........... (20,000)
-----------
$43,778,791
===========
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Tri-Magna Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Tri-Magna
Corporation (a Delaware corporation) and subsidiaries (collectively referred to
as the Company) as of May 29, 1996 and December 31, 1995, including the
consolidated schedules of investments as of May 29, 1996 and December 31, 1995,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the five-month period ended May 29, 1996 and each of the two
years in the period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As explained in Note 2, the consolidated financial statements include loans
receivable valued at $95,621,617 (97% of total assets) and at $96,046,416 (96%
of total assets) as of May 29, 1996 and December 31, 1995, respectively, whose
values have been estimated by the Board of Directors in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values that
would have been used had a ready market for the loans existed, and the
differences could be material.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tri-Magna
Corporation and subsidiaries as of May 29, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the five-month period ended
May 29, 1996 and each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 26, 1997
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MAY 29,
------------- -------------
1995 1996
------------- -------------
ASSETS
Investments (Note 2).................... $96,956,416 $96,531,617
Less unrealized depreciation on
investments (Note 6).................. (910,000) (910,000)
----------- -----------
96,046,416 95,621,617
Investment in unconsolidated
subsidiary (Note 2).................... 145,335 92,313
Cash.................................... 1,177,166 624,617
Accrued interest receivable............. 844,350 870,073
Furniture and fixtures, net............. 87,925 79,124
Other assets............................ 1,486,974 1,316,933
----------- -----------
Total Assets............................ $99,788,166 $98,604,677
=========== ===========
LIABILITIES
Notes payable to banks and demand
notes (Note 3)......................... $80,294,900 $79,394,900
Accounts payable and accrued expenses... 1,290,267 1,360,570
Dividends payable....................... - 542,012
Accrued interest payable................ 889,147 818,560
----------- -----------
Total Liabilities....................... 82,474,314 82,116,042
----------- -----------
Commitments and Contingencies (Note 9)
Shareholders' Equity (Notes 4 and 5)
Common stock (1,000,000 shares of $.01
par value stock authorized,
668,900 shares outstanding at
December 31, 1995 and May 29, 1996)... 6,689 6,689
Capital in excess of par value.......... 10,594,241 10,567,267
Accumulated undistributed income (loss). 710,822 (87,421)
----------- -----------
11,311,752 10,486,535
Restricted capital surplus.............. 6,002,100 6,002,100
----------- -----------
Total Shareholders' Equity.............. 17,313,852 16,488,635
----------- -----------
Total Liabilities and Shareholders'
Equity................................. $99,788,166 $98,604,677
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED PERIOD ENDED
-------------------------- -------------
DECEMBER 31, MAY 29,
-------------------------- -------------
1994 1995 1996
------------ ------------ -------------
Investment Income
Interest on investments................. $8,820,273 $9,802,560 $4,423,396
---------- ---------- ----------
Total Investment Income................ 8,820,273 9,802,560 4,423,396
---------- ---------- ----------
Interest Expense
Interest on SBA debentures.............. 974,105 780,254 -
Interest on bank debt (Note 3).......... 3,781,910 5,253,924 2,516,914
---------- ---------- ----------
Total Interest Expense................. 4,756,015 6,034,178 2,516,914
---------- ---------- ----------
Net Interest Income..................... 4,064,258 3,768,382 1,906,482
---------- ---------- ----------
Non-Interest Income
Equity in earnings(losses) of
unconsolidated subsidiary (Note 2)..... 18,379 125,956 (53,022)
Other income............................ 519,030 446,209 148,125
---------- ---------- ----------
Total Non-Interest Income.............. 537,409 572,165 95,103
---------- ---------- ----------
Expenses
Administration and advisory fees........ 33,905 13,149 3,671
Legal and accounting fees............... 367,484 344,311 144,562
Directors' fee (Note 8)................. 76,500 46,000 15,022
Officers' and employees' salaries....... 1,028,627 1,086,569 501,063
Employee benefit plans (Note 7)......... 136,000 70,008 44,000
Merger related costs (Note 5)........... - - 584,000
Other operating expenses................ 1,057,797 1,054,757 524,242
---------- ---------- ----------
Total Expenses......................... 2,700,313 2,614,794 1,816,560
---------- ---------- ----------
Dividends paid on minority interest..... 277,020 207,774 -
---------- ---------- ----------
Net Investment Income................... 1,624,334 1,517,979 185,025
---------- ---------- ----------
Realized and Unrealized Gain (Loss) on
Investments
Realized gain (loss) on investments
(Note 6)............................... (21,938) 61,194 -
Change in unrealized depreciation
(Note 6)............................... 58,000 (140,000) -
---------- ---------- ----------
Net Realized and Unrealized Gain
(Loss) on Investments.................. 36,062 (78,806) -
---------- ---------- ----------
Net Increase in Net Assets resulting
from Operations......................... $1,660,396 $1,439,173 $ 185,025
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SHARES OF CAPITAL ACCUMULATED RESTRICTED
------------ -------------- ------------- -------------- -----------
COMMON STOCK COMMON STOCK IN EXCESS UNDISTRIBUTED CAPITAL
------------ -------------- ------------- -------------- -----------
OUTSTANDING $.01 PAR VALUE OF PAR VALUE INCOME (LOSS) SURPLUS
------------ -------------- ------------- -------------- -----------
Balance at December 31, 1993....... 665,900 $6,659 $11,227,341 $ (399,918) $ --
Dividends paid, common........... -- -- -- (1,668,050) --
Distributable net income.......... -- -- -- 1,602,396 --
Sale of common stock.............. 3,000 30 49,470 -- --
Change in unrealized
depreciation..................... -- -- -- 58,000 --
-------- ------ ----------- ----------- ----------
Balance at December 31, 1994....... 668,900 $6,689 $11,276,811 $ (407,572) $ --
------- ------ ----------- ----------- ----------
Dividends declared,
common .......................... -- -- -- (1,003,349) --
Distributable net income.......... -- -- -- 1,579,173 --
SOP 93-2 Cumulative
reclassification
(Note 5)......................... -- -- (682,570) 682,570 --
Gain on minority interest
buyback (Note 4)................. -- -- -- -- 6,002,100
Change in unrealized
depreciation..................... -- -- -- (140,000) --
------- ------ ----------- ----------- ----------
Balance at December 31, 1995....... 668,900 $6,689 $10,594,241 $ 710,822 $6,002,100
------- ------ ----------- ----------- ----------
Dividends declared,
common (Note 5).................. -- -- -- (1,010,242) --
Distributable net
income........................... -- -- -- 185,025 --
SOP 93-2 reclassification
(Note 5)......................... -- -- (26,974) 26,974 --
Change in unrealized
depreciation..................... -- -- -- -- --
------- ------ ----------- ----------- ----------
Balance at May 29, 1996............ 668,900 $6,689 $10,567,267 $ (87,421) $6,002,100
======= ====== =========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED PERIOD ENDED
---------------------------- -------------
DECEMBER 31, MAY 29,
---------------------------- -------------
1994 1995 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Increase in Net Assets resulting
from Operations ...................... $ 1,660,396 $ 1,439,173 $ 185,025
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization.......... 64,848 43,594 19,929
Change in unrealized depreciation...... (58,000) 140,000 -
Realized loss (gain) on investments.... 21,938 (61,194) -
(Increase) decrease in investment in
unconsolidated subsidiary............. (19,379) (125,956) 53,022
(Increase) decrease in accrued interest
receivable............................ (64,697) (66,252) (25,723)
Decrease (increase) in other assets.... (99,434) (794,721) 165,111
Increase (decrease) in accounts
payable and accrued expenses.......... (90,565) 1,036,580 70,303
Increase (decrease) in dividends
payable minority interest............. (69,255) (69,255) -
Increase (decrease) in accrued
interest payable...................... 143,725 257,330 (70,587)
------------ ------------ ------------
Net cash provided by operating
activities........................... 1,489,577 1,799,299 397,080
Cash Flows from Investing Activities:
Increase in investments................ (33,103,213) (30,667,520) (7,252,488)
Proceeds from investment maturities
and terminations...................... 24,753,080 24,114,690 7,677,287
Proceeds from liquidation of other
assets................................ 414,884 144,100 -
Capital expenditures................... (6,991) (16,378) (6,198)
------------ ------------ ------------
Net cash provide by (used for)
investing activities................. (7,942,240) (6,425,108) 418,601
Cash Flows from Financing Activities:
Proceeds from (payments of) notes
payable to banks...................... 8,325,000 21,269,900 (900,000)
Payments of SBA debentures............. - (12,500,000) -
Buyback of minority interest........... - (3,231,900) -
Sale of common stock................... 49,500 - -
Dividends paid on common stock......... (1,668,050) (1,003,349) (468,230)
------------ ------------ ------------
Net cash provided by (used for)
financing activities................. 6,706,450 4,534,651 (1,368,230)
------------ ------------ ------------
Net Increase (Decrease) in Cash......... 253,787 (91,158) (552,549)
Cash, beginning of period............... 1,014,537 1,268,324 1,177,166
------------ ------------ ------------
Cash, end of period..................... $ 1,268,324 $ 1,177,166 $ 624,617
============ ============ ============
Supplemental Information:
Cash paid during the period for
interest (Includes dividends paid
on minority interest) ................ $ 4,958,565 $ 6,053,877 $ 2,587,501
The accompanying notes are an integral part of these consolidated financial
statements.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 29, 1996
(1) ORGANIZATION
On February 3, 1989, Tri-Magna Corporation, a newly formed Delaware
corporation, (referred to as Tri-Magna or the Parent Company) and its
subsidiary, Medallion Funding Corp. (Medallion) entered into an Agreement and
Plan of Share Exchange (the Share Exchange). Tri-Magna and its wholly-owned
subsidiaries Medallion, F.A.P. Holding Corp. (FAP) and Medallion Taxi Media,
Inc. (Media) are collectively referred to as the Company. Under the Share
Exchange, 100 shares of common stock of the Parent Company were exchanged for
each of the outstanding shares of common stock of Medallion. On May 18, 1989,
the shareholders of Medallion voted in favor of the Share Exchange Plan. This
transaction was accounted for as a pooling of interests.
The Parent Company was formed in January 1989 for the purpose of acquiring all
of the outstanding shares of Medallion common stock pursuant to the Share
Exchange. The Parent Company is a closed-end, diversified management investment
company registered under the Investment Company Act of 1940 (the 1940 Act), and
has elected to be treated as a regulated investment company under the Internal
Revenue Code of 1986, as amended.
Medallion was formed in 1979 for the purpose of operating as a Specialized
Small Business Investment Company (SSBIC), licensed, regulated and financed in
part by the U.S. Small Business Administration (SBA). Medallion was granted a
license to operate as a SSBIC by the SBA on June 23, 1980. On February 2, 1982,
Medallion registered as a closed-end, nondiversified investment company under
the 1940 Act.
On June 22, 1992, Medallion established a wholly-owned subsidiary, FAP. This
subsidiary was established for the purpose of acquiring and managing property
purchased in foreclosure from Medallion.
On August 23, 1994, Media, a New York corporation was formed. Media is engaged
in the outdoor media advertising business and is a wholly-owned subsidiary of
Tri-Magna. On May 29, 1996, Tri-Magna was acquired by Medallion Financial
Corp., pursuant to a merger agreement dated December 21, 1995. Under the merger
agreement, all of the Company's outstanding shares of capital stock was canceled
in exchange for $20.00 per share.
The accompanying consolidated financial statements include the accounts of
Tri-Magna and Medallion after elimination of all intercompany amounts. (See Note
2)
The consolidated balance sheet as of May 29, 1996 and consolidated statements
of operations, shareholders' equity and cash flows for the period ended May 29,
1996 include the accounts of Tri-Magna and Medallion prior to the consummation
of the merger with Medallion Financial Corp. on May 29, 1996.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company, which conform with
generally accepted accounting policies and accounting principles and procedures
generally accepted in the investment company industry, include the following:
Investments
Medallion's investments consist primarily of long-term loans to persons
defined by SBA regulations as being socially or economically disadvantaged, or
to entities that are at least 50% owned by such persons. Approximately 68% of
Medallion's loan portfolio at December 31, 1995, and May 29, 1996 have arisen in
connection with the financing of taxicab medallions, taxicabs and related
assets, substantially all in the metropolitan New York area. These loans are
secured by the medallions, taxicabs and related assets and are personally
guaranteed by the borrowers, or in the case of corporations, personally
guaranteed by the owners. The remaining portion of Medallion's portfolio
represents loans to various commercial enterprises, including dry cleaners,
garages, gas stations and laundromats. These loans are secured by various
equipment and/or real estate and are generally guaranteed by the owners, and in
certain cases, by the equipment dealers. These loans are made primarily in the
metropolitan New York City area.
Tri-Magna began funding loans in March, 1995. As of December 31, 1995 and May
29, 1996, Tri-Magna has funded 50 loans totaling $4,272,212 and 51 loans
totaling $4,752,212, respectively. Of these amounts, Tri-Magna participated out
a total of $2,538,721 and $2,922,721, respectively.
Under the 1940 Act, 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 directors take into consideration the financial
condition of the borrower, the adequacy of the collateral, and the relationships
between market rates and portfolio rates. Loans were valued at cost, less
unrealized depreciation of $910,000 at December 31, 1995 and May 29, 1996. The
directors have determined that this valuation approximates fair value.
The principal portion of loans serviced for others by the Company at December
31, 1995 and May 29, 1996 amounted to approximately $15,799,777 and $20,793,093,
respectively.
The Company offsets loan origination fees against related direct loan
origination costs. The net amount is deferred and amortized over the life of the
loan. At December 31, 1995 and May 29, 1996, the net deferred asset totaled
$293,400 and $324,438, respectively. Amortization expense was $22,117, $84,684
and $83,229 for the years ended December 31, 1994 and 1995, and period ended May
29, 1996, respectively.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Unconsolidated Subsidiary
Tri-Magna owns 100% of the outstanding stock of Media. Tri-Magna's investment
in Media is accounted for under the equity method because as a non-investment
company, Media, cannot be consolidated with an investment company, Tri-Magna.
Financial information for Media is summarized as follows:
DECEMBER 31, MAY 29,
------------ -------------
BALANCE SHEET 1995 1996
------------- ------------ -------------
Cash $ -- $110,182
Accounts receivable 214,238 285,696
Equipment, net 559,786 526,846
Other 55,720 36,504
---------- --------
Total Assets $ 829,744 $959,228
========== ========
Notes payable $ 275,000 275,000
Notes payable to parent - 443,651
Accrued expenses 409,409 148,264
---------- --------
Total Liabilities 684,409 866,915
---------- --------
Common stock 1,000 1,000
Retained earnings 144,335 91,313
---------- --------
Total equity 145,335 92,313
---------- --------
Total Liabilities and Shareholders
equity $ 829,744 $959,228
========== ========
PERIOD ENDED YEAR ENDED PERIOD ENDED
------------ ------------ ------------
STATEMENT OF OPERATIONS DECEMBER 31, DECEMBER 31, MAY 29,
----------------------- ------------ ------------ ------------
1994 1995 1996
-------- ---------- --------
Advertising revenue $227,756 $1,542,013 $671,148
Cost of services 83,341 483,721 283,891
-------- ---------- --------
Gross margin 144,415 1,058,292 387,257
Other operating expenses 126,036 829,293 455,278
-------- ---------- --------
Income (loss) before taxes 18,379 228,999 (68,021)
Income taxes ---- 103,043 (14,999)
-------- ---------- --------
Net income (loss) $ 18,379 $ 125,956 $(53,022)
======== ========== ========
On March 8, 1995, Tri-Magna guaranteed a demand loan for Media. At December
31, 1995 and May 29, 1996, $275,000 was outstanding at an interest rate of 2.00%
over prime or (10.50%) and (10.25%) interest rate, respectively. The loan
matured in June 1996 and was paid in full.
Federal Income Taxes
It is the Company's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies, which require the
Company to distribute at least 90% of its investment company taxable income to
its shareholders. Therefore, no provision for federal income tax has been made.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAP and Media have elected to be taxed as regular corporations and, for the
year ended December 31, 1995, recorded a provision for income taxes totaling
approximately $103,000. For the period ended May 29, 1996 both entities
incurred operating losses and required no provision for income taxes. The
provision (benefit) for income taxes are reflected in equity in earnings of
unconsolidated subsidiary on the accompanying consolidated statement of
operations.
Income Recognition
When, in the judgment of management, collection of any portion of the interest
or principal amount of a receivable is in doubt, accrual of interest income is
discontinued, and interest is recorded when received. At December 31, 1995 and
May 29 , 1996, nonaccrual loans totaled approximately $1,299,357 and $1,903,843,
respectively, and the related foregone interest income amounted to approximately
$218,853 and $106,856, respectively. Additionally, at December 31, 1995 and May
29, 1996, restructured loans totaled approximately $380,002 of which $0 was
included in nonaccrual loans, respectively. Other income on the accompanying
consolidated statements of operations consists of late fees, prepayment
penalties and fee income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(3) NOTES PAYABLE TO BANKS
At December 31, 1995 and May 29, 1996, the Company had outstanding bank
borrowings under the following agreements:
DECEMBER 31, MAY 29,
------------ ------------
DESCRIPTION 1995 1996
----------- ------------ ------------
Revolving Credit Agreement $73,150,000 72,250,000
Term Loan Agreements 5,231,900 5,231,900
Short-Term Note 1,913,000 1,913,000
----------- -----------
Total $80,294,900 $79,394,900
=========== ===========
Borrowings under these agreements are secured by all assets of the Company.
Revolving Credit Agreement
On March 27, 1992 (and as subsequently amended), the Company entered into a
committed revolving credit agreement (the Revolver) with a group of banks. The
Company extended the Revolver until June 30, 1997 at an aggregate credit
commitment amount of $78,000,000 pursuant to the Renewal and Extension Agreement
dated March 29, 1996. The Revolver may be extended annually thereafter upon the
option of the participating banks and acceptance by the Company. Should any
participating bank not extend its committed amount, the Revolver agreement
provides that each bank shall extend a term loan equal to its share of the
principal amount outstanding of the revolving credit note.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(3) NOTES PAYABLE TO BANKS (CONTINUED)
Maturity of the term note shall be the earlier of two years or any other date on
which it becomes payable in accordance with the Revolver. Interest and principal
payments are to be made monthly. Interest is calculated monthly at either the
bank's prime rate or a rate based on the adjusted London Interbank Offered Rate
of interest (LIBOR) at the option of the Company. Substantially all promissory
notes evidencing the Company's investments are held by a bank, as collateral
agent under the agreement. Outstanding borrowings under the Revolver were
$73,150,000 and $72,250,000, at December 31, 1995 and May 29, 1996, at an
average interest rate of 7.40% and 6.87%, respectively. During the year ended
December 31, 1995 and for the period ended May 29, 1996, the Company's weighted
average borrowings were approximately $62,203,800 and $73,180,000 and the
maximum outstanding borrowings were $73,150,000 and $74,150,000, respectively.
The weighted average interest rates on the weighted average borrowings were
7.64% and 7.44% during the year ended December 31, 1995 and the period ended May
29, 1996, respectively.
The Company is required to pay an annual facility fee of 1/4% effective
prospectively as of March 28, 1995 on the Revolver aggregate commitment. For the
year ended December 31, 1994 and up through March 27, 1995, the Company was
required to pay an annual facility fee of 3/8%. Additionally, effective
prospectively as of September 29, 1995, the Company is required to pay an
additional annual fee of $62,500.
Term Loan Agreements
At December 31, 1995 and May 29, 1996, the Company had borrowed a total of
$2,000,000 under a term loan agreement (Term Loan) with a bank. The $2,000,000
was outstanding at December 31, 1995 and May 29, 1996. During 1995, the fixed
interest rate of 5.88% was increased to 7.5%. Interest payments are due
quarterly. The weighted average interest rate paid on such borrowings was 6.68%
and 7.50%, during the year ended December 31, 1995 and period ended May 29,
1996, respectively. The total term borrowings outstanding at May 29, 1996 under
this agreement are due in July 1997.
On September 29, 1995, Tri-Magna entered into a $3,231,900 term loan with a
certain bank maturing on May 31, 1996. Interest is paid monthly at the prime
rate. The loan is secured by all assets of Tri-Magna. The proceeds of this
loan were invested in Medallion as a capital contribution to facilitate the
repurchase of its preferred stock from the SBA. (See Notes 4 and 10)
Short-Term Note
On December 19, 1994, Tri-Magna entered into a demand promissory note (Demand
Note) with a certain bank. On September 1, 1995, the Demand Note was converted
into a $2,000,000 short-term secured note (Short-Term Note) which matures on
August 31, 1996. Interest is calculated monthly at either the bank's prime rate
or a rate based upon adjusted LIBOR at the option of the Company. Substantially
all promissory notes evidencing Tri-Magna's investments are pledged to the bank
as collateral. The Company is required to pay an annual facility fee of 1/4%
effective prospectively as of September 29, 1995 on the aggregate amount of the
note. Outstanding borrowings under the Short-Term Note were $1,913,000 at
December 31, 1995 and May 29, 1996, at an average interest rate of 7.59% and
6.84%, respectively. During the year ended December 31, 1995 and period ended
May 29, 1996, Tri-Magna's weighted average borrowings were approximately
$1,025,500 and $1,902,820 and the maximum outstanding borrowings were
$1,913,000. The weighted average interest rate on such borrowings was 8.49% and
8.45% during the year ended December 31, 1995 and period ended May 29, 1996,
respectively.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(3) NOTES PAYABLE TO BANKS (CONTINUED)
Interest Rate Cap Agreements
On April 7, 1995, the Company entered into three interest rate cap agreements
to reduce the impact of changes in interest rates on its floating rate long-term
debt. These agreements limit the Company's maximum LIBOR exposure on $20,000,000
of its revolving credit facility to 7.5%. The premiums paid under these
agreements were $46,875, $31,000 and $46,687, respectively. The premiums have
been capitalized and are being amortized over the two-year term of the
agreements, which expires on April 7, 1997. The Company is exposed to credit
loss in the event of nonperformance by the counterparties on these interest rate
cap agreements. The Company does not anticipate nonperformance by any of these
parties.
On November 16, 1995, the Company entered into three additional interest rate
cap agreements to reduce the impact of changes in interest rates on its floating
rate long-term debt. These agreements limit the Company's maximum LIBOR exposure
on an additional $20,000,000 of its revolving credit facility to 7.0%. The
premiums paid under these agreements were $13,000, $25,000 and $12,500,
respectively. The premiums have been capitalized and are being amortized over
the two-year terms of the agreements, which expire on November 16, 1997. The
Company is exposed to credit loss in the event of nonperformance by the
counterparties on these interest rate cap agreements. The Company does not
anticipate nonperformance by any of these parties.
(4) MINORITY INTEREST
On September 29, 1995, Medallion repurchased and retired all of its 3%
preferred stock owned by the SBA at a discount of 65%, under an SBA preferred
stock repurchase agreement. The effective date of the buyback was August 12,
1994. The purchase price of the preferred stock was $3,231,900. The amount of
the discount, $6,002,100, was recorded as an increase in capital in an account
separate from other paid-in capital accounts, as restricted capital surplus
account. Under the repurchase agreement, the SBA retains a liquidating interest
in the amount of the discount on the repurchase, which expires on a straight
line basis over five years or on a later date if an event of default, as defined
in the agreement, has occurred and such default has not been cured or waived.
Upon the occurrence of any event of default, the SBA's liquidating interest will
become fixed at the level immediately preceding the event of default and will
not accrete further until the default is cured or waived.
While the liquidating interest expires over a five-year period, the balance in
the restricted capital surplus account remains unchanged in accordance with the
SBA requirements. The SBA requires this treatment because the additional equity
obtained as a result of the repurchase transaction is subject to certain
restrictions that remain even after the liquidated interest has been eliminated.
In the event of Medallion's liquidation, the unexpired portion of the
liquidating interest becomes immediately payable to the SBA.
At December 31, 1995 and May 29, 1996, the unaccreted amount of the SBA's
liquidating interest in the restricted capital surplus was $4,351,523 and
$3,851,348, respectively.
(5) SHAREHOLDERS' EQUITY
As discussed in Note (4), under the terms of the preferred stock repurchase
agreement with the SBA, a change in ownership of the Company could result in the
unexpired portion of the liquidating interest becoming payable to the SBA. This
provision was waived and the merger transaction with Medallion Financial Corp.
was approved by the SBA.
Direct costs associated with the merger agreement with Medallion Financial
Corp., previously deferred by the Company, were expensed on May 29, 1996. Total
direct costs charged to results of operations were $584,000.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(5) SHAREHOLDERS' EQUITY (CONTINUED)
On May 29, 1996, the Company declared an additional and liquidation dividend
of $0.81 per share totaling $542,012, payable on May 29, 1996 to the
shareholders at record as of such date.
In accordance with Statement of Position 93-2, ''Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies,'' a cumulative amount of $709,544 has
been reclassified from capital in excess of par value to accumulated
undistributed income on the accompanying consolidated balance sheets. This
reclassification has no impact on the Company's total shareholders' equity and
is designed to present the Company's capital accounts on a tax basis.
(6) REALIZED LOSSES (GAINS) AND UNREALIZED DEPRECIATION ON INVESTMENTS
A summary of realized losses and unrealized depreciation on investments for
the period ended May 29, 1996 and the years ended December 31, 1995 and 1994 is
as follows:
PERIOD ENDED
------------
MAY 29, YEAR ENDED DECEMBER 31,
---------- -------------------------
UNREALIZED DEPRECIATION 1996 1995 1994
----------------------- ---------- ---------- -------------
Balance at Beginning of Period $(910,000) $(770,000) $(828,000)
Change in Unrealized Depreciation -- (140,000) 58,000
--------- --------- ---------
Balance at End of Period $(910,000) $(910,000) $(770,000)
========= ========= =========
For the period ended May 29, 1996 and the years ended December 31, 1995 and
1994, realized losses and (gains) were $0, $(61,194), and $21,938, respectively.
(7) EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution employee benefit plan, the
Medallion Funding Corp. Profit-Sharing Retirement Plan (the Profit-Sharing
Plan), under which substantially all Tri-Magna and Medallion employees and
officers are covered.
In addition, prior to March 31, 1996, the Company also maintained a defined
contribution employee pension plan, the Medallion Funding Corp. Pension Plan,
(the Pension Plan).
The Company's management acts as trustee of both Plans. Under the Profit-
Sharing Plan, voluntary employee as well as Company contributions are allowed.
Under the Pension Plan, the Company contributed up to 10% of each participants
annual compensation. Total employer contributions to both Plans is limited to
the lesser of 10% of each participant's compensation or $10,000, annually. On
March 31, 1996, the Pension Plan was terminated by the Board of Directors. The
Company contributions, at participants' option were transferred to other plans.
The expense for employee benefit plans was approximately $70,000, $136,000 and
$44,000 for the years ended December 31, 1995 and 1994 and the period ended May
29, 1996, respectively.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(8) TRANSACTIONS WITH RELATED PARTIES
Certain officers and directors of Medallion are also shareholders of Tri-
Magna. Officers' salaries are set by the Board of Directors. Directors who are
not officers receive a fee of $1,000 per meeting. Directors who are members of
committees receive $500 for each meeting attended. Directors who are members of
the independent committee receive $1,000 for each meeting attended. One loan
receivable has been guaranteed by a related party.
(9) COMMITMENTS AND CONTINGENCIES
At December 31, 1995, and May 29, 1996, the Company's unfunded commitments
were approximately $2,447,800 for 35 loans and $2,958,900 for 29 loans,
respectively, that bear interest at rates ranging from 9.0% to 16.0% and 9.3% to
15.0%, respectively.
The Company has operating lease agreements for its executive and general
offices, expiring in December 1997, as amended. The leases call for an aggregate
annual rental of approximately $235,000, subject to certain escalation clauses.
During the years ended December 31, 1995 and 1994, and period ended May 29,
1996, rental expenses totaled $194,279, $195,777 and $94,422, respectively, and
are included in other operating expenses.
The Company is a party to various legal proceedings arising from the normal
course of business, none of which, in management's opinion, is expected to have
a material adverse impact on the Company's financial position or results of
operations.
(10) SUBSEQUENT EVENTS
On June 28, 1996 and January 28, 1997, Medallion increased the amount available
under the Revolver by $7,000,000 and $20,000,000, respectively. The aggregate
commitments under the Revolver was $85,000,000 and $105,000,000 at such dates,
respectively. Subsequent to the merger of Tri-Magna into Medallion Financial
Corp. on May 29, 1996 the Term Loan of $3,231,900 was paid in full. The
$2,000,000 Short-Term Note was assumed by Medallion Financial Corp. and was
converted into a $5,000,000 revolving credit agreement on December 1, 1996.
As a result of the merger of Tri-Magna into Medallion Financial Corp., Medallion
became a wholly-owned subsidiary of Medallion Financial Corp. On February 11,
1997 the SBA approved an amendment to the charters of Medallion and another
wholly-owned subsidiary, Transportation Capital Corp. (TCC), converting these
subsidiaries from SSBICs to SBICs. The conversion eliminates the restriction
for Medallion and TCC to lend only to individuals as being socially or
economically disadvantaged, or to small business concerns that are at least 50%
owned by such persons, as defined in the SBIA, subject to certain restrictions.
Effective January 1, 1997, Medallion Financial Corp. decided to merge all of the
assets and liabilities of TCC into Medallion, subject to the approval of the
SBA. This is expected to occur by the end of the second quarter of 1997.
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, ''Disclosures About Fair Value of Financial Instruments,''
requires disclosure of fair value information about certain financial
instruments, whether assets, liabilities or off-balance sheet commitments, if
practicable. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments. Fair value estimates which
were derived from broker quotes cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument.
In addition, SFAS 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
Investments - As described in Note 2, the carrying amount of investments is
the estimated fair value of such investments.
Notes payable to banks and demand notes - Due to the short-term nature of
these instruments, the carrying amount approximates fair value.
Commitments to Extend Credit - The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also includes a consideration of the difference
between the current levels of interest rates and the committed rates. At May
29, 1996, the estimated fair value of these off-balance sheet instruments was
not material.
Interest Rate Cap Agreements - The fair value is estimated based on market
prices or dealer quotes. At May 29, 1996, estimated fair value of these off-
balance sheet instruments was not material.
DECEMBER 31, 1995 MAY 29, 1996
---------------------------- -----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ----------- --------------- ------------
Financial assets:
Investments $96,046,416 $96,046,416 $95,621,617 $95,621,617
Financial liabilities:
Notes payable to banks
and demand notes $80,294,900 $80,294,900 $79,394,900 $79,394,900
TRI-MAGNA CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
MAY 29, 1996
BALANCE INTEREST
------------- ------------
NUMBER OF LOANS OUTSTANDING RATE
--------------- ------------- ------------
2 $ 92,529 5.00%-7.00%
16 3,625,886 8.00
3 287,797 8.25
18 2,783,824 8.50
10 901,136 8.63
12 981,255 8.75
55 6,751,204 9.00
99 8,133,949 9.25
122 14,125,122 9.50
2 114,819 9.63
32 3,825,894 9.75
119 10,989,259 10.00
30 3,236,713 10.25
40 3,994,604 10.50
29 2,628,392 10.75
1 59,382 10.90
43 3,983,410 11.00
6 356,496 11.25-11.50
2 146,961 11.75
53 3,878,890 12.00
7 448,314 12.50
3 369,083 12.75-12.95
99 5,177,644 13.00
2 372,799 13.25
22 1,165,954 13.50
3 46,411 13.75-13.87
97 4,612,518 14.00
4 105,443 14.05-14.30
19 1,163,039 14.50
7 213,388 14.75-14.84
224 9,955,553 15.00
8 687,574 15.20
7 208,929 15.25
5 88,044 15.50
1 100,239 15.75
11 325,999 16.00
5 193,989 16.50-18.00
2 74,737 19.00
----- -----------
Total: 1,220 $96,207,179 10.92%
=====
Plus: Loan Origination Costs, Net..... 324,438
-----------
Total Investments at Cost............ $96,531,617
Less: Unrealized depreciation on
investments (910,000)
-----------
Total Investments at directors' $95,621,617
valuation ===========
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
BALANCE INTEREST
------------- ------------
OUTSTANDING RATE
NUMBER OF LOANS ------------- ------------
---------------
2 $ 101,632 5.00-7.00%
18 3,715,031 8.00
3 298,833 8.25
21 3,279,235 8.50
9 1,331,792 8.75
56 8,152,656 9.00
70 7,111,900 9.25
116 13,814,980 9.50
2 120,696 9.63
24 2,677,911 9.75
150 12,175,743 10.00
33 3,207,015 10.25
1 130,055 10.38
41 4,181,332 10.50
31 2,959,616 10.75
1 65,064 10.90
41 3,930,343 11.00
9 614.874 11.25-11.75
58 4,260,742 12.00
9 490,107 12.50
4 406,362 12.75-12.95
96 5,426,944 13.00
3 630,453 13.25
20 1,114,053 13.50
3 60,526 13.75-13.87
86 4,316,872 14.00
1 41,995 14.05
1 47,046 14.20
1 8,181 14.25
1 16,166 14.30
15 1,000,341 14.50
7 227,427 14.75-14.84
206 9,123,581 15.00
8 723,762 15.20
8 250,164 15.25
7 134,764 15.50
2 101,658 15.63-15.75
8 289,662 16.00
6 123,502 16.25-18.00
----- -----------
Total: 1,178 $96,663,016 10.88%
=====
Plus: Loan Origination Costs,
Net........................... 293,400
-----------
Total Investments at Cost... 96,956,416
Less: Unrealized depreciation
on investments................ (910,000)
-----------
Total Investments at
directors' valuation $96,046,416
===========
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Transportation Capital Corp.:
We have audited the accompanying balance sheets of Transportation Capital
Corp. (a New York corporation) as of December 31, 1995, and May 29, 1996,
including the schedule of investments other than investments in affiliates and
schedule of loans as of December 31, 1995 and May 29, 1996, the related
statements of operations, changes in shareholders' equity and cash flows for the
year ended December 31, 1995 and the five month period ended May 29, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As explained in Note 1, the financial statements include loans receivable
valued at $9,154,139 (53% of total assets) as of December 31, 1995 and at
$9,312,331 (56% of total assets) as of May 29, 1996, whose values have been
estimated by the Board of Directors in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for the loans existed, and the differences could be
material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Transportation Capital Corp. as
of December 31, 1995 and May 29, 1996, and the results of its operations and its
cash flows for the year ended December 31, 1995 and the five month period ended
May 29, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 26, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Transportation Capital Corp.:
We have audited the accompanying Statement of Operations of Transportation
Capital Corp. (a New York corporation), and the related statements of
shareholders' equity and cash flows for of the year ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of its operations and cash flows for
Transportation Capital Corp. for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand LLP
New York, New York
October 24, 1995
TRANSPORTATION CAPITAL CORP.
BALANCE SHEETS
DECEMBER 31, MAY 29,
------------- ------------
1995 1996
------------- ------------
ASSETS
Loans Receivable........................ $ 9,796,728 $ 9,924,748
Allowance for Loan Losses............... (642,589) (612,417)
----------- -----------
Loans receivable, at fair value........ 9,154,139 9,312,331
Cash and Cash Equivalents............... 7,780,717 6,797,183
Accrued Interest Receivable............. 133,722 118,384
Furniture, Fixtures and Leasehold
Improvements, at cost, less accumulated
depreciation $12,256 and $14,122....... 16,253 14,387
Other Assets............................ 72,877 62,394
Deferred Income Taxes................... 257,900 246,365
----------- -----------
Total Assets............................ $17,415,608 $16,551,044
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures payable to the Small
Business Administration.............. $ 6,730,000 $ 5,640,000
Accrued interest payable............... 35,071 139,068
Accrued dividend payable............... -- 116,725
Accrued expenses....................... 171,888 111,960
----------- -----------
Total Liabilities....................... 6,936,959 6,007,753
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
3% Cumulative preferred stock, $1,000
par value --
Authorized -- 9,000 shares
Issued and outstanding -- none......... -- --
Common stock, $.125 par value --
Authorized -- 5,000,000 shares
Issued and outstanding -- 100 shares... 13 13
Additional paid-in capital.............. 7,749,456 7,749,456
Restricted contributed capital surplus.. 2,199,166 2,199,166
Accumulated undistributed net
investment income...................... 5,060,597 5,104,110
Accumulated net realized loan losses.... (4,144,594) (4,141,637)
Net unrealized depreciation on loans.... (385,989) (367,817)
----------- -----------
Total Shareholders' Equity.............. 10,478,649 10,543,291
----------- -----------
Total Liabilities and Shareholders'
Equity................................. $17,415,608 $16,551,044
=========== ===========
The accompanying notes are an integral part of these financial statements.
TRANSPORTATION CAPITAL CORP.
STATEMENTS OF OPERATIONS
PERIOD ENDED
------------
YEAR ENDED DECEMBER 31, MAY 29,
------------------------------- -------------
1994 1995 1996
--------------- -------------- -------------
Investment Income:
Interest from small business concerns
(net of interest to
participants)............................. $2,001,527 $1,411,116 $ 525,883
Interest from treasury bills............... 215,353 425,318 156,243
---------- ---------- ---------
2,216,880 1,836,434 682,126
---------- ---------- ---------
Expenses:
Interest................................... 708,695 450,071 148,362
Salaries................................... 246,874 227,343 79,899
Legal and other professional fees.......... 356,162 350,178 131,226
Rent expense............................... 58,046 23,999 10,865
General and administrative................. 50,533 158,810 37,430
---------- ---------- ---------
1,420,310 1,210,401 407,782
---------- ---------- ---------
Investment Income Before Income Taxes....... 796,570 626,033 274,344
Income Tax Provision........................ (342,948) (269,723) (114,106)
---------- ---------- ---------
Net Investment Income...................... 453,622 356,310 160,238
---------- ---------- ---------
Realized Loan (Losses) Gains Before
Income Taxes............................... (144,058) (50,055) 5,247
Income Tax Benefit (Provision).............. 59,748 22,399 (2,290)
---------- ---------- ---------
Net Realized Loan (Losses) Gains........... (84,310) (27,656) 2,957
---------- ---------- ---------
Change in Unrealized Depreciation on
Loans Before Income
Taxes...................................... 790,283 335,261 30,172
Deferred Income Tax Provision............... (369,700) (133,900) (12,000)
---------- ---------- ---------
Net Change in Unrealized Depreciation
on Loans................................... 420,583 201,361 18,172
---------- ---------- ---------
Increase in Net Assets from Operations..... $ 789,895 $ 530,015 $ 181,367
========== ========== =========
The accompanying notes are an integral part of these financial statements.
TRANSPORTATION CAPITAL CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
RESTRICTED
-----------
PREFERRED STOCK COMMON STOCK ADDITIONAL CONTRIBUTED
--------------- ------------ ---------- -----------
SHARES SHARES PAID-IN CAPITAL
------ ------ ------- -------
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL SURPLUS
------------ ------ ------------ ------ ------- -------
Balance, December 31, 1993 3,3831/3 $ 3,383,333 2,486,804 $ 310,851 $6,250,529 $ --
Merger of TCC Purchase Co. -- -- (2,486,704) (310,838) 314,760 --
Net investment income -- -- -- -- -- --
Net realized loan losses -- -- -- -- -- --
Net change in unrealized
depreciation on loans -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- ----------
Balance, December 31, 1994 3,3831/3 $ 3,383,333 100 $ 13 $6,565,289 $ --
========== =========== ========== ========= ========== ==========
Net investment income -- -- -- -- -- --
Net realized loan losses -- -- -- -- -- --
Net change in unrealized
depreciation on loans -- -- -- -- -- --
Capital contribution -- -- -- -- 310,818 --
Capitalization of
accumulated
undistributed net
investment income -- -- -- -- 873,349 --
Repurchase of 3% preferred
stock (3,383 1/3) (3,383,333) -- -- -- 2,199,166
---------- ----------- ---------- --------- ---------- ----------
Balance, December 31, 1995 -- $ -- 100 $ 13 $7,749,456 $2,199,166
========== =========== ========== ========= ========== ==========
Net investment income -- -- -- -- -- --
Net realized loan gains -- -- -- -- -- --
Preferred dividends
declared..................
Net change in unrealized
depreciation on loans -- -- -- -- -- --
---------- ----------- ---------- --------- ---------- ----------
Balance, May 29, 1996 -- $ -- 100 $ 13 $7,749,456 $2,199,166
========== =========== ========== ========= ========== ==========
ACCUMULATED
-----------
UNDISTRIBUTED ACCUMULATED NET
------------- ----------- ---
NET NET UNREALIZED TOTAL
--- --- ---------- -----
INVESTMENT REALIZED DEPRECIATION SHAREHOLDERS'
---------- -------- ------------ -------------
INCOME LOAN LOSSES ON LOANS EQUITY
------ ----------- -------- ------
Balance, December 31, 1993..... $5,124,014 $(4,032,628) $(1,007,933) $10,028,166
Merger of TCC Purchase Co...... -- -- -- 3,922
Net investment income.......... 453,622 -- -- 453,622
Net realized loan losses....... -- (84,310) -- (84,310)
Net change in unrealized
depreciation on loans......... -- -- 420,583 420,583
---------- ----------- ----------- -----------
Balance, December 31, 1994..... $5,577,636 $(4,116,938) $ (587,350) $10,821,983
========== =========== =========== ===========
Net investment income.......... 356,310 -- -- 356,310
Net realized loan losses....... -- (27,656) -- (27,656)
Net change in unrealized
depreciation on loans......... -- 201,361 201,361
Capital contribution........... -- -- -- 310,818
Capitalization of
accumulated
undistributed net
investment income............. (873,349) -- -- --
Repurchase of 3% preferred
stock......................... -- -- -- (1,184,167)
---------- ----------- ----------- -----------
Balance, December 31, 1995..... $5,060,597 $(4,144,594) $ (385,989) $10,478,649
========== =========== =========== ===========
Net investment income.......... 160,238 -- -- 160,238
Net realized loan gains........ -- 2,957 -- 2,957
Preferred dividends
declared...................... (116,725) (116,725)
Net change in unrealized
depreciation on loans......... -- -- 18,172 18,172
---------- ----------- ----------- -----------
Balance, May 29, 1996.......... $5,104,110 $(4,141,637) $ (367,817) $10,543,291
========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
TRANSPORTATION CAPITAL CORP.
STATEMENTS OF CASH FLOWS
PERIOD ENDED
------------
YEAR ENDED DECEMBER 31, MAY 29,
------------------------------ --------------
1994 1995 1996
-------------- -------------- --------------
Cash Flows from Operating Activities:
Increase in net assets from operations.. $ 789,895 $ 530,015 $ 181,367
Adjustments to reconcile increase in
net assets from operations to net
cash provided by
(used for) operating activities --
Change in unrealized depreciation on
loans................................. (790,283) (335,261) (30,172)
Provision for deferred taxes........... 549,800 138,300 11,535
Depreciation and amortization.......... 14,199 14,570 1,866
Realized loan losses................... 144,058 50,055 (5,247)
Net change in --
Accrued interest receivable........... 141,191 14,216 15,338
Other assets.......................... (102,185) 116,687 10,483
Accrued interest payable.............. (148,943) (38,317) 103,997
Accrued expenses...................... (462,757) 46,377 (59,928)
------------ ------------ -----------
Net cash provided by operating
activities............................. 134,975 536,642 229,239
------------ ------------ -----------
Cash Flows from Investing Activities:
Principal collected on loans............ 19,628,701 14,820,116 6,510,178
Advances on loans....................... (12,682,418) (13,697,563) (6,632,951)
Furniture, fixtures and office
equipment.............................. 3,500 (4,339) --
------------ ------------ -----------
Net cash provided by (used for)
investing activities................... 6,949,783 1,118,214 (122,773)
------------ ------------ -----------
Cash Flows from Financing Activities:
Repurchase of preferred stock from SBA.. -- (1,184,167) --
Repayment of debentures payable to SBA.. (2,800,000) (1,200,000) (1,090,000)
Capital contribution.................... -- 310,818 --
Merger of TCC Purchase Co............... 3,922 -- --
------------ ------------ -----------
Net cash used for financing activities.. (2,796,078) (2,073,349) (1,090,000)
------------ ------------ -----------
Net Increase (Decrease) in Cash and
Cash Equivalents........................ 4,288,680 (418,493) (983,534)
Cash and Cash Equivalents, Beginning of
Period.................................. 3,910,530 8,199,210 7,780,717
Cash and Cash Equivalents, End of........ ------------ ------------ -----------
Period.................................. $ 8,199,210 $ 7,780,717 $ 6,797,183
============ ============ ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for --
Interest............................... $ 857,638 $ 488,388 $ 44,365
============ ============ ===========
Net income tax payments................ $ 132,852 $ 205,322 $ 152,260
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
MAY 29, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Transportation Capital Corp. (the Company), a New York corporation, was an
indirect wholly owned subsidiary of Leucadia National Corporation (Leucadia) and
is licensed by the Small Business Administration (SBA) to operate as a
specialized small business investment company (SSBIC) under the Small Business
Investment Act of 1958, as amended. Effective on May 29, 1996, the Company was
acquired by Medallion Financial Corp. and registered as a closed-end management
investment under the Investment Company Act of 1940, as amended (the 1940 Act).
The balance sheet as of May 29, 1996 and statements of operations, changes in
shareholders' equity and cash flows for the period ended May 29, 1996 included
the accounts of the Company prior to the consummation of the acquisition by
Medallion Financial Corp. on May 29, 1996.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Loans and the Allowance for Loan Losses
Loans, net of participation sold to other lenders and an allowance for
possible losses, are stated at fair value. The fair value of such loans is
determined in good faith by the Board of Directors. The allowance for loan
losses is maintained at a level that, in the Board of Director's judgment, is
adequate to absorb losses inherent in the portfolio.
The allowance is reviewed and adjusted periodically by the Board of Directors
on the basis of available information, including the fair value of the
underlying collateral; individual credit risks; past loss experience; the
volume, composition and growth of the portfolio; and current and projected
economic conditions. Assets acquired in satisfaction of loans are carried at
estimated net realizable value.
A fully collateralized loan is placed on nonearning status once it becomes 180
days past due as to principal and interest. Loans that are not fully
collateralized are placed on nonearning status when they are 90 days past due as
to principal or interest. Interest on nonearning loans is recognized as income
when collected.
Realized Loan Losses
Realized loan losses consist of write-offs of loans or assets acquired in
satisfaction of loans, net of recoveries.
Unrealized Depreciation on Loans
All unrealized changes in the value of loans, including the provision for
losses, are included in the caption net change in unrealized depreciation on
loans, which is net of income tax effect. Net unrealized depreciation on loans
at December 31, 1995 and May 29, 1996 is net of deferred income taxes of
$256,600 and $244,600, respectively.
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and Amortization
Depreciation and amortization of furniture, fixtures, office equipment and
leasehold improvements is computed using straight-line and accelerated methods
at rates adequate to allocate the cost of applicable assets over their estimated
useful lives or, if less, the term of the lease. Depreciation and amortization
amounted to $4,296, $3,925 and $1,866 for the years ended December 31, 1995 and
1994 and period ended May 29, 1996, respectively.
Income Taxes
For the period ended May 29, 1996, the Company's results of operations was
reported in the consolidated federal income tax return filed by Leucadia. The
Company and Leucadia were operating under a tax sharing agreement pursuant to
which the Company made payments to (or receives payments from) Leucadia
consisting of the tax liability that the Company would incur if it filed a
separate federal income tax return.
The Company provided for income taxes using the liability method under
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Under the liability method, deferred income taxes are provided at
the statutory rates for differences between the tax and accounting bases of
substantially all assets and liabilities and for carryforwards. A valuation
allowance is provided if deferred tax assets are not considered more likely than
not to be realized.
Cash and Cash Equivalents
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
loan receivables.
The Company considers short-term instruments with original maturities of three
months or less, measured from their acquisition date, to be cash equivalents.
Cash and cash equivalents consist of cash in banks and U.S. Treasury bills at
market value.
Noncash Investing Activities
During the years ended 1995 and 1994 and period ended May 29, 1996, the
Company refinanced loans amounting to $740,826, $1,041,933 and $1,696,715,
respectively.
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(2) LOANS RECEIVABLE
Nonearning and reduced rate loans outstanding were approximately $88,200 and
$86,800 at December 31, 1995 and May 29, 1996, respectively. At December 31,
1995 and May 29, 1996, there were no commitments to loan additional funds to
borrowers whose loans were classified as nonearning or reduced rate.
Transactions in the allowance for loan losses are summarized as follows:
YEAR ENDED PERIOD ENDED
----------------------- -------------
DECEMBER 31, MAY 29,
----------------------- -------------
1994 1995 1996
----------- ---------- -------------
Balance, beginning.................... $1,768,133 $ 977,850 $642,589
Charge-offs........................... (176,975) (61,672) --
Recoveries............................ 32,917 11,617 5,247
Interest income deferred (received)... (289,430) -- --
Reduction in allowance................ (356,795) (285,206) (35,419)
---------- --------- --------
Balance, ending....................... $ 977,850 $ 642,589 $612,417
========== ========= ========
(3) DEBENTURES PAYABLE TO THE SMALL BUSINESS ADMINISTRATION
Debentures payable to the SBA at December 31, 1995 and May 29, 1996 consisted
of subordinated debentures with the following maturities and interest rates
(interest is payable semi-annually):
PRINCIPAL AMOUNT AT
----------------------
DECEMBER 31, MAY 29,
1995 1996 DUE DATE INTEREST RATE
---------- ---------- -------- ----------------
$1,090,000 $ -- 05/07/96 7.375% per annum
5,640,000 5,640,000 06/01/02 5.000% per annum
---------- ---------- through 5/31/97,
8% thereafter
$6,730,000 $5,640,000
========== ==========
Under the terms of the subordinated debentures, the Company may not repurchase
or retire any of its capital stock, make any distributions to its shareholders
other than dividends out of accumulated undistributed net investment income (as
computed in accordance with SBA regulations) or increase salaries under certain
conditions without the prior written approval of the SBA.
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(4) SHAREHOLDERS' EQUITY
The Company had an Employee Incentive Stock Option Plan (the Plan), that
expired on February 18, 1996.
On August 14, 1995, the Company repurchased and retired all of its 3%
preferred stock owned by the SBA at a discount of 65% under an SBA 3% preferred
stock repurchase agreement dated March 22, 1995. The purchase price of the
preferred stock was $1,184,167. The funds paid to the SBA were obtained from a
$310,818 capital contribution from the Company's sole shareholder, LNC
Investments, Inc., and a $873,349 capitalization of accumulated undistributed
net investment income, in accordance with Appendix I to Part 107 of the SBA
rules and regulations. As a result, the accumulated undistributed net investment
income was reduced, and the additional paid-in capital was increased by
$873,349; the net effect was the same as if the Company had made a distribution
to its shareholders, who then reinvested the same amount in the Company.
The amount of the discount was recorded as an increase in capital in an
account separate from additional paid-in capital, as restricted contributed
capital surplus account. Under the repurchase agreement, the SBA retains a
liquidating interest in the amount of the discount on the repurchase, which
expires on a straight-line basis over five years or on a later date if an event
of default, as defined in the repurchase agreement, has occurred and such
default has not been cured or waived. Upon the occurrence of any event of
default, the SBA's liquidating interest will become fixed at the level
immediately preceding the event of default and will not amortize further until
the default is cured or waived.
While the liquidating interest expires over a five-year period, the balance in
the restricted contributed capital surplus account remains unchanged in
accordance with the SBA requirements. The SBA requires this treatment because
the additional equity obtained as a result of the repurchase transaction is
subject to certain restrictions that remain even after the liquidating interest
has been eliminated.
In the event of the Company's liquidation, the unexpired portion of the
liquidating interest becomes immediately payable to the SBA. In addition, the
SBA retains a residual interest in the preferred dividends in arrears at March
22, 1995 in the amount of $152,250, which also expires on a straight-line basis
over five years.
On May 29, 1996, all of the outstanding shares of capital stock of the Company
was acquired by Medallion Financial Corp. (Medallion Financial) pursuant to the
stock purchase agreement dated February 12, 1996, for a purchase price of
approximately $10,546,000. The acquisition of the Company by Medallion
Financial was approved by the SBA. Under the terms of the preferred stock
repurchase agreement with the SBA, the change in ownership of the Company
resulted in the unexpired portion of the preferred dividends becoming payable to
the SBA in the amount of $116,725.
At December 31, 1995 and May 29, 1996, the unamortized amount of the SBA's
liquidating interest in the restricted contributed capital surplus was
$1,869,291 and $1,686,028, respectively.
There are 9,000 shares of redeemable preferred stock authorized, of which none
has been issued. Such shares, which may be issued only to the SBA, would have a
par value of $1,000 per share, bear cumulative annual dividends of 4% and would
be required to be redeemed 15 years after issuance.
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(5) INCOME TAXES
The provisions (benefits) for income taxes are as follows:
YEAR ENDED DECEMBER 31, PERIOD ENDED
---------------------------- MAY 29,
1994 1995 1996
------------- ------------- -------------
Net investment income --
Current --
Federal.................................. $110,233 $181,347 $ 83,029
State.................................... 52,615 83,976 31,577
-------- -------- --------
$162,848 $265,323 $114,606
-------- -------- --------
Deferred --
Federal.................................. $142,500 3,400 (400)
State.................................... 37,600 1,000 (100)
-------- -------- --------
180,100 4,400 (500)
-------- -------- --------
$342,948 $269,723 $114,106
======== ======== ========
Net realized loan (losses) gains --
Current --
Federal.................................. $(43,433) $(14,247) $ 1,431
State.................................... (16,315) (8,152) 859
-------- -------- --------
$(59,748) $(22,399) $ 2,290
======== ======== ========
Net change in unrealized depreciation
on loans --
Deferred --
Federal.................................. $298,600 $103,700 $ 9,300
State.................................... 71,100 30,200 2,700
-------- -------- --------
$369,700 $133,900 $ 12,000
======== ======== ========
The following is a reconciliation of income taxes at the expected statutory
federal income tax to the actual income tax provision (benefit):
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------ MAY 29,
1994 1995 1996
----------- ----------- -----------
Net investment income --
Expected federal income tax............. $270,834 $212,851 $ 93,277
State income taxes, net of federal...... 59,542 56,084 21,913
income tax benefit
Other................................... 12,572 788 (1,084)
-------- -------- --------
$342,948 $269,723 $114,106
======== ======== ========
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(5) INCOME TAXES (CONTINUED)
PERIOD ENDED
------------
YEAR ENDED DECEMBER 31, MAY 29,
------------------------ -------
1994 1995 1996
-------- -------- -------
Net realized loan (losses)gains --
Expected federal income tax................. $(48,980) $(17,019) $ 1,784
State income taxes, net of federal.......... (10,768) (5,380) 567
income tax benefit
Other....................................... -- -- (61)
-------- -------- -------
$(59,748) $(22,399) $ 2,290
======== ======== =======
Net change in unrealized depreciation
on loans --
Expected federal income tax................. $268,696 $113,989 $10,258
State income taxes, net of federal.......... 46,926 19,932 1,792
income tax benefit
Other....................................... 54,078 (21) (50)
-------- -------- -------
$369,700 $133,900 $12,000
======== ======== =======
The principal components of the deferred tax asset at December 31, 1995 and
May 29, 1996 are as follows:
DECEMBER 31, 1995 MAY 29, 1996
--------------------------------- ---------------------------------
FEDERAL STATE TOTAL FEDERAL STATE TOTAL
---------- --------- ---------- ---------- --------- ----------
Allowance for loan losses...... $198,800 $57,800 $256,600 $189,480 $55,120 $244,600
Interest....................... 2,300 600 2,900 2,450 710 3,160
Depreciation................... (1,300) (300) (1,600) (1,080) (315) (1,395)
-------- ------- -------- -------- ------- --------
$199,800 $58,100 $257,900 $190,850 $55,515 $246,365
======== ======= ======== ======== ======= ========
The Company believes it is more likely than not that the recorded deferred tax
asset will be realized; such realization is expected to result principally from
taxable income generated by profitable operations.
(6) TRANSACTIONS WITH AFFILIATES
In May 1994, the Company entered into a one-year management agreement with a
subsidiary of Leucadia pursuant to which the subsidiary agreed to perform
certain general, administrative and accounting functions for an annual fee of
$180,000 with subsequent annual increases to be determined according to
increases in the consumer price index. This agreement continued in full force
and effect after the initial one-year term upon approval on an annual basis by
the Company's Board of Directors. This agreement was terminated by both parties,
without payment of any penalty, on May 29, 1996.
Amounts charged to results of operations under this arrangement were $182,815
and $180,000 during the years ended December 31, 1995 and 1994 and $76,760
during the period ended May 29, 1996.
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(7) DIRECTORS' AND OFFICERS' COMPENSATION
Directors' Compensation amounted to $3,000, $6,900, and $1,300 and Officers'
compensation amounted to $182,709, $159,466 and $58,170, during the years ended
December 31, 1995 and 1994 and period ended May 29, 1996, respectively.
(8) PENSION PLAN
The Company provided pension benefits to its employees through Leucadia's
defined benefit pension plan, as a result of the merger of the Company's defined
benefit plan into Leucadia's plan effective on December 31, 1994. The merger of
the defined benefit plans resulted in a reduction in pension expense for the
Company in 1994. During the year ended December 31, 1995 and period ended May
29, 1996, the Company made contributions to Leucadia's plan based on its
allocable share of expenses in the amounts of $10,676 and $3,750, respectively.
(9) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingent liabilities that are not reflected in the financial statements. At
December 31, 1995 and May 29, 1996, the Company had outstanding loan commitments
of $403,000 and $395,300, respectively, which bear interest at rates ranging
from 12% to 14%. Management does not expect any material losses to result from
these matters.
At December 31, 1995 and May 29, 1996, the Company had operating leases for
office space expiring in August 1996 and future minimum annual rental
commitments were $19,800 and $2,000, respectively. In addition, the Company was
subject to additional rent based upon increases in the Consumer Price Index.
There are various lawsuits pending against the Company. In the opinion of
management, after consultation with counsel, it is remote that losses, if any,
arising from such claims will be material to the financial position or results
of operations of the Company.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of fair value information about certain financial instruments,
whether or not recognized on the balance sheet. Where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In addition, SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Therefore, the
aggregate fair value amounts presented do not purport to represent and should
not be considered representative of the underlying market or franchise value of
the Company.
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 29, 1996
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The methods and assumptions used to estimate the fair value of each class of
the financial instruments are described below:
Loans Receivable -- As described in Note 1, the carrying amount of loans
receivable is the estimated fair value of such loans.
Cash and Cash Equivalents -- For short-term investments, the carrying
amount approximates fair value.
Debentures Payable to SBA -- The fair value of the debentures payable to
SBA is estimated based upon current market interest rates for similar debt.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
DECEMBER 31, 1995 MAY 29, 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
---------- ---------- ---------- ----------
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Financial assets --
Loans receivable............. $9,154,139 $9,154,139 $9,312,331 $9,312,331
Cash and cash equivalents.... 7,780,717 7,780,717 6,797,183 6,797,183
Financial liabilities --
Debentures payable to SBA.... 6,730,000 7,189,000 5,640,000 5,954,000
(11) SUBSEQUENT EVENTS
On February 11, 1997, the SBA approved an amendment to the charter of the
Company, converting the Company from a SSBIC to a SBIC. The conversion
eliminates the restriction for the Company to lend only to individuals as being
socially or economically disadvantaged, or to small business concerns that are
at least 50% owned by such persons, as defined in the SBIA subject to certain
restrictions.
Effective January 1, 1997, Medallion Financial Corp. decided to merge all of
the assets and liabilities of the Company into Medallion Funding Corp., a wholly
owned subsidiary of Medallion Financial Corp., subject to the approval of the
SBA. Medallion Financial Corp. expects to complete the merger by the end of the
second quarter of 1997.
TRANSPORTATION CAPITAL CORP.
SCHEDULE OF INVESTMENTS OTHER THAN INVESTMENTS IN AFFILIATES
DECEMBER 31, 1995 MAY 29, 1996
----------------------------------------------- ------------------------------------------------
NUMBER NUMBER
------ PRINCIPAL ------ PRINCIPAL
OF --------- OF ---------
LOANS BY COLLATERAL TYPE LOANS BALANCE FAIR VALUE BOOK VALUE LOANS BALANCE FAIR VALUE BOOK VALUE
- --------------------------- ----- ------- ---------- ---------- ----- ------- ---------- ----------
MEDALLIONS:
New York..................... 17 $ 797,932 $ 797,932 $ 797,932 12 618,280 618,280 618,280
Boston....................... 80 3,400,557 3,400,557 3,400,557 75 3,131,238 3,131,238 3,131,238
Cambridge.................... 45 1,984,198 1,971,598 1,971,598 48 2,291,251 2,287,851 2,287,851
Chicago...................... 87 1,647,561 1,647,561 1,647,561 94 2,029,924 2,023,624 2,023,624
Newark....................... 12 158,157 156,836 156,836 8 91,342 91,342 91,342
--- ---------- ---------- ---------- --- ---------- ---------- ----------
Total medallions............ 241 7,988,405 7,974,484 7,974,484 237 8,162,035 8,152,335 8,152,335
NEW YORK RADIO CARS........... 35 599,694 238,198 238,198 32 535,696 201,605 201,605
MINUTEMAN RECEIVABLES......... 3 1,217,371 950,199 950,199 2 1,231,012 962,386 962,386
OTHERS........................ -- -- -- -- -- -- -- --
--- ---------- ---------- ---------- --- ---------- ---------- ----------
Subtotal.................... 279 9,805,470 9,162,881 9,162,881 271 9,928,743 9,316,326 9,316,326
RECEIVABLE FOR
FORECLOSURE EXPENSES......... -- 10,144 10,144 10,144 -- 8,766 8,766 8,766
UNAPPLIED COLLECTIONS......... -- (18,886) (18,886) (18,886) -- (12,761) (12,761) (12,761)
--- ---------- ---------- ---------- --- ---------- ---------- ----------
Total loans receivable,
net........................ 279 $9,796,728 $9,154,139 $9,154,139 271 $9,924,748 $9,312,331 $9,312,331
=== ========== ========== ========== === ========== ========== ==========
The accompanying notes are an integral part of these financial statement.
TRANSPORTATION CAPITAL CORP.
SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS
MAY 29, 1996
It is the Company's policy to make loans to persons who qualify under Small
Business Administration regulations as socially or economically disadvantaged
and to entities which are at least 50%-owned by such persons.
Substantially all of the Company's loans are for the purpose of financing the
purchase of New York City, Boston, Cambridge, Chicago and Newark taxi
medallions, taxi cabs, car radio rights, radio cars and related assets (the
Collateral). It is the Company's policy that these loans are collateralized by a
first priority perfected security interest in the collateral.
The distribution of loans at May 29, 1996 by rate of interest is as follows:
NUMBER BALANCE INTEREST
------ ------------ ---------
OF LOANS OUTSTANDING RATE
-------- ------------ ---------
2 $ 106,941 9.50%
3 119,292 10.00
2 288,838 10.50
28 1,326,481 11.00
38 667,453 12.00
2 52,028 12.50
66 1,793,509 13.00
2 6,978 13.25
47 1,768,645 13.50
3 88,268 13.75
41 1,942,791 14.00
11 157,874 14.25
5 1,265,835 14.50
1 54,236 14.75
13 166,207 15.00
3 19,576 15.75
1 10,609 16.00
2 57,670 16.50
1 35,512 16.75
--- ----------
271 9,928,743 13.08%
=== ========== =====
RECEIVABLES FOR FORECLOSURE
EXPENSES.................... 8,766
UNAPPLIED COLLECTIONS....... (12,761)
----------
$9,924,748
==========
The accompanying notes are an integral part of these financial statements.
TRANSPORTATION CAPITAL CORP.
SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS --(CONTINUED)
MAY 29, 1996
COMPOSITION OF LOAN PORTFOLIO: BALANCE OUTSTANDING PERCENT
------------------- --------
New York medallions...................... 618,280 6.22%
New York radios and others............... 535,696 5.40
New York minuteman receivables........... 1,231,012 12.40
Newark medallions........................ 91,342 0.92
Boston medallions........................ 3,131,238 31.54
Cambridge medallions..................... 2,291,251 23.08
Chicago medallions....................... 2,029,924 20.44
---------- ------
Total composition of loan portfolio .... $9,928,743 100.00%
========== ======
The accompanying notes are an integral part of these financial
statements.
SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS
DECEMBER 31, 1995
The distribution of loans at December 31, 1995 by rate of interest is as
follows:
NUMBER BALANCE INTEREST
------ ------------ ---------
OF LOANS OUTSTANDING RATE
-------- ------------ ---------
2 $ 115,650 9.50%
3 125,384 10.00
10 361,560 11.00
51 1,231,411 12.00
2 64,923 12.50
48 1,234,511 13.00
4 22,065 13.25
50 1,740,372 13.50
5 210,120 13.75
50 2,516,760 14.00
18 393,213 14.25
6 1,254,777 14.50
1 55,707 14.75
16 217,328 15.00
2 65,072 15.50
4 27,918 15.75
1 13,296 16.00
2 61,934 16.50
3 88,006 16.75
1 5,463 17.00
--- ----------
279 9,805,470 13.46
===
RECEIVABLES FOR FORECLOSURE
EXPENSES......................... 10,144
UNAPPLIED COLLECTIONS............. (18,886)
----------
$9,796,728
==========
PERCENT
--------
COMPOSITION OF LOAN PORTFOLIO:
New York medallions.................. $ 797,932 8.14
New York radios and others........... 599,694 6.12
New York minuteman receivables....... 1,217,371 12.41
Newark medallions.................... 158,157 1.61
Boston medallions.................... 3,400,557 34.68
Cambridge medallions................. 1,984,198 20.24
Chicago medallions................... 1,647,561 16.80
---------- ------
Total composition of loan
portfolio......................... $9,805,470 100.00%
========== ======
The accompanying notes are an integral part of these financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 9, 1997 By: /s/ Daniel F. Baker
-------------------
Daniel F. Baker
Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
3.1 Medallion Financial Corp. Restated Certificate of Incorporation.
Filed herewith.
3.2 Medallion Financial Corp. Restated By-Laws. Filed as Exhibit b
to the Company's Registration Statement on Form N-2 (File No.
333-1670) and incorporated by reference herein.
4.1 Debenture due April 1, 1997 in the amount of $1,500,000 issued by
Edwards Capital Company and payable to Chemical Bank as Trustee
under the Trust Agreement dated January 15, 1987 among the
Trustee, the U.S. Small Business Administration and SBIC Funding
Corporation (the "Trust Agreement"). Filed as Exhibit f.2 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
4.2 Debenture due June 1, 1998 in the amount of $3,000,000 issued by
Edwards Capital Company and payable to Chemical Bank under the
Trust Agreement. Filed as Exhibit f.3 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein.
4.3 Debenture due September 1, 2002 in the amount of $3,500,000
issued by Edwards Capital Company and payable to Chemical Bank as
Trustee under the Amended and Restated Trust Agreement dated
March 1, 1990 among the Trustee, the U.S. Small Business
Administration and SBIC Funding Corporation (the "Amended Trust
Agreement"). Filed as Exhibit f.4 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by
reference herein.
4.4 Debenture due September 1, 2002 in the amount of $6,050,000
issued by Edwards Capital Company and payable to Chemical Bank
under the Amended Trust Agreement. Filed as Exhibit f.5 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
4.5 Debenture due June 1, 2004 in the amount of $4,600,000 issued by
Edwards Capital Company and payable to Chemical Bank under the
Amended Trust Agreement. Filed as Exhibit f.6 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein.
4.6 Debenture due September 1, 2004 in the amount of $5,100,000
issued by Edwards Capital Company and payable to Chemical Bank
under the Amended Trust Agreement. Filed as Exhibit f.7 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
4.7 Letter Agreement, dated September 8, 1992, between the U.S. Small
Business Administration and Edwards Capital Company regarding
limit on incurrence of senior indebtedness, as amended on January
17, 1996. Filed as Exhibit f.8 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein. Letter dated September 19,
1996 from the U.S. Small Business Administration to Edwards
Capital Corp. amending such Letter Agreement is filed herewith.
4.8 Debenture due June 1, 2002 in the amount of $5,640,000 issued by
Transportation Capital Corp. and payable to Chemical Bank under
the Amended Trust Agreement. Filed as Exhibit f.10 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
10.1 Continuing General Security Agreement between NatWest Bank N.A.
(formerly National Westminster Bank USA) and Edwards Capital
Company dated June 17, 1987. Filed as Exhibit k.12 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
10.2 Term Note in the principal amount of $2,000,000 dated July 16,
1990 as amended March 27, 1992, July 16, 1993 and July 16, 1995
from Medallion Funding Corp. payable to NatWest Bank N.A.
(formerly National Westminster Bank USA). Filed as Exhibit k.18
to the Company's Registration Statement on Form N-2 (File No.
333-1670) and incorporated by reference herein.
10.3 General Loan and Security Agreement between Sterling National
Bank & Trust of New York and Edwards Capital Company dated May 1,
1991. Filed as Exhibit k.13 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by
reference herein.
10.4 General Security Agreement between Israel Discount Bank of New
York and Edwards Capital Company dated May 2, 1991. Filed as
Exhibit k.14 to the Company's Registration Statement on Form N-2
(File No. 333-1670) and incorporated by reference herein.
10.5 Inter-Creditor Agreement among and between Edwards Capital
Company and Bank Hapoalim B.M., Chemical Bank, Israel Discount
Bank of New York, NatWest Bank N.A. (formerly National
Westminster Bank USA), Marine Midland Bank and Sterling National
Bank & Trust Company of New York dated as of May 14, 1991. Filed
as Exhibit k.10 to the Company's Registration Statement on Form
N-2 (File No. 333-1670) and incorporated by reference herein.
10.6 Loan Agreement dated as of March 27, 1992 among Medallion Funding
Corp., the banks signatory thereto and NatWest Bank N.A.
(formerly National Westminster Bank USA), as amended March 31,
1993, September 29, 1993, March 31, 1994, September 29, 1995 and
March 28, 1996. Filed as Exhibit k.19 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein. Amendment Five dated January
28, 1997 amending such Loan Agreement is filed herewith.
10.7 Security Agreement between Medallion Funding Corp. and NatWest
Bank N.A. (formerly National Westminster Bank USA) dated as of
March 27, 1992 for the benefit of the banks signatory to the Loan
Agreement dated as of March 27, 1992, among Medallion Funding
Corp., the banks signatory thereto and NatWest Bank N.A.
(formerly National Westminster Bank USA). Filed as Exhibit k.20
to the Company's Registration Statement on Form N-2 (File No.
333-1670) and incorporated by reference herein.
10.8 Committed Line of Credit Agreement in the principal amount of
$3,000,000 dated as of July 29, 1993, as amended May 31, 1994,
October 31, 1994 and September 30, 1995 between Edwards Capital
Company and Bank Hapoalim B.M. Filed as Exhibit k.9 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
10.9 Promissory Note dated July 31, 1993 in the principal amount of
$5,000,000 from Edwards Capital Company payable to NatWest Bank
N.A. (formerly National Westminster Bank USA) as endorsed by
Endorsement No. 1 dated July 31, 1994 and Endorsement No. 2 dated
July 31, 1995. Filed as Exhibit k.8 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein.
10.10 Specialized Small Business Investment Company 3% Preferred Stock
Repurchase Agreement dated as of August 12, 1994 between
Medallion Funding Corp. and the U.S. Small Business
Administration. Filed as Exhibit k.28 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein.
10.11 Specialized Small Business Investment Company 3% Preferred Stock
Repurchase Agreement dated as March 22, 1995 between
Transportation Capital Corp. and the U.S. Small Business
Administration as amended by letter agreement dated June 1, 1995.
Filed as Exhibit k.29 to the Company's Registration Statement on
Form N-2 (File No. 333-1670) and incorporated by reference
herein.
10.12 Agreement of Merger between Medallion Financial Corp. and Tri-
Magna Corporation, dated December 21, 1995, as amended on
February 22, 1996. Filed as Exhibit k.3(i) to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein.
10.13 Stock Purchase Agreement among Medallion Financial Corp.,
Transportation Capital Corp., LNC Investments, Inc., Leucadia,
Inc. and Leucadia National Corporation, dated February 12, 1996*.
Filed as Exhibit k.1 to the Company's Registration Statement on
Form N-2 (File No. 333-1670) and incorporated by reference
herein.
10.14 Asset Purchase Agreement between Medallion Financial Corp., and
Edwards Capital Company, dated February 21, 1996. Filed as
Exhibit k.2 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
10.15 Amendment Number 2 to Agreement of Merger between Medallion
Financial Corp. and Tri-Magna Corporation, dated April 26, 1996.
Filed as Exhibit k.3(ii) to the Company's Registration Statement
on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
10.16 Amendment Number 1 to Stock Purchase Agreement among Medallion
Financial Corp. Transportation Capital Corp., LNC Investments,
Inc., Leucadia, Inc. and Leucadia National Corporation dated
April 30, 1996. Filed as Exhibit k.1(i) to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein.
10.17 Amendment Number 1 to Asset Purchase Agreement between Medallion
Financial Corp. and Edwards Capital Company dated April 30, 1996.
Filed as Exhibit k.2(i) to the Company's Registration Statement
on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
10.18 Sub-Advisory Agreement between Medallion Financial Corp. and FMC
Advisers, Inc. dated May 29, 1996. Filed herewith.
10.19 Employment Agreement between Medallion Financial Corp. and Alvin
Murstein dated May 29, 1996. Filed herewith.
10.20 Employment Agreement between Medallion Financial Corp. and Andrew
Murstein dated May 29, 1996. Filed herewith.
10.21 Agreement between Medallion Taxi Media, Inc., See-Level
Advertising, Inc. and See-Level Management, Inc. dated July 25,
1996. Filed as Exhibit 10.1 to the Company's Report on Form 10-Q
for the quarterly period ended September 30, 1996 and
incorporated herein by reference.
10.22 Agreement between Medallion Taxi Media, Inc. and Glenn Grumman
dated July 25, 1996. Filed as Exhibit 10.2 to the Company's
Report on Form 10-Q for the quarterly period ended September 30,
1996 and incorporated herein by reference.
10.23 Security Agreement dated October 31, 1996 between First Bank of
the Americas and Edwards Capital Corp. Filed herewith.
10.24 Master Grid Note (Secured Revolving Line of Credit) dated October
31, 1996 in the amount of $3,000,000 from Edwards Capital Corp.
payable to First Bank of the Americas. Filed herewith.
10.25 Letter Agreement dated December 1, 1996 between Fleet Bank, N.A.
and Medallion Financial Corp., as amended February 10, 1997.
Filed herewith.
10.26 Revolving Credit Note dated December 1, 1996 in the amount of
$6,000,000 from Medallion Financial Corp. payable to Fleet Bank,
N.A., endorsed by Endorsement No. 1 dated February 10, 1997. Filed
herewith.
10.27 Security Agreement dated December 1, 1996 between Fleet Bank,
N.A. and Medallion Financial Corp. Filed herewith.
10.28 Revolving Credit Note dated January 28, 1997 in the amount of
$25,000,000 from Medallion Funding Corp. payable to Fleet Bank,
N.A. Filed herewith.
10.29 Revolving Credit Note dated January 28, 1997 in the amount of
$22,500,000 from Medallion Funding Corp. payable to The First
National Bank of Boston. Filed herewith.
10.30 Revolving Credit Note dated January 28, 1997 in the amount of
$15,000,000 from Medallion Funding Corp. payable to Harris Trust
and Savings Bank. Filed herewith.
10.31 Revolving Credit Note dated January 28, 1997 in the amount of
$12,500,000 from Medallion Funding Corp. payable to Bank of
Tokyo-Mitsubishi Trust Company. Filed herewith.
10.32 Revolving Credit Note dated January 28, 1997 in the amount of
$10,000,000 from Medallion Funding Corp. payable to Israel
Discount Bank of New York. Filed herewith.
10.33 Revolving Credit Note dated January 28, 1997 in the amount of
$10,000,000 from Medallion Funding Corp. payable to European
American Bank. Filed herewith.
10.34 Revolving Credit Note dated January 28, 1997 in the amount of
$10,000,000 from Medallion Funding Corp. payable to Bank Leumi
Trust Company of New York. Filed herewith.
10.35 Letter Agreement, dated February 21, 1997, between Medallion
Funding Corp. and the U.S. Small Business Administration
regarding the conversion of Medallion Funding Corp. from a
specialized small business investment company to a small business
investment company. Filed herewith.
10.36 Letter Agreement, dated February 21, 1997, between Transportation
Capital Corp. and the U.S. Small Business Administration
regarding the conversion of Transportation Capital Corp. from a
specialized small business investment company to a small business
investment company. Filed herewith.
10.37 Agreement between Medallion Taxi Media, Inc. and Metropolitan
Taxicab Board of Trade, Inc. dated March 6, 1997. Filed
herewith.
10.38 Promissory Note from Edwards Capital Company payable to Israel
Discount Bank of New York. Filed as Exhibit k.4 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein.
10.39 Schedule of Promissory Notes from Edwards Capital Company payable
to Israel Discount Bank of New York. Filed as Exhibit k.5 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
10.40 Secured Note from Edwards Capital Company payable to Sterling
National Bank & Trust Company of New York. Filed as Exhibit k.6
to the Company's Registration Statement on Form N-2 (File No.
333-1670) and incorporated by reference herein.
10.41 Schedule of Secured Notes from Edwards Capital Company payable to
Sterling National Bank & Trust Company of New York. Filed as
Exhibit k.7 to the Company's Registration Statement on Form N-2
(File No. 333-1670) and incorporated by reference herein.
10.42. Medallion Financial Corp. Dividend Reinvestment Plan. Filed as
Exhibit e to the Company's Registration Statement on Form N-2
(File No. 333-1670) and incorporated by reference herein.
10.43 Medallion Financial Corp. 1996 Stock Option Plan. Filed as
Exhibit i.1 to the Company's Registration Statement on Form N-2
(File No. 333-1670) and incorporated by reference herein.
10.44 Medallion Financial Corp. 1996 Non-Employee Directors Stock
Option Plan. Filed herewith.
23.1 Consent of Arthur Andersen LLP relating to its report concerning
Medallion Financial Corp. dated February 19, 1997. Filed
herewith.
23.2 Consent of Arthur Andersen LLP relating to its report concerning
Edwards Capital Company dated March 26, 1997. Filed herewith.
23.3 Consent of Arthur Andersen LLP relating to its report concerning
Transportation Capital Corp. dated March 26, 1997. Filed
herewith.
23.4 Consent of Arthur Andersen LLP relating to its report concerning
Tri-Magna Corporation dated March 26, 1997. Filed herewith.
23.5 Consent of Friedman, Alpren & Green LLP relating to its report
concerning Edwards Capital Company dated January 28, 1995. Filed
herewith.
27 Medallion Financial Corp. Financial Data Schedule. Filed
herewith.