================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission file number 0-27812 MEDALLION FINANCIAL CORP. (Exact name of registrant as specified in its charter) DELAWARE 04-3291176 (State of Incorporation) (IRS Employer Identification No.) 437 MADISON AVENUE, NEW YORK, NEW YORK 10022 (Address of principal executive offices) (Zip Code) (212) 328-2100 (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, par value $.01 per share (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 [X]. The approximate aggregate market value of common equity held by non-affiliates of the Registrant as of March 20, 1997 was approximately $245 million based on the average bid and ask prices of the Registrant's Common Stock on the Nasdaq National Market as of the close of business on March 20, 1997. There were 12,882,996 shares of the Registrant's Common Stock outstanding as of March 20, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Definitive Proxy Statement for its 1998 Annual Meeting of Shareholders to be held on June 11, 1998, 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, 1997, are incorporated by reference into Part III of this Form 10-K. ================================================================================
MEDALLION FINANCIAL CORP. 1997 FORM 10-K ANNUAL REPORT Table of Contents <TABLE> <CAPTION> Page ---------- <S> <C> <C> PART I......... 3 Item 1. Business of the Company............................................................... 18 Item 2. Properties............................................................................ 18 Item 3. Legal Proceedings..................................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders................................... 18 PART II........ 20 Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.............. 20 Item 6. Selected Financial Data............................................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 42 Item 8. Financial Statements and Supplementary Data........................................... 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. 42 PART III....... 43 Item 10. Directors and Executive Officers of the Registrant.................................... 43 Item 11. Executive Compensation................................................................ 43 Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 43 Item 13. Certain Relationships and Related Transactions........................................ 43 PART IV........ 43 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 43 </TABLE> 2
PART I ITEM 1. BUSINESS OF THE COMPANY GENERAL Medallion Financial Corp. ("Medallion Financial") acquired on May 29, 1996 the 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. On October 31, 1997, Medallion Financial's subsidiary, Business Lenders, LLC ("BLLC"), acquired certain assets and assumed certain liabilities of Business Lenders, Inc. ("Business Lenders"). BLLC operates as a specialty finance company focusing on long-term loans to active businesses secured by real estate. Medallion Financial is a business development company under the Investment Company Act of 1940, as amended (the "1940 Act"). --------------- UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES HEREIN TO THE "COMPANY" INCLUDE MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES COLLECTIVELY AND REFERENCES HEREIN TO "MEDALLION FINANCIAL" REFER TO 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. Through its subsidiary BLLC, the Company is licensed by the U.S. Small Business Administration (the "SBA") to operate in the Section 7(a) loan program and lends to active businesses secured by assets and or real estate also referred to as Commercial Installment Loans. 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, 1997, the Company had approximately 3,500 installed taxicab rooftop advertising displays ("Displays"). The Company sells advertising space to advertising agencies and companies promoting products. Currently, the Company provides such advertising in New York City and Boston and intends to expand to other major metropolitan areas. Medallion Financial is a closed-end, non-diversified management investment company under 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 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. Medallion Financial'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. 3
The following chart illustrates the organizational structure of the Company: Medallion Financial Corp. ("Medallion Financial") . RIC . BDC <TABLE> <S> <C> <C> <C> <C> Medallion Funding Edwards Capital Transportation Business Medallion Taxi Corp. Corp. Capital Corp. Lenders LLC. Media, Inc. ("MFC") ("Edwards") ("TCC") ("BLLC") ("Media") . RIC . RIC . RIC . 7a Lender . Taxicab . SBIC . SBIC . SBIC advertising business . C Corporation </TABLE> BDC Business Development Company under the 1940 Act ("BDC"). RIC Regulated Investment Company under the Code. SBIC Small Business Investment Company licensed by the SBA. 7a Lender Participating lender under the SBA's Section 7(a) loan program. 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 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 department that originates Commercial Installment Loans. As an SSBIC, MFC was restricted to financing small business concerns owned and managed by persons deemed to be socially or economically disadvantaged ("Disadvantaged Borrowers"). As an SBIC, MFC is permitted to lend to any small business meeting the size and eligibility requirements established by the SBA, 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. 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 and Boston and intends to both expand within its existing markets and enter other major metropolitan markets. In furtherance of its expansion efforts, Media acquired 450 additional installed Displays in New York City 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 on over 1,600 New York City taxicabs owned by members of the MTBOT commencing on September 22, 1997. The effect of this agreement increased the number of taxicabs Media currently has under contract in New York City from approximately 1,700 to approximately 3,300. The agreement with MTBOT has made Media the leading taxicab rooftop advertiser in New York City and one of the largest in the nation. Media also has 200 Displays in the Boston area. 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's subsidiary, Edwards, acquired substantially all of its assets and assumed substantially all of its liabilities on May 29, 1996. Edward is registered as a closed-end, management investment company under the 1940 Act. In the second quarter of 1998, 4
the Company intends to merge Edwards into MFC to increase MFC's capital and simplify the Company's corporate structure, subject to SBA approval. 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 a market presence 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 modification 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. In the second quarter of 1998, the Company intends to merge TCC into MFC to increase MFC's capital and simplify the Company's corporate structure, subject to SBA approval. Business Lenders LLC. BLLC is a Delaware limited liability company (LLC). BLLC is licensed by the State of Connecticut Department of Banking as a business and industrial development corporation and is also licensed by the SBA as a participating lender in the SBA's Section 7(a) loan program. As a Section 7(a) lender, the Company is eligible to make loans guaranteed by the SBA to small businesses meeting certain size and other eligibility requirements of the SBA. BLLC makes secured loans to small businesses in principal amounts ranging from $10,000 to $1,100,000 with terms of up to 25 years. These loans are made both on a guaranteed basis under the SBA's Section 7(a) loan program (with guarantees ranging from 68.2% to 80%) and on an unguaranteed basis independent of the Section 7(a) program by participating with Medallion Financial. On October 31, 1997, BLLC purchased the assets and assumed certain liabilities of Business Lenders. Recent Acquisitions. On February 4, 1998, Medallion Financial announced that it had executed a purchase agreement pursuant to which it would acquire certain assets and assume certain liabilities of VGI, VGII and Venture Opportunities Corp. ("VOC"), three lenders under common management involved in the financing of taxicab medallions, and laundry and dry cleaning equipment. VOC is an SBIC. On March 9, 1998, Medallion Financial announced that it had executed an agreement to acquire Capital Dimensions, Inc., a Minneapolis-based SSBIC focused on providing small business loans throughout the United States, in a stock for stock merger expected to be accounted for as a "pooling of interests." Both transactions are subject to certain regulatory and other approvals, while the CDI acquisition is subject to satisfactory completion of Medallion's due diligence. The Company expects both acquisitions to close during the second quarter of 1998. GROSS LOAN PORTFOLIO SUMMARY DATA The following table classifies the Company's loans outstanding as of December 31, 1997 and 1996: <TABLE> <CAPTION> December 31, 1997 Weighted NUMBER AVERAGE MATURITY BALANCE Type of Loans of Loans Interest Rate Date Outstanding - ------------- --------------- --------------------- --------------- ------------------ <S> <C> <C> <C> <C> New York City Medallion Loans............. 1757 9.02% 1/98-6/22 $204,514,675 Other Medallion Loans..................... 511 11.80% 1/98-6/07 21,446,574 ----- ----- ---------- ------------ All Medallion Loans..................... 2,268 9.28% 1/98-6/22 225,961,249 Dry cleaners and laundromats.............. 768 13.19% 1/98-6/05 41,033,760 Other..................................... 315 11.54% 1/98-3/23 23,963,154 ----- ----- ------------ Total..................................... 3,351 10.03% 1/98-3/23 $290,958,163 ===== ===== ========== ============ 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 ----- ----- ---------- ------------ 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 ----- ----- ------------ Total..................................... 2,370 10.80% 1/97-12/15 $176,540,188 ===== ===== ========== ============ </TABLE> 5
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 Taxi and Limousine Commission ("TLC"), individual (owner-driver) medallions currently sell for approximately $234,000 and corporate medallions currently sell for approximately $260,000. 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% more passengers than Manhattan buses in 1993. In addition, taxicabs provided 34% 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%, while citywide bus ridership declined by 40%. 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, an additional 133 were sold in October 1996, and the balance were sold in October 1997. The Company believes that the auctions have provided it with additional opportunities because it has financed the purchase of a large number of the medallions sold at auction. As a result of the limited supply of medallions, an active market for medallions has developed. The Company estimates that the total value of all New York City medallions exceeds $3.0 billion. The law limiting the number of medallions also stipulates that the ownership for the 12,053 medallions outstanding at December 31, 1997 shall remain divided into 5,086 owner-driver or individual medallions and 6,967 fleet or corporate medallions. Corporate medallions are more valuable because they can be aggregated by businesses and leased to drivers and operated for more than one shift. 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% 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 approximately $72 million to $124 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 $125,000. 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 $190 million. In addition, the Company estimates Cambridge medallions currently sell for approximately $90,000. 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 $22 million. The Chicago Market. Based on the Company's experience, Chicago medallions currently sell for approximately $55,000. Pursuant to a 1988 municipal ordinance, the number of outstanding medallions, currently is capped at 5,700, has increased steadily from 4,600 in 1988. The Company estimates that the total value of all Chicago medallions and related assets is approximately $313 million. 6
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 90.5% of the value of the Company's Medallion Loan portfolio at December 31, 1997. The balance consisted of Medallion Loans collateralized by Boston, Chicago, Cambridge, Newark, Baltimore and Hartford taxicab medallions. The Company believes that there are significant growth opportunities in these and other metropolitan markets nationwide. Most New York City medallion transfers are handled through approximately 31 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. LOAN PORTFOLIO Medallion Loans comprised approximately 78.3% of the Company's loan portfolio at December 31, 1997. On that date, the Company had 2,268 Medallion Loans outstanding ranging from $300 to $560,000 in principal amount outstanding with an average principal amount outstanding of $99,600 and an aggregate principal amount outstanding of $226.0 million. These loans generally require equal monthly payments covering accrued interest and amortization of principal over a ten to fifteen year schedule subject to a balloon payment of all outstanding principal after four or five years. More recently, the Company has begun to originate loans with one to four year interest rate maturities. Borrowers may prepay Medallion Loans upon payment of a fee ranging from 0 to 90 days' interest. The Company generally retains the Medallion Loans it originates. 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, 1997, 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 75%. 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, 1997. 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 400 to 700 basis points over the prevailing prime rate of interest charged by major commercial banks (the "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, (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 7
and terms of credit are standardized. Moreover, the consistency among the loans has facilitated simplified credit review and portfolio analysis. BLLC lends primarily to businesses secured by assets and or real estate throughout the New England and the New York area under the SBA's Section 7(a) loan program. BLLC's loans are typically secured by assets or real estate, have floating interest rates tied to a spread over the prime rate, and are guaranteed by the SBA, up to a maximum guarantee of $750,000. Additionally, a liquid market exists for the sale of the guaranteed portion of the loans. The Company believes that the floating rate nature of these loans is beneficial for its interest rate exposure management. 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 BLLC, Edwards, TCC and Medallion Financial itself. LOAN PORTFOLIO Commercial Installment Loans comprised 21.7% of the Company's loan portfolio at December 31, 1997. 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 $1,700,000. These loans are generally retained by the Company and typically have maturities ranging from one to ten years. At December 31, 1997, there were 1,083 Commercial Installment Loans outstanding with a balance of $62.8 million. Loans to dry cleaners and laundromats represented 67.1% of the aggregate principal amount of Commercial Installment Loans outstanding at December 31, 1997. The remaining Commercial Installment Loans are spread among other industries including: food service, real estate and radio broadcast licenses. 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 ranging from 0 to 90 days' interest. At December 31, 1997, the Company's Commercial Installment Loans had a weighted average interest rate of 12.60%. 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 334 basis points at December 31, 1997. The Company believes that the increased yield on Commercial Installment Loans compensates for their higher risk relative to Medallion Loans and further illustrates the benefits of diversification. The Company generally originates Commercial Installment Loans at an approximate average loan to value ratio of 70-75%. 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, 1997, 67.1% 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, 32.9%, was secured by real estate, food service equipment, radio broadcast licenses and other equipment. In addition, the Company requires the principals of borrowers to personally guarantee loans. Further more, equipment vendors sometimes provide full and partial recourse guarantees on loans. MARKETING, ORIGINATION AND LOAN APPROVAL PROCESS The Company and its subsidiaries employ 25 loan originators 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. 8
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 senior management 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 the Chief Executive Officer or the Chief Operating Officer GROSS LOANS RECEIVABLE The following table sets forth the Company's gross loans receivable: <TABLE> <CAPTION> December 31, ------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------------- -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> (in thousands) Loans Receivable BLLC........................ $ 14,019 5% Medallion Financial......... $ 14,640 8% 48,560 17 Tri-Magna (MFC)............. $ 82,014 57% $ 90,343 62% $ 96,956 64% 99,662 57 158,345 54 Edwards..................... 44,141 30 43,487 30 43,799 29 46,630 26 59,882 21 TCC......................... 18,074 13 10,981 8 9,797 7 15,608 9 10,152 3 -------- --- -------- --- -------- --- -------- --- -------- --- Total...................... $144,229 100% $144,811 100% $150,552 100% $176,540 100% $290,958 100% </TABLE> LOAN ACTIVITY The following table sets forth the Company's loans originated, renewed and repaid on a combined basis for the periods indicated: <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------- 1995 1996 1997 ---------------- ----------------- ---------------- <S> <C> <C> <C> (in thousands) Loans originated................................. $ 52,714 $ 88,070 $ 212,978 Loan participations repurchased.................. - - 22,537 Loan repayments (including renewals)............. (46,983) (60,569) (122,370) Decrease (increase) in unrealized depreciation... 195 9 (790) Loans (written off) recovered, net............... 11 5 (125) -------- -------- --------- Increase (decrease) in loans receivable-net...... 5,937 27,515 112,230 Loans receivable-net (beginning of period)....... 143,042 148,979 176,494 -------- -------- --------- Loans receivable-net (end of period)............. $148,979 $176,494 $ 288,724 ======== ======== ========= </TABLE> 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 Commercial Installment 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, 1997, the Company had 80 loans with an aggregate principal balance of $15.8 million, or 5.5% of the portfolio, which were delinquent for 90 days or more, compared to 88 loans with an aggregate principal balance of $8.4 million or 4.8% of the portfolio, which were delinquent for 90 days or more at December 31, 1996. The Company considers a loan to be delinquent if the borrower fails to make payments for 30 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. 9
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. The following table sets forth the Company's unrealized depreciation of investments and the loan loss experience on a combined basis: <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------- 1995 1996 1997 ----------------- ------------------ ---------------- <S> <C> <C> <C> (in thousands) Balance, beginning of year................................... $1,768 $1,573 $1,569 Change in unrealized depreciation of investments............. (145) (9) 790 Realized loan losses......................................... (62) 0 (125) Recoveries................................................... 12 5 0 Interest income received..................................... -- -- -- ------ ------ ------ Balance, end of year......................................... $1,573 $1,569 $2,234 ====== ====== ====== </TABLE> CUSTODIAL SERVICES Fleet Bank N.A. acts as the custodian of all of the Company's portfolio assets, except that BLLC's portfolio assets are held by Colsen Services, Inc. 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. Additionally, under an agreement with MTBOT, the Company has added an additional 1,600 Displays to the number under contract in New York City. Media intends to continue to expand this business through internally generated growth and additional acquisitions of taxicab rooftop advertising businesses. The Company currently provides taxicab rooftop advertising in New York City 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, 1997, the Company had approximately 3,500 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 generally vary from 30 days to one year and provide for monthly payments by the advertiser. The Company's advertising accounts have in the past included: Donna Karan; Armani Eyewear; Armani Exchange; Fleet Bank N.A.; Discover Card; The New York Times; Continental Airlines; Philip Morris Tobacco Corp.; Helmut Lang; Old Navy; Ringling Bros. Barnum & Bailey Combined Shows, Inc.; Luxottica Group S.P.A.; R. J. Reynolds Tobacco Company; and Brown & Williamson Tobacco Corporation. 10
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 57% of Media's taxicab rooftop advertising revenue is derived from tobacco products advertising. Various federal, state and local government agencies, including the U.S. Food and Drug Administration (the "FDA") have from time to time proposed regulations restricting the sale and advertising of cigarette and smokeless tobacco products. Additionally, various tobacco companies have voluntarily proposed eliminating outdoor tobacco advertising in exchange for immunity from class action suits. Accordingly, such regulations or voluntary restrictions could have an adverse effect upon the taxicab rooftop advertising business of the Company. The Company believes, however, that it could replace some of the revenue which may be lost due to the loss of tobacco taxicab rooftop advertising. 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 an analysis of the respective financial and other costs and burdens associated with funding sources. In addition, SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. Accordingly, the Company plans to limit its use of SBA funding and will seek such funding only when advantageous. At December 31, 1997, 83.2% of the Company's $165.6 million of debt consisted of bank debt, substantially all of which was at variable effective rates of interest averaging below the Prime Rate and 16.8% of the Company's debt consisted of subordinated SBA debentures, with fixed rates of interest with a weighted average rate of 7.91%. An additional $90.3 million of debt was available at December 31, 1997 at variable effective rates of interest averaging below the Prime Rate under the Company's $228.0 million in bank credit facilities. 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 FUNDING Medallion Financial has a $25 million revolving line of credit with a bank. At December 31, 1997, $16.1 million was outstanding under this facility, bearing interest at an average rate of 7.06%. Medallion Financial is in the process of increasing and extending the existing line of credit beyond its current maturity of April 30, 1998. EDWARDS FUNDING Edwards has an $8.0 million revolving line of credit with two banks. At December 31, 1997, $6.4 million was outstanding under this facility, bearing interest at the rate of 7.26%. 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. These agreements mature on April 30, 1998. As an SBIC, Edwards is eligible to obtain low cost financing from the SBA through the issuance of SBA debentures. Edwards has debentures outstanding in the principal amount of $22.3 million at December 31, 1997. 11
Edwards intends to seek to issue additional SBA debentures only if interest rates are favorable. 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, 1997, the aggregate amount outstanding was $27.9 million. The interest rates payable on outstanding subordinated SBA debentures at December 31, 1997 ranged from 7.15% to 9.80% with a weighted average of 7.91%. At December 31, 1997, Edwards had Leveragable Capital of $9.6 million and had issued $22.3 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 June 1, 1998 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, 1997, to issue $6.5 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 $195 million revolving line of credit. 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, 1997, the average interest rate was 6.97%, which was 153 basis points below the Prime Rate and 113 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, 1999. As of December 31, 1997, there was an outstanding balance of $115.3 million under the revolving line of credit. SBA financing is limited and so long as an SBIC has SBA financing outstanding, the SBA restricts the amount of secured bank debt that 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 previously obtain from both the SBA and banks combined under SBA limitations, and that this will permit MFC to more effectively expand its operations. The Company currently intends to merge TCC and Edwards into MFC during the second quarter of 1998, subject to SBA approval. In connection with the merger, MFC will assume TCC's and Edwards' SBA debentures. Ordinarily this would result in the imposition of limitations on the amount of third party bank debt that MFC could incur. MFC, however, anticipates entering into an agreement with the SBA permitting MFC to continue to incur an unlimited amount of third party bank debt, but providing that the SBA debentures of TCC and Edwards assumed by MFC will be secured by Commercial Installment Loans on a basis senior to 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. If, however, the Company is unable to negotiate such an agreement, then it will not merge MFC with TCC and Edwards. On March 13, 1998, MFC established a commercial paper program as an additional source of liquidity. In connection with such program, MFC obtained two investment grade ratings for its short term borrowings. MFC began issuing commercial paper on March 16, 1998 and at March 27, 1998 had $24.6 million outstanding. 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, 1997, TCC had $5.6 million of subordinated SBA debentures outstanding and no preferred stock outstanding. At December 31, 1997 the interest rate payable on subordinated SBA debentures was 8.00%. 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 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, 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 12
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, 1997, 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 8.00% 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, 1997, TCC had $4.2 million in principal amount of non-Medallion Loans outstanding. Subject to the foregoing limitations, TCC was eligible on December 31, 1997, 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 that MFC can incur and a realized gain in retained earnings in the amount of the repurchase discount which is being accreted to paid-in capital on a straight-line basis over 60 months, commencing August 12, 1994. If MFC or TCC were to liquidate or lose its SBA license during the accretion period, the SBA would receive the remaining unaccreted amount of the realized gain attributable to the subsidiary liquidating or losing its license. The Company anticipates entering into an agreement with the SBA permitting the proposed merger of TCC into MFC without triggering repayment of TCC's liquidating interest. 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. If, however, the Company is unable to negotiate such an agreement, then it will not merge MFC with TCC. At December 31, 1997, the aggregate remaining unaccreted amount of the realized gain for MFC and TCC was $2.9 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 or 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 Medallion Financial, that otherwise would be treated for federal income tax purposes as corporations are 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. 13
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. 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 be subject to the nondeductible 4% excise tax or it may fail to qualify as a RIC. 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 stockholder'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. 14
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 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 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) the issuer does not have a class of securities with respect to which a broker or dealer may extend margin credit; or (ii) the issuer is controlled by a BDC and the BDC has an affiliated person serving as a director of issuer; (iii) the issuer has total assets of not more than $4 million and capital and surplus (shareholders' equity less retained earnings) of not less than $2 million, or such other amounts as the Securities and Exchange 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; 15
(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; and (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 that 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 relending 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 that SBICs provide, except that SSBIC were limited to loans to small business concerns which were 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. Such small business concerns were required to 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 with the SBA, MFC is authorized to make loans to borrowers other than Disadvantaged Borrowers provided that, at the time of such loan, MFC has 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, 1997 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 approximately $100.5 million. Likewise, under the TCC Conversion Agreement with the SBA, 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 16
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, 1997, (i) the principal amount of TCC's outstanding subsidized SBA debentures was $5.6 million, (ii) the amount of the unamortized repurchase discount was $990,000, and (iii) the amount of unamortized preferred stock dividends was $116,525, for a sum total of approximately $6.7 million. At December 31, 1997, TCC had outstanding loans to Disadvantaged Borrowers with an aggregate cost basis of $9.5 million. On February 18, 1998, TCC repaid its unamortized preferred stock dividend to the SBA, which repayment was triggered by TCC's payment of cash dividends to Medallion Financial. 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 the higher of (i) 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. At December 31, 1997, the maximum rate of interest permitted on loans originated by the RIC Subsidiaries is 19%. At December 31, 1997, the Company's outstanding Medallion Loans had a weighted average rate of interest of 9.28% and outstanding Commercial Installment Loans had a weighted average rate of interest of 12.60%. SBA Regulations also require that each loan originated by an SBIC have a term of between 5 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 agreements with the SBA, 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 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 in originating Commercial Installment Loans. 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. 17
EMPLOYEES As of December 31, 1997, the Company employed a total of 86 persons. 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 17,000 square feet of office space in New York City for its corporate headquarters under a lease expiring in June 2006. The Company also leases office space for loan origination offices in Boston, MA, Chicago, IL, Hartford, CT, Southbury, CT, Clifton, NJ, Providence, RI, Rochester, NY, Scottsdale, AZ, Wellesley, MA and West Berlin, NJ. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries have been named as defendants in various legal proceedings incident to its business. Management intends to vigorously defend these outstanding claims. 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 on the Company's results of operations or financial condition. 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 Company's fiscal year. EXECUTIVE OFFICERS OF THE REGISTRANT The current executive officers of the Company are as follows: <TABLE> <CAPTION> NAME Age Position(S) Held With the Company <S> <C> <C> Alvin Murstein*..................... 63 Chairman, Chief Executive Officer and Director Andrew Murstein*.................... 33 President and Director Allen S. Greene*.................... 51 Senior Executive Vice President and Chief Operating Officer Daniel F. Baker*.................... 34 Treasurer and Chief Financial Officer Marie Russo*........................ 73 Senior Vice President and Secretary Michael J. Kowalsky*................ 54 Executive Vice President </TABLE> - ---------------- An asterisk (*) indicates an "interested person" as such term is defined in Section 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 his or her 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 and President of Media from its inception. Mr. Murstein has also been a Director of Medallion Financial, MFC, Edwards and TCC since October 1997. He served as Tri-Magna's Director of New Business Development from 1994 until its acquisition 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 18
Council. Andrew Murstein is the son of Alvin Murstein, and is the third generation of his family to be active in the taxicab industry. Allen S. Greene has been Senior Executive Vice President and Chief Operating Officer of Medallion Financial since August 1997. Prior to joining the Company, Mr. Greene was President, Director and Chief Executive Officer of Ryan Beck & Co., a full service securities and investment banking firm, from 1994 to 1997. From 1990 through 1994, Mr. Greene was Chairman, Director, Chief Executive Officer and President of Valley Savings Bank and its parent, VSB Bancorp. Mr. Greene also served as a director of Elmwood Bancorp and its subsidiary Elmwood Federal Savings Bank from 1989 to 1994 and Tri-Magna and MFC from 1991 to 1994. Mr. Greene is also a licensed New York State real estate broker. Mr. Greene received both a B.B.A. and an M.B.A. from the City University of New York. 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- Magna and from 1988 through 1991 he was Controller of MFC. Prior to joining MFC, Mr. Baker was employed by Arthur Andersen LLP. Mr. Baker received a B.S. in accounting from Husson College. 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. Michael J. Kowalsky has been Executive Vice President of Medallion Financial 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. 19
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 on the Nasdaq National Market under the symbol "TAXI." As of March 20, 1998, there were approximately 650 holders of record of the Company's Common Stock. The following table sets forth for the periods indicated, the range of high and low closing prices for the Company's Common Stock on the Nasdaq National Market. <TABLE> <CAPTION> HIGH LOW YEAR ENDED DECEMBER 31, 1997 <S> <C> <C> Quarter Ended March 31, 1997 $19-3/4 $ 14 Quarter Ended June 30, 1997 $20-1/8 $ 16 Quarter Ended September 30, 1997 $21-3/4 $17-3/4 Quarter Ended December 31, 1997 $ 23 $ 20 YEAR ENDED DECEMBER 31, 1996 Period from May 23, 1996 through June 30, 1996 $13-3/8 $12-1/4 Quarter Ended September 30, 1996 $ 15 $10-3/8 Quarter Ended December 31, 1996 $15-1/4 $12-7/8 </TABLE> On November 26, 1996, the Company paid its first quarterly cash dividend of $0.20 per share of Common Stock. The Company has paid quarterly dividends since that time, and currently anticipates that it will continue to pay quarterly cash dividends on the Common Stock. There can be no assurance, however, that the Company will have sufficient earnings to pay such dividends 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 year ending December 31, 1997 and 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 Annual 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 the period ended May 29, 1996, have been derived from audited financial statements included in this Annual 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 Annual 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 Annual 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 20
adjustments, 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 Annual Report on Form 10-K. 21
MEDALLION FINANCIAL CORP. SELECTED CONSOLIDATED FINANCIAL DATA FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997 <TABLE> <CAPTION> May 30 To Year Ended DECEMBER 31, DECEMBER 31, 1996 1997 --------------------- -------------------- STATEMENT OF OPERATIONS DATA (in thousands except per share amounts) <S> <C> <C> Investment income...................................................... $ 10,412 $ 23,446 Interest expense....................................................... 5,008 9,209 -------- -------- Net interest income.................................................... 5,404 14,237 Equity in earnings (losses) of unconsolidated subsidiary(1)........................................... (63) 203 Other income........................................................... 411 980 Accretion of negative goodwill......................................... 421 722 Gain on sale of loans.................................................. - 336 Operating expenses..................................................... (2,231) 4,797 Amortization of goodwill............................................... (259) 368 -------- -------- Net investment income.................................................. 3,683 11,314 Realized gain on investments, net...................................... 84 144 Change in unrealized depreciation of investments(2).................... (46) (25) -------- -------- Net increase in net assets resulting from operations(3)................ $ 3,721 $ 11,434 ======== ======== Net increase in net assets resulting from operations per share (3)..... $0.45 $1.03 ======== ======== Dividends declared per share........................................... $0.41 $0.95 ======== ======== December 31, DECEMBER 31, BALANCE SHEET DATA (IN THOUSANDS) 1996 1997 -------- -------- Investments Medallion Loans....................................................... $134,615 $225,961 Commercial Installment Loans.......................................... 41,879 62,763 -------- -------- Investments, net of unrealized depreciation of investments............. 176,494 288,724 Total assets........................................................... 189,625 310,045 Notes payable and demand notes......................................... 96,450 137,750 Subordinated SBA debentures............................................ 29,390 27,890 Total liabilities...................................................... 130,619 176,858 Total stockholders' equity............................................. 56,487 131,392 </TABLE> <TABLE> <CAPTION> December 31, December 31, 1996 1997 --------------------- -------------------- SELECTED FINANCIAL RATIOS AND OTHER DATA (UNAUDITED) <S> <C> <C> Return on assets(4)(5)................................................. 3.36% 4.81% Return on equity(5)(6)................................................. 11.29 8.70 Average yield, e.o.p.(7)............................................... 10.80 10.58 Average cost of funds, e.o.p.(8)....................................... 7.11 7.24 Spread, e.o.p.(9)...................................................... 3.69 3.34 Other income ratio(5)(10).............................................. 0.40 0.44 Operating expense ratio(5)(11)......................................... 2.02 2.02 Medallion Loans as a percentage of investments......................... 76.25 78.26 Commercial Installment Loans as a percentage of investments............ 23.75 21.74 Investments to assets.................................................. 93.08 93.49 Equity to assets....................................................... 29.79 42.38 Debt to equity......................................................... 222.76 126.65 SBA debt to total debt................................................. 23.36 15.77 </TABLE> 22
MEDIA (1) <TABLE> <CAPTION> MAY 30 TO YEAR ENDED DECEMBER 31, DECEMBER 31, 1996 1997 ---------------- --------------- <S> <C> <C> STATEMENT OF OPERATIONS DATA Advertising revenue............................... $1,095,346 $3,070,119 Cost of services.................................. 499,135 1,204,892 ---------- ---------- Gross margin...................................... 596,211 1,865,227 Other operating expenses.......................... 659,211 1,499,803 ---------- ---------- Income (losses) before taxes...................... (63,000) 365,424 Income taxes...................................... - 162,000 ---------- ---------- Net income (loss)................................. $ (63,000) $ 203,424 ========== ========== </TABLE> (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 year or period indicated, divided by total assets at December 31, 1996 and 1997, respectively. (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 year or period indicated, divided by total stockholders' equity at December 31, 1996 and 1997, respectively. (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 year or period indicated, divided by investments at December 31, 1996 and 1997, respectively. (11) Operating expense ratio represents operating expenses, for the year or period indicated, divided by total assets at December 31, 1996 and 1997, respectively. 23
SELECTED FINANCIAL DATA (3) TRI-MAGNA (MFC, BUT NOT MEDIA, IS CONSOLIDATED WITH TRI-MAGNA) <TABLE> <CAPTION> January 1 YEAR ENDED DECEMBER 31, To ---------------------------------------------------------- May 29, 1992 1993 1994 1995 1996 ------------- ------------- ------------- ------------- --------------- (UNAUDITED) (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> 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)................................... ------------ (53) 58 (140) -- 125 ------- ------- ------- ------- ------- Net increase in net assets resulting from operations....................................... ============ ======= ======= ======= $ 185 $ 1,947 $ 1,671 $ 1,660 $ 1,439 ======= ======= ======= ======= ======= 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 10,897 Weighted average debt............................. 47,160 60,160 67,955 73,063 79,912 </TABLE> <TABLE> <CAPTION> DECEMBER 31,(3) --------------------------------------------------------- MAY 29, 1992 1993 1994 1995 1996(3) ------------ -------------- ------------ ------------ ---------------- <S> <C> <C> <C> <C> <C> 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 -- -- </TABLE> 24
TRI-MAGNA <TABLE> <CAPTION> December 31, -------------- May 29, 1992 1993 1994 1995 1996 ----------- -------------- -------- -------- -------- <S> <C> <C> <C> <C> <C> (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 </TABLE> MEDIA(1) <TABLE> <CAPTION> NOVEMBER 22 TO YEAR ENDED DECEMBER JANUARY 1 TO DECEMBER 31, 31, MAY 29, 1994 1995 1996 ------------------------- -------------------- ----------------------- <S> <C> <C> <C> 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) </TABLE> (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. 25
EDWARDS <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------- JANUARY 1 TO MAY 29, 1992 1993 1994 1995 1996 -------- -------- -------- -------- ------------- <S> <C> <C> <C> <C> <C> (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 </TABLE> <TABLE> <CAPTION> DECEMBER 31, (2) -------- MAY 29, 1992 1993 1994 1995 1996 (2) -------- -------- -------- -------- ------------- <S> <C> <C> <C> <C> <C> 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 </TABLE> 26
EDWARDS <TABLE> <CAPTION> DECEMBER 31, ---------------------------- JANUARY 1 TO MAY 29, 1992 1993 1994 1995 1996 <S> <C> <C> <C> <C> <C> (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 </TABLE> (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 partners' capital for the period. sale of assets) divided by the weighted average (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. 27
TCC <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------- JANUARY 1 TO MAY 29, 1992 1993 1994 1995 1996 ----------- -------- -------- -------- ------------- <S> <C> <C> <C> <C> <C> (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 </TABLE> <TABLE> <CAPTION> DECEMBER 31,(4) MAY 29, ----------------------------- 1992 1993 1994 1995 1996(4) ----- ------ ------ ------ ---------- <S> <C> <C> <C> <C> <C> 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 </TABLE> 28
TCC <TABLE> <CAPTION> DECEMBER 31, ----------------------------------------- MAY 29, 1992 1993 1994 1995 1996 ----------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> (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 </TABLE> (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. 29
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 Annual 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: <TABLE> <CAPTION> December 31, 1996 December 31, 1997 Weighted Percentage Weighted Percentage Average Principal of Total Average Principal Of Total Yield Amounts Portfolio Yield Amounts Portfolio --------- ------------ ----------- --------- ------------ ----------- <S> <C> <C> <C> <C> <C> <C> Medallion Loan Portfolio 9.92% $134,614,899 76.3% 9.28% $225,961,249 78.3% Commercial Installment Loan Portfolio 13.51 41,878,989 23.7 12.60 62,763,197 21.7 ------------ ----- ------------ ----- Total Portfolio 10.80 $176,493,888 100.0% 10.02 $288,724,446 100.0% ============ ===== ============ ===== </TABLE> The weighted average yield e.o.p. of the Medallion Loan portfolio decreased 64 basis points from 9.92% at December 31, 1996 to 9.28% at December 31, 1997. Medallion Loans constituted 76.3% of the total portfolio of $176.5 million at December 31, 1996 and 78.3% of the total portfolio of $288.7 million at December 31, 1997./1/ The weighted average yield e.o.p. of the entire portfolio decreased 78 basis points from 10.80% at December 31, 1996 to 10.02% at December 31, 1997. The decrease in the average yield on Medallion Loans was caused by a reduction in loan yields due to lower long-term interest rates and competition. To offset the resulting decline in investment income, the Company increased its Medallion Loan portfolio by continuing to buyback loan participations previously sold to third parties of approximately $22.5 million and expanding lending. The Company also increased the origination of loans with shorter interest rate maturity dates, thereby reducing the Company's interest rate risk exposure. 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 - --------------- /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. 30
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 had been 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 Prime Rate; however, the Medallion Loan portfolio grew faster than anticipated. The weighted average yield e.o.p. of the Commercial Installment Loan portfolio decreased 89 basis points from 13.51% at December 31, 1996 to 12.60% at December 31, 1997. In addition, the percentage of the entire portfolio composed of Commercial Installment Loans decreased from 23.7%, or $41.9 million, at December 31, 1996 to 21.7%, or $62.7 million, at December 31, 1997. The large decline in the commercial portfolio yield is the result of the acquisition of the Business Lenders portfolio of approximately $9.9 million of floating rate loans tied to prime at an average yield of 11.05%. This purchase shifts the average yield on commercial loans lower; however, interest rate exposure is mitigated by the floating rate nature of these loans. The Company intends to continue to increase the percentage of Commercial Installment Loans in the total portfolio and increase the origination of floating rate loans. 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 the SBA regulations promulgated thereunder ("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 December 31, 1996 and December 31, 1997, short- term LIBOR-based debt constituted 75.1% and 83.2% of total debt, respectively. The Company's cost of funds is primarily driven by (i) the average maturity of debt issued by the Company, (ii) the premium 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 75.1% at December 31, 1996 to 83.2% at December 31, 1997. The Company measures its cost of funds as its aggregate interest expense for all MAY 29,of its interest-bearing liabilities divided by the face amount of such liabilities. The Company analyzes its cost of funds in relation to the average of the 90- and 180-day LIBOR (the "LIBOR Benchmark"). The Company's average cost of funds e.o.p. increased from 7.11% or 153 basis points over the LIBOR Benchmark of 5.58% at December 31, 1996 to 7.16%, or 133 basis points over the LIBOR Benchmark of 5.83% at December 31, 1997. 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 Displays that it owns and the occupancy rate and advertising rate of those Displays. At December 31, 1997, Media had approximately 3,500 installed Displays, 450 of which were acquired in connection with the acquisition of the assets of See Level Advertising, Inc. and See Level Management, 31
Inc. on July 25, 1996. In addition, on March 6, 1997, Media entered into an agreement with the MTBOT to provide advertising on over 1,600 New York City taxicabs affiliated with the MTBOT commencing on September 22, 1997. The effect of that agreement increased the number of taxicabs Media has under contract for rooftop advertising in New York City from approximately 1,700 to approximately 3,300. With this agreement, Media is the leading taxicab rooftop advertiser in the city. Media also has 200 Displays in the Boston area. 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 that 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 value of its loan portfolio is below the cost basis of the loan portfolio. Under the 1940 Act and the Small Business Investment Act of 1954, as amended (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 and the adequacy of its collateral. 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. Upon the completion of the Acquisitions on May 29, 1996, the Company's loan portfolio was recorded on the balance sheet at fair 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. For the year ended December 31, 1997, there was a $25,000 increase in net unrealized depreciation of investments. In connection with the Business Lenders portfolio acquisition, the Company recorded the investments on the balance sheet at fair value, which included $400,000 of net unrealized depreciation. 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 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 year ending December 31, 1997 and 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, 1995 are then discussed. All period percentages involving income statement accounts have been annualized for discussion purposes. CONSOLIDATED RESULTS OF OPERATIONS For the Year Ending December 31, 1997. Performance Summary. For the year ended December 31, 1997, investment income has been positively impacted by the strong growth of the entire loan portfolio. Interest expense for the period reflected an increase in the LIBOR benchmark e.o.p. of 25 basis points, slightly offset by a decrease in the spread over LIBOR charged by the banks in the Company's revolving credit facilities. Strong portfolio growth offset by the decline in spread between the average yield on the entire portfolio and the average of costs of funds contributed to the $11.3 million of net investment income earned during the year ended December 31, 1997. Investment Income. Investment income for the year ended December 31, 1997 was $23.4 million. The Company's investment income reflects the positive impact of portfolio growth during the period. Total portfolio 32
growth was $112.2 million or an increase of 63.6% from $176.5 million at December 31, 1996 to $288.7 million at December 31, 1997. The average portfolio outstanding during the year ended December 31, 1997 was $221.6 million, which produced investment income of $23.4 million at a weighted average interest rate of 10.58%. Gross loan originations net of participations during the year ended December 31, 1997 were $213.0 million offset by prepayments, terminations and refinancings by the Company aggregating $119.0 million. In addition, during the year ended December 31, 1997, the Company repurchased approximately $22.5 million in Medallion Loans previously participated out to other lenders. Average yield e.o.p. of the entire portfolio decreased 78 basis points from 10.80% at December 31, 1996 to 10.02% at December 31, 1997. The decrease in the yield of the entire loan portfolio was caused by a decrease in the average yield on Medallion Loans coupled with a decrease in the average yield on Commercial Installment Loans and a decrease in the percentage of the portfolio composed of higher yielding Commercial Installment Loans which historically have been originated at a yield of approximately 350 basis points higher than Medallion Loans and 500 to 700 basis points higher than the prevailing Prime Rate. The average yield e.o.p. of the Medallion Loan portfolio decreased 64 basis points from 9.92% at December 31, 1996 to 9.28% at December 31, 1997 and the average yield of the Commercial Installment Loan portfolio decreased 89 basis points from 13.51% at December 31, 1996 to 12.62% at December 31, 1997. The decrease in the average yield on Medallion Loans was caused by a reduction in loan yields due to lower long-term interest rates and competition. To offset the resulting decline in investment income, the Company increased its Medallion Loan portfolio by continuing to buyback loan participations previously sold to third parties and expanding lending. The Company also increased the origination of loans with shorter interest rate maturity dates, thereby reducing the Company's interest rate risk exposure. The percentage of the portfolio composed of higher yielding Commercial Installment Loans decreased from 23.7% at December 31, 1996 to 22.3% at December 31, 1997. Although the Company continues to follow a strategy of trying to shift its portfolio mix towards higher yielding Commercial Installment Loans, this shift was reversed by higher than expected growth in the Medallion Loan portfolio during the year. The large decline in the commercial portfolio yield is the result of the acquisition of the Business Lenders portfolio of approximately $9.9 million of floating rate loans tied to prime at an average yield of 11.05%. This purchase shifts the average yield on commercial yields lower, however, interest rate exposure is mitigated by the floating rate nature of these loans. The additional growth in the Medallion Loan portfolio was due in part to the Company's use of a portion of the proceeds from its 1997 equity offering to repurchase approximately $22.5 million in Medallion Loans which the Company had previously participated out to other lenders. Interest Expense. The Company's interest expense was $9.2 million for the year ended December 31, 1997. The Company's average cost of funds e.o.p. increased from 7.11% or 153 basis points over the LIBOR benchmark of 5.58% at December 31, 1996 to 7.16% or 131 basis points over the LIBOR benchmark of 5.83% at December 31, 1997. The increase in the average cost of funds e.o.p. was caused by a 25 basis point increase in the LIBOR benchmark offset by a reduction in the premium to LIBOR paid by the Company. The Company's net borrowings at the end of the year, increased by $39.8 million or 31.6% from $125.8 million at December 31, 1996 to $165.6 million at December 31, 1997. The increased borrowings were used to fund portfolio growth and the acquisition of BLLC. The percentage of the Company's short-term LIBOR based indebtedness increased as a percentage of total indebtedness from 75.1% at December 31, 1996 to 83.2% at December 31, 1997. Average borrowings during the year ended December 31, 1997 were $127.2 million, which produced an interest expense of $9.2 million at a weighted average interest rate of 7.24%. The weighted average interest rate of 7.24% includes commitment fees and amortization of premiums on existing interest rate cap agreements as a reflection of total cost of funds borrowed. The Company anticipates a reduction in cost of funds during 1998 for the following reasons: the use of commercial paper that MFC began selling on March 16, 1998, a reduction in the spread over LIBOR that banks charge MFC for borrowings that became effective on December 24, 1997 and the repayment of a $3 million debenture payable to the SBA on June 1, 1998 at an interest rate of 9.80%. Net Interest Income. Net interest income was $14.2 million for the year ended December 31, 1997. Net interest income reflects the positive impact of the portfolio growth coupled with a slight increase in the average cost of funds offset by a decrease in the spread between average yield and average cost of funds. The average spread between the average yield on the portfolio and the average cost of funds during the year ending December 31, 1997 was 3.34%. 33
Equity in Earnings of Unconsolidated Subsidiary. For the year ended December 31, 1997, Media generated advertising revenue of $3,070,000 and incurred Display rental costs of approximately $1,205,000, resulting in a gross margin of approximately $1,865,000 or 60.7% of advertising revenue. The number of Displays owned by Media were approximately 3,500 at December 31, 1997. For the year ended December 31, 1997, operating expenses were $1,500,000 and Media generated net income of $203,000 which is recorded as equity in earnings or losses of unconsolidated subsidiary on the Company's statement of operations. Display occupancy increased from 64.0% at December 31, 1996 to 100.0% at December 31, 1997. The average for the year was 84.6%. Other Income. The Company derived $980,000 in other income, or 0.44% of average investments for the year ended December 31, 1997. Other income was primarily derived from late charges, prepayment fees and miscellaneous income. Prepayment fees are heavily influenced by the level and volatility of interest rates and competition. Gain on Sale of Loans. The Company derived gains on the sale of loans of $336,000, or 0.15% of average investments for the year ended December 31, 1997. The gains were the result of the sale of approximately $5,415,000 of the guaranteed portions of the SBA Section 7a loans originated by BLLC since its acquisition on October 31, 1997. BLLC retains the servicing rights to these loans and receives a service fee of approximately 1.5% on the outstanding balance of each loan. This additional income is reflected as an enhancement to the average yield. At December 31, 1997, BLLC serviced approximately $52.5 million for third parties. Non-Interest Expenses. The Company had non-interest expenses of $5.2 million for the year ended December 31, 1997. Approximately $1,797,000, or 34.8% of non-interest expenses, were related to salaries and benefits, $761,000, or 14.7%, consisted of professional fees and $226,000, or 4.4% consisted of investment advisory fees. The operating expense ratio was 2.02% for the year ended December 31, 1997. 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 $368,000 for the year ended December 31, 1997 relates to $6.5 million of goodwill generated in the acquisitions of Edwards and TCC. Goodwill is the amount by which the cost of acquired businesses exceeds the fair value of the net assets acquired. Goodwill is being amortized on a straight-line basis over 15 years. Negative goodwill is the excess of fair market value of net assets of an acquired business over the cost basis of such business. Negative goodwill of $2.9 million was generated in the acquisition of Tri-Magna and is being amortized on a straight-line basis over four years. Net Realized Gain/Loss on Investments. The Company realized a net gain on investments of $144,000 during the year ended December 31, 1997. The gain was the result of the sale of warrants on a radio station for a gain of $257,000, recoveries in the amount of $12,000 on certain loans secured by radio dispatch and broadcast equipment and other assets used in connection with livery taxicab services previously written off, offset by write-offs of $125,000 related to foreclosures on various equipment secured loans. Net Investment Income. Net investment income earned during the year ended December 31, 1997 was $11.3 million reflecting the positive impact of portfolio growth offset by an increase in the average cost of funds resulting in a decrease in the spread between average yield and average cost of funds. Net Increase in Net Assets Resulting from Operations. Net increase in net assets resulting from operations was $11.4 million for the year ended December 31, 1997 and reflects portfolio growth offset by a decrease in the spread between average yield and average cost of funds. Return on assets and return on equity for the year ended December 31, 1997, on an annualized basis, were 4.81% and 8.70%, respectively. 34
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 was 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 eleven 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 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 that 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. 35
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. 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 that 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. 36
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. 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. 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. 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 that 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. 37
SCHEDULE OF PRINCIPAL PAYMENTS AS OF DECEMBER 31, 1997 The following schedule of principal payments sets forth at December 31, 1997 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 $291.9 million and interest rate sensitive liabilities were $165.6 million at December 31, 1997. The one year cumulative interest rate gap was negative $64.7 million, or 22.2% of interest rate sensitive assets. SCHEDULE OF PRINCIPAL PAYMENTS AS OF DECEMBER 31, 1997 <TABLE> <CAPTION> 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 ---------- -------------- ------------- ------------- ------------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> <C> (IN THOUSANDS) Earning Assets Medallion Loans and Commercial Fixed rate Installment Loans $ 47,052 $ 41,594 $56,605 $101,590 $ 5,234 $ 10,827 $262,902 Variable rate Installment Loans 26,498 - - - - - 26,498 Cash and cash equivalents 2,530 -- -- -- -- -- 2,530 -------- ------------- ------------- -------- ------------- -------- -------- Total 76,080 41,594 56,605 101,590 5,234 10,827 291,930 -------- ------------- ------------- -------- ------------- -------- -------- Liabilities Revolving line of credit 137,750 -- -- -- -- -- 137,750 Subordinated SBA debentures 3,000 -- -- 15,190 -- 9,700 27,890 -------- ------------- ------------- -------- ------------- -------- -------- Total 140,750 -- -- 15,190 -- 9,700 $165,640 -------- ------------- ------------- -------- ------------- -------- -------- Interest rate gap $(64,670) $ 41,594 $56,605 $ 86,400 $ 5,234 $ 1,127 $126,290 ======== ============= ============= ======== ============= ======== ======== Cumulative interest rate gap $(64,670) $(23,076) $33,529 $119,929 $125,163 $126,290 </TABLE> Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. The mismatch between maturities and interest rate sensitivities of the Company's interest-earning assets and interest-bearing liabilities results in interest rate risk. Abrupt increases in market rates of interest may have an adverse impact on the Company's earnings. 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. On April 17, 1997 38
MFC entered into an interest rate cap agreement, limiting the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit facility to 6.0% until April 21, 1998. In addition, on May 9, 1997, MFC entered into an interest rate cap agreement limiting the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit facility to 6.5% until May 13, 1998 and 7.0% until November 13, 1999. On May 12, 1997, MFC entered into an interest rate cap agreement limiting the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit facility to 7.0% until May 13, 1999. At December 31, 1997, these caps hedged 21.8% of the Company's LIBOR-based indebtedness. In addition, the Company manages its exposure to increases in market rates of interest by incurring fixed rate indebtedness, such as subordinated SBA debentures. The Company currently has outstanding subordinated SBA debentures in the principal amount of $27.9 million with a weighted average rate of interest of 7.90%. Of such debentures, $3.0 million mature on June 1, 1998 at an interest rate of 9.8%. At December 31, 1997, these debentures constituted 16.8% 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, 1997, 83.2% of the Company's $165.6 million of debt consisted of bank debt, substantially all of which was at variable effective rates of interest with a weighted average rate of 7.01% or 149 basis points below the Prime Rate and 16.8% consisted of subordinated SBA debentures with fixed rates of interest with a weighted average rate of 7.90%. The Company is eligible to seek SBA funding but plans to continue to limit its use of SBA funding and will seek such funding only when advantageous, such as when SBA financing rates are particularly attractive, or to fund loans that qualify under SBA Regulations through Edwards and TCC which are already subject to SBA restrictions. In the event that the Company seeks SBA funding, no assurance can be given that such funding will be obtained. In addition to possible additional SBA funding, an additional $90.3 million of debt was available at December 31, 1997 at variable effective rates of interest averaging below the Prime Rate under the Company's $228.0 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. 39
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, 1997. <TABLE> <CAPTION> Medallion Financial MFC Edwards TCC BLLC Total ---------- --------- ------------ ------- ----- ----------- <S> <C> <C> <C> <C> <C> <C> (dollars in thousands) Cash and cash equivalents............ $ 34 $ 1,213 $ 250 $ 528 $505 $ 2,530 Revolving lines of credit............ 25,000 195,000 8,000 -- -- 228,000 Amounts available.................. 8,900 79,750 1,600 -- -- 90,250 Amounts outstanding................ 16,100 115,250 6.400 -- -- 137,750 Average interest rate............ 7.06% 6.97% 7.26% -- -- 7.01% Maturity......................... 4/98 6/99 1/98; 4/98 -- -- 1/98-6/99 SBA debentures....................... -- -- 22,250 5,640 -- 27,890 Average interest rate............ -- -- 7.87% 8.00% -- 7.90% Maturity......................... -- -- 6/98-9/04 6/02 -- 6/98-9/04 Total cash and remaining amounts available under credit facilities.. 8,934 80,963 1,850 528 505 92,780 Total debt outstanding............... $16,100 $115,250 $ 28,650 $5,640 $ - $ 165,640 </TABLE> 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, 1997, SBA financing represented 16.8% of total debt as compared to 23.4% at December 31, 1996. Media funds its operations through internal cash flow and inter-company debt. Media is not a RIC and, therefore, is able to retain earnings to finance growth. 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 established a commercial paper program on March 13, 1998 permitting maximum borrowings of $195 million in conjunction with MFC's syndicated credit facilities. The establishment of the commercial paper program was contingent upon MFC obtaining two investment grade ratings for its short term borrowings. The issuance of commercial paper can substantially reduce MFC's cost of funds. At March 27, 1998, MFC had $24.6 million outstanding under the commercial paper 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 that 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 Annual 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. 40
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. 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, approximately 57% of Media's taxicab rooftop advertising revenue is derived from tobacco products advertising. Various federal, state and local government agencies, including the U.S. Food and Drug Administration (the "FDA") have from time to time proposed regulations restricting the sale and advertising of cigarette and smokeless tobacco products. Additionally, various tobacco companies have voluntarily proposed eliminating outdoor tobacco advertising in exchange for immunity from class action suits. Accordingly, such regulations or voluntary restrictions could have an adverse effect upon the taxicab rooftop advertising business of the Company. The Company believes, however, that it could replace some of the revenue which may be lost due to the loss of tobacco taxicab rooftop advertising. Year 2000. The Company is addressing the Year 2000 problem, which concerns the inability of systems, primarily computer software programs, to properly recognize and process date sensitive information relating to the year 2000 and beyond. The Company, in the ordinary course of business, has for several years had several information system improvement initiatives underway. These initiatives include the installation of new accounting software. Management believes that such initiatives will adequately address the Year 2000 problem, although there can be no assurance in this regard. Costs related to new information systems will be capitalized and amortized over their useful lives. Management does not believe that the other costs associated with addressing the 41
Year 2000 problem will be material. The Company will continue to address the Year 2000 issue in connection with its future acquisitions. The ability of third parties with which the Company transacts business to adequately address their Year 2000 issues is outside of the Company's control. Failure of such third parties or the Company to adequately address their respective Year 2000 issues could have a material adverse effect on the Company's financial condition or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 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 Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 42
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 11, 1998 (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 None. (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. 43
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, 1997 and 1996........... F-3 Consolidated Statements of Operations for the Year Ended December 31, 1997 and the Period from May 30, 1996 (Commencement of Operations) to December 31, 1996.................... F-4 Consolidated Statements of Changes in Shareholders' Equity for the Year Ended December 31, 1997 and the Period from May 30, 1996 (Commencement of Operations) to December 31, 1996............... F-5 Consolidated Statements of Cash Flows for the Year ended December 31, 1997 and the Period from May 30, 1996 (Commencement of Operations) to December 31, 1996..................................... F-6 Notes to Consolidated Financial Statements............................. F-8 TRI-MAGNA CORPORATION AND SUBSIDIARIES Report of Arthur Andersen LLP, Independent Public Accountants.......... F-28 Consolidated Balance Sheets as of May 29, 1996 and December 31, 1995... F-29 Statements of Operations for the Period Ended May 29, 1996 and the year ended December 31, 1995..................................... F-30 Statements of Shareholders' Equity for the Period Ended May 29, 1996 and the year ended December 31, 1995............................ F-31 Consolidated Statements of Cash Flows for the Period Ended May 29, 1996 and the year ended December 31, 1995........................ F-32 Notes to Consolidated Financial Statements............................. F-33 EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) Report of Arthur Andersen LLP, Independent Public Accountants.......... F-44 Balance Sheets as of May 29, 1996 and December 31, 1995................ F-45 Statements of Operations for the Period ended May 29, 1996 And the year ended December 31, 1995................................. F-46 Statements of Changes in Partners' Capital for the Period Ended May 29, 1996 and the year ended December 31, 1995.............. F-47 Statements of Cash Flows for the Period Ended May 29, 1996 for The year ended December 31, 1995..................................... F-48 Notes to Financial Statements.......................................... F-49 TRANSPORTATION CAPITAL CORP. Report of Arthur Andersen LLP, Independent Public Accountants.......... F-57 Balance Sheets as of May 29, 1996 and December 31, 1995................ F-58 Statements of Operations for the Period Ended May 29, 1996 and the year ended December 31, 1995................................. F-59 Statements of Changes in Shareholders' Equity for Period Ended May 29, 1996 and the year ended December 31, 1995.............. F-60 Statements of Cash Flows for the Period Ended May 29, 1996 and the year ended December 31, 1995.................................. F-61 Notes to Financial Statements.......................................... F-62 F-1
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 its subsidiaries as of December 31, 1997 and 1996, including the consolidated schedule of investments as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the year ended December 31, 1997 and the period from 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 certain loans receivable as of December 31, 1997 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 $288,724,446 (93% of total assets) as of December 31, 1997, 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 present fairly, in all material respects, the financial position of Medallion Financial Corp. and its subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the year ended December 31, 1997 and the period from May 30, 1996 (commencement of operations) to December 31, 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts February 25, 1998 (except for the matters discussed in Note 15 (a) and (c), for which the dates are March 9, 1998 and March 13, 1998, respectively) F-2
MEDALLION FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> DECEMBER 31, DECEMBER 31, 1997 1996 ------------- ------------- <S> <C> <C> ASSETS Investments: Medallion loans........................ $225,961,249 $134,614,899 Commercial installment loans........... 62,763,197 41,878,989 ------------ ------------ Net investments......................... 288,724,446 176,493,888 Investment in unconsolidated subsidiary. 1,140,424 937,000 ------------ ------------ Total investments.................. $289,864,870 $177,430,888 ------------ ------------ Cash.................................... 2,529,613 1,664,603 Accrued interest receivable............. 2,934,840 1,696,584 Receivable from sale of loans........... 2,862,981 - Fixed assets, net....................... 356,206 89,815 Goodwill, net........................... 6,082,515 6,250,636 Servicing fee receivable................ 1,671,415 - Other assets............................ 3,742,204 2,491,974 ------------ ------------ Total assets....................... $310,044,644 $189,624,500 ============ ============ LIABILITIES Accounts payable........................ $ 4,410,508 $ 1,491,490 Accrued expenses........................ 2,439,714 352,543 Dividends payable....................... 3,594,402 1,849,225 Accrued interest payable................ 773,194 1,086,247 Notes payable to banks and demand notes. 137,750,000 96,450,000 SBA debentures payable.................. 27,890,000 29,390,000 ------------ ------------ Total liabilities.................. 176,857,818 130,619,505 ------------ ------------ Negative goodwill, net.................. 1,795,316 2,517,716 ------------ ------------ Commitments and contingencies (Note 9) SHAREHOLDERS' EQUITY Preferred Stock (1,000,000 shares of - - $.01 par value stock authorized none outstanding) Common stock (15,000,000 shares of $.01 128,803 82,500 par value stock authorized -- 12,880,296 and 8,250,000 shares outstanding at December 31, 1997 and 1996, respectively.................. Capital in excess of par value......... 130,378,936 56,359,555 Accumulated undistributed income....... 883,771 45,224 ------------ ------------ Total shareholders' equity......... 131,391,510 56,487,279 ------------ ------------ Total liabilities and shareholders' equity.............. $310,044,644 $189,624,500 ============ ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-3
MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 <TABLE> <CAPTION> FOR THE PERIOD FROM FOR THE YEAR MAY 30, 1996 (COMMENCEMENT OF ENDED OPERATIONS) TO DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------ ------------------------------ <S> <C> <C> Investment income: Interest income on investments......... $23,418,070 $10,374,238 Interest income on U.S. treasury bills. 28,326 37,603 ----------- ----------- Total investment income............ 23,446,396 10,411,841 ----------- ----------- Interest expense: Notes payable to bank.................. 7,041,286 3,631,746 SBA debentures......................... 2,168,088 1,376,747 ----------- ----------- Total interest expense............. 9,209,374 5,008,493 ----------- ----------- Net interest income..................... 14,237,022 5,403,348 ----------- ----------- Non-interest income: Equity in gains (losses) of 203,424 (63,000) unconsolidated subsidiary............. Accretion of negative goodwill......... 722,400 421,435 Gain on sale of loans (Note 2)......... 336,300 - Other Income........................... 980,309 410,991 ----------- ----------- Total non-interest income.......... 2,242,433 769,426 ----------- ----------- Expenses: Administration and advisory fees....... 226,086 161,886 Professional fees...................... 761,278 410,420 Salaries and benefits.................. 1,797,473 779,445 Other operating expenses............... 2,012,027 879,187 Amortization of goodwill............... 368,196 259,260 ----------- ----------- Total expenses..................... 5,165,060 2,490,198 ----------- ----------- Net investment income.................. 11,314,395 3,682,576 Increase in net unrealized (25,000) (46,300) depreciation on investments........... Net realized gain on investments....... 144,271 84,447 ----------- ----------- Net increase in net assets resulting $11,433,666 $ 3,720,723 from operations....................... =========== =========== Net increase in net assets resulting from operations per common share (Note 2) Basic................................. $1.03 $0.45 Fully Diluted......................... $1.02 $0.45 Weighted average common shares outstanding: Basic Average Shares................... 11,112,849 8,250,000 Fully Diluted Average Shares........... 11,157,544 8,278,524 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-4
MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 <TABLE> <CAPTION> SHARES OF CAPITAL ACCUMULATED COMMON STOCK COMMON STOCK IN EXCESS UNDISTRIBUTED OUTSTANDING $.01 PAR VALUE OF PAR VALUE INCOME ------------ -------------- -------------- -------------- <S> <C> <C> <C> <C> Balance at December 31, 1995 (Note 1)... 2,500,000 $ 25,000 $ (23,000) $ -- Issuance of common stock under offering 5,750,000 57,500 56,089,556 -- (Note 1)................................ For the period from May 30, 1996 to December 31, 1996: Distributable net investment income.... -- -- -- 3,767,023 Dividends declared on common stock -- -- -- (3,382,500) ($0.41 per share)..................... SOP 93-2 Cumulative reclassification -- -- 292,999 (292,999) (Note 11).............................. Change in unrealized depreciation...... -- -- -- (46,300) ---------- -------- ------------ ------------ Balance at December 31, 1996............ 8,250,000 82,500 56,359,555 45,224 Issuance of common stock under offering 4,600,000 46,000 74,293,425 -- (Note 1)................................ Exercise of stock options (Note 7)...... 30,296 303 341,644 -- Distributable net investment income.... -- -- -- 11,458,666 Dividends declared on common stock -- -- -- (11,210,807) ($1.01 per share)..................... SOP 93-2 Cumulative reclassification -- -- (615,688) 615,688 (Note 11).............................. Change in unrealized depreciation, net. -- -- -- (25,000) ---------- -------- ------------ ------------ Balance at December 31, 1997............ 12,880,296 $128,803 $130,378,936 $ 883,771 ========== ======== ============ ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-5
MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 <TABLE> <CAPTION> FOR THE PERIOD FROM FOR THE YEAR MAY 30, 1996 (COMMENCEMENT OF ENDED OPERATIONS) TO DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------ ------------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in net assets resulting $ 11,433,666 $ 3,720,723 from operations........................ Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Depreciation and amortization......... 80,072 14,500 Increase in equity in (earnings) (203,424) 63,000 losses of unconsolidated subsidiary.. Amortization of goodwill.............. 368,196 259,260 Increase in unrealized depreciation... 25,000 46,300 Increase in accrued interest (1,053,073) (301,310) receivable........................... Increase in other assets.............. (1,136,196) (1,933,829) Increase in accounts payable.......... 1,720,881 300,546 Increase in accrued expenses.......... 2,087,171 70,957 Accretion of negative goodwill........ (722,400) (421,435) Decrease in receivable from sale of 1,309,168 - loans................................ Increase in servicing fee receivable.. (131,737) - Decrease in accrued interest payable.. (313,053) (553,280) ------------- ------------ Net cash provided by operating 13,464,271 1,265,432 activities........................ ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Originations of loans (investments).... (212,977,601) (71,419,455) Proceeds from sales and maturities of 96,546,925 44,323,364 loans (investments)................... Payment for purchase of Tri-Magna, net. - (11,848,283) Payment for purchase of Edwards - (15,624,995) Capital Company....................... Payment for purchase of TCC, net....... - (3,748,576) Payment for purchase of BLLC, net...... (1,022,984) - Capital expenditures for fixed assets.. (161,343) (89,928) ------------- ------------ Net cash used for investing (117,615,003) (58,407,873) activities........................ ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of notes payable to banks..... 41,300,000 6,050,000 Repayment of notes payable to SBA...... (1,500,000) (1,200,000) Payment of declared dividends to - (542,012) former shareholders................... Payment of declared dividends to (9,465,630) (1,650,000) present shareholders.................. Proceeds from public offering of 74,339,425 56,147,056 common stock, net of expenses......... Proceeds from exercise of stock options. 341,947 - ------------- ------------ Net cash provided by financing 105,015,742 58,805,044 activities........................ ------------- ------------ NET INCREASE IN CASH.................... 865,010 1,662,603 CASH, beginning of period............... 1,664,603 2,000 ------------- ------------ CASH, end of period..................... $ 2,529,613 $ 1,664,603 ============= ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-6
MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 (CON'T) <TABLE> <CAPTION> FOR THE PERIOD FROM FOR THE YEAR MAY 30, 1996 (COMMENCEMENT OF ENDED OPERATIONS) TO DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------------------- <S> <C> <C> SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 9,522,427 $ 5,561,773 =========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND ACTIVITIES In conjunction with the Acquisitions, liabilities were assumed as follows: EDWARDS CAPITAL TRI-MAGNA COMPANY TCC BLI ------------ ------------------ ------------- ----------- Fair value of assets acquired, other $97,808,510 $51,356,894 $ 9,714,029 $ 1,333,918 than cash............................... ----------- ----------- ----------- ----------- Cash acquired........................... 1,529,717 -- 6,797,183 256,538 Cash paid............................... 13,378,000 15,624,995 10,545,759 1,279,522 ----------- ----------- ----------- ----------- Cash paid, net.......................... 11,848,283 15,624,995 3,748,576 1,022,984 =========== =========== =========== =========== Negative goodwill....................... 2,939,085 -- -- -- ----------- ----------- ----------- ----------- Liabilities assumed..................... $83,021,142 $35,731,899 $ 5,965,453 $15,381,827 =========== =========== =========== =========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-7
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (1) FORMATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES Medallion Financial Corp. (the Company) is a closed-end management investment company organized as a Delaware corporation in 1995. The Company has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the 1940 Act). On May 29, 1996, the Company completed an initial public offering (the Offering) of its common stock, 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 1996 Acquisitions) (see Note 3). The assets acquired and liabilities assumed from Edwards Capital Company were acquired and assumed by Edwards Capital Corporation (Edwards), a newly formed and wholly owned subsidiary of the Company. 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. MFC, Edwards and TCC are closed-end management investment companies registered under the 1940 Act and are each licensed as a small business investment company (SBIC) by the SBA. As an adjunct to the Company's taxicab medallion finance business, Media operates a taxicab rooftop advertising business. Effective January 1, 1997, the Company decided to merge all of the assets and liabilities of Edwards and TCC into MFC subject to the approval of the SBA. As of December 31, 1997, the Company is awaiting such approval from the SBA. On October 31, 1997, the Company consummated the purchase of substantially all of the assets and liabilities of Business Lenders, Inc. through the Company's wholly owned subsidiary, BLI Acquisition Co., LLC. In connection with the transaction, BLI Acquisition Co., LLC was renamed Business Lenders, LLC. (Business Lenders). Business Lenders is licensed by the SBA under its section 7a program. In connection with the 1996 Acquisitions and the Business Lenders Acquisition, the Company received the Acquisition Orders under the 1940 Act from the Securities and Exchange Commission, as well as approval from the Small Business Administration (SBA). (2) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Operations 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 F-8
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 industries (commercial installment loans) as well as originates and sells loans guaranteed by the SBA. While medallion and commercial installment loans are originated substantially in the metropolitan New York and Connecticut areas, the Company also finances medallion loans in the Boston, Cambridge, Baltimore and Chicago areas. (b) Use of Estimates The accounting and reporting policies of the Company conform with generally accepted accounting principles and general practices in the investment company industry. The preparation of financial statements in conformity with generally accepted accounting principles requires 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. (c) Principles of Consolidation The consolidated financial statements include the accounts of Medallion Financial Corp. and its wholly owned subsidiaries (except for Media). 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, which represents the period from the closing of the Offering and the 1996 Acquisitions to the end of the period. Prior to the 1996 Acquisitions, Medallion Financial Corp. had no operations and each of the subsidiaries had been operating independently of each other. All significant intercompany balances and transactions have been eliminated. 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. (d) Investment Valuation The Company's loans, net of participations and any unearned discount, 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 socially or economically disadvantaged, or to entities that are at least 50% owned by such persons. Approximately 78% and 76% of the Company's loan portfolio at December 31, 1997 and 1996, respectively, has 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. A 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. The remaining portion of the Company's portfolio is from the origination of loans guaranteed by the SBA under its section 7a program, less the sale of the guaranteed portion of those loans. Funding for the section 7a program depends on annual appropriations by the U.S. Congress. F-9
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (e) Investment Transactions and Income Recognition The principal portion of loans serviced for others by the Company at December 31, 1997 and 1996 amounted to approximately $ 83,316,000 and $60,160,000, respectively. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of related loans. At December 31, 1997 and 1996 net deferred costs totaled $1,557,199 and $567,204, respectively. Amortization expense for the year ended December 31, 1997 and the period ended December 31, 1996 was $510,272 and 161,977, respectively. Interest income is recorded on the basis of interest accrued. Loans are placed on nonaccrual 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 nonaccrual loans is recognized as income when collected. At December 31, 1997 and 1996, total nonaccrual loans were $4,295,432 and $2,450,702 respectively. For the year ended December 31, 1997 and the period ended December 31, 1996, the amount of interest income on nonaccrual loans that would have been recognized if the loans had been paying in accordance with their original terms was $ 358,252 and $111,209, respectively. (f) Loan Sales and Servicing Fee Receivable SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. These standards are based on consistent approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets when control has been surrendered, and derecognizes distinguishing transfers of financial assets that are sales from transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and was applied prospectively by the Company. The adoption of this statement as of January 1, 1997 did not impact the Company's financial condition or its results of operation. Receivable from loans sold and gain on loan sales are attributable to the sale of commercial loans which have been at least partially guaranteed by the SBA. The Company recognizes gains or losses from the sale of the SBA guaranteed portion of a loan at the date of the sales agreement when control of the future economic benefits embodied in the loan is surrendered. The gains are calculated in accordance with SFAS No. 125, which requires that the gain on the sale of a portion of a loan be based on the relative fair market values of the loan sold and the loan retained. A portion of the gain on commercial loan sales is due to a servicing fee receivable which represents the present value of the differential between the servicing fee received by the Company (generally 100 to 200 basis points) and the sum of the Company's costs and a normal profit after considering the estimated effects of prepayments and defaults. The Company considers 40 basis points to be its costs plus a normal profit. The discount rate utilized in calculating the servicing fee receivable approximates the market rate an investor would demand on a risk-adjusted basis. The servicing fee receivable is amortized as a charge to non-interest income over the estimated lives of the underlying loans using the effective interest method. The servicing fee receivable is carried at the lower of amortized cost or net realizable value. The carrying value of the servicing fee receivable at December 31, 1997 and 1996 was $1,671,415 and $0, respectively. An adjustment to the portion of the loan retained is recorded as unearned discount or premium and is amortized as an adjustment to interest income over the estimated life of the loan using the effective interest method. (g) 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. An analysis of the unrealized depreciation of investments for the year ended December 31, 1997 and the period ended December 31, 1996 is as follows: <TABLE> <CAPTION> 1997 1996 ------------ ----------- <S> <C> <C> Balance, beginning of period $1,568,717 $1,522,417 Unrealized depreciation of acquired 400,000 - subsidiary Increase in unrealized depreciation 390,000 46,300 Realized losses (125,000) - ---------- ---------- Balance, end of period $2,233,717 $1,568,717 ========== ========== </TABLE> F-10
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 For the year ended December 31, 1997 and the period ended December 31, 1996, gross realized gains and losses were as follows: <TABLE> <CAPTION> FOR THE YEAR ENDED FOR THE SEVEN MONTHS DECEMBER 31, 1997 ENDED DECEMBER 31, 1996 REALIZED UNREALIZED REALIZED UNREALIZED ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Gains on sale of warrants $ 269,271 $ - $ 189,447 $ - & recoveries Increase in unrealized - 240,000 - - gains Increase in unrealized - (390,000) - (46,300) losses Realized losses (125,000) 125,000 (105,000) - --------- --------- --------- ---------- Net gain (loss) on $ 144,271 $ (25,000) $ 84,447 $(46,300) investments ========= ========= ========= ========== </TABLE> (h) 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. In 1996, the Company adopted Statement of Financial Accounting Standards(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. 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 in accordance with SFAS No. 121. F-11
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (i) Fixed Assets Fixed assets are stated at cost less accumulated depreciation. Fixed assets are depreciated using the straight-line method to depreciate the cost over their estimated useful lives, which range from 5 to 10 years. (j) 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, among other things, 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. In 1997, the Company declared quarterly cash dividends totaling $11,210,807, or $1.01 per share, to shareholders. During the year, the Company's subsidiaries declared dividends payable to the Company totaling $5,966,464 from Medallion Funding Corp., $1,729,500 from Transportation Capital Corp. and $2,642,000 from Edwards Capital Corp. In conjunction with the 1997 equity offering, the Company contributed $30 million as capital to Medallion Funding Corp. Media, as a non-investment company, has elected to be taxed as a regular corporation. Refer to Note (4) for financial information for Media. (k) Net Increase in Net Assets Resulting from Operations per Share In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The Company has applied the provisions of SFAS No. 128 retroactively to all periods presented. In accordance with Staff Accounting Bulletin (SAB) No. 98, the Company has determined that there were no nominal issuances of common stock or potential common stock in the period prior to the Company's initial public offering (IPO). The dilutive effect of potential common shares in 1997, consisting of outstanding stock options is determined using the treasury method in accordance with SFAS No. 128. Basic and fully diluted EPS for the year ended December 31, 1997 and the period ended December 31, 1996 are as follows: <TABLE> <CAPTION> 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, excepts per Income Shares Per Share Amount Income Shares Per Share Amount share amounts) - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net Income $11,434 $3,721 Basic EPS Income available to common stockholders 11,434 11,112,849 $1.03 3,721 8,250,000 $.45 Effect of dilutive options Stock options 44,695 28,524 Diluted EPS Income available to common stockholders 11,434 11,157,544 $1.02 3,721 8,278,524 $.45 </TABLE> F-12
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (l) Stock-Based Compensation In 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes a fair value-based method of accounting for stock options and similar equity 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 (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. (m) Interest Rate Caps Premiums paid for interest rate cap agreements are amortized to interest expense over the terms of the cap. Unamortized premiums are included in other assets in the accompanying consolidated balance sheet. Amounts receivable, if any, under cap agreements are accounted for as a reduction of interest expense. (n) Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is to become effective for fiscal years beginning after December 15, 1997. SFAS No. 130 established standards for reporting and display of comprehensive income and its components. Comprehensive income is the total of net income and all other nonowner changes in equity. Reclassification of financial statements of earlier periods presented for comparative purposes is required. The adoption of this statement is not expected to have a significant impact on the Company's financial position or results of operations. (o) Segment Information In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". This statement establishes the standards for reporting information about segments in annual and interim financial statements. SFAS No. 131 introduces a new model for segment reporting: the "management approach." The management approach is based on the way the chief operating decision maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure any manner in which management disaggregates a company. This statement is effective and will be adopted for the Company's financial statements for the fiscal year ended December 31, 1998 and requires the restatement of previously reported segment information for all periods presented. (p) Reclassifications Certain reclassifications have been made to prior year balances to conform with the current year presentation. F-13
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (3) ACQUISITIONS Tri-Magna, Edwards Capital Corp. and TCC On May 30, 1996, the Company completed the acquisition of Tri-Magna, Edwards Capital Corp and TCC. These acquisitions were accounted for under the purchase method of accounting (see Note 1). Funds used to finance these acquisitions were primarily provided through the Company's Revolving Credit Agreements. The remaining portion of net proceeds were from the initial public offering. Business Lenders, Inc. On October 31, 1997, the Company completed its acquisition of certain assets and the assumption of certain liabilities of Business Lenders Inc., a small business lender headquartered in Hartford, Connecticut. The transaction was accounted for under the purchase method of accounting. The balance of the purchase price is payable pursuant to a contingent earn-out provision based on a multiple of net after-tax earnings and will approximate $13 million. The purchase price included approximately $310,000 of acquisition-related expenses associated with this transaction. Accordingly, the results of operations for these acquisitions have been included in the consolidated results of the Company from the date of acquisition. Under this accounting method, the Company has recorded as its cost the fair value of the acquired assets and liabilities assumed. The difference between the cost of acquired companies and the sum of the fair values of tangible and identifiable intangible assets less liabilities assumed was recorded as goodwill or negative goodwill. A summary of the cash consideration and allocation of the purchase price, as of the acquisition dates, are as follows: <TABLE> <CAPTION> EDWARDS CAPITAL TRI-MAGNA COMPANY TCC BLI ------------- ---------------- ------------- ------------- <S> <C> <C> <C> <C> Cash and cash equivalents............... $ 1,529,717 $ -- $ 6,797,183 $ 256,538 Investments*............................ 95,621,617 44,510,149 9,312,331 10,153,754 Accrued interest receivable............. 870,073 406,817 118,583 185,183 Goodwill (Negative Goodwill)............ (2,939,085) 6,303,562 206,334 411,680 Other assets............................ 1,316,820 136,366 76,781 5,964,928 Dividends payable....................... (542,012) -- (116,725) -- Notes payable to banks.................. (80,300,000) (10,100,000) -- (12,483,490) Accounts payable and accrued expenses... (1,360,570) -- (69,660) (1,198,137) Accrued interest payable................ (818,560) (681,899) (139,068) -- SBA and other debentures payable........ -- (24,950,000) (5,640,000) (1,700,000) ------------ ------------ ----------- ------------ Total acquisition cost.................. $ 13,378,000 $ 15,624,995 $10,545,759 $ 1,590,456 ============ ============ =========== ============ *Net of unrealized depreciation of investments of $1,922,417. </TABLE> The following unaudited pro forma combined financial information for the years ended December 31, 1997 and 1996 are presented as follows assuming each of the acquisitions completed during 1996 and 1997 had occurred as of the beginning of the period reported. F-14
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1997 1996 ----------------------- ------------ <S> <C> <C> Investment income....................... 24,376,248 $17,754,099 Net interest income..................... 14,082,282 9,129,399 Net investment income................... 8,715,484 3,474,259 Net increase in net assets resulting 10,894,726 5,614,445 from operations - basic and fully diluted................................ Net increase in net assets resulting $0.98 $0.68 from operations per share - basic and fully diluted.......................... </TABLE> Such unaudited pro forma combined financial information is not necessarily indicative of the results of operations that would have actually been reported had the Offering and the acquisitions occurred on January 1, 1997 or 1996, nor does it purport to represent the Company's future results of operations. The pro forma 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, 1997 and 1996 for Media, are as follows: <TABLE> <CAPTION> DECEMBER 31, 1997 1996 ----------- ----------- <S> <C> <C> Cash.................................... $ 594,377 $ 79,827 Accounts receivable..................... 700,392 307,303 Equipment, net.......................... 1,422,284 976,442 Other................................... 533,541 330,839 ---------- ---------- Total assets....................... $3,250,594 $1,694,411 ========== ========== Notes payable to parent................. 1,555,637 584,566 Accounts payable and accrued expenses... 283,915 64,516 Federal income taxes payable............ 162,000 - ---------- ---------- Total liabilities.................. 2,001,552 649,082 Equity.................................. 1,001,000 1,001,000 Retained earnings....................... 248,042 44,329 ---------- ---------- Total equity....................... 1,249,042 1,045,329 ---------- ---------- Total liabilities and shareholders' $3,250,594 $1,694,411 equity................................. ========== ========== </TABLE> The statements of operations of Media (1) for the year ended December 31, 1997 (2) for the period commencing with the Company's acquisition of Media from May 30, 1996 to December 31, 1996 (3) for the five-month period ended May 29, 1996 and (4) for the fiscal year ended December 31, 1995 are as follows: F-15
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 <TABLE> <CAPTION> YEAR ENDED SEVEN MONTHS ENDED FIVE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MAY 29, DECEMBER 31, 1997 1996 1996 1995 ------------ ------------------- ------------------ ------------ <S> <C> <C> <C> <C> STATEMENTS OF OPERATIONS Advertising revenue......... $3,070,119 $1,095,346 $671,148 $1,542,013 Cost of services............ 1,204,892 499,135 283,891 483,721 ---------- ---------- -------- ---------- Gross margin................ 1,865,227 596,211 387,257 1,058,292 Other operating expenses.... 1,499,803 659,211 455,278 829,293 ---------- ---------- -------- ---------- Income (loss) before taxes.. 365,424 (63,000) (68,021) 228,999 Income taxes................ 162,000 -- (14,999) 103,043 ---------- ---------- -------- ---------- Net income (loss)........... $ 203,424 $ (63,000) $(53,022) $ 125,956 </TABLE> 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. The Company's investment in Media was $1,140,000 and $937,000 at December 31, 1997 and 1996, respectively. These amounts are comprised of the initial capital contribution and the results of operations for subsequent periods. On March 6, 1997, Media entered into a five-year agreement with the Metropolitan Taxi Board of Trade, Inc. (MTBOT) to provide rooftop advertising on New York City taxicabs affiliated with the MTBOT commencing on September 22, 1997. The agreement calls for fixed payments to the fleets for a two-year period unless tobacco advertising is banned from cabs by the government. (5) NOTES PAYABLE TO BANKS AND DEMAND NOTES Short-term borrowings consisted of the following: <TABLE> <CAPTION> DECEMBER 31, DECEMBER 31, DESCRIPTION 1997 1996 ------------- ------------ <S> <C> <C> Revolving Credit Agreements.. $137,750,000 $94,450,000 Term Loan Agreement.......... - 2,000,000 ------------ ----------- Total........................ $137,750,000 $96,450,000 ============ =========== </TABLE> Borrowings under these agreements are secured by all assets of the Company. (a) 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, 1999 at an aggregate credit commitment amount of $195,000,000 pursuant to the Loan Agreement dated December 24, 1997. 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. At December 31, 1997, MFC is required to pay an annual facility fee of 15 basis points on the unused portion of the Revolver aggregate F-16
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 commitment. This amount increases as the debt to equity ratio increases to a maximum fee of 20 basis points. Commitment fee expense for the year ended December 31, 1997 and the period ended December 31, 1996 was $288,399 and $114,528, respectively. Outstanding borrowings under the Revolver were $115,250,000 and $77,550,000 at weighted average interest rate of 6.97% and 7.10% at December 31, 1997 and 1996, respectively. MFC is required under the Revolver to maintain minimum tangible net assets of $45,000,000 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, 1997 and 1996, MFC was in compliance with all its debt covenants. Edwards had $8,000,000 and $15,000,000 in available lines of credit with several banks at December 31, 1997 and 1996, respectively. These agreements mature on January 31, 1998 and April 30, 1998, respectively. 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 $6,400,000 and $12,450,000, at a weighted average interest rate of 7.26% and 6.8% at December 31, 1997 and 1996, respectively. Edwards is required to maintain under a promissory note agreement with one of the two banks; a minimum tangible net worth plus subordinated debt of $32,000,000. At December 31, 1997 and 1996, Edwards was in compliance with all its debt covenants. 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, the Company entered into a revolving credit agreement with a bank. On December 22, 1997, the agreement was amended to extend the term to April 30, 1998 and provides for short-term borrowings up to $25,000,000. The revolving credit borrowings, at the option of the Company, are at the bank's prime rate or at a rate based on the adjusted LIBOR. The Company is required to pay a facility fee of 1/4% of the commitment. Outstanding borrowings under this agreement were $16,100,000 and $4,450,000 at a weighted average interest rate of 7.06% and 6.84% at December 31, 1997 and 1996, respectively. The weighted average interest rate for the Company's outstanding borrowings at December 31, 1997 and 1996 was 7.0%. During the year ended December 31, 1997 and the period ended December 31, 1996, the Company's weighted average borrowings were $97,423,000 and $82,980,000 with a weighted average interest rate of 6.78% and 7.50%, respectively. The maximum outstanding borrowings of the Company were $137,750,000 and $94,550,000 at any month-end during the year ended December 31, 1997 and the seven-month period ended December 31, 1996, respectively. (b) Term Loan Agreement MFC had 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. The Term Loan was paid off in July 1997. The weighted average interest rate paid on such borrowings was 7.5% during the period through July 31, 1997 and the seven-month period ended December 31, 1996. (c) 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 were capitalized and amortized over the two-year term of the agreements, which expired on April 7, 1997. The Company was exposed to credit loss in the event of nonperformance by the counterparties on these interest rate cap agreements. F-17
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 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 were capitalized and amortized over the two-year terms of the agreements, which expired on November 16, 1997. The Company was exposed to credit loss in the event of nonperformance by the counterparties on these interest rate cap agreements. On April 17, 1997, MFC entered into an interest rate cap agreement limiting the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit facility to 6.0% until April 21, 1998. In addition, on May 9, 1997, MFC entered into an interest rate cap agreement limiting the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit facility to 6.5% until May 13, 1998 and 7.0% until November 13, 1999. On May 12, 1997, MFC entered into an interest rate cap agreement limiting the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit facility to 7.0% until May 13, 1999. Total premiums of $144,000 paid under the agreements are being amortized over the respective terms of the agreements. 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, 1997 and 1996: 1997 1996 ------------ ------------ DUE DATE AMOUNT AMOUNT INTEREST RATE - ------------------- ------------ ------------ ---------------------------- April 1, 1997 $ - $ 1,500,000 8.95% June 1, 1998 3,000,000 3,000,000 9.80 June 1, 2002 5,640,000 5,640,000 5.0 (until June 1, 1997 and 8.00% thereafter) September 1, 2002 3,500,000 3,500,000 7.15% September 1, 2002 6,050,000 6,050,000 7.15 June 1, 2004 4,600,000 4,600,000 7.80 September 1, 2004 5,100,000 5,100,000 8.20 ----------- ----------- $27,890,000 $29,390,000 =========== =========== 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. At December 31, 1997, 453,918 shares of the Company's common stock remained available for future grants. 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. The Director Plan provides for the issuance of a maximum of 100,000 shares of common stock of the Company. At December 31, 1997, 70,656 shares of the Company's common stock remained available for future grants. 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 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. F-18
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 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, 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: <TABLE> <CAPTION> YEAR ENDED SEVEN-MONTH PERIOD ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ------------------------ <S> <C> <C> Net increase in net assets resulting from operations: As reported........................... $11,433,666 $3,720,723 Pro forma............................. $11,260,632 $3,696,480 Net increase in net assets resulting from operations per share-fully diluted: As reported........................... $ 1.02 $ 0.45 Pro forma............................. $ 1.01 $ 0.45 </TABLE> 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, 1997 and the period ended December 31, 1996: <TABLE> <CAPTION> WEIGHTED NUMBER EXERCISE PRICE AVERAGE OF OPTIONS PER SHARE EXERCISE PRICE ----------- -------------- -------------- Outstanding at December 31, 1995 -- -- -- <S> <C> <C> <C> Granted........................... 218,389 $11.00-$14.375 $11.52 Canceled.......................... -- -- -- Exercised......................... -- -- -- ------- Outstanding at December 31, 1996.. 218,389 $11.00-$14.375 $11.52 ------- Granted........................... 163,984 $ 17.38-$22.38 $19.54 Canceled.......................... (56,947) $ 11.00-$14.38 $10.99 Exercised......................... (30,296) $ 11.00-$14.38 $11.29 ------- Outstanding at December 31, 1997.. 295,130 $ 11.00-$22.38 $16.07 ======= Options exercisable at: December 31, 1996............ 7,576 $ 11.00 $11.00 December 31, 1997............ 41,652 $11.00-$14.375 $12.50 </TABLE> The following table summarizes information regarding options outstanding and options exercisable at December 31, 1997 under the employee Stock Compensation Plan and Stock Option Plans for Directors. F-19
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 <TABLE> <CAPTION> Options Outstanding Options Exercisable ---------------------------------------------------- ------------------------------------------------ Weighted Weighted average Number average Weighted Number remaining Weighted exercisable at remaining average outstanding at contractual life average December 31, contractual exercise Range of Exercise Prices December 31, 1997 in years exercise price 1997 life in years price - ------------------------ ----------------- ---------------- -------------- -------------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> $11.00 100,002 8.39 11.00 22,728 8.39 11.00 $14.38 16,600 3.85 14.38 16,500 3.85 14.38 $13.75 14,544 3.98 13.75 2,424 3.98 13.75 $17.38 - 20.63 163,984 8.65 19.54 - - - ----------------- ---------------- -------------- -------------- ------------- ------------ 295,130 8.06 16.07 41,652 6.33 12.50 ================= ================ ============== ============== ============= ============ </TABLE> The weighted average fair value of options granted during the year ended December 31, 1997 and the period ended December 31, 1996 was $4.43 and $3.20 per share, respectively. 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 in 1997 and 1996: <TABLE> <CAPTION> Year ended December 31, 1997 1996 -------- -------- <S> <C> <C> Risk-free interest rate.... 6.3% 6.4% Expected dividend yield.... 5.0% 4.6% Expected life of option in 6.6 5.8 years..................... Expected volatility........ 42.2% 36.7% </TABLE> (8) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> One Month 1996 Quarter Ended Ended June 30 September 30 December 31 - ------------------------------------------------------------------------ <S> <C> <C> <C> (in thousands except per share amounts) Investment Income 1,392 4,264 4,756 Net Investment Income 543 1,523 1,617 Net Income 543 1,549 1,629 Net Income per common .07 .19 .20 share-basic and diluted </TABLE> F-20
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 <TABLE> <CAPTION> 1997 Quarter Ended March 31 June 30 September 30 December 31 - -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Investment Income 4,885 5,286 5,971 7,304 Net Investment Income 1,768 2,487 3,342 3,717 Net Income 1,799 2,457 3,470 3,708 Net Income per common share - basic and .22 .24 .27 .29 diluted </TABLE> (9) COMMITMENTS AND CONTINGENCIES (a) Sub-Advisory Agreement 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 year ended December 31, 1997 and the period ended December 31, 1996 were $ 225,000 and $131,250, respectively. (b) Employee Agreements 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. (c) Other Commitments 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, 1997, the Company had unfunded loan commitments of approximately $12,923,000, which bear interest at rates ranging from 8.25% to 18.00%. F-21
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 Commitments for leased premises expire at various dates through June 30, 2006. At December 31, 1997, minimum rental commitments for noncancelable leases are as follows: <TABLE> <CAPTION> Dollars -------------- (in thousands) -------------- <S> <C> 1998 $ 356,265 1999 311,724 2000 248,982 2001 233,004 2002 and thereafter 1,048,484 ---------- Total $2,198,459 ---------- </TABLE> Rent expense for the year ended December 31, 1997 and the period ended December 31, 1996 was $291,730 and $165,002, respectively. (d) Litigation The Company and its subsidiaries become defendants to various legal proceedings arising from the normal course of business. In the opinion of management, based on 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. (10) RELATED PARTY TRANSACTIONS Certain directors, officers and shareholders of Medallion Financial Corp. are also directors of wholly owned subsidiaries, MFC, Edwards, TCC, BLI 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 during the period ended December 1997 and 1996 were $79,657 and $37,542, respectively. At December 31, 1997 and 1996, total officer compensation was $1,182,400 and $588,065, respectively. (11) SHAREHOLDERS' EQUITY On May 16, 1997, the Company completed a secondary equity offering and sold 4,600,000 shares at $17.25 per share. Offering costs incurred by the Company in connection with the sale of shares totaling $5,010,575 were recorded as a reduction of capital upon completion of the Secondary Equity Offering. On May 29, 1996, the Company issued and sold 5,750,000 shares at $11.00 per share in an initial public 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 consolidated financial statements have been restated to reflect the stock split. The proceeds from the secondary equity 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 secondary equity 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, F-22
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 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 ($2,940,314 at December 31, 1997) 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," $615,688 was reclassified from capital in excess of par value to accumulated undistributed income at December 31, 1997. At December 31, 1996, $292,999 was reclassified from accumulated undistributed income to capital in excess of par value in the accompanying consolidated balance sheet. These reclassifications had no impact on the Company's total shareholders' equity and were designed to present the Company's capital accounts on a tax basis. (10) OTHER OPERATING EXPENSES AND OTHER INCOME The major components of other operating expenses for the year ended December 31, 1997 and the period ended December 31, 1996 were as follows: <TABLE> <CAPTION> 1997 1996 ----------- --------- <S> <C> <C> Office expenses............. $ 675,122 $254,715 Insurance................... 490,968 254,440 Rent........................ 291,731 165,002 Other....................... 554,206 205,030 ---------- -------- $2,012,027 $879,187 ========== ======== </TABLE> The major components OF OTHER INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD ENDED DECEMBER 31, 1996 WERE AS FOLLOWS: <TABLE> <CAPTION> 1997 1996 --------- --------- <S> <C> <C> Late charge................. $212,139 $123,646 Prepayment.................. 390,511 205,329 Other....................... 343,659 82,016 Loan commitment fee income.. 34,000 - -------- -------- $980,309 $410,991 ======== ======== </TABLE> (11) 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 can provide for employer matching contributions, at the discretion of the Board of Directors, beginning in 1997. F-23
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (14) 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 instrument. Fair value estimates that 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) The fair market value of excess servicing fees receivable is estimated by expected future service fee income cash flows discounted at a rate that approximates that currently offered for instruments with similar prepayment and risk characteristics. (c) Notes payable to banks and demand notes--Due to the short-term nature of these instruments, the carrying amount approximates fair value. (d) 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, 1997 and December 31, 1996, the estimated fair value of these off-balance-sheet instruments was not material. (e) Interest Rate Cap Agreements--The fair value is estimated based on market prices or dealer quotes. At December 31, 1997 and December 31, 1996, the estimated fair value of these off-balance-sheet instruments were not materially different. (f) Debentures Payable to SBA--The fair value of the debentures payable to SBA is estimated based on current market interest rates for similar debt. <TABLE> <CAPTION> DECEMBER 31, 1997 DECEMBER 31, 1996 --------------------------- --------------------------- CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE --------------- ---------- --------------- ---------- <S> <C> <C> <C> <C> (DOLLARS IN THOUSANDS) Financial Assets: Investments........................ $288,724 $288,724 $176,494 $176,494 Cash............................... 2,530 2,530 1,665 1,665 Servicing fee receivable........... 1,671 1,671 - - Financial Liabilities: Notes payable to banks and demand 137,750 137,750 96,450 96,450 notes............................. SBA debentures payable............. 27,890 27,890 29,390 29,320 </TABLE> F-24
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (15) SUBSEQUENT EVENTS (a) Acquisitions On February 4, 1998, the Company signed a definitive agreement to acquire VGI, VGII and Venture Opportunities Corp., an SBIC lender headquartered in New York City. The transaction included the purchase of most of the assets and assumption of certain liabilities, aggregating a purchase price of approximately $19 million. This transaction is subject to approval by the SBA and is expected to close in the second quarter of 1998. On March 9, 1998, the Company announced the execution of a definitive agreement to acquire Capital Dimensions, Inc. (CDI), an SSBIC lender, headquartered in Minneapolis, MN. The transaction is structured as a tax-free exchange and as a pooling of interests for accounting purposes. Based on the closing price of the Company's stock on March 8, 1998, the transaction would be valued at approximately $30 million. The agreement is subject to approval by the SBA and is expected to close during the second quarter of 1998. (b) Actions of the Board of Directors On February 25, 1998, the Board of Directors voted to extend the Sub-Advisory Agreement with FMC until May 1999 under provisions of the renewal in the agreement (see Note 8). (c) Commercial Paper Program On March 13, 1998, the Company entered into a commercial paper program with maximum borrowings of $195 million as a supplement to MFC's syndicated credit facilities. The program is contingent upon the maintenance of investment-grade ratings from two of the four rating agencies. The program has no specified maturity and may be terminated at any time. F-25
MEDALLION FINANCIAL CORP. CONSOLIDATED SCHEDULE OF INVESTMENTS DECEMBER 31, 1997 <TABLE> <CAPTION> NUMBER OF BALANCE LOANS OUTSTANDING RATE --------- -------------- ------------ <S> <C> <C> 2 $ 48,922 5.00-7.00% 22 2,910,738 7.63-7.77 74 17,712,665 8.00 22 5,656,282 8.13 11 2,445,199 8.20 174 28,470,286 8.25 12 2,785,264 8.30-8.38 199 25,905,594 8.50 141 20,937,604 8.60-8.75 15 4,063,370 8.80-8.90 191 23,416,770 9.00 207 19,029,373 9.25 183 18,255,772 9.50 76 6,559,975 9.60-9.75 6 271,618 9.80-9.90 253 19,566,492 10.00 37 3,073,823 10.25 3 600,000 10.27-10.28 2 246,205 10.38 91 4,650,430 10.50 34 3,311,237 10.75-10.90 203 10,170,310 11.00 201 10,707,415 11.25-11.33 3 323,460 11.50 3 122,599 11.75 8 1,045,031 11.90 116 8,252,167 12.00 12 1,773,975 12.25 5 429,568 12.50 10 973,445 12.75-12.90 309 12,558,888 13.00 39 1,683,614 13.25 46 2,392,484 13.50 3 148,178 13.75-13.90 161 6,755,248 14.00-14.05 82 5,705,206 14.20-14.50 11 380,508 14.70-14.84 6 256,502 14.90-14.95 284 10,907,481 15.00 8 430,947 15.20-15.25 16 993,941 15.50 9 1,044,595 15.75-15.90 23 1,098,278 16.00 5 268,661 16.25 12 391,665 16.50-16.95 6 286,355 17.00-17.90 5 215,257 18.00-18.50 6 167,567 19.00 - ---------------------------------------- ------------ Total 3,347 $289,400,967 10.02% ============ ----------- Plus: Origination costs, net 1,557,199 ------------ Investments at cost 290,958,163 Less: Unrealized depreciation on investments (2,233,717) ------------ Investment at directors' valuation $288,724,446 ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-26
MEDALLION FINANCIAL CORP. CONSOLIDATED SCHEDULE OF INVESTMENTS DECEMBER 31, 1996 <TABLE> <CAPTION> NUMBER OF BALANCE LOANS OUTSTANDING RATE --------- ------------ --------------- <S> <C> <C> 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 ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-27
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 F-28
TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> DECEMBER 31, MAY 29, 1995 1996 ------------- ------------ <S> <C> <C> ASSETS Investments (Note 2)................... $96,956,416 $96,531,617 Less unrealized depreciation on (910,000) (910,000) investments (Note 6).................. ----------- ----------- 96,046,416 95,621,617 Investment in unconsolidated 145,335 92,313 subsidiary (Note 2)................... 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 $80,294,900 $79,394,900 notes (Note 3)........................ 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 6,689 6,689 shares outstanding at December 31, 1995 and May 29, 1996)................ 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' $99,788,166 $98,604,677 Equity................................. =========== =========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-29
TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, 1994 1995 1996 ---------- ---------- ------------ <S> <C> <C> <C> 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 ========== ========== ========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-30
TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY <TABLE> <CAPTION> SHARES OF CAPITAL ACCUMULATED RESTRICTED COMMON STOCK COMMON STOCK IN EXCESS UNDISTRIBUTED CAPITAL OUTSTANDING $.01 PAR VALUE OF PAR VALUE INCOME (LOSS) SURPLUS -------------- -------------- ------------ ------------- ---------- <S> <C> <C> <C> <C> <C> 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 ============== ============ =========== =========== ========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-31
TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, ---------------------------- ------------ 1994 1995 1996 ------------ ------------ ------------ <S> <C> <C> <C> 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 (64,697) (66,252) (25,723) interest receivable................... 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 1,489,577 1,799,299 397,080 Activities.......................... 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) (7,942,240) (6,425,108) 418,601 investing activities................ 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) 6,706,450 4,534,651 (1,368,230) financing activities................ ------------ ------------ ----------- 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 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-32
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. F-33
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. F-34
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: <TABLE> <CAPTION> DECEMBER 31, MAY 29, ------------ ------------- BALANCE SHEET 1995 1996 ------------- ------------ ------------- <S> <C> <C> 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 $829,744 $ 959,228 equity................................. ======== ========== </TABLE> <TABLE> <CAPTION> PERIOD ENDED YEAR ENDED PERIOD ENDED STATEMENT OF OPERATIONS DECEMBER 31, DECEMBER 31, MAY 29, ------------ ------------ ------------ 1994 1995 1996 ------------ ------------ ------------ <S> <C> <C> <C> 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) ======== ========== ======== </TABLE> 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. F-35
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: <TABLE> <CAPTION> DECEMBER 31, MAY 29, DESCRIPTION 1995 1996 ----------- ----------- <S> <C> <C> 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 =========== =========== </TABLE> 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. F-36
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. F-37
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 F-38
TRI-MAGNA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (5) SHAREHOLDERS' EQUITY(CONTINUED) Company, were expensed on May 29, 1996. Total direct costs charged to results of operations were $584,000. 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: <TABLE> <CAPTION> PERIOD ENDED MAY 29, YEAR ENDED DECEMBER 31, 1996 1995 1994 ------------ ------------- ----------- <S> <C> <C> <C> 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) ========= ========= ========= </TABLE> 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. F-39
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 TriMagna. 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. F-40
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. <TABLE> <CAPTION> DECEMBER 31, 1995 MAY 29, 1996 --------------------------- ----------------------------- CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE <S> <C> <C> <C> <C> 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 </TABLE> F-41
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' valuation $ 95,621,617 ============ F-42
TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS DECEMBER 31, 1995 BALANCE INTEREST NUMBER OF LOANS OUTSTANDING RATE --------------- ----------- ---------- 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 =========== F-43
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 F-44
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) BALANCE SHEETS <TABLE> <CAPTION> DECEMBER 31, MAY 29, 1995 1996 ------------ ----------- <S> <C> <C> ASSETS Cash.................................... $ 115,571 $ 437,886 Finance Receivables: Medallions............................ 43,177,063 43,920,609 Other, less allowance for doubtful 601,728 569,540 accounts of $20,000 in 1995 and 1996. Accrued Interest Receivable............. 396,000 406,817 Deferred Financing Costs, net of accumulated amortization of $176,967 353,683 330,000 in 1995 and $200,650 in 1996............ Property and Equipment, at cost, net of accumulated depreciation and 66,826 60,356 amortization of $133,937 in 1995 and $140,407 in 1996....................... 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 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. F-45
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, 1995 1996 ------------ ------------ <S> <C> <C> Revenues: Interest from finance receivables..... $4,316,669 $1,727,102 Other income.......................... 443,190 129,101 ---------- ---------- Total Revenues...................... 4,759,859 1,856,203 ---------- ---------- Operating Expenses: Interest on subordinated debentures... 1,993,075 818,707 Interest on bank loans................ 754,404 279,148 Salaries.............................. 354,041 123,244 Employee benefits..................... 33,236 14,572 Payroll and other taxes............... 28,266 14,467 Professional fees..................... 204,071 41,437 Legal fees related to the sale of -- 350,000 assets............................... Rent.................................. 39,996 16,342 Office expense........................ 42,762 15,204 Computer expense...................... 44,642 14,903 Telephone............................. 9,685 3,860 Entertainment......................... 9,901 2,205 Amortization of deferred financing 53,460 23,683 costs................................ Processing and collection services.... 42,448 28,689 Depreciation and amortization......... 18,292 6,470 New York City unincorporated business 40,111 15,610 tax.................................. Sundry................................ 4,496 5,847 ---------- ---------- Total Operating Expenses..... 3,672,886 1,774,388 ---------- ---------- Net Income................... $1,086,973 $ 81,815 ========== ========== </TABLE> The accompanying notes are an integral part of these financial statements. F-46
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, 1995 1996 ------------- ------------- <S> <C> <C> Cumulative Capital Contributions.. $7,200,000 $7,200,000 ========== ========== SBA Permanent Capital............. $8,400,000 $8,400,000 ========== ========== Balance, Beginning of Period...... $8,576,068 $9,116,831 Net income...................... 1,086,973 81,815 Distributions - Limited Partners............. (546,210) (91,500) ---------- ---------- Balance, end of period............ $9,116,831 $9,107,146 ========== ========== </TABLE> The accompanying notes are an integral part of these financial statements. F-47
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, 1995 1996 ------------- ------------- <S> <C> <C> Cash flows from operating activities: Net income.............................. $ 1,086,973 $ 81,815 Adjustments to reconcile net income to net cash provided by operating activities -- Amortization of deferred financing 53,460 23,683 costs................................ Depreciation and amortization......... 18,292 6,470 Changes in assets and liabilities -- Accrued interest receivable........... (67,000) (10,817) Prepaid expenses and other assets..... (247,648) 97,435 Accounts payable and accrued expenses. 118,697 676,587 ------------ ----------- Net cash provided by operating 962,774 875,173 activities............................. Cash flows from investing activities: Origination of new finance receivables (8,348,655) (2,764,191) Repayments of finance receivables..... 8,036,706 2,052,833 Purchase of property and equipment.... (9,769) -- ------------ ----------- Net cash (used in) provided by (321,718) (711,358) investing activities................ Cash flows from financing activities: Proceeds from bank loans.............. 11,925,000 5,900,000 Principal payments of bank loans...... (12,075,000) (5,650,000) Distributions to limited partners. (546,210) (91,500) ------------ ----------- Net cash used in financing activities... (696,210) 158,500 ------------ ----------- Net increase (decrease) in cash......... (55,154) 322,315 Cash, beginning of period............... 170,725 115,571 ------------ ----------- Cash, end of period..................... $ 115,571 $ 437,886 ============ =========== Supplemental disclosure of cash flow information: Interest paid......................... $ 2,699,890 $ 974,982 ============ =========== New York City unincorporated business tax.................................. $ 14,058 $ 15,448 ============ =========== </TABLE> The accompanying notes are an integral part of these financial statements. F-48
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. F-49
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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. F-50
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 Maximum original terms of finance receivables at December 31, 1995 and May 29, 1996 are as follows: (ROUNDED TO 000'S) <TABLE> <CAPTION> DECEMBER 31, MAY 29, 1995 1996 ------------ ----------- <S> <C> <C> 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 =========== =========== Contractual maturities of finance receivables at December 31, 1995 and May 29, 1996 are approximately as follows: DECEMBER 31, MAY 29, 1995 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 =========== =========== </TABLE> 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: <TABLE> <CAPTION> DECEMBER 31, MAY 29, 1995 1996 ------------ -------- <S> <C> <C> 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 ======== ======== </TABLE> F-51
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (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. (5) SUBORDINATED DEBENTURES PAYABLE Outstanding subordinated debentures, which are guaranteed by the SBA, are as follows at December 31, 1995 and May 29, 1996: <TABLE> <CAPTION> INTEREST DUE DATE RATE AMOUNT - -------- --------- ------ <S> <C> <C> 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 =========== </TABLE> (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. F-52
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (6) RELATED PARTY TRANSACTIONS (CONTINUED) Rent expense and legal fees paid and accrued to Herrick, Feinstein LLP for the years ended December 31, 1995 and period ended May 29, 1996 are as follows: <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, 1995 1996 ------------- ------------ <S> <C> <C> Rent expense.. $ 39,996 $16,342 Legal fees.... 92,501 9,926 -------- ------- $132,497 $26,268 ======== ======= </TABLE> 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). 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. F-53
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (8) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and estimated fair values of the Partnership's financial instruments are as follows: <TABLE> <CAPTION> MAY 29, 1996 CARRYING AMOUNT FAIR VALUE --------------- ----------- <S> <C> <C> 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 </TABLE> F-54
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: <TABLE> <CAPTION> NUMBER BALANCE INTEREST OF LOANS OUTSTANDING RATE ---------- ------------ --------- <S> <C> <C> <C> 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 =========== </TABLE> F-55
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: <TABLE> <CAPTION> NUMBER BALANCE INTEREST OF LOANS OUTSTANDING RATE -------- ----------- -------- <S> <C> <C> <C> 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 =========== </TABLE> F-56
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 F-57
TRANSPORTATION CAPITAL CORP. BALANCE SHEETS <TABLE> <CAPTION> December 31, May 29, 1995 1996 ----------- ------------ <S> <C> <C> 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' $17,415,608 $16,551,044 Equity................................. =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. F-58
TRANSPORTATION CAPITAL CORP. STATEMENTS OF OPERATIONS <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, ----------- --------- 1995 1996 ----------- --------- <S> <C> <C> Investment Income: Interest from small business concerns (net of interest to participants)........................... $1,411,116 $ 525,883 Interest from treasury bills........... 425,318 156,243 ---------- --------- 1,836,434 682,126 ---------- --------- Expenses: Interest............................. 450,071 148,362 Salaries............................. 227,343 79,899 Legal and other professional fees.... 350,178 131,226 Rent expense......................... 23,999 10,865 General and administrative........... 158,810 37,430 ---------- --------- 1,210,401 407,782 ---------- --------- Investment Income Before Income Taxes 626,033 274,344 Income Tax Provision................. (269,723) (114,106) ---------- --------- Net Investment Income................ 356,310 160,238 ---------- --------- Realized Loan (Losses) Gains Before Income Taxes......................... (50,055) 5,247 Income Tax Benefit (Provision)....... 22,399 (2,290) ---------- --------- Net Realized Loan (Losses) Gains..... (27,656) 2,957 ---------- --------- Change in Unrealized Depreciation on Loans Before Income Taxes.............. 335,261 30,172 Deferred Income Tax Provision........ (133,900) (12,000) ---------- --------- Net Change in Unrealized Depreciation on Loans............................. 201,361 18,172 ---------- --------- Increase in Net Assets from $ 530,015 $ 181,367 Operations.......................... ========== ========= </TABLE> The accompanying notes are an integral part of these financial statements. F-59
TRANSPORTATION CAPITAL CORP. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY <TABLE> <CAPTION> PREFERRED STOCK COMMON STOCK RESTRICTED ----------------------- ----------- ------------ ADDITIONAL CONTRIBUTED SHARES SHARES PAID-IN CAPITAL OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL SURPLUS ----------- ----------- ----------- ------------ ----------- ------------- <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1994..... 3,383 1/3 $ 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 ------------- ------------ ------------ ------------- <S> <C> <C> <C> <C> 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 ========== =========== ============ ============= </TABLE> The accompanying notes are an integral part of these financial statements. F-60
TRANSPORTATION CAPITAL CORP. STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, 1995 1996 ------------ ------------ <S> <C> <C> Cash Flows from Operating Activities: Increase in net assets from operations.. $ 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 (335,261) (30,172) loans.................................. Provision for deferred taxes......... 138,300 11,535 Depreciation and amortization........ 14,570 1,866 Realized loan losses................. 50,055 (5,247) Net change in Accrued interest receivable........................ 14,216 15,338 Other assets....................... 116,687 10,483 Accrued interest payable........... (38,317) 103,997 Accrued expenses................... 46,377 (59,928) ------------ ----------- Net cash provided by operating 536,642 229,239 activities......................... ------------ ----------- Cash Flows from Investing Activities: Principal collected on loans......... 14,820,116 6,510,178 Advances on loans.................... (13,697,563) (6,632,951) Furniture, fixtures and office equipment............................ (4,339) -- ------------ ----------- Net cash provided by (used for) 1,118,214 (122,773) investing activities ------------ ----------- Cash Flows from Financing Activities: Repurchase of preferred stock from (1,184,167) -- SBA Repayment of debentures payable to (1,200,000) (1,090,000) SBA................................. Capital contribution................. 310,818 -- ------------ ----------- Net cash used for financing (2,073,349) (1,090,000) activities...................... ------------ ----------- Net Increase (Decrease) in Cash and Cash Equivalents........................ (418,493) (983,534) Cash and Cash Equivalents, Beginning of Period.................................. 8,199,210 7,780,717 ------------ ----------- Cash and Cash Equivalents, End of. Period.................................. $ 7,780,717 $ 6,797,183 ============ =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for - Interest................................ $ 488,388 $ 44,365 ============ =========== Net income tax payments................. $ 205,322 $ 152,260 ============ =========== </TABLE> The accompanying notes are an integral part of these financial statements. F-61
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. F-62
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 and $1,866 for the year ended December 31, 1995 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 year ended 1995 and period ended May 29, 1996, the Company refinanced loans amounting to $740,826 and $1,696,715, respectively. F-63
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: <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, 1995 1996 ------------ ------------ <S> <C> <C> Balance, beginning................... $ 977,850 $642,589 Charge-offs.......................... (61,672) - Recoveries........................... 11,617 5,247 Interest income deferred (received).. - - Reduction in allowance............... (285,206) (35,419) ---------- -------- Balance, ending...................... $ 642,589 $612,417 ========== ======== </TABLE> (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): <TABLE> <CAPTION> PRINCIPAL AMOUNT AT DECEMBER 31, MAY 29, 1995 1996 DUE DATE INTEREST RATE - ------------------- ---------- -------- ---------------- <S> <C> <C> <C> $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, $6,730,000 $5,640,000 8% thereafter ========== ========== </TABLE> 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. F-64
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. F-65
TRANSPORTATION CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (5) INCOME TAXES The provisions (benefits) for income taxes are as follows: <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, 1995 1996 ------------- ------------ <S> <C> <C> Net investment income -- Current -- Federal................................ $181,347 $ 83,029 State.................................. 83,976 31,577 -------- -------- $265,323 $114,606 -------- -------- Deferred -- Federal................................ 3,400 (400) State.................................. 1,000 (100) -------- -------- 4,400 (500) -------- -------- $269,723 $114,106 ======== ======== Net realized loan (losses) gains -- Current -- Federal................................ $(14,247) $ 1,431 State.................................. (8,152) 859 -------- -------- $(22,399) $ 2,290 ======== ======== Net change in unrealized depreciation on loans -- Deferred -- Federal................................ $103,700 $ 9,300 State.................................. 30,200 2,700 -------- -------- $133,900 $ 12,000 ======== ======== </TABLE> The following is a reconciliation of income taxes at the expected statutory federal income tax to the actual income tax provision (benefit): <TABLE> <CAPTION> YEAR ENDED PERIOD ENDED DECEMBER 31, MAY 29, 1995 1996 ------------- ------------ <S> <C> <C> Net investment Income -- Expected federal income tax......... $212,851 $ 93,277 State income taxes, net of federal... 56,084 21,913 income tax benefit Other............................... 788 (1,084) -------- -------- $269,723 $114,106 ======== ======== </TABLE> F-66
TRANSPORTATION CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 <TABLE> <CAPTION> YEAR ENDED PERIOD ENDING DECEMBER 31, MAY 29, 1995 1996 ------------ ------------- <S> <C> <C> Net realized loan (losses)gains -- Expected federal income tax............ $(17,019) 1,784 State income taxes, net of federal..... (5,380) 567 income tax benefit Other................................... -- (61) -------- -------- $(22,399) 2,290 ======== ======== Net change in unrealized depreciation on loans -- Expected federal income tax............ $113,989 10,258 State income taxes, net of federal..... 19,932 1,792 income tax benefit Other................................... (21) (50) -------- -------- $133,900 12,000 ======== ======== </TABLE> The principal components of the deferred tax asset at December 31, 1995 and May 29, 1996 are as follows: <TABLE> <CAPTION> DECEMBER 31, 1995 MAY 29, 1996 ----------------------------- ---------------------------- FEDERAL STATE TOTAL FEDERAL STATE TOTAL -------- ------- -------- -------- ------- -------- <S> <C> <C> <C> <C> <C> <C> 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 ======== ======= ======== ======== ======= ======== </TABLE> 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 was $182,815 during the year ended December 31, 1995 and $76,760 during the period ended May 29, 1996. F-67
TRANSPORTATION CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (7) DIRECTORS' AND OFFICERS' COMPENSATION Directors' Compensation amounted to $3,000, and $1,300 and Officers' compensation amounted to $182,709 and $58,170, during the year ended December 31, 1995 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. 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. F-68
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: <TABLE> <CAPTION> DECEMBER 31, 1995 MAY 29, 1996 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> 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 </TABLE> (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. F-69
TRANSPORTATION CAPITAL CORP. SCHEDULE OF INVESTMENTS OTHER THAN INVESTMENTS IN AFFILIATES <TABLE> <CAPTION> DECEMBER 31, 1995 MAY 29, 1996 -------------------------------------------- -------------------------------------------- NUMBER NUMBER OF PRINCIPAL OF PRINCIPAL LOANS BY COLLATERAL TYPE LOANS BALANCE FAIR VALUE BOOK VALUE LOANS BALANCE FAIR VALUE BOOK VALUE - -------------------------- ----- ----------- ----------- ----------- ----- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> 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 === ========== ========== ========== === ========== ========== ========== </TABLE> The accompanying notes are an integral part of these financial statement. F-70
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: <TABLE> <CAPTION> NUMBER BALANCE INTEREST OF LOANS OUTSTANDING RATE -------- ----------- --------- <S> <C> <C> 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 ========== </TABLE> The accompanying notes are an integral part of these financial statements. F-71
TRANSPORTATION CAPITAL CORP. SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS --(CONTINUED) MAY 29, 1996 <TABLE> <CAPTION> COMPOSITION OF LOAN PORTFOLIO: BALANCE OUTSTANDING PERCENT ------------------- -------- <S> <C> <C> 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% ========== ====== </TABLE> The accompanying notes are an integral part of these financial statements. F-72
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: <TABLE> <CAPTION> NUMBER BALANCE INTEREST OF LOANS OUTSTANDING RATE -------- ------------ --------- <S> <C> <C> 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 ========== BALANCE COMPOSITION OF LOAN PORTFOLIO OUTSTANDING PERCENT ----------------------------- ----------- ------- 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% ========== ====== </TABLE> The accompanying notes are an integral part of these financial statements. F-73
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. By: /s/ Daniel F. Baker ------------------- Daniel F. Baker Treasurer and Chief Financial Officer Date: March 31, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURES Title Date ---------- ----- ---- <S> <C> <C> /s/ Alvin Murstein Chairman of the Board of Directors and March 31, 1998 - ------------------------------------- Chief Executive Officer Alvin Murstein /s/ Daniel F. Baker Treasurer and Chief Financial Officer March 31, 1998 - ------------------------------------- Daniel F. Baker /s/ Andrew Murstein President and Director March 31, 1998 - ------------------------------------- Andrew Murstein /s/ Mario Cuomo Director March 31, 1998 - ------------------------------------- Mario Cuomo /s/ Stanley Kreitman Director March 31, 1998 - ------------------------------------- Stanley Kreitman Director March 31, 1998 - ------------------------------------- David L. Rudnick /s/ Benjamin Ward Director March __, 1998 - ------------------------------------- Benjamin Ward Director March __, 1998 - ------------------------------------- Frederick S. Hammer </TABLE>
EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.1 Medallion Financial Corp. Restated Certificate of Incorporation. Filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 3.2 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 a 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 was filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and is incorporated by reference herein. 4.8 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 was filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and is incorporated by reference herein. 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. (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 as Exhibit 10.18 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 10.19 Employment Agreement between Medallion Financial Corp. and Alvin Murstein dated May 29, 1996. Filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 10.20 Employment Agreement between Medallion Financial Corp. and Andrew Murstein dated May 29, 1996. Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.23 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.24 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 10.25 Letter Agreement dated December 1, 1996 between Fleet Bank, N.A. and Medallion Financial Corp., as amended February 10, 1997. Filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.26 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 10.27 Security Agreement dated December 1, 1996 between Fleet Bank, N.A. and Medallion Financial Corp. Filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.28 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.29 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.31 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.31 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.32 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.33 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.34 to the Company's Annual Report on Form 10- K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.35 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.36 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 10.37 Agreement between Medallion Taxi Media, Inc. and Metropolitan Taxicab Board of Trade, Inc. dated March 6, 1997. Filed as Exhibit 10.37 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 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 as Exhibit 10.44 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 10.45 Letter Agreement dated April 18, 1997 between MFC and The Chase Manhattan Bank relating to an interest rate cap transaction in the amount of $10,000,000. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 and incorporated by reference herein.
10.46 Letter Agreement dated May 9, 1997 between MFC and Fleet National Bank ("Fleet") relating to an interest rate cap transaction in the amount of $10,000,000. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 and incorporated by reference herein. 10.47 Letter Agreement dated May 12, 1997 between MFC and Fleet relating to an interest rate cap transaction in the amount of $10,000,000. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 and incorporated by reference herein. 10.48 Employment Agreement dated August 29, 1997 between the Company and Allen S. Greene. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997 and incorporated by reference herein. 10.49 Asset Purchase Agreement dated as of August 20, 1997 among the Company, BLI Acquisition Co., LLC, Business Lenders, Inc., Thomas Kellogg, Gary Mullin, Penn Ritter and Triumph-Connecticut, Limited Partnership (including all exhibits thereto - schedules omitted). Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997 and incorporated by reference herein. 10.50 Amended and Restated Loan Agreement, dated as of December 24, 1997, by and among Medallion Funding Corp., the lenders party thereto, Fleet Bank, National Association as Swing Line Lender, Administrative Agent and Collateral Agent and The Bank of New York as Documentation Agent with Fleet Bank, National Association as Arranger. Filed herewith. 10.51 Revolving Credit Note dated December 24, 1997 in the amount of $30,000,000 from Medallion Funding Corp. payable to Fleet Bank, National Association. Filed herewith. 10.52 Revolving Credit Note dated December 24, 1997 in the amount of $30,000,000 from Medallion Funding Corp. payable to The Bank of New York. Filed herewith. 10.53 Revolving Credit Note dated December 24, 1997 in the amount of $30,000,000 from Medallion Funding Corp. payable to BankBoston, N.A. Filed herewith. 10.54 Revolving Credit Note dated December 24, 1997 in the amount of $20,000,000 from Medallion Funding Corp. payable to Harris Trust and Savings Bank. Filed herewith. 10.55 Revolving Credit Note dated December 24, 1997 in the amount of $20,000,000 from Medallion Funding Corp. payable to Bank Tokyo - Mitsubishi Trust Company. Filed herewith. 10.56 Revolving Credit Note dated December 24, 1997 in the amount of $15,000,000 from Medallion Funding Corp. payable to Israel Discount Bank of New York. Filed herewith. 10.57 Revolving Credit Note dated December 24, 1997 in the amount of $15,000,000 from Medallion Funding Corp. payable to European American Bank. Filed herewith. 10.58 Revolving Credit Note dated December 24, 1997 in the amount of $15,000,000 from Medallion Funding Corp. payable to Bank Leumi USA. Filed herewith. 10.59 Revolving Credit Note dated December 24, 1997 in the amount of $20,000,000 from Medallion Funding Corp. payable to The Chase Manhattan Bank. Filed herewith.
10.60 Swing Line Note dated December 24, 1997 in the amount of $5,000,000 from Medallion Funding Corp. payable to Fleet Bank, National Association. Filed herewith. 10.61 Amended and Restated Security Agreement, dated as of December 24, 1997, between Medallion Funding Corp., as Debtor and Fleet Bank, N.A., as Agent and Secured Party for the benefit of the Banks and Swing Line Lender signatory to the Amended and Restated Loan Agreement, dated as of December 24, 1997, among Medallion Funding Corp., the banks signatory thereto, the Swing Line Lender, The Bank of New York as Documentation Agent and Fleet Bank, N.A. as Arranger and Agent and the Holders of Commercial Paper issued by Medallion Funding Corp. Filed herewith. 10.62 First Amendment, dated as of February 5, 1998, to Amended and Restated Loan Agreement, dated as of December 24, 1997, by and among Medallion Funding Corp., the lenders party thereto, Fleet Bank, National Association as Swing Line Lender, Administrative Agent and Collateral Agent and The Bank of New York as Documentation Agent with Fleet Bank, National Association as Arranger. Filed herewith. 10.63 Amendment No. 1, dated as of March 12, 1998, to Amended and Restated Security Agreement, dated as of December 24, 1997, between Medallion Funding Corp., as Debtor and Fleet Bank, N.A., as Agent and Secured Party for the benefit of the Banks and Swing Line Lender signatory to the Amended and Restated Loan Agreement, dated as of December 24, 1997, among Medallion Funding Corp., the banks signatory thereto, the Swing Line Lender, The Bank of New York as Documentation Agent and Fleet Bank, N.A. as Arranger and Agent and the Holders of Commercial Paper issued by Medallion Funding Corp. Filed herewith. 10.64 Indenture of Lease, dated October 31, 1997, by and between Sage Realty Corporation, as Agent and Landlord, and Medallion Financial Corp., as Tenant. Filed herewith. 10.65 Third Amendment, dated December 22, 1997, to Letter Agreement, dated as of December 1, 1996. between Medallion Financial Corp. and Fleet Bank, National Association. Filed herewith. 10.66 Endorsement No. 3, dated December 22, 1997, to Revolving Credit Note dated December 1, 1996 in the amount of $6,000,000 from Medallion Financial Corp. payable to Fleet Bank, N.A. Filed herewith. 21 List of Subsidiaries. Filed herewith. 23.1 Consent of Arthur Andersen LLP relating to its report concerning Medallion Financial Corp. dated February 25, 1998. Filed herewith. 23.2 Consent of Arthur Andersen LLP relating to its reports concerning Edwards Capital Corp., Transportation Capital Corp. and Tri-Magna Corporation dated March 26, 1997. Filed herewith. 27 Medallion Financial Corp. Financial Data Schedule. Filed herewith.