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 27,335,884 Other.......................... 140 12.67% 1/97-10/02 14,589,405 ----- ------------ Total....................... 2,370 10.80% 1/97-12/15 \$176,540,188 ===== ============
December 31, ------------------------------------------------------------------------------ 1992 1993 1994 1995 1996 -------------- -------------- -------------- -------------- -------------- (in thousands) Loans Receivable Medallion Financial.. \$ 14,640 8% Tri-Magna (MFC)...... \$ 69,785 53% \$ 82,014 57% \$ 90,343 62% \$ 96,956 64% 99,662 57 Edwards.............. 43,020 32 44,141 30 43,487 30 43,799 29 46,630 26 TCC.................. 20,192 15 18,074 13 10,981 8 9,797 7 15,608 9 Total.............. \$132,997 100% \$144,229 100% \$144,811 100% \$150,552 100% \$176,540 100% ======== === ======== === ======== === ======== === ======== ===
During the year ended December 31, 1996, the Company originated over 1,000 loans in the aggregate principal amount of \$98.5 million. For that period, the Company's realized losses of principal were less than 0.01% of its loan portfolio. During the year ended December 31, 1995, the Company originated loans in the aggregate principal amount of \$52.7 million. For that year, the Company's realized losses of principal were less than 0.01% of its loan portfolio. 10 LOAN ACTIVITY The following table sets forth the Company's loans originated, renewed and repaid on a combined basis for the periods indicated:
Year Ended December 31, ------------------------------- 1994 1995 1996 --------- --------- --------- (in thousands) Loans originated................................ \$ 61,357 \$ 52,714 \$ 98,525 Loan repayments (including renewals)............ (60,610) (46,983) (71,024) Decrease (increase) in unrealized depreciation.. 871 195 9 Loans (written off) recovered, net.............. (166) 11 5 -------- -------- -------- Increase (decrease) in loans receivable-net..... 1,452 5,937 27,515 Loans receivable-net (beginning of period)...... 141,590 143,042 148,979 -------- -------- -------- Loans receivable-net (end of period)............ \$143,042 \$148,979 \$176,494 ======== ======== ========
DELINQUENCY AND LOAN LOSS EXPERIENCE Under the Company's collection policy, when a borrower fails to make a required monthly payment, the borrower is notified by mail after approximately 10 days, and a collection officer generally contacts the borrower if the payment remains unpaid after 10 additional days. The Company generally follows a practice of discontinuing the accrual of interest income on loans which are in arrears as to interest payments for a period in excess of 90 days. The Company delivers a default notice and begins foreclosure and liquidation proceedings when management determines that pursuit of these remedies is the most appropriate course of action in the circumstances. At December 31, 1996, the Company had 88 loans with an aggregate principal balance of \$8.4 million, or 4.8% of the portfolio, for which accrued interest and principal payments of \$791,000 were delinquent for 90 days or more, compared to 69 loans with an aggregate principal balance of \$6.4 million or 4.3% of the portfolio, for which accrued interest and principal payments of \$512,000 were delinquent for 90 days or more at December 31, 1995. Of the 88 loans which were delinquent at December 31, 1996, 55, in the aggregate principal amount of \$5.78 million, were Medallion Loans. The Company considers a loan to be delinquent if the borrower fails to make payments for 10 days or more; however, the Company may agree with a borrower that cannot make payments in accordance with the original loan agreement to modify the payment terms of the loan. Based upon the Company's assessment of its collateral position, the Company anticipates that a substantial portion of the principal amount of its delinquent loans would be collected upon foreclosure of such loans, if necessary. There can be no assurance, however, that the collateral securing such loans will be adequate in the event of foreclosure. The Company monitors delinquent loans for possible exposure to loss. In its analysis, the Company reviews various factors, including the value of the collateral securing the loan and the borrower's prior payment history. Based upon these factors and the Company's analysis of the yield and maturity of loans in the portfolio relative to current and projected market interest rates, the Company determines net unrealized depreciation of investments or the amount by which the Company's estimate of the current realizable value of its portfolio is below the cost basis thereof. 11 The following table sets forth the Company's unrealized depreciation of investments and the loan loss experience on a combined basis:
Year Ended December 31, -------------------------- 1994 1995 1996 -------- ------- ------- (in thousands) Balance, beginning of year........................ \$2,639 \$1,768 \$1,573 Change in unrealized depreciation of investments.. (415) (145) (9) Realized loan losses.............................. (200) (62) 0 Recoveries........................................ 33 12 5 Interest income received.......................... (289) -- -- ------ ------ ------ Balance, end of year.............................. \$1,768 \$1,573 \$1,569 ====== ====== ======
NAME AGE POSITION(S) HELD WITH THE COMPANY - - ------------------------- --- ------------------------------------- Alvin Murstein*....... 62 Chairman and Chief Executive Officer Andrew Murstein*...... 32 President and Chief Operating Officer Marie Russo*.......... 72 Senior Vice President and Secretary Daniel F. Baker*...... 33 Treasurer and Chief Financial Officer Michael Fanger*....... 39 Executive Vice President Michael J. Kowalsky*.. 51 Executive Vice President - - ------------------
An asterisk (*) indicates an "interested person" as such term is defined in (S) 2(a)(19) of the 1940 Act. Each officer's term extends until the first meeting of the Board of Directors following the next annual meeting of stockholders and until a successor is elected and qualified. Alvin Murstein has been Chairman of the Board of Directors of Medallion Financial since its founding in 1995 and has been Chief Executive Officer of Medallion Financial since February 1996. Mr. Murstein has also been Chairman of the Board of Directors and Chief Executive Officer of MFC since its founding in 1979 and of Media since its founding in 1994. Mr. Murstein has been Chairman of the Board of Directors and Chief Executive Officer of Edwards and TCC since June 1996. He served as Chairman of the Board of Directors and Chief Executive Officer of Tri-Magna from its founding in 1989 until its acquisition by the Company in May 1996. Mr. Murstein received a B.A. and an M.B.A. from New York University and has been an executive in the taxicab industry for over 40 years. Mr. Murstein has served on the Board of Directors of the Strober Organization, Inc., a building supply company, since 1988. Alvin Murstein is the father of Andrew Murstein. Andrew Murstein has been President of Medallion Financial since its inception in 1995, Chief Operating Officer of Medallion Financial since February 1996 and President of Media from inception. Mr. Murstein has also been a Director of MFC, Edwards and TCC since May 1996. He served as Tri-Magna's Director of New Business Development from 1994 until the acquisition of Tri- Magna by the Company in May 1996. Mr. Murstein received a B.A. in economics, cum laude, from Tufts University and an M.B.A. in finance from New York University. Mr. Murstein serves on the New York City Private Industry Council. Andrew Murstein is the son of Alvin Murstein and the son-in-law of Mr. Rudnick, and is the third generation of his family to be active in the taxicab industry. Marie Russo has been Senior Vice President and Secretary of Medallion Financial since February 1996. Ms. Russo has also been Senior Vice President and Secretary of MFC, Edwards and TCC since June 1996. Ms. Russo served as Vice President of Operations of Tri-Magna from 1989 until its acquisition by the Company in May 1996. From 1989 to 1996 she was Vice President of MFC and from 1983 to 1986 she was Controller of MFC. Ms. Russo received a B.S. in accounting from Hunter College. Daniel F. Baker has been Treasurer and Chief Financial Officer of Medallion Financial since February 1996. Mr. Baker has also been Treasurer and Chief Financial Officer of MFC, Edwards, TCC and Media since June 1996. Mr. Baker also served as Tri-Magna's Vice President of Finance from 1992 until its acquisition by the Company in May 1996. From 1989 through 1991, he was Controller of Tri- 23 Magna and from 1988 through 1991 he was Controller of MFC. Prior to joining MFC, Mr. Baker was employed by Arthur Andersen & Co. Mr. Baker received a B.S. in accounting from Husson College. Michael Fanger has been Executive Vice President of Medallion Financial since February 1996 and President of TCC since June 1996. Mr. Fanger has also been Executive Vice President of MFC and Senior Vice President of Edwards since June 1996. He served as Tri-Magna's Vice President of Commercial Lending from its inception until its acquisition by the Company in May 1996. Prior to joining MFC, Mr. Fanger was a Vice President, Commercial Lending at Shawmut Bank, N.A. Mr. Fanger received a B.A. from Colby College. Michael J. Kowalsky has been Executive Vice President of the Company since May 1996. Mr. Kowalsky has been President of MFC and Edwards since June 1996. He also served as Chief Operating Officer of Edwards from 1992 until June 1996. Prior to joining Edwards in 1990, Mr. Kowalsky was a Senior Vice President at General Cigar Co. Inc., a cigar manufacturing company. Mr. Kowalsky received a B.A. and M.A. in economics from the University of Kentucky and an M.B.A. from the New York University Graduate School of Business. 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock commenced trading on May 23, 1996 in the Nasdaq National Market System under the symbol "TAXI." As of March 31, 1997, there were approximately 650 holders of record of the Company's Common Stock. The following table sets forth for the fiscal periods indicated, the range of high and low closing prices for the Company's Common Stock on the Nasdaq National Market System.
HIGH LOW YEAR ENDED DECEMBER 31, 1996 Third Quarter Ended September 30, 1996 \$15 \$10 Fourth Quarter Ended December 31, 1996 \$15 1/4 \$12 1/8
On November 26, 1996 the Company paid its first quarterly cash dividend of \$0.20 per share to holders of record of the Company's Common Stock on November 12, 1996. On January 30, 1997 the Company paid its second quarterly dividend of \$0.21 per share to stockholders of record on December 30, 1996. The Company currently anticipates that it will continue to pay quarterly cash dividends on its Common Stock. There can be no assurance, however, that the Company will have sufficient earnings to pay such dividends, if any, in the future. ITEM 6. SELECTED FINANCIAL DATA On May 29, 1996, Medallion Financial acquired each of the Founding Companies. Prior to this acquisition, each of the Founding Companies had been operating independently of each other and Medallion Financial had no operations. Accordingly, the following Selected Financial Data is comprised of two major sections. The first section, Consolidated Selected Financial Data, presents consolidated audited financial data of the Company for the period commencing May 30, 1996 and ending December 31, 1996 and is derived from the actual financial position and results of operation of the Company as set forth in the audited Consolidated Financial Statements of the Company included as Item 8 in this Report on Form 10-K. The second section of the following discussion presents the Historical Selected Financial Data of each of the Founding Companies. The Historical Selected Financial Data for the fiscal years ended December 31, 1995 and 1994 and the period ended May 29, 1996, have been derived from audited financial statements included in this Report on Form 10-K. The Historical Selected Financial Data for Edwards and TCC have been reclassified to permit a presentation that is consistent with the investment company status they acquired upon completion of the Acquisitions. The Historical Selected Financial Data for the fiscal years ended December 31, 1992 for Edwards and 1993 for each of the Founding Companies have been derived from their respective audited financial statements not included in this Report on Form 10-K. The Historical Selected Financial Data for the fiscal year ended December 31, 1992 for Tri-Magna and TCC have been derived from their respective unaudited financial statements not included in this Report on Form 10-K. These unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, 25 consisting only of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations of the Founding Companies for the period presented. The Selected Financial Data provided herein should be read in conjunction with the financial statements of Medallion Financial, Tri-Magna, Edwards and TCC, including the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Report on Form 10-K. 26 MEDALLION FINANCIAL CORP. SELECTED CONSOLIDATED FINANCIAL DATA FOR THE PERIOD MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
THREE MONTHS ENDED MAY 30 TO ---------------------------------- MAY 30 TO JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1996 1996 1996 ----------- ------------------- -------------- ------------- (unaudited) (unaudited) (unaudited) STATEMENT OF OPERATIONS DATA (in thousands except per share amounts) Investment income............................................ \$ 1,392 \$ 4,264 \$ 4,756 \$ 10,412 Interest expense............................................. 699 2,100 2,209 5,008 -------- -------- -------- -------- Net interest income.......................................... 693 2,164 2,547 5,404 Equity in earnings (losses) of unconsolidated subsidiary(1)............................... 29 (23) (69) (63) Other income................................................. 58 234 119 411 Accretion of negative goodwill............................... 64 181 176 421 Operating expenses........................................... (266) (932) (1,033) (2,231) Amortization of goodwill..................................... ( 35) (101) (123) (259) -------- -------- -------- -------- Net investment income........................................ 543 1,523 1,617 3,683 Realized gain on investments, net............................ -- 26 58 84 Change in unrealized depreciation of investments(2).......... -- -- (46) (46) -------- -------- -------- -------- Net increase in net assets resulting from operations(3)...... \$ 543 \$ 1,549 \$ 1,629 \$ 3,721 ======== ======== ======== ======== Net increase in net assets resulting from operations per share (3).............................................. \$ 0.07 \$ 0.19 \$ 0.20 \$ 0.45 ======== ======== ======== ======== Dividends declared per share................................. \$ 0.00 \$ 0.20 \$ 0.21 \$ 0.41 ======== ======== ======== ======== MAY 30, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1996 -------- -------- -------- -------- BALANCE SHEET DATA (IN THOUSANDS) (unaudited) (unaudited) (unaudited) Investments Medallion Loans.......................................... \$116,398 \$121,720 \$125,039 \$134,615 Commercial Installment Loans............................. 33,046 34,463 36,766 41,925 Unrealized depreciation of investments....................... -- -- -- (46) -------- -------- -------- -------- Investments, net of unrealized depreciation of investments... 149,444 156,183 161,805 176,494 Total assets................................................. 184,938 173,001 174,584 189,625 Notes payable and demand notes............................... 90,400 79,700 81,300 96,450 Subordinated SBA debentures.................................. 30,590 30,421 29,263 29,390 Total liabilities............................................ 125,877 113,284 113,649 130,619 Total stockholders' equity................................... 56,122 56,692 58,241 56,487 DECEMBER 31, 1996 -------- SELECTED FINANCIAL RATIOS AND OTHER DATA (unaudited) Return on assets(4)(5)....................................................................................... 3.36% Return on equity(5)(6)....................................................................................... 11.29 Average yield, e.o.p.(7)..................................................................................... 10.80 Average cost of funds, e.o.p.(8)............................................................................. 6.88 Spread, e.o.p.(9)............................................................................................ 3.92 Other income ratio(5)(10).................................................................................... 0.40 Operating expense ratio(5)(11)............................................................................... 2.02 Medallion Loans as a percentage of investments............................................................... 76.25 Commercial Installment Loans as a percentage of investments.................................................. 23.75 Investments to assets........................................................................................ 93.08 Equity to assets............................................................................................. 29.79 Debt to equity............................................................................................... 222.76 SBA debt to total debt....................................................................................... 23.36
27 MEDIA (1)
MAY 30 TO JULY 1 TO OCTOBER 1 TO MAY 30 TO JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1996 1996 1996 ----------- -------------- ------------- ------------- (unaudited) (unaudited) (unaudited) STATEMENT OF OPERATIONS DATA Advertising revenue........... \$151,253 \$452,943 \$491,150 \$1,095,346 Cost of services.............. 45,228 215,846 238,061 499,135 -------- -------- -------- ---------- Gross margin.................. 106,025 237,097 253,089 596,211 Other operating expenses...... 61,886 272,295 325,030 659,211 -------- -------- -------- ---------- Income (losses) before taxes.. 44,139 (35,198) (71,941) (63,000) Income taxes.................. 5,000 (12,500) 7,500 -- -------- -------- -------- ---------- Net income (loss)............. \$ 39,139 \$(22,698) \$(79,441) \$ (63,000) ======== ======== ======== ==========
__________________________ (1) Equity in earnings (losses) of unconsolidated subsidiary represents the net income (loss) for the period indicated from the Company's investment in Media. (2) Change in unrealized depreciation of investments represents the (increase) decrease for the period in the unrealized depreciation applied against the Company's investments to state them at fair value. (3) Net increase in net assets resulting from operations is the sum of net investment income, net realized gains or losses on investments and the change in unrealized gains or losses on investments. (4) Return on assets represents net increase in net assets resulting from operations, for the period indicated, divided by total assets at December 31, 1996. (5) Selected financial ratios have been annualized for the period from May 30, 1996 to December 31, 1996. (6) Return on equity represents net increase in net assets resulting from operations, for the period indicated, divided by total stockholders' equity at December 31, 1996. (7) Average yield, e.o.p. represents the end of period weighted average interest rate on investments at the date indicated. (8) Average cost of funds, e.o.p. represents the end of period weighted average interest rate on debt at the date indicated. (9) Spread, e.o.p. represents average yield, e.o.p. less average cost of funds, e.o.p. (10) Other income ratio represents other income, for the period indicated, divided by investments at December 31, 1996. (11) Operating expense ratio represents operating expenses, for the period indicated, divided by total assets at December 31, 1996. 28 SELECTED FINANCIAL DATA TRI-MAGNA (MFC, BUT NOT MEDIA, IS CONSOLIDATED WITH TRI-MAGNA)
YEAR ENDED DECEMBER 31, JANUARY 1 TO --------------------------------------------- MAY 29, 1992 1993 1994 1995 1996 ------------ ----------- -------- -------- --------------- (unaudited) (dollars in thousands) STATEMENT OF OPERATIONS DATA Investment income..................................... \$ 7,953 \$ 8,333 \$ 8,820 \$ 9,803 \$ 4,423 Interest expense...................................... 3,509 3,661 4,756 6,034 2,517 ------- ------- ------- ------- ------- Net interest income................................... 4,444 4,672 4,064 3,769 1,906 Equity in earnings (losses) of unconsolidated subsidiary(1)........................................ -- -- 18 126 (53) Other income.......................................... 632 541 519 446 148 Total non-interest expense............................ 2,754 3,097 2,700 2,615 1,816 Dividends paid on minority interest................... 277 277 277 208 -- ------- ------- ------- ------- ------- Net investment income................................. 2,045 1,839 1,624 1,518 185 Realized gain (loss) on investments, net.............. (223) (115) (22) 61 -- Change in unrealized depreciation of investments(2)... 125 (53) 58 (140) -- Net increase in net assets resulting from operations.. \$ 1,947 \$ 1,671 \$ 1,660 \$ 1,439 \$ 185 ======= ======= ======= ======= ======= SELECTED FINANCIAL RATIOS AND OTHER DATA(3) Return on average assets(4)(5)........................ 2.81% 2.12% 1.88% 1.50% 1.86% Return on average equity(5)(6)........................ 17.67 15.29 15.29 12.97 16.93 Interest rate spread Average yield(5)(7).................................. 12.11 10.99 10.20 10.61 11.00 Average cost of funds(5)(8).......................... 7.44 6.09 7.00 8.26 7.56 Spread(9)............................................ 4.67 4.90 3.20 2.35 3.44 Other income to average assets(5)..................... 0.91 0.69 0.59 0.46 0.36 Non-interest expense to average assets(5)(10)......... 3.97 3.92 3.05 2.72 2.98 Weighted average assets............................... \$69,401 \$78,921 \$88,414 \$96,189 \$99,197 Weighted average investments(11)...................... 65,673 75,790 86,496 92,433 96,479 Weighted average equity............................... 11,019 10,931 10,855 11,094 10,899 Weighted average debt................................. 47,160 60,160 67,955 73,063 79,912 DECEMBER 31,(3) ---------------------------------------- MAY 29, 1992 1993 1994 1995 1996(3) ------- ------- ------- ------- ------- Medallion Loans as a percentage of investments........ 81.0% 81.0% 72.4% 68.4% 67.9% Commercial Installment Loans as a percentage of investments...................................... 19.0 19.0 27.6 31.6 32.1 Investments to assets................................. 93.8 96.4 96.7 96.3 97.0 Equity to assets...................................... 15.0 12.9 11.8 17.4 16.7 Debt to equity(12).................................... 259 315 356 464 482 SBA debt to total debt................................ 23.8 19.8 17.5 -- --
29 TRI-MAGNA
DECEMBER 31, -------------------------------------- MAY 29, 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (unaudited) (dollars in thousands) BALANCE SHEET DATA Investments Medallion Loans............................... \$56,460 \$66,437 \$65,424 \$66,338 \$64,934 Commercial Installment Loans.................. 13,325 15,577 24,918 30,619 31,598 Unrealized depreciation of investments.......... (775) (828) (770) (910) (910) ------- ------- ------- ------- ------- Investments, net of unrealized depreciation of investments................................... 69,010 81,186 89,572 96,047 95,622 Total assets.................................... 73,603 84,239 92,590 99,788 98,605 Notes payable................................... 40,000 50,700 59,025 80,295 79,395 Subordinated SBA debentures..................... 12,500 12,500 12,500 -- -- Total liabilities............................... 53,341 64,171 72,480 82,474 82,116 Minority interest............................... 9,234 9,234 9,234 -- -- Total stockholders' equity...................... 11,027 10,834 10,876 17,314 16,489
MEDIA(1)
NOVEMBER 22 TO YEAR ENDED JANUARY 1 TO DECEMBER 31, DECEMBER 31, MAY 29, 1994 1995 1996 -------------- ------------ ------------- STATEMENT OF OPERATIONS DATA Advertising revenue........... \$227,756 \$1,542,013 \$671,148 Cost of services.............. 83,341 483,721 283,891 -------- ---------- -------- Gross margin.................. 144,415 1,058,292 387,257 Other operating expenses...... 126,036 829,293 455,278 -------- ---------- -------- Income (losses) before taxes.. 18,379 228,999 (68,021) Income taxes.................. -- 103,043 (14,999) -------- ---------- -------- Net income (loss)............. \$ 18,379 \$ 125,956 \$(53,022) ======== ========== ======== - - ------------------
(1) Equity in earnings (losses) of unconsolidated subsidiary represents the net income (loss) for the period earned by Tri-Magna from its investment in Media. (2) Change in unrealized depreciation of investments represents the (increase) decrease for the period in the unrealized depreciation applied against Tri- Magna's investments to state them at fair value. (3) Unaudited. (4) Return on average assets is calculated as the net increase in net assets resulting from operations (excluding Merger Related Costs) divided by the weighted average assets for the period. (5) Selected financial ratios are annualized for the period from January 1, 1996 to May 29, 1996. (6) Return on average equity is calculated as the net increase in net assets resulting from operations (excluding Merger Related Costs) divided by the weighted average equity for the period. (7) Average yield is calculated as gross investment income for the period divided by the weighted average investments for the period. (8) Average cost of funds is calculated as interest expense for the period divided by the weighted average debt for the period. (9) Spread is calculated as the difference between average yield and average cost of funds. (10) Non-interest expense to average assets is calculated as the total non- interest expense (excluding Merger Related Costs) divided by the weighted average assets for the period. (11) Investments consists of the Tri-Magna's loan portfolio and excludes cash and cash equivalents and Tri-Magna's investment in Media. (12) Debt to equity is defined as total debt divided by total stockholders equity and minority interest. 30 EDWARDS
YEAR ENDED DECEMBER 31, JANUARY 1 TO -------------------------------------- MAY 29, 1992 1993 1994 1995 1996 -------- -------- -------- -------- --------------- (dollars in thousands) STATEMENT OF OPERATIONS DATA Investment income............................... \$ 5,444 \$ 4,955 \$ 4,334 \$ 4,317 \$ 1,727 Interest expense................................ 2,873 2,741 2,765 2,748 1,098 ------- ------- ------- ------- ------- Net interest income............................. 2,571 2,214 1,569 1,569 629 Other income.................................... 412 476 620 443 129 Total non-interest expense...................... 1,512 1,022 1,108 885 660 Income tax expense.............................. 73 51 21 40 16 ------- ------- ------- ------- ------- Net investment income........................... 1,398 1,617 1,060 1,087 82 Realized gain (loss) on investments, net........ (13) -- -- -- -- ------- ------- ------- ------- ------- Net increase in net assets resulting from operations before extraordinary items......... 1,385 1,617 1,060 1,087 82 Extraordinary items(1).......................... -- -- (526) -- -- ------- ------- ------- ------- ------- Net increase in net assets resulting from operations............................... \$ 1,385 \$ 1,617 \$ 534 \$ 1,087 \$ 82 ======= ======= ======= ======= ======= SELECTED FINANCIAL RATIOS AND OTHER DATA(2) Return on average assets(3)(4).................. 3.19% 3.60% 2.35% 2.42% 2.28% Return on average partners' capital(4)(5)....... 16.47 17.51 11.69 12.29 11.38 Interest rate spread Average yield(4)(6)........................ 13.10 11.51 10.06 9.92 9.40 Average cost of funds(4)(7)................ 8.14 7.97 7.97 7.96 7.54 Spread(8).................................. 4.96 3.54 2.09 1.96 1.86 Other income to average assets(4)............... 0.95 1.06 1.38 0.99 0.68 Non-interest expense to average assets(4)(9).... 3.48 2.27 2.46 1.98 1.63 Weighted average assets......................... \$43,465 \$44,953 \$45,025 \$44,829 \$45,543 Weighted average investments(10)................ 41,567 43,047 43,074 43,508 44,103 Weighted average partners' capital.............. 8,409 9,235 9,064 8,846 9,112 Weighted average debt........................... 35,275 34,385 34,690 34,535 34,947 DECEMBER 31,(2) ------------------------------------- MAY 29, 1992 1993 1994 1995 1996(2) ------- ------- ------- ------- ------- Medallion Loans as a percentage of investments.. 98.3% 98.3% 98.3% 98.6% 98.7% Commercial Installment Loans as a percentage of investments................................ 1.7 1.7 1.7 1.4 1.3 Investments to assets........................... 96.7 97.0 97.5 97.1 96.7 Partners' capital to assets..................... 20.1 21.0 19.2 20.2 19.8 Debt to partners' capital(11)................... 382 365 408 382 385 SBA debt to total debt.......................... 73.2 71.6 71.4 71.7 71.2
31 EDWARDS
DECEMBER 31, -------------------------------------- MAY 29, 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (dollars in thousands) BALANCE SHEET DATA Investments Medallion Loans......................... \$42,301 \$43,383 \$42,740 \$43,177 \$43,921 Commercial Installment Loans............ 719 758 747 622 589 Unrealized depreciation of investments....... (50) (43) (20) (20) (20) ------- ------- ------- ------- ------- Investments, net of unrealized depreciation of investments............................. 42,970 44,098 43,467 43,779 44,490 Total assets................................. 44,430 45,476 44,574 45,084 46,001 Notes payable and demand notes............... 9,125 9,900 10,000 9,850 10,100 Subordinated SBA debentures.................. 24,950 24,950 24,950 24,950 24,950 Total liabilities............................ 35,511 35,926 35,998 35,967 36,894 Total partners' capital...................... 8,919 9,551 8,576 9,117 9,107 - - ------------------
(1) Edwards incurred a prepayment premium of \$526,000 in connection with its refinancing of \$4.6 million and \$5.1 million of subordinated SBA debentures on June 29, 1994 and September 28, 1994, respectively. (2) Unaudited. (3) Return on average assets is calculated as the net increase in net assets resulting from operations before extraordinary items (excluding legal fees related to sale of assets) divided by the weighted average assets for the period. (4) Selected financial ratios are annualized for the period from January 1, 1996 to May 29, 1996. (5) Return on average partners' capital is calculated as the net increase in net assets resulting from operations before extraordinary items (excluding legal fees related to sale of assets) divided by the weighted average partners' capital for the period. (6) Average yield is calculated as gross investment income for the period divided by the weighted average investments for the period. (7) Average cost of funds is calculated as interest expense for the period divided by the weighted average debt for the period. (8) Spread is calculated as the difference between average yield and average cost of funds. (9) Non-interest expense to average assets is calculated as the total non-interest expense (excluding legal fees related to sale of assets) divided by the weighted average assets for the period. (10) Investments consists of Edwards' loan portfolio and excludes cash and cash equivalents. (11) Debt to partners' capital is defined as total debt divided by total partners' capital. 32 TCC
YEAR ENDED DECEMBER 31, JANUARY 1 TO --------------------------------------------- MAY 29, 1992 1993 1994 1995 1996 ------------ ----------- -------- -------- ------------- (unaudited) STATEMENT OF OPERATIONS DATA Investment income.................................... \$ 3,944 \$ 3,110 \$ 2,217 \$ 1,836 \$ 682 Interest expense..................................... 1,538 1,064 709 450 148 ------- ------- ------- ------- ------- Net interest income.................................. 2,406 2,046 1,508 1,386 534 Total non-interest expense........................... 1,038 1,269 711 760 260 Income tax expense (benefit)(1)...................... 74 (983) 653 381 128 ------- ------- ------- ------- ------- Net investment income, adjusted for taxes(2)......... 1,294 1,760 144 245 146 Realized gain (loss) on investments.................. (646) (69) (144) (50) 5 Change in unrealized depreciation of investments(3).. -- 232 790 335 30 ------- ------- ------- ------- ------- Net increase (decrease) in net assets resulting from operations.................................... \$ 648 \$ 1,923 \$ 790 \$ 530 \$ 181 ======= ======= ======= ======= ======= SELECTED FINANCIAL RATIOS AND OTHER DATA(4) Return on average assets(5)(6)....................... 2.46% 8.36% 3.90% 2.91% 2.56% Return on average common equity(6)(7)................ 14.73 33.84 11.22 6.74 5.23 Interest rate spread Average yield(6)(8)............................. 15.90 15.77 13.86 13.58 12.95 Average cost of funds(6)(9)..................... 8.56 8.10 7.60 6.14 5.58 Spread(10)...................................... 7.34 7.67 6.26 7.44 7.37 Non-interest expense to average assets(6)............ 3.94 5.51 3.51 4.18 3.67 Weighted average assets.............................. \$26,338 \$23,011 \$20,260 \$18,183 \$16,983 Weighted average investments(11)..................... 24,235 18,994 14,442 10,389 9,745 Weighted average common equity....................... 4,398 5,683 7,042 7,859 8,312 Weighted average debt................................ 17,967 13,133 9,330 7,330 6,368 DECEMBER 31,(4) ---------------------------------------- MAY 29, 1992 1993 1994 1995 1996(4) ------- ------- ------- ------- ------- Medallion Loans as a percentage of investments....... 81.6% 85.4% 80.1% 81.5% 76.0% Commercial Installment Loans as a percentage of investments..................................... 18.4 14.6 19.9 18.5 24.0 Loans to assets...................................... 74.4 75.6 52.8 52.6 56.3 Equity to assets..................................... 33.2 46.5 57.1 60.2 63.7 Debt to equity(12)................................... 192 107 73 64 53 SBA debt to total debt............................... 73.4 100.0 100.0 100.0 100.0
33 TCC
DECEMBER 31, -------------------------------------------- MAY 29, 1992 1993 1994 1995 1996 ------------ ----------- -------- -------- -------- (unaudited) (dollars in thousands) BALANCE SHEET DATA Investments Medallion Loans............................ \$16,471 \$15,433 \$ 8,796 \$ 7,988 \$ 7,543 Commercial Installment Loans............... 3,721 2,641 2,185 1,808 2,381 Unrealized depreciation of investments.......... (2,000) (1,768) (978) (642) (612) ------- ------- ------- ------- ------- Investments, net of unrealized depreciation of investments................................... 18,192 16,306 10,003 9,154 9,312 Cash and cash equivalents....................... 5,790 3,911 8,199 7,781 6,797 Total assets.................................... 24,453 21,569 18,951 17,416 16,551 Notes payable and demand notes.................. 4,132 -- -- -- -- SBA debentures.................................. 11,405 10,730 7,930 6,730 5,640 Total liabilities............................... 16,348 11,541 8,129 6,937 6,008 Total stockholders' equity...................... 8,105 10,028 10,822 10,479 10,543 - - ---------------------
(1) Income tax expense (benefit) includes income tax provision (benefit) on investment income, realized losses on investments and change in unrealized depreciation of investments. See note (2). (2) Net investment income has been adjusted by combining TCC's income tax provision (benefit) in order to present TCC's financial statements on a comparable basis to the other Founding Companies. (3) Change in unrealized depreciation of investments represents the (increase) decrease for the period in the unrealized depreciation applied against TCC's investments to state them at fair value. (4) Unaudited. (5) Return on average assets is calculated as the net increase (decrease) in net assets resulting from operations divided by the weighted average assets for the period. (6) Selected financial ratios are annualized for the period from January 1, 1996 to May 29, 1996. (7) Return on average common equity is calculated as the net increase in net assets resulting from operations divided by the weighted average equity for the period. (8) Average yield is calculated as gross investment income excluding interest income on cash and cash equivalents for the period divided by the weighted average investments for the period. (9) Average cost of funds is calculated as interest expense for the period divided by the weighted average debt for the period. (10) Spread is calculated as the difference between average yield and average cost of funds. (11) Investments consists of TCC's loan portfolio and excludes cash and cash equivalents. (12) Debt to equity is defined as total debt divided by total stockholders equity and minority interests. 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in this section should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing in this Report on Form 10-K. In addition, this Management's Discussion and Analysis contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are set forth below in the Investment Considerations section. GENERAL The Company's principal activity is the origination and servicing of Medallion Loans and Commercial Installment Loans. The earnings of the Company depend primarily on its level of net interest income, which is the difference between interest earned on interest-earning assets consisting primarily of Medallion Loans and Commercial Installment Loans, and the interest paid on interest- bearing liabilities consisting primarily of credit facilities with bank syndicates and subordinated debentures issued to or guaranteed by the SBA. Net interest income is a function of the net interest rate spread, which is the difference between the average yield earned on interest-earning assets and the average interest rate paid on interest-bearing liabilities, as well as the average balance of interest-earning assets as compared to interest-bearing liabilities. Net interest income is affected by economic, regulatory and competitive factors that influence interest rates, loan demand and the availability of funding to finance the Company's lending activities. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets reprice on a different basis than its interest-bearing liabilities. Trend in Loan Portfolio Yield. The Company's investment income is driven by the principal amount of and yields on Medallion Loans and Commercial Installment Loans. The following table illustrates the Company's weighted average portfolio yield at the dates indicated:
May 30, 1996 December 31, 1996 ------------ ----------------- Weighted Percentage Weighted Percentage Average Principal of Total Average Principal of Total Yield Amounts Portfolio Yield Amounts Portfolio --------- ------------ ----------- --------- ----------------- ----------- Medallion Loan Portfolio 9.84% 116,398,395 77.9% 9.92% \$134,614,899 76.3% Commercial Installment Loan Portfolio 13.42 33,045,702 22.1 13.51 41,925,290 23.7 ----------- ------------ Total Portfolio 10.63 149,444,097 100.0 10.80 \$176,540,189 100.0 ===== =========== ===== ============ =====
Medallion Financial MFC Edwards TCC Total ------------ ---------- ------------- ------- -------------- (dollars in thousands) Cash and cash equivalents............ \$ 102 \$ 676 \$ 206 \$ 680 \$ 1,664 Revolving lines of credit............ 5,000(1) 85,000(2) 15,000 -- 105,000 Amounts available.................. 550 7,450 2,550 -- 10,550 Amounts outstanding................ 4,450 77,550 12,450 -- 94,450 Average interest rate............ 6.84% 7.00% 6.81% -- 6.87% Maturity......................... 12/97 6/97 4/97-7/97 -- 4/97-7/97 Term loans........................... -- 2,000 -- 2,000 Interest rate.................... -- 7.50% -- -- 7.50% Maturity......................... -- 7/97 -- -- 7/97 SBA debentures....................... -- -- 23,750(1) 5,640 29,390(1) Average interest rate............ -- -- 7.95% 5.00% 7.38% Maturity......................... -- -- 4/97-9/04 6/02 4/97-9/04 Total cash and remaining amounts available under credit facilities.. 652 8,126 2,756 680 12,214(2)(3) Total debt outstanding............... \$4,450 \$79,550 \$ 36,200 \$5,640 \$ 125,840 - - ----------------
DECEMBER 31, DECEMBER 31, -------------- ------------- 1996 1995 -------------- ------------- ASSETS Investments (Note 2) Medallion loans \$134,614,899 \$ - Commercial installment loans 41,925,289 - ------------ -------- Gross investments 176,540,188 - Unrealized depreciation of investments (46,300) - ------------ -------- Net investments 176,493,888 - Investment in unconsolidated subsidiary (Note 4) 937,000 - ------------ -------- Total investments \$177,430,888 \$ - Cash 1,664,603 2,000 Accrued interest receivable 1,696,584 - Fixed assets, net 89,815 - Goodwill, net (Note 2) 6,250,636 - Other assets 2,491,974 716,217 ------------ -------- Total assets \$189,624,500 \$718,217 ============ ======== LIABILITIES Accounts payable and accrued expenses \$ 1,844,033 \$716,217 Dividends payable 1,849,225 - Accrued interest payable 1,086,247 - Notes payable to banks and demand notes (Note 5) 96,450,000 - SBA debentures payable (Note 6) 29,390,000 - ------------ -------- Total liabilities \$130,619,505 \$716,217 ------------ -------- Negative goodwill, net (Note 2) 2,517,716 - ------------ -------- Commitments and contingencies (Note 8) STOCKHOLDERS' EQUITY (Notes 1 and 10) Preferred Stock (1,000,000 shares of \$.01 par value stock authorized - none outstanding) \$ - \$ - Common stock (15,000,000 shares of \$.01 par value stock authorized - 8,250,000 and 2,500,000 shares outstanding at December 31, 1996 and 1995, respectively 82,500 25,000 Capital in excess of par value 56,359,555 (23,000) Accumulated undistributed income 45,224 - ------------ -------- Total stockholders' equity 56,487,279 2,000 ------------ -------- Total liabilities and stockholders' \$189,624,500 \$718,217 equity ============ ========
The accompanying notes are an integral part of these financial statements. MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF OPERATIONS FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 Investment income: Interest income on investments \$10,374,238 Interest income on treasury bills 37,603 ----------- Total investment income 10,411,841 ----------- Interest expense: Notes payable to bank 3,631,746 SBA debentures 1 376,747 ----------- Total interest expense 5,008,493 ----------- Net interest income 5,403,348 ----------- Non-interest income: Equity in losses of unconsolidated subsidiary (63,000) Accretion of negative goodwill 421,435 Other Income 410,991 ----------- Total non-interest income 769,426 ----------- Expenses: Administration and advisory fees 161,886 Professional fees 410,420 Salaries and benefits 779,445 Other operating expenses 879,187 Amortization of goodwill 259,260 ----------- Total expenses 2,490,198 ----------- Net investment income 3,682,576 Increase in net unrealized depreciation (46,300) Net realized gain on investments 84,447 ----------- Net increase in net assets resulting from operations \$ 3,720,723 =========== Net increase in net assets resulting from operations per common share \$0.45 =========== Weighted average shares and common share equivalents outstanding 8,276,207 =========== The accompanying notes are an integral part of these financial statements. MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
SHARES OF CAPITAL ACCUMULATED COMMON STOCK COMMON STOCK IN EXCESS UNDISTRIBUTED OUTSTANDING \$.01 PAR VALUE OF PAR VALUE INCOME ------------------------------------------------------------ Balance at December 31, 1995 (Note 1) 2,500,000 \$25,000 \$ (23,000) \$ - Issuance of common stock under offering (Note 1) 5,750,000 57,500 56,089,556 - For the period from May 30, 1996 to December 31, 1996: Distributable net investment income - - - 3,767,023 Dividends declared on common stock (\$0.41 per share) - - - (3,382,500) SOP 93-2 Cumulative reclassification (Note 10) - - 292,999 (292,999) Change in unrealized depreciation - - - (46,300) ------------ -------------- ------------ ----------- Balance at December 31, 1996 8,250,000 \$82,500 \$56,359,555 \$ 45,224 ============ ============== ============ ===========
The accompanying notes are an integral part of these financial statements. MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF CASH FLOWS FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in net assets resulting \$ 3,720,723 from operations Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used for) operating activities: Depreciation and amortization 14,500 Increase in equity in earnings (losses) of unconsolidated subsidiary 63,000 Amortization of goodwill 259,260 Increase in unrealized depreciation 46,300 Decrease (increase) in accrued interest receivable (301,310) Decrease (increase) in other assets (1,933,829) Increase (decrease) in accounts payable and accrued expenses 371,503 Accretion of negative goodwill (421,435) Increase (decrease) in accrued interest payable (553,280) ------------ Net cash provided by (used for) operating activities \$ 1,265,432 ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Originations of loans (investments) \$(75,170,981) Proceeds from sales and maturities of loans (investments) 48,074,890 Payment for purchase of Tri-Magna, net (11,848,283) Payment for purchase of Edwards Capital Company (15,624,995) Payment for purchase of TCC, net (3,748,576) Capital expenditures (89,928) ------------ Net cash provided by (used for) investing activities \$(58,407,873) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of notes payable to banks \$ 6,050,000 Repayment of notes payable to SBA (1,200,000) Payment of declared dividends to former shareholders (542,012) Payment of declared dividends to present shareholders (1,650,000) Proceeds from initial public offering, net of expenses 56,147,056 ------------ Net cash provided by (used for) financing activities \$ 58,805,044 ------------ NET INCREASE (DECREASE) IN CASH \$ 1,662,603 CASH, beginning of period 2,000 ------------ CASH, end of period \$ 1,664,603 ============ SUPPLEMENTAL INFORMATION: Cash paid during the period for interest \$ 5,561,773 ============ SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Note received for exercise of warrant \$ 157,000 ============ The accompanying notes are an integral part of these financial statements. MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF CASH FLOWS FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 (CONTINUED) SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: In conjunction with the Acquisitions, liabilities were assumed as follows:
Tri-Magna Edwards Capital Company TCC ------------ ----------------------- ----------- Fair value of assets acquired, other than cash \$97,809,154 \$51,356,894 \$ 9,713,830 ----------- ----------- ----------- Cash acquired 1,529,717 - 6,797,183 Cash paid 13,378,000 15,624,995 10,545,759 ----------- ----------- ----------- Cash paid, net 11,848,283 15,624,995 3,748,576 ----------- ----------- ----------- Liabilities assumed \$85,960,871 \$35,731,899 \$ 5,965,254 =========== =========== ===========
Tri-Magna Edwards Capital Company TCC ------------- ------------------------ ------------ Cash and cash equivalents \$ 1,529,717 \$ - \$ 6,797,183 Investments * 95,621,617 44,510,149 9,312,331 Accrued interest receivable 870,073 406,817 118,583 Goodwill (Negative Goodwill) (2,939,085) 6,303,562 206,334 Other assets 1,316,820 136,366 76,781 Dividends payable (542,012) - (116,725) Notes payable to banks (80,300,000) (10,100,000) - Accounts payable and accrued expenses (1,360,570) - (69,660) Accrued interest payable (818,560) (681,899) (139,068) SBA debentures payable - (24,950,000) (5,640,000) --------------- ------------- ----------- Total acquisition cost \$ 13,378,000 \$ 15,624,995 \$10,545,759 =============== ============ ===========
*Net of unrealized depreciation of investments of \$1,522,417. The following unaudited proforma combined financial information for the years ended December 31, 1996 and 1995 is presented as follows assuming the formation of the Company and the Acquisitions described in Notes (1) and (3) had occurred on January 1, 1996 or 1995, respectively: MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (3) THE ACQUISITIONS (CONTINUED)
Year ended December 31, ------------------------ 1996 1995 ----------- ----------- Investment Income \$17,130,990 \$15,679,763 Net interest income 9,129,366 8,209,057 Net investment income 6,153,461 5,719,331 Net increase in net assets resulting 6,227,027 5,925,731 from operations Net increase in net assets resulting from operations per share \$0.75 \$0.72 Proforma weighted average share, and common share equivalents, outstanding 8,250,000 8,250,000
Such unaudited proforma combined financial information is not necessarily indicative of the results of operations which would have actually been reported had the Offering and Acquisition occurred on January 1, 1996 or 1995, nor does it purport to represent the Company's future results of operations. The proforma information also does not give effect to any anticipated benefits and cost reductions nor future corporate costs that are not under contract, in connection with the transactions. (4) INVESTMENT IN UNCONSOLIDATED SUBSIDIARY The balance sheets at December 31, 1996 and 1995 for Media, are as follows:
DECEMBER 31, ---------------------- 1996 1995 ----------- --------- Cash ...................... \$ 79,827 \$ - Accounts receivable ....... 307,303 214,238 Equipment, net ............ 976,442 559,786 Other ..................... 330,839 55,720 ---------- -------- Total Assets ....... \$1,694,411 \$829,744 ========== ======== Notes payable ............ \$ - \$275,000 Notes payable parent ..... 584,566 Accrued expenses .......... 64,516 409,409 ---------- -------- Total Liabilities .. 649,082 684,409 ---------- -------- Equity .................... 1,001,000 1,000 Retained earnings ......... 44,329 144,335 ---------- -------- Total equity ....... 1,045,329 145,335 ---------- -------- Total Liabilities and Shareholders equity .................. \$1,694,411 \$829,744 ========== ========
The statements of operations of Media (1) for the period commencing with the Company's acquisition of Media from May 30, 1996 to December 31, 1996; (2) for the five month period ended May 29, 1996, (3) for the fiscal year ended December 31, 1995 and (4) for the period from inception (August 23, 1994) to December 31, 1994, respectively, are as follows:
SEVEN MONTHS ENDED FIVE MONTHS ENDED YEAR ENDED PERIOD ENDED ------------------- ------------------ ------------ ------------ DECEMBER 31, MAY 29, DECEMBER 31, DECEMBER 31, ------------------- ------------------ ------------ ------------ 1996 1996 1995 1994 ------------------- ------------------ ------------ ------------ STATEMENT OF OPERATIONS ----------------------- Advertising revenue \$1,095,346 \$671,148 \$1,542,013 \$227,756 Cost of services 499,135 283,891 483,721 83,341 ---------- -------- ---------- -------- Gross margin 596,211 387,257 1,058,292 144,415 Other operating expenses 659,211 455,278 829,293 126,036 ---------- -------- ---------- -------- Income (loss) before taxes (63,000) (68,021) 228,999 18,379 Income taxes - (14,999) 103,043 - ---------- -------- ---------- -------- Net income (Loss) \$ (63,000) \$(53,022) \$ 125,956 \$ 18,379 ========== ======== ========== ========
DUE DATE AMOUNT INTEREST RATE ----------------- ----------- -------------------------------- April 1, 1997 \$ 1,500,000 8.95% June 1, 1998 3,000,000 9.80 June 1, 2002 5,640,000 5.00 (until June 1, 1997 and 8.00% September 1, 2002 3,500,000 7.15% thereafter) September 1, 2002 6,050,000 7.15 June 1, 2004 4,600,000 7.80 September 1, 2004 5,100,000 8.20 ----------- \$29,390,000 ===========
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (6) SBA DEBENTURES PAYABLE (CONTINUED) The SBA imposes certain restrictions, among others, including transfers of stock and payments of dividends by its licensees, to which the Company is subject. (7) STOCK OPTIONS The Company has a stock option plan (1996 Stock Option Plan) available to grant both incentive and nonqualified stock options to employees. The 1996 Stock Option Plan, which was approved by the Board of Directors and stockholders on May 22, 1996, provides for the issuance of a maximum of 750,000 shares of common stock of the Company. The Plan is administered by the Compensation Committee of the Board of Directors. The option price per share may not be less than the current market value of the Company's share of common stock on the date the option is granted. The term and vesting periods of the options are determined by the Compensation Committee, provided that the maximum term of an option may not exceed a period of ten years. The Company records stock compensation in accordance with APB Opinion No. 25 (see Note 2). Had compensation cost for stock options been determined based on the fair value at the date of grant for awards in 1996, consistent with the provisions of SFAS No. 123, the Company's net increase in net assets resulting from operations would have been reduced to the pro forma amounts indicated below:
Seven month period ended ------------------------ December 31, 1996 ----------------- Net increase in net assets resulting from operations: As reported \$3,720,723 Pro Forma \$3,696,404 Net increase in net assets resulting from operations per share: As reported \$ 0.45 Pro Forma \$ 0.45
The following table presents the activity for the stock option program under the 1996 Stock Option Plan for the year ended December 31, 1996:
Weighted Number Exercise Price Average of Options Per Share Exercise Price ---------- -------------- -------------- Outstanding at December 31, 1995 - - - Granted 201,420 \$11.00-\$14.75 \$11.37 Canceled - - - Exercised - - - ------- ------------- ------ Outstanding at December 31, 1996 201,420 \$11.00-\$14.75 \$11.37 Options exercisable at December 31, 1996 7,576 \$ 11.00 \$11.00
DECEMBER 31, 1996 -------------------------- CARRYING AMOUNT FAIR VALUE --------------- ---------- Financial Assets: Investments................................. \$176,493,888 \$176,493,888 Cash........................................ 1,664,603 1,664,603 Financial Liabilities: Notes payable to banks and demand notes..... 96,450,000 96,450,000 SBA debentures payable...................... 29,390,000 29,319,500
MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (14) SUBSEQUENT EVENTS On January 28, 1997, the Company increased the aggregate commitment of MFC's Revolver from \$85,000,000 to \$105,000,000. On February 11, 1997, the SBA approved an amendment to the charters of MFC and TCC, converting these subsidiaries from an SSBIC to an SBIC. The conversion eliminates the restriction for MFC and TCC to lend only to individuals as being socially or economically disadvantaged, or to small business concerns that are at least 50% owned by such persons as defined in the SBIA, subject to certain restrictions. Effective January 1, 1997, the Company decided to merge all of the assets and liabilities of TCC into MFC subject to the approval of the SBA. The Company expects to complete the merger by the end of the second quarter of 1997. CONSOLIDATED SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
Number of Balance Loans Outstanding Rate ----- ----------- ---- 1 \$ 60,754 5.000% 11 548,641 7.000-7.700 19 3,150,172 8.000-8.200 18 1,901,132 8.250 7 487,074 8.300 12 758,448 8.370 6 304,843 8.400-8.440 24 3,205,029 8.500 9 689,313 8.600 10 892,704 8.625 13 376,064 8.700 49 5,379,874 8.750 12 672,116 8.720 108 11,322,414 9.000 2 235,992 9.120 157 15,042,298 9.250 5 1,036,661 9.320-9.380 248 26,661,479 9.500 1 170,000 9.600 94 9,208,547 9.750 29 2,789,612 9.800-9.900 207 18,467,948 10.000 76 6,640,204 10.250 5 462,805 10.370-10.3750 47 4,855,909 10.500 30 2,592,974 10.750 1 50,983 10.900 164 10,290,809 11.000 17 1,483,897 11.250-11.900 107 5,910,504 12.000 11 1,014,949 12.500 3 351,109 12.750-12.950 254 10,113,883 13.000 4 633,040 13.250 56 2,914,663 13.500 5 128,772 13.550-13.750 166 8,044,479 14.000 11 176,089 14.050-14.300 36 3,064,635 14.500 11 354,145 14.750-14.950 262 11,806,060 15.000 11 610,583 15.200-15.250 9 590,210 15.500 8 511,816 15.750-15.950 15 745,357 16.000 5 160,939 16.500 4 202,387 16.640-16.950 1 24,750 17.000 3 193,142 18.000 6 205,193 19.000 ----- ------------ Total 2,370 \$177,495,401 10.800% ===== --- Plus: Origination costs, net 567,204 ------------ Investments at cost 178,062,605 Less: Unrealized depreciation on investments (1,568,717) ------------ Investments at directors' valuation \$176,493,888 ============
The accompanying notes are an integral part of these financial statements. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Edwards Capital Company: We have audited the accompanying balance sheet of Edwards Capital Company (a New York limited partnership), including the schedule of loans as of May 29, 1996 and December 31, 1995, and the related statements of operations, changes in partners' capital and cash flows for the five month period ended May 29, 1996 and the year ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in Note 1, the financial statements include finance receivables valued at \$44,490,149 (97% of total assets) as of May 29, 1996 and at \$43,778,791 (97% of total assets) as of December 31, 1995, the values of which have been estimated by the General Partner in the absence of readily ascertainable market values. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the loans existed, and the differences could be material. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Edwards Capital Company as of May 29, 1996 and December 31, 1995 and, the results of its operations and its cash flows for the five month period ended May 29, 1996 and year ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts March 26, 1997 INDEPENDENT AUDITORS' REPORT To the Partners of Edwards Capital Company: We have audited the accompanying balance sheet of Edwards Capital Company (a limited partnership) as of December 31, 1994, and the related statements of operations, changes in partners' capital and cash flows for each of the two years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Edwards Capital Company as of December 31, 1994, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ Friedman, Alpren & Green LLP New York, New York January 28, 1995 EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) BALANCE SHEETS ASSETS DECEMBER 31, MAY 29, ------------ ------------ 1995 1996 ------------ ------------ Cash .................................. \$ 115,571 \$ 437,886 Finance Receivables: Medallions ........................... 43,177,063 43,920,609 Other, less allowance for doubtful accounts of \$20,000 in 1995 and 1996.. 601,728 569,540 Accrued Interest Receivable ........... 396,000 406,817 Deferred Financing Costs, net of accumulated amortization of \$176,967 in 1995 and \$200,650 in 1996.............. 353,683 330,000 Property and Equipment, at cost, net of accumulated depreciation and amortization of \$133,937 in 1995 and \$140,407 in 1996 ..................... 66,826 60,356 Prepaid Expenses and Other Assets ..... 373,116 275,681 ----------- ----------- Total Assets ............................ \$45,083,987 \$46,000,889 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Bank Loans Payable .................... \$ 9,850,000 \$10,100,000 Subordinated Debentures Payable ....... 24,950,000 24,950,000 Accounts Payable and Accrued Expenses... 1,167,156 1,843,743 ----------- ----------- 35,967,156 36,893,743 Partners' Capital ..................... 9,116,831 9,107,146 ----------- ----------- Total Liabilities and Partners' Capital .............................. \$45,083,987 \$46,000,889 =========== =========== The accompanying notes are an integral part of these financial statements. EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS
YEARS ENDED PERIOD ENDED ----------------------- ------------ DECEMBER 31, MAY 29, ----------------------- ------------ 1994 1995 1996 ----------- ---------- ------------ Revenues: Interest from finance receivables ..... \$4,334,100 \$4,316,669 \$1,727,102 Other income .......................... 619,716 443,190 129,101 ---------- ---------- ---------- Total Revenues ....................... 4,953,816 4,759,859 1,856,203 ---------- ---------- ---------- Operating Expenses: Interest on subordinated debentures ... 2,136,807 1,993,075 818,707 Interest on bank loans ................ 627,700 754,404 279,148 Salaries .............................. 351,715 354,041 123,244 Employee benefits ..................... 35,280 33,236 14,572 Payroll and other taxes ............... 28,576 28,266 14,467 Professional fees ..................... 393,513 204,071 41,437 Legal fees related to the sale of assets ............................... - - 350,000 Rent .................................. 39,996 39,996 16,342 Office expense ........................ 45,082 42,762 15,204 Computer expense ...................... 48,859 44,642 14,903 Telephone ............................. 9,963 9,685 3,860 Entertainment ......................... 17,378 9,901 2,205 Amortization of deferred financing costs ................................ 79,118 53,460 23,683 Processing and collection services .... 57,950 42,448 28,689 Depreciation and amortization ......... 22,586 18,292 6,470 New York City unincorporated business tax .................................. 21,289 40,111 15,610 Reduction in allowance for doubtful radio loans .......................... (23,415) - - Sundry ................................ 1,511 4,496 5,847 ---------- ---------- ---------- Total Operating Expenses ............. 3,893,908 3,672,886 1,774,388 ---------- ---------- ---------- Income Before Extraordinary Charge ... 1,059,908 1,086,973 81,815 Extraordinary Charge -- Premium on Prepayment of Subordinated Debentures .. 526,287 - - ---------- ---------- ---------- Net Income ........................... \$ 533,621 \$1,086,973 \$ 81,815 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
PERIOD ENDED ------------- YEARS ENDED DECEMBER 31, MAY 29, --------------------------- ------------- 1994 1995 1996 ------------ ------------- ------------- Cumulative Capital Contributions .. \$ 7,200,000 \$7,200,000 \$7,200,000 =========== ========== ========== SBA Permanent Capital ............. \$ 8,400,000 \$8,400,000 \$8,400,000 =========== ========== ========== Balance, Beginning of Period ...... \$ 9,550,947 \$8,576,068 \$9,116,831 Net income ..................... 533,621 1,086,973 81,815 Distributions -- General Partner ............. (16,000) - - Limited Partners ............... (1,492,500) (546,210) (91,500) ----------- ---------- ---------- Balance, end of period ............ \$ 8,576,068 \$9,116,831 \$9,107,146 =========== ========== ==========
The accompanying notes are an integral part of these financial statements. EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS
YEARS ENDED PERIOD ENDED ---------------------------- ------------- DECEMBER 31, MAY 31, ---------------------------- ------------- 1994 1995 1996 ------------- ------------- ------------- Cash flows from operating activities: Net income............................. \$ 533,621 \$ 1,086,973 \$ 81,815 Adjustments to reconcile net income to net cash provided by operating activities -- Extraordinary charge.................. 526,287 - - Amortization of deferred financing costs................................ 79,118 53,460 23,683 Depreciation and amortization......... 22,586 18,292 6,470 Reduction in allowance for doubtful radio loans.......................... (23,415) - - Changes in assets and liabilities -- Accrued interest receivable.......... (339) (67,000) (10,817) Prepaid expenses and other assets.... 91,806 (247,648) 97,435 Accounts payable and accrued expenses............................ (21,710) 118,697 676,587 Deferred income...................... (5,332) - - ------------ ------------ ----------- Net cash provided by operating activities......................... 1,202,622 962,774 875,173 Cash flows from investing activities: Origination of new finance receivables. (15,573,645) (8,348,655) (2,764,191) Repayments of finance receivables...... 16,228,136 8,036,706 2,052,833 Collection of notes receivable......... 272,546 - - Purchase of property and equipment..... ( 5,041) (9,769) - ------------ ------------ ----------- Net cash (used in) provided by investing activities............... 921,996 (321,718) (711,358) Cash flows from financing activities: Premium on prepayment of subordinated debentures............................ (526,287) - - Proceeds from bank loans............... 22,425,000 11,925,000 5,900,000 Principal payments of bank loans....... (22,325,000) (12,075,000) (5,650,000) Deferred financing costs............... (254,625) - - Distributions to partners -- General partner....................... (16,000) - - Limited partners...................... (1,492,500) (546,210) (91,500) ------------ ------------ ----------- Net cash used in financing activities......................... (2,189,412) (696,210) 158,500 ------------ ------------ ----------- Net increase (decrease) in cash......... (64,794) (55,154) 322,315 Cash, beginning of period............... 235,519 170,725 115,571 ------------ ------------ ----------- Cash, end of period..................... \$ 170,725 \$ 115,571 \$ 437,886 ============ ============ =========== Supplemental disclosure of cash flow information: Interest paid.......................... \$ 2,885,512 \$ 2,699,890 \$ 974,982 ============ ============ =========== New York City unincorporated business tax................................... \$ 27,939 \$ 14,058 \$ 15,448 ============ ============ ===========
DECEMBER 31, MAY 29, ------------ ----------- 1995 1996 ------------ ----------- 60 months \$42,307,000 \$39,961,000 84 months 1,027,000 754,000 120 months 465,000 3,795,000 ----------- ----------- \$43,799,000 \$44,510,000 =========== ===========
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (2) FINANCE RECEIVABLES (CONTINUED) Contractual maturities of finance receivables at December 31, 1995 and May 29, 1996 are approximately as follows:
DECEMBER 31, 1995 MAY 29, 1996 ----------------- ------------ 1996 \$ 2,623,000 \$ 374,000 1997 4,482,000 993,000 1998 7,046,000 3,098,000 1999 15,329,000 13,582,000 2000 11,450,000 14,591,000 Thereafter 2,869,000 11,872,000 ----------- ----------- \$43,799,000 \$44,510,000 =========== ===========
Actual maturities may differ, as loans are often paid in advance of their maturities, and loans with participation sold to others contain subordinate prepayment provisions. During the year ended December 31, 1995 and the period ended May 29, 1996, the collections of loans and prepayments totaled approximately \$8,037,000 and \$2,053,000, respectively. (3) PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1995 and May 29, 1996:
DECEMBER 31, MAY 29, 1995 1996 ------------ --------- Furniture and Equipment............ \$162,700 \$162,700 Leasehold Improvements............. 38,063 38,063 -------- -------- 200,763 200,763 Less -- Accumulated Depreciation and Amortization..... 133,937 140,407 -------- -------- \$ 66,826 \$ 60,356 ======== ========
(4) BANK LOANS PAYABLE The Partnership has lines of credit with four banks totaling \$12,500,000, of which \$9,850,000 and \$10,100,000 were drawn upon at December 31, 1995 and May 29, 1996, respectively. Interest is charged at the borrower's option, at either the lender's prime rate or at a rate based on the adjusted London Inter-bank Offered Rate (LIBOR). Under an agreement with the SBA, Edwards was restricted from borrowing more than \$11.5 million in bank debt without the prior approval of the SBA. The average amount of borrowings for the year ended December 31, 1995 and for the period ended May 29, 1996 was \$9,585,000 and \$ 9,997,000, respectively. The loans are secured by all of the Partnership's assets. Under an inter- creditor agreement, all banks share in the collateral. In addition, all bank indebtedness is senior to SBA-guaranteed indebtedness pursuant to SBA rules and regulations. EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (5) SUBORDINATED DEBENTURES PAYABLE Outstanding subordinated debentures, which are guaranteed by the SBA, are as follows at December 31, 1995 and May 29, 1996:
INTEREST --------- DUE DATE RATE AMOUNT ----------------- --------- ----------- September 1, 1996 8.75% \$ 1,200,000 April 1, 1997 8.95 1,500,000 June 1, 1998 9.80 3,000,000 September 1, 2002 7.15 3,500,000 September 1, 2002 7.15 6,050,000 June 1, 2004 7.80 4,600,000 September 1, 2004 8.20 5,100,000 ----------- \$24,950,000 ===========
(6) RELATED PARTY TRANSACTIONS The law firm of Herrick, Feinstein LLP provides legal services to the Partnership and subleases office space to it under a lease that commenced on June 1, 1992 and expires on April 30, 1997. The lease requires minimum annual rental payments of \$40,000 and additional rentals based on increases in real estate taxes and operating expenses over base period amounts. It is cancelable by the firm upon giving 60 days' notice. Certain principals of the firm are limited partners of the Partnership and are shareholders of the corporate General Partner of the Partnership. Rent expense and legal fees paid and accrued to Herrick, Feinstein LLP for the years ended December 31, 1994, 1995 and period ended May 29, 1996 are as follows:
PERIOD ENDED ------------ YEARS ENDED DECEMBER 31, MAY 29, ------------------------- ------------ 1994 1995 1996, ----------- ------------ ------------ Rent expense \$ 39,996 \$ 39,996 \$16,342 Legal fees 288,985 92,501 9,926 -------- -------- ------- \$328,981 \$132,497 \$26,268 ======== ======== =======
During the year ended December 31, 1995 and the period ended May 29, 1996, legal fees of \$225,000 and \$125,000, respectively were incurred and accrued to Herrick, Feinstein in connection with the sale of assets by the Partnership to Medallion Financial Corp. These costs were charged to operations on May 29, 1996. (7) COMMITMENTS AND CONTINGENCIES In the ordinary course of business, there are outstanding commitments and contingent liabilities that are not reflected in the financial statements. At December 31, 1995 and May 29, 1996, the Partnership had an operating lease for office space which expires on April 30, 1997 (Note 6). EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (7) COMMITMENTS AND CONTINGENCIES (CONTINUED) There are lawsuits pending against the Partnership in the normal course of business. Based on its review of current litigation and discussions with legal counsel, management does not expect that the resolution of such matters will have a material adverse effect on the Partnership's financial condition or results of operations. (8) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about certain financial instruments, whether or not recognized on the balance sheet. In addition, SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Therefore, the aggregate fair value amounts presented do not purport to represent and should not be considered representative of the underlying market or franchise value of the Partnership. The methods and assumptions used to estimate the fair value of each class of the financial instruments are described below: Finance Receivables -- As described in Note 1, the carrying amount of finance receivables is the estimated fair value of such loans. Subordinated Debentures Payable to SBA -- The fair value of the debentures payable to SBA is estimated based upon current market interest rates for similar debt. Banks Loans Payable -- Due to the short-term nature of these instruments, the carrying amount approximates fair value. The carrying amounts and estimated fair values of the Partnership's financial instruments are as follows:
MAY 29, 1996 ---------------------------- CARRYING AMOUNT FAIR VALUE --------------- ----------- Financial assets Finance receivables. \$44,490,149 \$44,490,149 Financial liabilities Subordinated debentures payable 24,950,000 24,950,000 Bank loans payable 10,100,000 10,100,000
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP) SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS MAY 29, 1996 The distribution of loans at May 29, 1996 by rate of interest is as follows:
NUMBER BALANCE INTEREST ------ ------------- --------- OF LOANS OUTSTANDING RATE -------- ------------- --------- 9 \$ 532,000 7.70% 5 200,000 8.00 2 300,988 8.20 12 800,000 8.25 13 722,000 8.38 6 239,000 8.40 5 214,473 8.44 4 184,000 8.50 4 161,200 8.60 13 375,000 8.70 15 974,750 8.75 9 507,500 8.88 51 3,485,039 9.00 2 239,768 9.13 15 2,028,924 9.25 2 265,658 9.39 83 8,876,722 9.60 3 789,656 9.63 62 7,584,689 9.75 3 214,887 9.80 1 18,125 9.88 19 2,602,540 9.90 50 6,464,952 10.00 29 3,636,894 10.25 4 476,062 10.38 6 618,236 10.50 9 736,561 11.00 2 185,620 11.25 2 295,394 11.50 2 144,062 11.75 2 363,586 12.00 1 2,033 12.50 2 117,611 13.25 1 36,910 13.50 1 58,196 13.55 1 12,966 14.00 2 44,147 15.00 --- ----------- 452 \$44,510,149 9.58% === Less: Allowance for Doubtful Accounts on Radio Loans........... (20,000) ----------- \$44,490,149 ===========
EDWARDS CAPITAL COMPANY ======================== (A LIMITED PARTNERSHIP) SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS DECEMBER 31, 1995 The distribution of loans at December 31, 1995 by rate of interest is as follows:
NUMBER BALANCE INTEREST ------ ------------ --------- OF LOANS OUTSTANDING RATE -------- ------------ --------- 1 \$ 570,207 7.820% 17 1,132,000 8.250 6 239,000 8.300 8 392,000 8.375 7 515,461 8.440 4 200,000 8.490 14 475,750 8.500 4 161,200 8.600 2 368,000 8.750 1 605,265 8.780 9 507,500 8.875 49 2,729,873 9.000 12 746,361 9.125 15 1,957,713 9.250 2 280,012 9.385 65 6,982,190 9.500 6 447,920 9.600 3 793,091 9.625 52 7,336,160 9.750 2 168,256 9.800 15 1,858,397 9.900 49 6,225,055 10.000 41 5,241,320 10.250 5 600,951 10.375 10 862,401 10.500 2 122,266 10.750 12 862,662 11.000 3 191,531 11.250 2 297,291 11.500 4 256,300 11.750 6 373,899 12.000 1 4,110 12.500 2 125,942 13.250 1 36,910 13.500 1 58,196 13.550 1 14,831 14.000 2 11,874 14.500 2 46,896 15.000 --- ----------- ------ 438 \$43,798,791 9.695% === Less Allowance for Doubtful Accounts on Radio Loans........... (20,000) ----------- \$43,778,791 ===========
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Tri-Magna Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheets of Tri-Magna Corporation (a Delaware corporation) and subsidiaries (collectively referred to as the Company) as of May 29, 1996 and December 31, 1995, including the consolidated schedules of investments as of May 29, 1996 and December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the five-month period ended May 29, 1996 and each of the two years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in Note 2, the consolidated financial statements include loans receivable valued at \$95,621,617 (97% of total assets) and at \$96,046,416 (96% of total assets) as of May 29, 1996 and December 31, 1995, respectively, whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the loans existed, and the differences could be material. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tri-Magna Corporation and subsidiaries as of May 29, 1996 and December 31, 1995, and the results of their operations and their cash flows for the five-month period ended May 29, 1996 and each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts March 26, 1997 TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MAY 29, ------------- ------------- 1995 1996 ------------- ------------- ASSETS Investments (Note 2).................... \$96,956,416 \$96,531,617 Less unrealized depreciation on investments (Note 6).................. (910,000) (910,000) ----------- ----------- 96,046,416 95,621,617 Investment in unconsolidated subsidiary (Note 2).................... 145,335 92,313 Cash.................................... 1,177,166 624,617 Accrued interest receivable............. 844,350 870,073 Furniture and fixtures, net............. 87,925 79,124 Other assets............................ 1,486,974 1,316,933 ----------- ----------- Total Assets............................ \$99,788,166 \$98,604,677 =========== =========== LIABILITIES Notes payable to banks and demand notes (Note 3)......................... \$80,294,900 \$79,394,900 Accounts payable and accrued expenses... 1,290,267 1,360,570 Dividends payable....................... - 542,012 Accrued interest payable................ 889,147 818,560 ----------- ----------- Total Liabilities....................... 82,474,314 82,116,042 ----------- ----------- Commitments and Contingencies (Note 9) Shareholders' Equity (Notes 4 and 5) Common stock (1,000,000 shares of \$.01 par value stock authorized, 668,900 shares outstanding at December 31, 1995 and May 29, 1996)... 6,689 6,689 Capital in excess of par value.......... 10,594,241 10,567,267 Accumulated undistributed income (loss). 710,822 (87,421) ----------- ----------- 11,311,752 10,486,535 Restricted capital surplus.............. 6,002,100 6,002,100 ----------- ----------- Total Shareholders' Equity.............. 17,313,852 16,488,635 ----------- ----------- Total Liabilities and Shareholders' Equity................................. \$99,788,166 \$98,604,677
=========== =========== The accompanying notes are an integral part of these consolidated financial statements. TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED PERIOD ENDED -------------------------- ------------- DECEMBER 31, MAY 31, -------------------------- ------------- 1994 1995 1996 ------------ ------------ ------------- Investment Income Interest on investments................. \$8,820,273 \$9,802,560 \$4,423,396 ---------- ---------- ---------- Total Investment Income................ 8,820,273 9,802,560 4,423,396 ---------- ---------- ---------- Interest Expense Interest on SBA debentures.............. 974,105 780,254 - Interest on bank debt (Note 3).......... 3,781,910 5,253,924 2,516,914 ---------- ---------- ---------- Total Interest Expense................. 4,756,015 6,034,178 2,516,914 ---------- ---------- ---------- Net Interest Income..................... 4,064,258 3,768,382 1,906,482 ---------- ---------- ---------- Non-Interest Income Equity in earnings(losses) of unconsolidated subsidiary (Note 2)..... 18,379 125,956 (53,022) Other income............................ 519,030 446,209 148,125 ---------- ---------- ---------- Total Non-Interest Income.............. 537,409 572,165 95,103 ---------- ---------- ---------- Expenses Administration and advisory fees........ 33,905 13,149 3,671 Legal and accounting fees............... 367,484 344,311 144,562 Directors' fee (Note 8)................. 76,500 46,000 15,022 Officers' and employees' salaries....... 1,028,627 1,086,569 501,063 Employee benefit plans (Note 7)......... 136,000 70,008 44,000 Merger related costs (Note 5)........... - - 584,000 Other operating expenses................ 1,057,797 1,054,757 524,242 ---------- ---------- ---------- Total Expenses......................... 2,700,313 2,614,794 1,816,560 ---------- ---------- ---------- Dividends paid on minority interest..... 277,020 207,774 - ---------- ---------- ---------- Net Investment Income................... 1,624,334 1,517,979 185,025 ---------- ---------- ---------- Realized and Unrealized Gain (Loss) on Investments Realized gain (loss) on investments (Note 6)............................... (21,938) 61,194 - Change in unrealized depreciation (Note 6)............................... 58,000 (140,000) - ---------- ---------- ---------- Net Realized and Unrealized Gain (Loss) on Investments.................. 36,062 (78,806) - ---------- ---------- ---------- Net Increase in Net Assets resulting from Operations......................... \$1,660,396 \$1,439,173 \$ 185,025 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SHARES OF CAPITAL ACCUMULATED RESTRICTED ------------ -------------- ------------- -------------- ----------- COMMON STOCK COMMON STOCK IN EXCESS UNDISTRIBUTED CAPITAL ------------ -------------- ------------- -------------- ----------- OUTSTANDING \$.01 PAR VALUE OF PAR VALUE INCOME (LOSS) SURPLUS ------------ -------------- ------------- -------------- ----------- Balance at December 31, 1993....... 665,900 \$6,659 \$11,227,341 \$ (399,918) \$ -- Dividends paid, common........... -- -- -- (1,668,050) -- Distributable net income.......... -- -- -- 1,602,396 -- Sale of common stock.............. 3,000 30 49,470 -- -- Change in unrealized depreciation..................... -- -- -- 58,000 -- -------- ------ ----------- ----------- ---------- Balance at December 31, 1994....... 668,900 \$6,689 \$11,276,811 \$ (407,572) \$ -- ------- ------ ----------- ----------- ---------- Dividends declared, common .......................... -- -- -- (1,003,349) -- Distributable net income.......... -- -- -- 1,579,173 -- SOP 93-2 Cumulative reclassification (Note 5)......................... -- -- (682,570) 682,570 -- Gain on minority interest buyback (Note 4)................. -- -- -- -- 6,002,100 Change in unrealized depreciation..................... -- -- -- (140,000) -- ------- ------ ----------- ----------- ---------- Balance at December 31, 1995....... 668,900 \$6,689 \$10,594,241 \$ 710,822 \$6,002,100 ------- ------ ----------- ----------- ---------- Dividends declared, common (Note 5).................. -- -- -- (1,010,242) -- Distributable net income........................... -- -- -- 185,025 -- SOP 93-2 reclassification (Note 5)......................... -- -- (26,974) 26,974 -- Change in unrealized depreciation..................... -- -- -- -- -- ------- ------ ----------- ----------- ---------- Balance at May 29, 1996............ 668,900 \$6,689 \$10,567,267 \$ (87,421) \$6,002,100 ======= ====== =========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED PERIOD ENDED ---------------------------- ------------- DECEMBER 31, MAY 29, ---------------------------- ------------- 1994 1995 1996 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Increase in Net Assets resulting from Operations ...................... \$ 1,660,396 \$ 1,439,173 \$ 185,025 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......... 64,848 43,594 19,929 Change in unrealized depreciation...... (58,000) 140,000 - Realized loss (gain) on investments.... 21,938 (61,194) - (Increase) decrease in investment in unconsolidated subsidiary............. (19,379) (125,956) 53,022 (Increase) decrease in accrued interest receivable............................ (64,697) (66,252) (25,723) Decrease (increase) in other assets.... (99,434) (794,721) 165,111 Increase (decrease) in accounts payable and accrued expenses.......... (90,565) 1,036,580 70,303 Increase (decrease) in dividends payable minority interest............. (69,255) (69,255) - Increase (decrease) in accrued interest payable...................... 143,725 257,330 (70,587) ------------ ------------ ------------ Net cash provided by operating activities........................... 1,489,577 1,799,299 397,080 Cash Flows from Investing Activities: Increase in investments................ (33,103,213) (30,667,520) (13,956,591) Proceeds from investment maturities and terminations...................... 24,753,080 24,114,690 14,381,390 Proceeds from liquidation of other assets................................ 414,884 144,100 - Capital expenditures................... (6,991) (16,378) (6,198) ------------ ------------ ------------ Net cash provide by (used for) investing activities................. (7,942,240) (6,425,108) 418,601 Cash Flows from Financing Activities: Proceeds from (payments of) notes payable to banks...................... 8,325,000 21,269,900 (900,000) Payments of SBA debentures............. - (12,500,000) - Buyback of minority interest........... - (3,231,900) - Sale of common stock................... 49,500 - - Dividends paid on common stock......... (1,668,050) (1,003,349) (468,230) ------------ ------------ ------------ Net cash provided by (used for) financing activities................. 6,706,450 4,534,651 (1,368,230) ------------ ------------ ------------ Net Increase (Decrease) in Cash......... 253,787 (91,158) (552,549) Cash, beginning of period............... 1,014,537 1,268,324 1,177,166 ------------ ------------ ------------ Cash, end of period..................... \$ 1,268,324 \$ 1,177,166 \$ 624,617 ============ ============ ============ Supplemental Information: Cash paid during the period for interest (Includes dividends paid on minority interest) ................ \$ 4,958,565 \$ 6,053,877 \$ 2,587,501
DECEMBER 31, MAY 29, ------------ ------------ DESCRIPTION 1995 1996 ----------- ------------ ------------ Revolving Credit Agreement \$73,150,000 72,250,000 Term Loan Agreements 5,231,900 5,231,900 Short-Term Note 1,913,000 1,913,000 ----------- ----------- Total \$80,294,900 \$79,394,900 =========== ===========
PERIOD ENDED YEAR ENDED ---------------------- ------------- MAY 29, DECEMBER 31, ---------------------- ------------- UNREALIZED DEPRECIATION 1996 1995 1994 ----------------------- ---------- ---------- ------------- Balance at Beginning of Period \$(910,000) \$(770,000) \$(828,000) Change in Unrealized Depreciation -- (140,000) 58,000 --------- --------- --------- Balance at End of Period \$(910,000) \$(910,000) \$(770,000) ========= ========= =========
DECEMBER 31, 1995 MAY 29, 1996 ---------------------------- ----------------------------- CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE --------------- ----------- --------------- ------------ Financial assets: Investments \$96,046,416 \$96,046,416 \$95,621,617 \$95,621,617 Financial liabilities: Notes payable to banks and demand notes \$80,294,900 \$80,294,900 \$79,394,900 \$79,394,900
TRI-MAGNA CORPORATION CONSOLIDATED SCHEDULE OF INVESTMENTS MAY 29, 1996 BALANCE INTEREST ------------- ------------ NUMBER OF LOANS OUTSTANDING RATE --------------- ------------- ------------ 2 \$ 92,529 5.00%-7.00% 16 3,625,886 8.00 3 287,797 8.25 18 2,783,824 8.50 10 901,136 8.63 12 981,255 8.75 55 6,751,204 9.00 99 8,133,949 9.25 122 14,125,122 9.50 2 114,819 9.63 32 3,825,894 9.75 119 10,989,259 10.00 30 3,236,713 10.25 40 3,994,604 10.50 29 2,628,392 10.75 1 59,382 10.90 43 3,983,410 11.00 6 356,496 11.25-11.50 2 146,961 11.75 53 3,878,890 12.00 7 448,314 12.50 3 369,083 12.75-12.95 99 5,177,644 13.00 2 372,799 13.25 22 1,165,954 13.50 3 46,411 13.75-13.87 97 4,612,518 14.00 4 105,443 14.05-14.30 19 1,163,039 14.50 7 213,388 14.75-14.84 224 9,955,553 15.00 8 687,574 15.20 7 208,929 15.25 5 88,044 15.50 1 100,239 15.75 11 325,999 16.00 5 193,989 16.50-18.00 2 74,737 19.00 ----- ----------- Total: 1,220 \$96,207,179 10.92% ===== Plus: Loan Origination Costs, Net..... 324,438 ----------- Total Investments at Cost............ \$96,531,617 Less: Unrealized depreciation on investments (910,000) ----------- Total Investments at directors' \$95,621,617 valuation =========== TRI-MAGNA CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS DECEMBER 31, 1995 BALANCE INTEREST ------------- ------------ OUTSTANDING RATE NUMBER OF LOANS ------------- ------------ --------------- 2 \$ 101,632 5.00-7.00% 18 3,715,031 8.00 3 298,833 8.25 21 3,279,235 8.50 9 1,331,792 8.75 56 8,152,656 9.00 70 7,111,900 9.25 116 13,814,980 9.50 2 120,696 9.63 24 2,677,911 9.75 150 12,175,743 10.00 33 3,207,015 10.25 1 130,055 10.38 41 4,181,332 10.50 31 2,959,616 10.75 1 65,064 10.90 41 3,930,343 11.00 9 614.874 11.25-11.75 58 4,260,742 12.00 9 490,107 12.50 4 406,362 12.75-12.95 96 5,426,944 13.00 3 630,453 13.25 20 1,114,053 13.50 3 60,526 13.75-13.87 86 4,316,872 14.00 1 41,995 14.05 1 47,046 14.20 1 8,181 14.25 1 16,166 14.30 15 1,000,341 14.50 7 227,427 14.75-14.84 206 9,123,581 15.00 8 723,762 15.20 8 250,164 15.25 7 134,764 15.50 2 101,658 15.63-15.75 8 289,662 16.00 6 123,502 16.25-18.00 ----- ----------- Total: 1,178 \$96,663,016 10.88% ===== Plus: Loan Origination Costs, Net........................... 293,400 ----------- Total Investments at Cost... 96,956,416 Less: Unrealized depreciation on investments................ (910,000) ----------- Total Investments at directors' valuation \$96,046,416 =========== REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Transportation Capital Corp.: We have audited the accompanying balance sheets of Transportation Capital Corp. (a New York corporation) as of December 31, 1995, and May 29, 1996, including the schedule of investments other than investments in affiliates and schedule of loans as of December 31, 1995 and May 29, 1996, the related statements of operations, changes in shareholders' equity and cash flows for the year ended December 31, 1995 and the five month period ended May 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in Note 1, the financial statements include loans receivable valued at \$9,154,139 (53% of total assets) as of December 31, 1995 and at \$9,312,331 (56% of total assets) as of May 29, 1996, whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the loans existed, and the differences could be material. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Transportation Capital Corp. as of December 31, 1995 and May 29, 1996, and the results of its operations and its cash flows for the year ended December 31, 1995 and the five month period ended May 29, 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts March 26, 1997 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Transportation Capital Corp.: We have audited the accompanying Statement of Operations of Transportation Capital Corp. (a New York corporation), and the related statements of shareholders' equity and cash flows for of the year ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of its operations and cash flows for Transportation Capital Corp. for the year ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand LLP New York, New York October 24, 1995 TRANSPORTATION CAPITAL CORP. BALANCE SHEETS
DECEMBER 31, MAY 29, ------------- ------------ 1995 1996 ------------- ------------ ASSETS Loans Receivable........................ \$ 9,796,728 \$ 9,924,748 Allowance for Loan Losses............... (642,589) (612,417) ----------- ----------- Loans receivable, at fair value........ 9,154,139 9,312,331 Cash and Cash Equivalents............... 7,780,717 6,797,183 Accrued Interest Receivable............. 133,722 118,384 Furniture, Fixtures and Leasehold Improvements, at cost, less accumulated depreciation \$12,256 and \$14,122....... 16,253 14,387 Other Assets............................ 72,877 62,394 Deferred Income Taxes................... 257,900 246,365 ----------- ----------- Total Assets............................ \$17,415,608 \$16,551,044 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Debentures payable to the Small Business Administration.............. \$ 6,730,000 \$ 5,640,000 Accrued interest payable............... 35,071 139,068 Accrued dividend payable............... -- 116,725 Accrued expenses....................... 171,888 111,960 ----------- ----------- Total Liabilities....................... 6,936,959 6,007,753 ----------- ----------- Commitments and Contingencies Shareholders' Equity: 3% Cumulative preferred stock, \$1,000 par value -- Authorized -- 9,000 shares Issued and outstanding -- none......... -- -- Common stock, \$.125 par value -- Authorized -- 5,000,000 shares Issued and outstanding -- 100 shares... 13 13 Additional paid-in capital.............. 7,749,456 7,749,456 Restricted contributed capital surplus.. 2,199,166 2,199,166 Accumulated undistributed net investment income...................... 5,060,597 5,104,110 Accumulated net realized loan losses.... (4,144,594) (4,141,637) Net unrealized depreciation on loans.... (385,989) (367,817) ----------- ----------- Total Shareholders' Equity.............. 10,478,649 10,543,291 ----------- ----------- Total Liabilities and Shareholders' Equity................................. \$17,415,608 \$16,551,044
=========== =========== The accompanying notes are an integral part of these financial statements. TRANSPORTATION CAPITAL CORP. STATEMENTS OF OPERATIONS
PERIOD ENDED ------------ YEAR ENDED DECEMBER 31, MAY 29, ------------------------------- ------------- 1994 1995 1996 --------------- -------------- ------------- Investment Income: Interest from small business concerns (net of interest to participants)............................. \$2,001,527 \$1,411,116 \$ 525,883 Interest from treasury bills............... 215,353 425,318 156,243 ---------- ---------- --------- 2,216,880 1,836,434 682,126 ---------- ---------- --------- Expenses: Interest................................... 708,695 450,071 148,362 Salaries................................... 246,874 227,343 79,899 Legal and other professional fees.......... 356,162 350,178 131,226 Rent expense............................... 58,046 23,999 10,865 General and administrative................. 50,533 158,810 37,430 ---------- ---------- --------- 1,420,310 1,210,401 407,782 ---------- ---------- --------- Investment Income Before Income Taxes....... 796,570 626,033 274,344 Income Tax Provision........................ (342,948) (269,723) (114,106) ---------- ---------- --------- Net Investment Income...................... 453,622 356,310 160,238 ---------- ---------- --------- Realized Loan (Losses) Gains Before Income Taxes............................... (144,058) (50,055) 5,247 Income Tax Benefit (Provision).............. 59,748 22,399 (2,290) ---------- ---------- --------- Net Realized Loan (Losses) Gains........... (84,310) (27,656) 2,957 ---------- ---------- --------- Change in Unrealized Depreciation on Loans Before Income Taxes...................................... 790,283 335,261 30,172 Deferred Income Tax Provision............... (369,700) (133,900) (12,000) ---------- ---------- --------- Net Change in Unrealized Depreciation on Loans................................... 420,583 201,361 18,172 ---------- ---------- --------- Increase in Net Assets from Operations..... \$ 789,895 \$ 530,015 \$ 181,367 ========== ========== =========
The accompanying notes are an integral part of these financial statements. TRANSPORTATION CAPITAL CORP. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
RESTRICTED ----------- PREFERRED STOCK COMMON STOCK ADDITIONAL CONTRIBUTED --------------- ------------ ---------- ----------- SHARES SHARES PAID-IN CAPITAL ------ ------ ------- ------- OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL SURPLUS ------------ ------ ------------ ------ ------- ------- Balance, December 31, 1993 3,3831/3 \$ 3,383,333 2,486,804 \$ 310,851 \$6,250,529 \$ -- Merger of TCC Purchase Co. -- -- (2,486,704) (310,838) 314,760 -- Net investment income -- -- -- -- -- -- Net realized loan losses -- -- -- -- -- -- Net change in unrealized depreciation on loans -- -- -- -- -- -- ---------- ----------- ---------- --------- ---------- ---------- Balance, December 31, 1994 3,3831/3 \$ 383,333 100 \$ 13 \$6,565,289 \$ -- ========== =========== ========== ========= ========== ========== Net investment income -- -- -- -- -- -- Net realized loan losses -- -- -- -- -- -- Net change in unrealized depreciation on loans -- -- -- -- -- -- Capital contribution -- -- -- -- 310,818 -- Capitalization of accumulated undistributed net investment income -- -- -- -- 873,349 -- Repurchase of 3% preferred stock (3,383 1/3) (3,383,333) -- -- -- 2,199,166 ---------- ----------- ---------- --------- ---------- ---------- Balance, December 31, 1995 -- \$ -- 100 \$ 13 \$7,749,456 \$2,199,166 ========== =========== ========== ========= ========== ========== Net investment income -- -- -- -- -- -- Net realized loan gains -- -- -- -- -- -- Preferred dividends declared.................. Net change in unrealized depreciation on loans -- -- -- -- -- -- ---------- ----------- ---------- --------- ---------- ---------- Balance, May 29, 1996 -- \$ -- 100 \$ 13 \$7,749,456 \$2,199,166 ========== =========== ========== ========= ========== ========== ACCUMULATED ----------- UNDISTRIBUTED ACCUMULATED NET ------------- ----------- --- NET NET UNREALIZED TOTAL --- --- ---------- ----- INVESTMENT REALIZED DEPRECIATION SHAREHOLDERS' ---------- -------- ------------ ------------- INCOME LOAN LOSSES ON LOANS EQUITY ------ ----------- -------- ------ Balance, December 31, 1993..... \$5,124,014 \$(4,032,628) \$(1,007,933) \$10,028,166 Merger of TCC Purchase Co...... -- -- -- 3,922 Net investment income.......... 453,622 -- -- 453,622 Net realized loan losses....... -- (84,310) -- (84,310) Net change in unrealized depreciation on loans......... -- -- 420,583 420,583 ---------- ----------- ----------- ----------- Balance, December 31, 1994..... \$5,577,636 \$(4,116,938) \$ (587,350) \$10,821,983 ========== =========== =========== =========== Net investment income.......... 356,310 -- -- 356,310 Net realized loan losses....... -- (27,656) -- (27,656) Net change in unrealized depreciation on loans......... -- 201,361 201,361 Capital contribution........... -- -- -- 310,818 Capitalization of accumulated undistributed net investment income............. (873,349) -- -- -- Repurchase of 3% preferred stock......................... -- -- -- (1,184,167) ---------- ----------- ----------- ----------- Balance, December 31, 1995..... \$5,060,597 \$(4,144,594) \$ (385,989) \$10,478,649 ========== =========== =========== =========== Net investment income.......... 160,238 -- -- 160,238 Net realized loan gains........ -- 2,957 -- 2,957 Preferred dividends declared...................... (116,725) (116,725) Net change in unrealized depreciation on loans......... -- -- 18,172 18,172 ---------- ----------- ----------- ----------- Balance, May 29, 1996.......... \$5,104,110 \$(4,141,637) \$ (367,817) \$10,543,291 ========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. TRANSPORTATION CAPITAL CORP. STATEMENTS OF CASH FLOWS
PERIOD ENDED ------------ YEAR ENDED DECEMBER 31, MAY 29, ------------------------------ -------------- 1994 1995 1996 -------------- -------------- -------------- Cash Flows from Operating Activities: Increase in net assets from operations.. \$ 789,895 \$ 530,015 \$ 181,367 Adjustments to reconcile increase in net assets from operations to net cash provided by (used for) operating activities -- Change in unrealized depreciation on loans................................. (790,283) (335,261) (30,172) Provision for deferred taxes........... 549,800 138,300 11,535 Depreciation and amortization.......... 14,199 14,570 1,866 Realized loan losses................... 144,058 50,055 (5,247) Net change in -- Accrued interest receivable........... 141,191 14,216 15,338 Other assets.......................... (102,185) 116,687 10,483 Accrued interest payable.............. (148,943) (38,317) 103,997 Accrued expenses...................... (462,757) 46,377 (59,928) ------------ ------------ ----------- Net cash provided by operating activities............................. 134,975 536,642 229,239 ------------ ------------ ----------- Cash Flows from Investing Activities: Principal collected on loans............ 19,628,701 14,820,116 6,510,178 Advances on loans....................... (12,682,418) (13,697,563) (6,632,951) Furniture, fixtures and office equipment.............................. 3,500 (4,339) -- ------------ ------------ ----------- Net cash provided by (used for) investing activities................... 6,949,783 1,118,214 (122,773) ------------ ------------ ----------- Cash Flows from Financing Activities: Repurchase of preferred stock from SBA.. -- (1,184,167) -- Repayment of debentures payable to SBA.. (2,800,000) (1,200,000) (1,090,000) Capital contribution.................... -- 310,818 -- Merger of TCC Purchase Co............... 3,922 -- -- ------------ ------------ ----------- Net cash used for financing activities.. (2,796,078) (2,073,349) (1,090,000) ------------ ------------ ----------- Net Increase (Decrease) in Cash and Cash Equivalents........................ 4,288,680 (418,493) (983,534) Cash and Cash Equivalents, Beginning of Period.................................. 3,910,530 8,199,210 7,780,717 Cash and Cash Equivalents, End of........ ------------ ------------ ----------- Period.................................. \$ 8,199,210 \$ 7,780,717 \$ 6,797,183 ============ ============ =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for -- Interest............................... \$ 857,638 \$ 488,388 \$ 44,365 ============ ============ =========== Net income tax payments................ \$ 132,852 \$ 205,322 \$ 152,260 ============ ============ ===========
YEAR ENDED PERIOD ENDED ----------------------- ------------- DECEMBER 31, MAY 29, ----------------------- ------------- 1994 1995 1996 ----------- ---------- ------------- Balance, beginning.................... \$1,768,133 \$ 977,850 \$642,589 Charge-offs........................... (176,975) (61,672) -- Recoveries............................ 32,917 11,617 5,247 Interest income deferred (received)... (289,430) -- -- Reduction in allowance................ (356,795) (285,206) (35,419) ---------- --------- -------- Balance, ending....................... \$ 977,850 \$ 642,589 \$612,417 ========== ========= ========
(3) DEBENTURES PAYABLE TO THE SMALL BUSINESS ADMINISTRATION Debentures payable to the SBA at December 31, 1995 and May 29, 1996 consisted of subordinated debentures with the following maturities and interest rates (interest is payable semi-annually):
PRINCIPAL AMOUNT AT ---------------------- DECEMBER 31, MAY 29, 1995 1996 DUE DATE INTEREST RATE ---------- ---------- -------- ---------------- \$1,090,000 \$ -- 05/07/96 7.375% per annum 5,640,000 5,640,000 06/01/02 5.000% per annum ---------- ---------- through 5/31/97, 8% thereafter \$6,730,000 \$5,640,000 ========== ==========
Under the terms of the subordinated debentures, the Company may not repurchase or retire any of its capital stock, make any distributions to its shareholders other than dividends out of accumulated undistributed net investment income (as computed in accordance with SBA regulations) or increase salaries under certain conditions without the prior written approval of the SBA. TRANSPORTATION CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (4) SHAREHOLDERS' EQUITY The Company had an Employee Incentive Stock Option Plan (the Plan), that expired on February 18, 1996. On August 14, 1995, the Company repurchased and retired all of its 3% preferred stock owned by the SBA at a discount of 65% under an SBA 3% preferred stock repurchase agreement dated March 22, 1995. The purchase price of the preferred stock was \$1,184,167. The funds paid to the SBA were obtained from a \$310,818 capital contribution from the Company's sole shareholder, LNC Investments, Inc., and a \$873,349 capitalization of accumulated undistributed net investment income, in accordance with Appendix I to Part 107 of the SBA rules and regulations. As a result, the accumulated undistributed net investment income was reduced, and the additional paid-in capital was increased by \$873,349; the net effect was the same as if the Company had made a distribution to its shareholders, who then reinvested the same amount in the Company. The amount of the discount was recorded as an increase in capital in an account separate from additional paid-in capital, as restricted contributed capital surplus account. Under the repurchase agreement, the SBA retains a liquidating interest in the amount of the discount on the repurchase, which expires on a straight-line basis over five years or on a later date if an event of default, as defined in the repurchase agreement, has occurred and such default has not been cured or waived. Upon the occurrence of any event of default, the SBA's liquidating interest will become fixed at the level immediately preceding the event of default and will not amortize further until the default is cured or waived. While the liquidating interest expires over a five-year period, the balance in the restricted contributed capital surplus account remains unchanged in accordance with the SBA requirements. The SBA requires this treatment because the additional equity obtained as a result of the repurchase transaction is subject to certain restrictions that remain even after the liquidating interest has been eliminated. In the event of the Company's liquidation, the unexpired portion of the liquidating interest becomes immediately payable to the SBA. In addition, the SBA retains a residual interest in the preferred dividends in arrears at March 22, 1995 in the amount of \$152,250, which also expires on a straight-line basis over five years. On May 29, 1996, all of the outstanding shares of capital stock of the Company was acquired by Medallion Financial Corp. (Medallion Financial) pursuant to the stock purchase agreement dated February 12, 1996, for a purchase price of approximately \$10,546,000. The acquisition of the Company by Medallion Financial was approved by the SBA. Under the terms of the preferred stock repurchase agreement with the SBA, the change in ownership of the Company resulted in the unexpired portion of the preferred dividends becoming payable to the SBA in the amount of \$116,725. At December 31, 1995 and May 29, 1996, the unamortized amount of the SBA's liquidating interest in the restricted contributed capital surplus was \$1,869,291 and \$1,686,028, respectively. There are 9,000 shares of redeemable preferred stock authorized, of which none has been issued. Such shares, which may be issued only to the SBA, would have a par value of \$1,000 per share, bear cumulative annual dividends of 4% and would be required to be redeemed 15 years after issuance. TRANSPORTATION CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (5) INCOME TAXES The provisions (benefits) for income taxes are as follows:
YEAR ENDED DECEMBER 31, PERIOD ENDED ---------------------------- MAY 29, 1994 1995 1996 ------------- ------------- ------------- Net investment income -- Current -- Federal.................................. \$110,233 \$181,347 \$ 83,029 State.................................... 52,615 83,976 31,577 -------- -------- -------- \$162,848 \$265,323 \$114,606 -------- -------- -------- Deferred -- Federal.................................. \$142,500 3,400 (400) State.................................... 37,600 1,000 (100) -------- -------- -------- 180,100 4,400 (500) -------- -------- -------- \$342,948 \$269,723 \$114,106 ======== ======== ======== Net realized loan (losses) gains -- Current -- Federal.................................. \$(43,433) \$(14,247) \$ 1,431 State.................................... (16,315) (8,152) 859 -------- -------- -------- \$(59,748) \$(22,399) \$ 2,290 ======== ======== ======== Net change in unrealized depreciation on loans -- Deferred -- Federal.................................. \$298,600 \$103,700 \$ 9,300 State.................................... 71,100 30,200 2,700 -------- -------- -------- \$369,700 \$133,900 \$ 12,000 ======== ======== ========
The following is a reconciliation of income taxes at the expected statutory federal income tax to the actual income tax provision (benefit):
YEAR ENDED DECEMBER 31, PERIOD ENDED ------------------------ MAY 29, 1994 1995 1996 ----------- ----------- ----------- Net investment income -- Expected federal income tax............. \$270,834 \$212,851 \$ 93,277 State income taxes, net of federal...... 59,542 56,084 21,913 income tax benefit Other................................... 12,572 788 (1,084) -------- -------- -------- \$342,948 \$269,723 \$114,106 ======== ======== ========
TRANSPORTATION CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MAY 29, 1996 (5) INCOME TAXES (CONTINUED)
PERIOD ENDED ------------ YEAR ENDED DECEMBER 31, MAY 29, ------------------------ ------- 1994 1995 1996 -------- -------- ------- Net realized loan (losses)gains -- Expected federal income tax................. \$(48,980) \$(17,019) \$ 1,784 State income taxes, net of federal.......... (10,768) (5,380) 567 income tax benefit Other....................................... -- -- (61) -------- -------- ------- \$(59,748) \$(22,399) \$ 2,290 ======== ======== ======= Net change in unrealized depreciation on loans -- Expected federal income tax................. \$268,696 \$113,989 \$10,258 State income taxes, net of federal.......... 46,926 19,932 1,792 income tax benefit Other....................................... 54,078 (21) (50) -------- -------- ------- \$369,700 \$133,900 \$12,000 ======== ======== =======
The principal components of the deferred tax asset at December 31, 1995 and May 29, 1996 are as follows:
DECEMBER 31, 1995 MAY 29, 1996 --------------------------------- --------------------------------- FEDERAL STATE TOTAL FEDERAL STATE TOTAL ---------- --------- ---------- ---------- --------- ---------- Allowance for loan losses...... \$198,800 \$57,800 \$256,600 \$189,480 \$55,120 \$244,600 Interest....................... 2,300 600 2,900 2,450 710 3,160 Depreciation................... (1,300) (300) (1,600) (1,080) (315) (1,395) -------- ------- -------- -------- ------- -------- \$199,800 \$58,100 \$257,900 \$190,850 \$55,515 \$246,365 ======== ======= ======== ======== ======= ========
DECEMBER 31, 1995 MAY 29, 1996 ---------------------- ---------------------- CARRYING FAIR CARRYING FAIR ---------- ---------- ---------- ---------- AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Financial assets -- Loans receivable............. \$9,154,139 \$9,154,139 \$9,312,331 \$9,312,331 Cash and cash equivalents.... 7,780,717 7,780,717 6,797,183 6,797,183 Financial liabilities -- Debentures payable to SBA.... 6,730,000 7,189,000 5,640,000 5,954,000
(11) SUBSEQUENT EVENTS On February 11, 1997, the SBA approved an amendment to the charter of the Company, converting the Company from a SSBIC to a SBIC. The conversion eliminates the restriction for the Company to lend only to individuals as being socially or economically disadvantaged, or to small business concerns that are at least 50% owned by such persons, as defined in the SBIA subject to certain restrictions. Effective January 1, 1997, Medallion Financial Corp. decided to merge all of the assets and liabilities of the Company into Medallion Funding Corp., a wholly owned subsidiary of Medallion Financial Corp., subject to the approval of the SBA. Medallion Financial Corp. expects to complete the merger by the end of the second quarter of 1997. TRANSPORTATION CAPITAL CORP. SCHEDULE OF INVESTMENTS OTHER THAN INVESTMENTS IN AFFILIATES
DECEMBER 31, 1995 MAY 29, 1996 ----------------------------------------------- ------------------------------------------------ NUMBER NUMBER ------ PRINCIPAL ------ PRINCIPAL OF --------- OF --------- LOANS BY COLLATERAL TYPE LOANS BALANCE FAIR VALUE BOOK VALUE LOANS BALANCE FAIR VALUE BOOK VALUE - - --------------------------- ----- ------- ---------- ---------- ----- ------- ---------- ---------- MEDALLIONS: New York..................... 17 \$ 797,932 \$ 797,932 \$ 797,932 12 618,280 618,280 618,280 Boston....................... 80 3,400,557 3,400,557 3,400,557 75 3,131,238 3,131,238 3,131,238 Cambridge.................... 45 1,984,198 1,971,598 1,971,598 48 2,291,251 2,287,851 2,287,851 Chicago...................... 87 1,647,561 1,647,561 1,647,561 94 2,029,924 2,023,624 2,023,624 Newark....................... 12 158,157 156,836 156,836 8 91,342 91,342 91,342 --- ---------- ---------- ---------- --- ---------- ---------- ---------- Total medallions............ 241 7,988,405 7,974,484 7,974,484 237 8,162,035 8,152,335 8,152,335 NEW YORK RADIO CARS........... 35 599,694 238,198 238,198 32 535,696 201,605 201,605 MINUTEMAN RECEIVABLES......... 3 1,217,371 950,199 950,199 2 1,231,012 962,386 962,386 OTHERS........................ -- -- -- -- -- -- -- -- --- ---------- ---------- ---------- --- ---------- ---------- ---------- Subtotal.................... 279 9,805,470 9,162,881 9,162,881 271 9,928,743 9,316,326 9,316,326 RECEIVABLE FOR FORECLOSURE EXPENSES......... -- 10,144 10,144 10,144 -- 8,766 8,766 8,766 UNAPPLIED COLLECTIONS......... -- (18,886) (18,886) (18,886) -- (12,761) (12,761) (12,761) --- ---------- ---------- ---------- --- ---------- ---------- ---------- Total loans receivable, net........................ 279 \$9,796,728 \$9,154,139 \$9,154,139 271 \$9,924,748 \$9,312,331 \$9,312,331 === ========== ========== ========== === ========== ========== ==========
The accompanying notes are an integral part of these financial statement. TRANSPORTATION CAPITAL CORP. SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS MAY 29, 1996 It is the Company's policy to make loans to persons who qualify under Small Business Administration regulations as socially or economically disadvantaged and to entities which are at least 50%-owned by such persons. Substantially all of the Company's loans are for the purpose of financing the purchase of New York City, Boston, Cambridge, Chicago and Newark taxi medallions, taxi cabs, car radio rights, radio cars and related assets (the Collateral). It is the Company's policy that these loans are collateralized by a first priority perfected security interest in the collateral. The distribution of loans at May 29, 1996 by rate of interest is as follows:
NUMBER BALANCE INTEREST ------ ------------ --------- OF LOANS OUTSTANDING RATE -------- ------------ --------- 2 \$ 106,941 9.50% 3 119,292 10.00 2 288,838 10.50 28 1,326,481 11.00 38 667,453 12.00 2 52,028 12.50 66 1,793,509 13.00 2 6,978 13.25 47 1,768,645 13.50 3 88,268 13.75 41 1,942,791 14.00 11 157,874 14.25 5 1,265,835 14.50 1 54,236 14.75 13 166,207 15.00 3 19,576 15.75 1 10,609 16.00 2 57,670 16.50 1 35,512 16.75 --- ---------- 271 9,928,743 13.08% === ========== ===== RECEIVABLES FOR FORECLOSURE EXPENSES.................... 8,766 UNAPPLIED COLLECTIONS....... (12,761) ---------- \$9,924,748 ==========
The accompanying notes are an integral part of these financial statements. TRANSPORTATION CAPITAL CORP. SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS --(CONTINUED) MAY 29, 1996 COMPOSITION OF LOAN PORTFOLIO: BALANCE OUTSTANDING PERCENT ------------------- -------- New York medallions...................... 618,280 6.22% New York radios and others............... 535,696 5.40 New York minuteman receivables........... 1,231,012 12.40 Newark medallions........................ 91,342 0.92 Boston medallions........................ 3,131,238 31.54 Cambridge medallions..................... 2,291,251 23.08 Chicago medallions....................... 2,029,924 20.44 ---------- ------ Total composition of loan portfolio .... \$9,928,743 100.00% ========== ====== The accompanying notes are an integral part of these financial statements. SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS DECEMBER 31, 1995 The distribution of loans at December 31, 1995 by rate of interest is as follows:
NUMBER BALANCE INTEREST ------ ------------ --------- OF LOANS OUTSTANDING RATE -------- ------------ --------- 2 \$ 115,650 9.50% 3 125,384 10.00 10 361,560 11.00 51 1,231,411 12.00 2 64,923 12.50 48 1,234,511 13.00 4 22,065 13.25 50 1,740,372 13.50 5 210,120 13.75 50 2,516,760 14.00 18 393,213 14.25 6 1,254,777 14.50 1 55,707 14.75 16 217,328 15.00 2 65,072 15.50 4 27,918 15.75 1 13,296 16.00 2 61,934 16.50 3 88,006 16.75 1 5,463 17.00 --- ---------- 279 9,805,470 13.46 === RECEIVABLES FOR FORECLOSURE EXPENSES......................... 10,144 UNAPPLIED COLLECTIONS............. (18,886) ---------- \$9,796,728 ========== PERCENT -------- COMPOSITION OF LOAN PORTFOLIO: New York medallions.................. \$ 797,932 8.14 New York radios and others........... 599,694 6.12 New York minuteman receivables....... 1,217,371 12.41 Newark medallions.................... 158,157 1.61 Boston medallions.................... 3,400,557 34.68 Cambridge medallions................. 1,984,198 20.24 Chicago medallions................... 1,647,561 16.80 ---------- ------ Total composition of loan portfolio......................... \$9,805,470 100.00% ========== ======
Revolving Credit Name and Address of Bank Facility Available Percentage - - ----------------------------------------------------------------------- Fleet Bank N.A.* 595 Fifth Ave New York, New York 10036 \$ 25,000,000 250/1050 The First National Bank of Boston 100 Federal Street Boston, Massachusetts 02110 \$ 22,500,000 225/1050 Harris Trust and Savings Bank 111 West Monroe Chicago, IL 60690 \$ 15,000,000 150/1050 Bank Tokyo - Mitsubishi Trust Company 1251 Ave of the Americas New York, New York 10016 \$ 12,500,000 125/1050 Israel Discount Bank of New York 511 Fifth Avenue New York, New York 10022 \$ 10,000,000 100/1050 European American Bank 335 Madison Avenue New York, New York 10017 \$ 10,000,000 100/1050 Bank Leumi Trust Company of NY 562 Fifth Ave New York, NY 10036 \$ 10,000,000 100/1050 ------------ TOTAL FACILITIES \$105,000,000 ============
*In addition, NatWest has \$2,000,000 outstanding in Fleet Bank Existing Term Note, which matures in 7/97. This agreement is secured by a perfected security interest in all of the Licensee's assets. Fleet Bank NA acts as collateral agent on behalf of the entire banking group. Medallion Funding Corp. does not have any other outstanding liens.