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SECURITIES ACT FILE NO. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] PRE-EFFECTIVE AMENDMENT NO.
[_] POST-EFFECTIVE AMENDMENT NO.
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MEDALLION FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
205 EAST 42ND STREET, SUITE 2020, NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 682-3300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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ALVIN MURSTEIN
CHIEF EXECUTIVE OFFICER
MEDALLION FINANCIAL CORP.
205 EAST 42ND STREET, SUITE 2020
NEW YORK, NEW YORK 10017
(NAME AND ADDRESS OF AGENT FOR SERVICE)
WITH COPIES TO:
STEVEN N. FARBER, ESQ. CHRISTOPHER E. MANNO, ESQ.
STANLEY KELLER, ESQ. WILLKIE FARR & GALLAGHER
PALMER & DODGE LLP 153 EAST 53RD STREET
ONE BEACON STREET NEW YORK, NEW YORK 10022
BOSTON, MASSACHUSETTS 02108 (212) 821-8000
(617) 573-0100
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box [_]
It is proposed that this filing will become effective (check appropriate
box):
[_] when declared effective pursuant to Section 8(c) of the Securities Act of
1933.
[_] This Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933 and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is 333- .
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<CAPTION>
PROPOSED
TITLE OF AMOUNT MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES BEING BEING OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 4,025,000 $17.0625 $68,676,562.50 $20,812
</TABLE>
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(1) Includes 525,000 shares which may be sold by the Company pursuant to an
option granted to the Underwriters solely to cover over-allotments, if
any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933 on the basis of the
average high and low sale prices of the Common Stock on April 3, 1997 as
reported on the Nasdaq National Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
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<PAGE>
MEDALLION FINANCIAL CORP.
CROSS-REFERENCE SHEET
PARTS A AND B OF PROSPECTUS*
<TABLE>
<CAPTION>
ITEMS IN PARTS A AND B OF
ITEM NO. FORM N-2 LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Outside Front Cover......... Front Cover Page
2. Inside Front and Outside Front Cover Page and Outside Back
Back Cover Page............. Cover Page
3. Fee Table and Synopsis...... Prospectus Summary; Fees and Expenses
Additional Information
4. Financial Highlights........ Prospectus Summary; Selected Financial
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations
5. Plan of Distribution........ Cover Page; Prospectus Summary;
Underwriting
6. Selling Stockholders........ Not Applicable
7. Use of Proceeds............. Use of Proceeds
8. General Description of the Cover Page; Prospectus Summary; Risk
Registrant.................. Factors; The Company; Distributions
and Price Range of Common Stock;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Investment
Objectives, Policies and
Restrictions; Determination of Net
Asset Value; Financial Statements
9. Management.................. Management; Custodian, Transfer Agent,
Dividend Disbursing Agent and
Registrar; Investment Objectives,
Policies and Restrictions
10. Capital Stock, Long Term
Debt, and Other Distributions and Price Range of
Securities................. Common Stock; Business; Dividend
Reinvestment Plan; Federal Income Tax
Considerations; Description of
Capital Stock
11. Defaults and Arrears on Not Applicable
Senior Securities...........
12. Legal Proceedings........... Not Applicable
13. Table of Contents of the
Statement of Additional
Information................ Not Applicable
14. Cover Page.................. Not Applicable
15. Table of Contents........... Not Applicable
16. General Information and Business
History.....................
17. Investment Objective and Business; Investment Objectives,
Policies.................... Policies and Restrictions
18. Management.................. Management; Principal Stockholders
19. Control Persons and
Principal Holders of
Securities................. Principal Stockholders
20. Investment Advisory and Management; Custodian, Transfer Agent,
Other Services.............. Dividend Disbursing Agent and
Registrar; Experts; Investment
Objectives, Policies and Restrictions
21. Brokerage Allocation and Not Applicable
Other Practices.............
22. Tax Status.................. Federal Income Tax Considerations
23. Financial Statements........ Index to Financial Statements;
Financial Statements
</TABLE>
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* Pursuant to the General Instructions to Form N-2, all information required
to be set forth in Part B: Statement of Additional Information has been
included in Part A: The Prospectus. All items required to be set forth in Part
C are set forth in Part C.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+U.S. SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR +
+MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL , 1997
3,500,000 SHARES
[LOGO] MEDALLION
Financial Corp.
COMMON STOCK
All of the shares of Common Stock, $.01 par value (the "Common Stock"),
offered hereby (the "Offering") are being sold by Medallion Financial Corp.
(the "Company").
The Company is a specialty finance company with a leading position in the
origination and servicing of loans financing the purchase of taxicab medallions
and related assets. The Company also originates and services commercial
installment loans financing small businesses in other targeted industries. In
addition, the Company operates a taxicab rooftop advertising business. See
"Business." The Company is a closed-end, non-diversified management investment
company that has elected to be treated as a business development company under
the Investment Company Act of 1940, as amended. On May 29, 1996, the Company
acquired the specialty finance and taxicab rooftop advertising businesses
conducted by several companies. Prior to that date, the Company had no
operations. See "The Company."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"TAXI." On April 7, 1997, the last reported sale price on the Common Stock was
$17.25 per share.
This Prospectus sets forth the information about the Company that a
prospective investor should know before purchasing Common Stock. Prospective
investors are advised to read this Prospectus and retain it for future
reference.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR INFORMATION THAT
PROSPECTIVE INVESTORS SHOULD CONSIDER IN CONNECTION WITH THEIR INVESTMENT
DECISION.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
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Total(3).................................. $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted a 30-day option to the Underwriters to purchase up
to an aggregate of 525,000 additional shares of Common Stock at the Price
to Public less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If all of such shares are purchased, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to reject orders in whole or in part. It is
expected that delivery of share certificates will be made against payment
therefor at the offices of Furman Selz LLC in New York, New York on or about
, 1997.
FURMAN SELZ
BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
J.C. BRADFORD & CO.
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The date of this Prospectus is , 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE
COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET
IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
Medallion Financial Corp. ("Medallion Financial") acquired on May 29, 1996
the specialty finance businesses conducted by Tri-Magna Corporation ("Tri-
Magna"), Edwards Capital Company (collectively with its successor, Edwards
Capital Corp., "Edwards") and Transportation Capital Corp. ("TCC" and,
collectively with Tri-Magna and Edwards, the "Founding Companies") as well as
the taxicab rooftop advertising business conducted by Tri-Magna. Tri-Magna had
conducted its specialty finance and taxicab rooftop advertising businesses
through its wholly-owned subsidiaries, Medallion Funding Corp. ("MFC") and
Medallion Media, Inc. ("Media"), respectively, and references herein to Tri-
Magna include such subsidiaries unless the context indicates otherwise. Prior
to the closing of the acquisitions of the Founding Companies (the
"Acquisitions"), Medallion Financial had no operations. See "Business."
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UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES HEREIN TO THE
"COMPANY" INCLUDE MEDALLION FINANCIAL CORP. AND THE FOUNDING COMPANIES
COLLECTIVELY AND REFERENCES HEREIN TO "MEDALLION FINANCIAL" SHALL MEAN
MEDALLION FINANCIAL CORP. ALONE.
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THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION AND
DATA IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS
NOT EXERCISED.
THE COMPANY
The Company is a specialty finance company with a leading position in the
origination and servicing of loans financing the purchase of taxicab medallions
and related assets ("Medallion Loans"). The Company also originates and
services commercial installment loans financing small businesses in other
targeted industries ("Commercial Installment Loans"). In addition, the Company
operates a taxicab rooftop advertising business. See "Business."
Management of the Company successfully operated Tri-Magna, the largest of the
three Founding Companies acquired by Medallion Financial and an investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), from the time it began its medallion lending operations in 1979.
Alvin Murstein, a founder and the Chairman and Chief Executive Officer of the
Company and of Tri-Magna, has over 40 years of experience in the ownership,
management and financing of taxicab fleets, taxicab medallions and corporate
car services. Andrew Murstein, the President and Chief Operating Officer, is
the third generation of his family to be active in the taxicab industry. While
loans in Tri-Magna's portfolio had been from time to time in arrears or
default, Tri-Magna never experienced a loss of principal on any of the $299
million in aggregate principal amount of Medallion Loans it originated prior to
the Acquisitions. Similarly, since the closing of the Acquisitions, the Company
has not experienced any losses of principal on the Medallion Loans it has
originated. See "Management" and "Business--Medallion Lending."
Medallion Loans comprised 76.3% of the Company's $176.5 million loan
portfolio at December 31, 1996. Since 1979, the Company has originated, on a
combined basis, approximately $561 million in Medallion Loans in New York City,
Boston, Chicago, Cambridge, Newark, Philadelphia and Hartford. Substantially
all of the Company's Medallion Loans are originated at fixed rates of interest
in excess of the prime rate of interest charged by major commercial banks (the
"Prime Rate"). Approximately 90% in principal amount of the Medallion Loans are
collateralized by first security interests in New York City taxicab medallions
and related assets. The Company estimates that the average loan-to-value ratio
of all of the Company's Medallion Loans was 54% at December 31, 1996, which the
Company believes is representative of its historical average loan to value
ratio. In addition, the Company has recourse against the direct and indirect
owners of the taxicab medallions and related assets through personal
guarantees. Although personal guarantees increase the commitment of borrowers
to repay their loans, there can be no assurance that the assets available under
personal guarantees would, if required, be
3
<PAGE>
sufficient to satisfy the obligations secured by such guarantees. The New York
City Taxi and Limousine Commission (the "TLC") estimates that the total value
of all New York City medallions and related assets exceeds $2.5 billion and the
Company estimates that the total value of all taxicab medallions and related
assets in the United States exceeds $5 billion. The Company believes that it
will continue to develop growth opportunities by further penetrating the highly
fragmented medallion financing markets and by acquiring additional medallion
financing businesses and portfolios. See "Business--Medallion Lending."
Commercial Installment Loans comprised 23.7% of the Company's loan portfolio
at December 31, 1996. From the inception of this business in 1987 through
December 31, 1996, on a combined basis, the Company has originated
approximately 1,382 Commercial Installment Loans in an aggregate principal
amount of approximately $107 million. The Company's Commercial Installment Loan
activity has increased in recent years, with the number and principal amount of
Commercial Installment Loans originated by the Company, on a combined basis, in
1996 being 30.9% and 55.1% greater, respectively, than in 1995. The Company's
Commercial Installment Loans generally are secured by equipment and made at
fixed rates of interest averaging approximately 500 to 700 basis points over
the prevailing Prime Rate. Approximately 81% of the aggregate principal
outstanding of the Company's Commercial Installment Loan portfolio at December
31, 1996 was comprised of loans secured by either retail dry cleaning equipment
or coin operated laundromat equipment. In addition, as with Medallion Loans,
the Company requires, in substantially all cases, personal guarantees in
connection with Commercial Installment Loans. The Company has focused its
lending efforts on the retail dry cleaning and coin operated laundromat
industries because they have offered the Company high rates of interest and a
strong collateral position. The Company's aggregate realized loss of principal
on loans secured by retail dry cleaning and coin operated laundromat equipment
originated to date is $111,000 or 0.15% of the $72.1 million in principal
amount of such loans. The Company plans to expand its Commercial Installment
Loan activities to include a more diverse borrower base, a larger geographic
area and other targeted industries. See "Business--Commercial Installment
Loans."
The Company has applied to the SBA for a license to operate as a
participating lender in the SBA's Section 7(a) loan program (a "Participating
Lender"). If the Company's application is successful, the Company would become
eligible to make loans guaranteed by the SBA to small businesses meeting
certain size and other eligibility requirements established by the SBA.
Thereby, the Company may provide a broader range of products, including
variable rate loans, to its customers in existing and new markets while
incurring a reduced level of credit risk associated with the U.S. government
guarantee. There can be no assurance that the Company will be successful in its
efforts to establish a Participating Lender or, if successful, that the SBA
will guarantee loans originated by it. See "Business--The SBA Section 7(a)
Program."
The Company funds its operations through credit facilities with bank
syndicates and, to a lesser degree, through the issuance of fixed-rate, long-
term subordinated debentures that are issued to, or guaranteed by, the U.S.
Small Business Administration (the "SBA"). In addition, the Company intends to
establish a commercial paper program to reduce its cost of funds. There can be
no assurance, however, that the Company will be able to establish such a
program. See "Risk Factors--Availability of Funds." At December 31, 1996, $96.5
million of the Company's debt consisted of bank debt which was at a weighted
average effective rate of interest of 7.03%, or 122 basis points below the
Prime Rate and 147 basis points above 90-day LIBOR on such date. The balance of
the Company's debt, $29.4 million, consisted of subordinated SBA debentures,
with fixed rates of interest with a weighted average rate of 7.38%. At December
31, 1996, an additional $10.5 million of credit was available under the
Company's $105.0 million revolving lines of credit at variable effective rates
of interest averaging below the Prime Rate. Subsequent to December 31, 1996,
the Company increased the amount available under its credit facilities by $21.0
million and repaid $1.5 million of subordinated SBA debentures. See "Business--
Sources of Funds."
The Company also has been providing taxicab rooftop advertising since
November 1994, and at December 31, 1996, the Company had approximately 2,000
installed taxicab rooftop advertising displays ("Displays") nationwide. In
furtherance of the Company's expansion strategy in this industry, the Company
recently entered
4
<PAGE>
into an agreement to provide advertising on over 1,800 additional New York City
taxicabs commencing in September 1997. The effect of this agreement will be to
increase the number of taxicabs the Company currently has under contract in New
York City from approximately 1,700 to approximately 3,500. As a result of this
agreement, the Company will be the leading taxicab rooftop advertiser in the
city. See "Business--Taxicab Rooftop Advertising."
The Company believes that there is a significant opportunity for a provider
of taxicab rooftop advertising that operates in several major metropolitan
markets because many large advertisers prefer to advertise nationally. The
Company is well positioned to take advantage of this opportunity because it
believes it is one of the largest providers of such advertising in the nation.
The Company currently provides such advertising in New York City, Miami,
Philadelphia and Boston and intends to expand to other major metropolitan
areas. The Company believes that there are growth opportunities within its
existing markets because only approximately 28% of New York City taxicabs, and
a much smaller percentage of the taxicabs in other major metropolitan areas
nationwide, have rooftop advertising. In addition, the Company believes that
its growth will be facilitated by its reputation and relationships within the
taxicab industry and because the Company's arrangement with the taxicab owners
provides them with incremental income. See "Business--Taxicab Rooftop
Advertising."
The Company is a closed-end, non-diversified management investment company
under the 1940 Act. The investment objectives of the Company are to provide a
high level of distributable income, consistent with preservation of capital, as
well as long-term growth of net asset value. The Company is managed by its
executive officers under the supervision of its Board of Directors and has
retained FMC Advisers, Inc. ("FMC") as an investment adviser. The principals of
FMC had served as directors and executive officers of Tri-Magna and MFC from
inception of these businesses until the Acquisitions. The Company has elected
to be treated as a business development company under the 1940 Act. See
"Regulation." In addition, it has elected to be treated for tax purposes as a
regulated investment company (a "RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). As a RIC, the Company will not be subject to U.S.
federal income tax on any investment company taxable income (which includes,
among other things, dividends and interest reduced by deductible expenses) that
it distributes to its stockholders if at least 90% of its investment company
taxable income for that taxable year is distributed. The Company pays quarterly
cash dividends to comply with this requirement. Stockholders can elect to
reinvest distributions. See "Dividend Reinvestment Plan." The Company's
specialty finance subsidiaries, MFC, TCC and Edwards (collectively the "RIC
Subsidiaries"), have also elected to be treated as RICs and distribute at least
90% of their respective investment company taxable income to the Company. Media
is not a RIC and, therefore, it does not have an income distribution
requirement and is permitted to retain earnings to finance growth. See "Federal
Income Tax Considerations."
THE OFFERING
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<S> <C>
Common Stock offered by the
Company(1).................. 3,500,000 shares
Common Stock to be
outstanding after the
Offering(1)(2).............. 11,750,000 shares
Nasdaq National Market
Symbol...................... TAXI
Use of proceeds.............. Temporarily reduce of indebtedness, increase
loan portfolio, fund possible acquisitions and
provide working capital.
Distributions................ The Company pays quarterly cash dividends to its
stockholders of at least 90% of its investment
company taxable income.
</TABLE>
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(1) Does not include 525,000 shares of Common Stock issuable pursuant to the
over-allotment option granted to the Underwriters.
(2) Excludes 218,389 shares issuable upon the exercise of options outstanding
as of December 31, 1996 with a weighted average exercise price of $11.52
per share.
5
<PAGE>
RISK FACTORS
Investment in shares of the Common Stock involves certain risks relating to
the structure, operations and regulation of the Company that should be
considered by prospective purchasers of the Common Stock. The following summary
of risk factors is qualified in its entirety by the more detailed information
appearing under the heading "Risk Factors" in this Prospectus. Principal risk
factors include:
Interest Rate Spread. The Company's net interest income is largely dependent
upon achieving a positive interest rate spread. Accordingly, if recent
increases in prevailing interest rates lead to a trend of higher interest
rates, the Company's interest rate spread could decline. See "Risk Factors--
Interest Rate Spread."
Leverage. The Company's use of leverage poses certain risks for holders of
the Common Stock, including the possibility of higher volatility of both the
net asset value of the Company and the market price of the Common Stock and,
therefore, an increase in the speculative character of the Common Stock. See
"Risk Factors--Leverage."
Industry and Geographic Concentration. A substantial portion of the Company's
revenue is derived from operations in New York City and these operations are
substantially focused in the area of financing New York City taxicab medallions
and related assets. There can be no assurance that an economic downturn in New
York City in general, or in the New York City taxicab industry in particular,
would not have an adverse impact on the Company. See "Risk Factors--Industry
and Geographic Concentration" and "--Taxicab Industry Regulation."
Reliance on Management. The success of the Company will be largely dependent
upon the efforts of senior management. The death, incapacity or loss of the
services of any of such individuals could have an adverse effect on the
Company. See "Risk Factors--Reliance on Management."
Government Regulation of Tobacco Advertising. Historically, a substantial
portion of the Company's taxicab rooftop advertising revenue has been derived
from tobacco products advertising. In August 1996, the U.S. Food and Drug
Administration (the "FDA") enacted final regulations restricting the sale and
advertising of cigarette and smokeless tobacco products. The Company believes
that certain of these regulations, which become effective on August 28, 1997,
could have an adverse effect upon the taxicab rooftop advertising business of
the Company. See "Risk Factors--Government Regulation of Tobacco Advertising."
Substantial Influence by Existing Stockholders and Shares Eligible for Future
Sale. After the Offering, two officers who are also directors of the Company,
together with entities affiliated with them, will beneficially own
approximately 22% of the Common Stock outstanding. Because of their Common
Stock ownership, these stockholders, if they were to act together, could
influence the election of all members of the Company's Board of Directors and
determine some corporate actions after the Offering. All of these shares are
restricted securities under Rule 144 of the Securities Act of 1933, as amended
(the "Securities Act") and will be eligible for sale, subject to the Rule 144
resale restrictions on April 29, 1997. However, all of such shares are also
subject to lock-up agreements with the Underwriters and may not be sold until
May 23, 1998 without the prior written consent of Furman Selz LLC. Such consent
would not, however, affect the resale restrictions under Rule 144. See "Risk
Factors--Control by Existing Stockholders" and "--Shares Eligible for Future
Sale."
6
<PAGE>
FEES AND EXPENSES
The purpose of the following table is to assist prospective investors in
understanding the various costs and expenses that an investor in the Company
will bear directly or indirectly.
FEE TABLE(1)
<TABLE>
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)..................... %(2)
Dividend Reinvestment Plan Fees.................................... None(3)
ANNUAL EXPENSES (as a percentage of net assets attributable to Common
Stock) (4)
Management Fees.................................................... (5)
Interest Payments on Borrowed Funds................................ (6)
Operating Expenses................................................. (7)
Other Expenses.....................................................
----
Total Annual Expenses................................................ %
====
</TABLE>
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(1) Based on estimated amounts for the current fiscal year.
(2) The underwriting discounts and commissions which are a one-time fee paid by
the Company to the Underwriters in connection with the Offering, are the
only sales load paid in connection with the Offering. See "Underwriting."
(3) The expenses of the Dividend Reinvestment Plan are included in stock record
expenses, a component of "Other Expenses." The participants in the Dividend
Reinvestment Plan will bear a pro rata share of brokerage commissions
incurred with respect to open market purchases. See "Distributions and
Price Range of Common Stock" and "Dividend Reinvestment Plan."
(4) Assumes a net asset value of $ million, which will be the Company's
estimated stockholders' equity upon completion of the Offering. Operating
expenses, interest payments on borrowed funds and other expenses are
calculated on an annualized basis based on the period beginning May 30,
1996 and ended December 31, 1996.
(5) Management expenses consist of fees paid to the Company's investment
adviser, FMC. See "Investment Objectives, Policies and Restrictions--The
Investment Adviser" and "Certain Transactions."
(6) Interest payments on borrowed funds consist primarily of interest payable
under credit agreements with banks and on subordinated SBA debentures. See
"Business--Sources of Funds."
(7) Operating expenses consist primarily of compensation and employee benefits,
data processing, advertising, travel and other marketing expenses,
occupancy costs and other similar expenses. See "Management."
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Company. These amounts assume no increase or
decrease in leverage and are based upon payment by an investor of a % sales
load (the underwriting discount paid by the Company in connection with the
Offering) and payment by the Company of operating expenses at the levels set
forth in the table above.
An investor would pay the following expenses on a $1,000 investment, assuming
(i) a 5.0% annual return and (ii) reinvestment of all dividends and
distributions at net asset value:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ $ $ $
</TABLE>
This example as well as the information set forth in the table above should
not be considered a representation of the future expenses of the Company.
Actual expenses may be greater or less than those shown. Moreover, while the
example assumes (as required by the Securities and Exchange Commission (the
"Commission")) a 5.0% annual return, the Company's performance will vary and
may result in a return greater or less than 5.0%. In addition, while the
example assumes reinvestment of all dividends and distributions at net asset
value, participants in the Dividend Reinvestment Plan will receive shares
purchased by the Dividend Reinvestment Plan Agent at the market price in effect
at the time, which may be at, above or below net asset value. See
"Distributions and Price Range of Common Stock" and "Dividend Reinvestment
Plan."
7
<PAGE>
MEDALLION FINANCIAL CORP.
SUMMARY CONSOLIDATED FINANCIAL DATA
FOR THE PERIOD MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 30 TO --------------------------- MAY 30 TO
JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996
----------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Investment income........ $ 1,393 $ 4,263 $ 4,756 $ 10,412
Interest expense......... 699 2,099 2,210 5,008
-------- -------- -------- --------
Net interest income...... 694 2,164 2,546 5,404
Equity in earnings
(losses) of
unconsolidated
subsidiary(1)........... 29 (23) (69) (63)
Other income............. 57 235 119 411
Accretion of negative
goodwill................ 65 180 176 421
Operating expenses....... (266) (932) (1,033) (2,231)
Amortization of
goodwill................ (35) (102) (122) (259)
-------- -------- -------- --------
Net investment income.... 544 1,522 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)........... $ 544 $ 1,548 $ 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
======== ======== ======== ========
<CAPTION>
MAY 30, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
----------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (IN
THOUSANDS)
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
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(UNAUDITED)
<S> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA
Return on assets(4)(5)............................................. 3.36%
Return on equity(5)(6)............................................. 11.29
Average yield, e.o.p.(7)........................................... 10.80
Average cost of funds, e.o.p.(8)................................... 7.11
Spread, e.o.p.(9).................................................. 3.69
Other income ratio(5)(10).......................................... 0.40
Operating expense ratio(5)(11)..................................... 2.02
Medallion Loans as a percentage of investments..................... 76
Commercial Installment Loans as a percentage of investments........ 24
Investments to assets.............................................. 93
Equity to assets................................................... 30
Debt to equity..................................................... 223
SBA debt to total debt............................................. 23
</TABLE>
8
<PAGE>
(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.
9
<PAGE>
MEDALLION FINANCIAL CORP.
PRO FORMA SUMMARY FINANCIAL DATA(1)
(SEE PRO FORMA FINANCIAL STATEMENTS FOR ADJUSTMENTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------- YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996
--------- -------- ------------- ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Investment income....... $4,021 $4,091 $4,263 $ 4,756 $17,131
Interest expense........ 1,822 1,871 2,099 2,210 8,002
------ ------ ------ ------- -------
Net interest income..... 2,199 2,220 2,164 2,546 9,129
Equity in earnings
(losses) of
unconsolidated
subsidiary(2).......... (26) 2 (23) (69) (116)
Other income............ 164 170 235 119 688
Accretion of negative
goodwill............... 193 193 180 176 742
Operating expenses...... (921) (970) (932) (1,033) (3,856)
Amortization of
goodwill............... (105) (105) (102) (122) (434)
------ ------ ------ ------- -------
Net investment income... 1,504 1,510 1,522 1,617 6,153
Realized gain (loss) on
investments, net....... (4) 10 26 58 90
Change in unrealized
depreciation of
investments(3)......... 24 6 -- (46) (16)
------ ------ ------ ------- -------
Net increase in net
assets resulting from
operations(4).......... $1,524 $1,526 $1,548 $ 1,629 $ 6,227
====== ====== ====== ======= =======
Pro forma net increase
in net assets resulting
from operations per
share(4)............... $ 0.18 $ 0.18 $ 0.19 $ 0.20 $ 0.75
====== ====== ====== ======= =======
</TABLE>
- ----------
(1) Prepared as if the Company's initial public offering of its Common Stock
on May 29, 1996 (the "IPO") and the application of the proceeds of the IPO
(including the Acquisitions and the application of the cash acquired in
connection with the Acquisitions) occurred on January 1, 1996.
(2) Equity in earnings (losses) of unconsolidated subsidiary represents the
net income (loss) for the period indicated from the Company's investment
in Media.
(3) 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.
(4) 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. Per share data is
based upon 8,250,000 shares outstanding and does not reflect common stock
equivalents as their effect is not material.
10
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors in
evaluating an investment in the shares of Common Stock offered hereby.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below.
INTEREST RATE SPREAD
While the Medallion Loans and Commercial Installment Loans originated by the
Company in most cases bear interest at fixed rates, the Company finances a
substantial portion of such loans by incurring indebtedness with floating
interest rates. As a result, the Company's interest costs have increased in
the past and could increase in the future during periods of rising interest
rates, which may decrease the interest rate spread and thereby adversely
affect the Company's profitability. Accordingly, the Company, like most
financial services companies, faces the risk of interest rate fluctuations.
Accordingly, if recent increases in prevailing interest rates lead to a trend
of higher interest rates, the Company's interest rate spread could decline.
Although the Company intends to continue to manage its interest rate risk
through asset and liability management, including the use of interest rate
caps, general rises in interest rates will tend to reduce the Company's
interest rate spread in the short term. In addition, the Company relies on its
counterparties to perform their obligations under such interest rate caps. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Furthermore, loans made by the Company typically may be prepaid by the
borrower upon payment of certain prepayment charges. A borrower is likely to
exercise prepayment rights at a time when the interest rate payable on the
borrower's loan is high relative to prevailing interest rates. In such a lower
interest rate environment, the Company will have difficulty re-lending such
prepaid funds at comparable rates and, therefore, to the extent that the
Company's cost of funds is not correspondingly reduced, such a decrease in
market interest rates could adversely affect the Company. See "Business --
Medallion Lending" and "-- Commercial Installment Loans."
LEVERAGE
The Company is leveraged as a result of its bank borrowings and subordinated
SBA debentures. Leverage poses certain risks for holders of Common Stock,
including possible higher volatility of both the net asset value of the
Company and the market price of the Common Stock. Since interest is paid to
the Company's creditors before any income is distributed to the Company's
stockholders, fluctuations in the interest payable to such creditors affect
the yield to holders of the Common Stock. In addition, income earned by the
Company from operations and lending the proceeds of borrowings must exceed the
interest payable with respect to such borrowings in order for there to be
income available for distribution to stockholders. Furthermore, the high rate
of distribution of investment company taxable income required to maintain the
Company's tax status as a RIC limits the funds that can be retained in the
business to cover periods of loss, provide for future growth and pay for
extraordinary items. In addition, in the event of a liquidation of the
Company, the Company's creditors would have claims on the Company's assets
superior to the claims of the holders of the Common Stock. Furthermore,
certain amounts could become payable to the SBA in connection with the
Company's repurchase, at a discount, of preferred stock from the SBA
previously issued by MFC and TCC, which resulted in a realized gain in
retained earnings in the amount of the repurchase discount. Such discount is
being accreted to paid-in capital on a straight-line basis over 60 months;
however, if MFC or TCC is liquidated or loses its SBA license during the
accretion period, the SBA would have a claim for the remaining unaccreted
amount attributable to the subsidiary liquidating or losing its license. See
"Business -- Sources of Funds -- Preferred Stock Repurchase Agreements."
11
<PAGE>
At December 31, 1996, the Company had $96.5 million outstanding under credit
facilities with bank syndicates aggregating $107.0 million and consisting of
(i) revolving lines of credit totalling $105.0 million, and (ii) a $2.0
million term loan. Subsequent to December 31, 1996, the Company increased the
amount available under its credit facilities by $21.0 million. Amounts
outstanding under the revolving lines of credit are secured by all of the
Company's assets and bear interest at the relevant agent bank's prime rate or,
at the Company's option, a rate based on LIBOR. At December 31, 1996, the
rates of interest on amounts outstanding under the revolving lines of credit
ranged from 6.50% to 8.25%. The $2.0 million term loan bears interest at the
annual rate of 7.50%. The revolving lines of credit mature between April 30,
1997 and December 1, 1997 and the $2.0 million term loan matures on July 31,
1997. See "Use of Proceeds" and "Business -- Sources of Funds."
At December 31, 1996, the Company had borrowed $29.4 million under
subordinated SBA debentures that have fixed rates of interest and
substantially all of which have a ten-year term. On April 7, 1997, the Company
repaid $1.5 million of debentures. The remaining debentures have maturities
ranging from June 1, 1998 to September 1, 2004 and rates of interest varying
from 5.00% to 9.80% per annum.
At December 31, 1996, the weighted average annual rate of interest on all of
the Company's borrowings was 7.11%. Based upon that rate, the Company must
achieve annual returns on investments of at least 4.72% to cover annual
interest payments on the bank and subordinated SBA debentures described above.
The following table illustrates the effect of leverage to a stockholder
assuming the Company's cost of funds at December 31, 1996 as described above
and various annual rates of return, net of expenses. The calculations set
forth in the table are hypothetical and actual returns may be greater or less
than those appearing below:
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed return on investments (net of
expenses)(1)................................. -10% -5% 0% 5% 10%
Corresponding net income to common
stockholders(1).............................. -49.4% -32.6% -15.8% 0.9% 17.7%
</TABLE>
- ----------
(1) Assumes (i) $189.6 million in average assets, (ii) an average cost of
funds of 7.11%, (iii) $125.8 million in average debt outstanding and (iv)
$56.5 million of average stockholders equity.
INDUSTRY AND GEOGRAPHIC CONCENTRATION
Medallion Loans collateralized by New York City taxicab medallions and
related assets comprised a substantial portion of the Company's Medallion Loan
portfolio at December 31, 1996. According to TLC data, over the past 20 years
New York City medallions have appreciated in value an average of 10.2% each
year; however, for sustained periods during that time, medallions declined in
value. Most of the Company's Commercial Installment Loans have been made to
retail dry cleaning and coin operated laundromat businesses in New York City
and a major portion of the Company's taxicab advertising revenue is derived
from New York City taxicabs. There can be no assurance that the Company will
be able to diversify geographically its operations or that an economic
downturn in New York City in general, or in the New York City taxicab, retail
dry cleaning or coin operated laundromat industries in particular, would not
have an adverse impact on the Company. In addition to expanding
geographically, the Company intends to continue to expand its financing
operations to include other industries and financial products and there can be
no assurance that management's experience with its current lending activities
will lead to success with such other industries and products. See "Business."
RELIANCE ON MANAGEMENT
The success of the Company is largely dependent upon the efforts of senior
management. The death, incapacity or loss of the services of any of such
individuals could have an adverse effect on the Company and there can be no
assurance that other qualified officers could be hired. See "Management."
GOVERNMENT REGULATION OF TOBACCO ADVERTISING
Historically, a substantial portion of the Company's taxicab rooftop
advertising revenue has been derived from tobacco products advertising. In
August 1996, President Clinton signed an executive order adopting rules
12
<PAGE>
proposed by the FDA restricting the sale and advertising of cigarette and
smokeless tobacco products. Portions of these rules, which limit tobacco
products advertising to a format consisting of black text on a white
background and require the inclusion of a statement which identifies the
product as a "nicotine-delivery device for persons over 18," apply to taxicab
rooftop advertising. Certain advertisers of tobacco products may be unwilling
to advertise in this format; accordingly, these rules, which become effective
on August 28, 1997, could have an adverse effect upon the taxicab rooftop
advertising business of the Company.
From time to time there have been legislative initiatives requiring
companies that carry tobacco product advertising to also display anti-smoking
messages. In 1994, the U.S. Court of Appeals for the Second Circuit upheld a
district court ruling which prevented the application of a New York City
ordinance requiring, in certain circumstances, that Displays carry anti-
smoking messages. There can be no assurance that there will not be further
such initiatives or that they will be nullified by judicial action.
SUBSTANTIAL INFLUENCE BY EXISTING STOCKHOLDERS
After the Offering, two officers who are also directors of the Company,
together with entities affiliated with them, will beneficially own
approximately 22% of the Common Stock outstanding (approximately 21% of the
Common Stock outstanding assuming exercise of the Underwriters' over-allotment
option in full). Because of their Common Stock ownership, these stockholders,
if they were to act together, could influence the election of all members of
the Company's Board of Directors and determine some corporate actions after
the Offering. See "Principal Stockholders."
POTENTIAL ACQUISITION RISK
As noted under "Use of Proceeds," the Company from time to time enters into
discussions with potential acquisition candidates. By their nature, corporate
acquisitions entail certain risks, including those related to undisclosed
liabilities, the entry into new markets and personnel matters. Difficulties
could also arise integrating the acquired operations or managing problems due
to sudden increases in the size of the Company's loan portfolio. In such
instances, the Company might be required to modify its operating systems and
procedures, hire additional staff, obtain and integrate new equipment and
complete other tasks appropriate for the assimilation of new and increased
business activities. There can be no assurance that the Company would be
successful, if and when necessary, in minimizing these inherent risks or in
establishing systems and procedures which will enable it to effectively
achieve its desired results in respect of any such acquisition. There also can
be no assurance that the Company will actually make significant acquisitions.
AVAILABILITY OF FUNDS
The Company has a continuing need for capital to finance its lending
activities. The Company funds its operations through credit facilities with
bank syndicates and, to a lesser degree, through subordinated SBA debentures.
Reductions in the availability of funds from banks and under SBA programs on
terms favorable to the Company could have a material adverse effect on the
Company. Because the Company distributes to its stockholders at least 90% of
its investment company taxable income, such earnings are not available to fund
loan originations.
At December 31, 1996, approximately 23.4% of the Company's $125.8 million of
outstanding indebtedness consisted of subordinated SBA debentures and the
Company intends to continue to seek to finance a portion of its business
through SBA funding programs. Although the Company is not aware of any pending
legislation to eliminate the SBA or to restrict or terminate the specific SBA
programs in which the Company participates, some members of Congress have
called for reform or elimination of various federally funded programs,
including those of the SBA. Discontinuation, elimination or a significant
reduction of or restriction on financing available to the Company from the SBA
would reduce the Company's funding alternatives.
13
<PAGE>
Even if the SBA continues to receive funding and its programs are maintained
in their current form, the financing that the SBA makes available to Small
Business Investment Companies ("SBICs") will remain limited and many SBICs
will continue to compete with the Company for the limited funds that are
available. Although the Company has obtained substantial financing under SBA
programs in the past, there can be no assurance that the Company will be able
to obtain its desired level of SBA financing in the future. See "Business--
Sources of Funds."
In addition to limits on the aggregate amount of SBA financing available,
such financing is restricted in its application. The SBA has informed the
Company that due to the SBA's concerns regarding the concentration of SBIC
loans in the taxicab industry and the availability of private capital to
finance taxicab related businesses, no additional SBA financing will be made
available to certain SBICs for such loans. As a result, the Company does not
expect to obtain additional SBA financing to originate additional Medallion
Loans. See "Business -- Sources of Funds."
The SBA also restricts the amount of secured bank debt that SBICs with
outstanding SBA financing may incur. As a result, the SBA could preclude TCC
and Edwards from increasing or refinancing their credit facilities. Combined
with limitations on SBA funding, these restrictions on secured bank debt could
restrict further growth of TCC's and Edwards' loan portfolios.
The Company intends to establish a commercial paper program at MFC as an
additional source of liquidity. In order to establish such a program, the
Company intends to merge TCC into MFC to increase MFC's capital base. The
Company intends to enter into an agreement with the SBA, maintaining MFC's
current exemption from certain SBA restrictions on the amount of third party
bank debt MFC can incur following the merger. If the Company does not enter
into such agreement, the Company currently plans to pay all outstanding SBA
subordinated debentures of TCC and thereby eliminate the SBA restrictions on
third party bank debt for MFC. There can be no assurance that the Company will
be able to enter into such an agreement with the SBA on terms acceptable to
the Company or that MFC will be able to establish a commercial paper program.
See "Business--Source of Funds."
COMPETITION
Banks, credit unions and other finance companies, some of which are SBICs,
compete with the Company in the origination of Medallion Loans and Commercial
Installment Loans. Finance subsidiaries of equipment manufacturers also
compete with the Company. Many of these competitors have greater resources
than the Company and certain competitors are subject to less restrictive
regulations than the Company. As a result, there can be no assurance that the
Company will be able to continue to identify and complete financing
transactions that will permit it to continue to compete successfully. The
Company's taxicab rooftop advertising business competes with other taxicab
rooftop advertisers as well as all segments of the out-of-home advertising
industry and other types of advertising media, including cable and network
television, radio, newspapers, magazines and direct mail marketing. Many of
these competitors have greater financial resources than the Company and offer
several forms of advertising as well as production facilities. There can be no
assurance that the Company will continue to compete with these businesses
successfully. See "Business."
CREDIT QUALITY
The Company's loans are not guaranteed by the SBA. The Company's borrower
base consists primarily of small business owners that have limited resources.
There is generally no publicly available information about such small business
owners, and the Company must rely on the diligence of its employees and agents
to obtain information in connection with the Company's credit decisions. In
addition, these small businesses do not have audited financial statements.
Typically, the success of small businesses and their ability to repay the
Company's loans are dependant upon the management talents and efforts of one
person or a small group of persons, and the death, disability or resignation
of one or more of these persons could have an adverse impact on their
business. Moreover, small businesses may be more vulnerable to economic
downturns and often need substantial additional capital to expand or compete.
Such companies may also experience substantial variations in operating
results.
14
<PAGE>
Lending to small businesses therefore involves a high degree of business and
financial risk, which can result in substantial losses and accordingly should
be considered speculative. In addition, expansion of the portfolio and
increases in the proportion of the portfolio consisting of Commercial
Installment Loans could have an adverse impact on the credit quality of the
portfolio. See "Business -- Medallion Lending" and "-- Commercial Installment
Loans."
PORTFOLIO VALUATION
Under the 1940 Act, the Company's loan portfolio must be recorded at fair
market value or "marked to market." Unlike certain lending institutions, the
Company is not permitted to establish reserves for loan losses, but adjusts
quarterly the valuation of its portfolio to reflect the Company's estimate of
the current realizable value of the loan portfolio. Since no ready market
exists for this portfolio, fair market value is subject to the good faith
determination of the Company's management and the approval of the Company's
Board of Directors. In determining such value, the directors may take into
consideration various factors such as the financial condition of the borrower,
the adequacy of the collateral and interest rates. For example, in a period of
sustained increases in market rates of interest, the Board of Directors could
decrease its valuation of the portfolio because the portfolio consists
primarily of fixed-rate loans. These fair valuation procedures are designed to
approximate the value that would have been established by market forces and
are therefore subject to uncertainties and variations from reported results.
Based on the foregoing criteria, 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 its cost basis. Upon
the completion of the Acquisitions on May 29, 1996, the Company's loan
portfolio was recorded on the balance sheet at fair market value, which
included $1.5 million of net unrealized depreciation, as estimated by the
Company in accordance with the 1940 Act and the purchase method of accounting.
At December 31, 1996, the Company's net unrealized depreciation of investments
was approximately $46,000. Based upon current market conditions and current
loan to value ratios, the Company's Board of Directors believes that its net
unrealized depreciation of investments is adequate to reflect the fair market
value of the portfolio. However, if recent increases in prevailing interest
rates lead to a trend of higher interest rates, net unrealized depreciation of
investments could increase and net increase in net assets resulting from
operations could decline. Because of the subjectivity of these estimates,
there can be no assurance that in the event of a foreclosure or in the sale of
portfolio loans, the Company would be able to recover the amounts reflected on
its balance sheet. Further, costs associated with foreclosure proceedings,
such as a 5% New York City transfer tax assessed in connection with every
medallion transfer, may reduce the Company's expected net proceeds. See
"Business -- Medallion Lending -- Loan Portfolio"; "-- Commercial Installment
Loans -- Loan Portfolio"; "-- Delinquency and Collections"; and "-- Loan Loss
Experience."
TAXICAB INDUSTRY REGULATION
Every city in which the Company originates Medallion Loans, and most other
major cities in the United States, limit the supply of taxicab medallions. In
many markets, regulation results in supply restrictions which, in turn,
support the value of medallions; consequently, actions which loosen such
restrictions and result in the issuance of additional medallions into a market
could decrease the value of medallions in that market and, therefore, the
collateral securing the Company's then outstanding Medallion Loans, if any, in
that market. The Company is unable to forecast with any degree of certainty
whether any potential increases in the supply of medallions will occur.
However, in January 1996, the New York City Council passed a law authorizing
the city to sell up to 400 additional taxicab medallions. The first 133 of
such medallions were sold in May 1996 and an additional 133 were sold in
October 1996 with the balance to be sold in either 1997 or 1998. See
"Business --Medallion Lending -- Industry Overview."
In New York City, and in other markets where the Company originates
Medallion Loans, taxicab fares are generally set by government agencies,
whereas expenses associated with operating taxicabs are largely
15
<PAGE>
unregulated. As a consequence, in the short term, the ability of taxicab
operators to recoup increases in expenses is limited. Escalating expenses,
therefore, can render taxicab operation less profitable and make it more
difficult for borrowers to service loans from the Company and could
potentially adversely affect the value of the Company's collateral.
PASS-THROUGH TAX TREATMENT
Risks Associated with Distribution Requirements and Leverage
The Company, together with the RIC Subsidiaries, has qualified as a RIC
under Subchapter M of the Code. In any year in which these companies so
qualify under Subchapter M, they generally will not be subject to federal
income tax on investment company taxable income (which includes, among other
things, dividends and interest reduced by deductible expenses) distributed to
their stockholders. To so qualify, these companies must meet certain income,
distribution and diversification requirements. See "Federal Income Tax
Considerations." However, because these companies use leverage, they are
subject to certain asset coverage ratio requirements set forth in the 1940
Act. These asset coverage requirements could, under certain circumstances,
prohibit these companies from making distributions that are necessary to
maintain Subchapter M status. In addition, the asset coverage and distribution
requirements impose significant cash flow management restrictions on the
Company and limit the Company's ability to retain earnings to cover periods of
negative income, provide for future growth and pay for extraordinary items,
such as the repayment of principal of debt incurred by the Company. See
"Federal Income Tax Considerations." Qualification as a RIC under Subchapter M
is made on an annual basis and, although Medallion Financial and the RIC
Subsidiaries are qualified as RICs, no assurance can be given that they will
each continue to qualify for such treatment. If these companies were to elect
not to be treated as RICs under Subchapter M, or were to fail to qualify
because the 1940 Act asset coverage requirements or the payment of
extraordinary items precluded distributions necessary to maintain Subchapter M
status or for any other reason, their respective incomes would become fully
taxable and a substantial reduction in the amount of income available for
distribution to Medallion Financial and its stockholders would result. See
"Federal Income Tax Considerations" and "Regulation."
The Small Business Investment Act of 1958 (the "SBIA") and regulations
thereunder ("SBA Regulations") restrict distributions by an SBIC.
Consequently, an SBIC which is also a RIC could be prohibited by SBA
Regulations from making the distributions necessary to qualify as a RIC. Under
such circumstances, in order to comply with the SBA Regulations and the RIC
distribution requirements, the applicable SBIC must request and receive a
waiver of the SBA's restrictions. While the current policy of the Office of
SBIC Operations is to grant such waivers if the SBIC makes certain offsetting
adjustments to its paid-in capital and surplus accounts, there can be no
assurance that this will continue to be the policy or that the relevant SBIC
will have adequate capital to make the required adjustments. In the absence of
a waiver, compliance with the SBA Regulations may result in loss of RIC status
and a consequent imposition of an entity-level tax.
Risks Associated with Diversification Requirements
The Company intends to continue to pursue an expansion strategy in its
taxicab rooftop advertising business and believes that there are growth
opportunities in this market. However, the asset diversification requirements
under the Code could restrict such expansion. These requirements provide, in
part, that not more than 25% of the value of a RIC's total assets may be
invested in the securities (other than U.S. Government securities or
securities of other RICs) of any one issuer or two or more issuers controlled
by such RIC which are engaged in similar or related trades or businesses.
Unlike Medallion Financial's investments in the RIC Subsidiaries, which are
not subject to this diversification test so long as these subsidiaries are
RICs, Medallion Financial's investment in Media is subject to this test. The
test is initially calculated at the time the assets are acquired. At the time
of the Acquisitions, Media represented less than 25% of Medallion Financial's
assets and the diversification test was satisfied. Subsequent growth of Media,
if internally generated, will not retrigger the test even if Media represents
in excess of 25% of Medallion Financial's assets. However, under the Code, the
test must be reapplied in the event that Medallion Financial makes a
subsequent investment in Media, lends to it or acquires another
16
<PAGE>
taxicab rooftop advertising business. If such aggregate asset value represents
more than 25% of Medallion Financial's total assets at that time, Medallion
Financial would fail the diversification test. If that were to occur, Medallion
Financial would lose its RIC status with the consequences described above.
Accordingly, the Company's maintenance of RIC status could limit the Company's
ability to expand its taxicab rooftop advertising business. It will be the
Company's policy to expand its advertising business through internally
generated growth and to only consider an acquisition if, giving effect to the
acquisition, the Code's diversification requirements would be met.
IMMEDIATE AND SUBSTANTIAL DILUTION
Immediately upon the closing of the Offering, the purchasers of the Common
Stock will experience dilution in the net tangible book value of their shares
of $7.99 per share. See "Dilution." In addition, such purchasers will incur
further dilution to the extent the Company issues options under the Medallion
Financial Corp. 1996 Stock Option Plan (the "1996 Plan") and the Medallion
Financial Corp. Non-interested Director Stock Option Plan (the "Director Plan")
and such options are exercised at a time when the exercise price is less than
the market price for the Common Stock. See "Management -- 1996 Stock Option
Plan" and "-- Non-Interested Directors Stock Option Plan."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock, which is quoted on the Nasdaq
National Market, may be subject to significant fluctuations in response to
quarterly fluctuations in the Company's revenues and financial results and
other factors. In particular, the realization of any of the risks described in
these "Risk Factors" could have a dramatic and adverse impact on such market
price. See "Underwriting."
DEPENDENCE ON CASH FLOW FROM SUBSIDIARIES
Medallion Financial is a holding company and derives most of its operating
income and cash flow from its subsidiaries. As a result, Medallion Financial
relies entirely upon distributions from its subsidiaries to generate the funds
necessary to make dividend payments and other distributions to its
stockholders. Funds are provided to Medallion Financial by its subsidiaries
through dividends and payments on intercompany indebtedness, but there can be
no assurance that such subsidiaries will be in a position to continue to make
such dividend or debt payments. See "The Company" and "Business."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation
("Certificate") and the Restated By-Laws (the "By-Laws") may have the effect of
discouraging a third party from making an acquisition proposal for the Company
and thereby inhibit a change in control of the Company in circumstances that
could give the holders of the Common Stock the opportunity to realize a premium
over the then prevailing market price of the Common Stock. Such provisions may
also adversely affect the market price for the Common Stock. In addition, the
classification of the Company's Board of Directors into three classes may have
the effect of delaying a change in control of the Company. See "Description of
Capital Stock -- Delaware Law and Certain Provisions of the Certificate of
Incorporation and the By-Laws."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market, or
the perception that such sales could occur, could adversely affect market
prices prevailing from time to time. In addition, several of the Company's
principal stockholders and entities affiliated with them hold a significant
portion of the Company's outstanding Common Stock and a decision by one or more
of these stockholders to sell their shares could adversely affect the market
price of the Common Stock. Upon completion of the Offering, the Company will
have outstanding 11,750,000 shares of Common Stock (12,275,000 if the
Underwriters' over-allotment option is
17
<PAGE>
exercised in full). Of these shares, 5,660,000 shares and the 3,500,000 shares
offered hereby (4,025,000 if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or registration
under the Securities Act except to the extent purchased by affiliates of the
Company.
Of the remaining 2,590,000 shares (the "Restricted Shares"), 2,500,000
shares were issued and sold by the Company in private transactions in reliance
upon exemptions from registration under the Securities Act and are restricted
securities under Rule 144 of the Securities Act and may not be sold without
registration except in compliance with Rule 144 or an exemption from
registration under the Securities Act. These 2,500,000 shares were sold at the
Company's inception on October 23, 1995 at their fair value at the time of
$2,000 or, after giving effect to a 12,500 for one stock split effected on May
29, 1996, less than one cent per share. The balance of the Restricted Shares,
90,000, were purchased by an affiliate in the Company's initial public
offering. All of the Restricted Shares are subject to lock-up agreements as
described below (the "Lock-up Agreements"). In addition, all of the Restricted
Shares will be eligible for sale pursuant to the recently amended Rule 144
resale restrictions, including volume limitations, on April 29, 1997.
Pursuant to Lock-up Agreements entered into by certain of the Company's
directors and officers and certain other stockholders, all 2,590,000 of the
Restricted Shares are subject to certain resale restrictions in addition to
those imposed under Rule 144. Each party to these Lock-up Agreements has
agreed not to, directly or indirectly, offer for sale, sell, contract to sell,
grant an option to purchase or otherwise dispose of any shares of the Common
Stock, except for shares escrowed by the Alvin Murstein Second Family Trust
and the Andrew Murstein Family Trust (collectively, the "Murstein Trusts") for
the benefit of FMC and gifts to family members or charitable institutions,
until May 23, 1998, without the prior written consent of Furman Selz LLC. Such
consent would not, however, affect the resale restrictions under Rule 144. In
addition, the Company and all of the Company's other officers and directors
have agreed that for a period of 90 days following the date of this
Prospectus, they will not, without the prior written consent of Furman Selz
LLC, directly or indirectly, offer for sale, sell, contract to sell, or grant
an option to purchase or otherwise dispose of any shares of the Common Stock,
except, in the case of the Company, options granted under the 1996 Plan or the
Director Plan or shares issued pursuant to the exercise of outstanding
options. See "Underwriting."
The Company has reserved a total of 750,000 shares of Common Stock for
issuance with respect to the grant of options under the 1996 Plan. Of such
reserved shares, the Company has granted options to purchase a total of
201,420 shares of Common Stock, 181,820 of which were granted at an exercise
price of $11.00 per share and 19,600 of which were granted at an exercise
price of $14.375 per share, leaving 548,580 shares of Common Stock available
for future grants under the 1996 Plan.
In addition, a total of 100,000 additional shares of Common Stock have been
reserved for issuance with respect to the grant of options under the Director
Plan. Under the Director Plan, the Company has granted stock options to
purchase a total of 16,969 shares of Common Stock at an option exercise price
of $13.75, leaving 83,031 shares of Common Stock available for future grants
under the Director Plan.
The Company filed a registration statement under the Securities Act to
register shares for issuance under the 1996 Plan. The Company expects to file
a registration statement under the Securities Act to register shares for
issuance under the Director Plan. Shares issued upon exercise of outstanding
stock options after the effective date of such registration statement
generally will be tradable without restriction under the Securities Act. See
"Shares Eligible for Future Sale."
18
<PAGE>
THE COMPANY
The Company is a specialty finance company with a leading position in the
origination and servicing of Medallion Loans. The Company also originates and
services Commercial Installment Loans. In addition, the Company operates a
taxicab rooftop advertising business. The investment objectives of the Company
are to provide a high level of current income, consistent with preservation of
capital, as well as long-term growth of net asset value. Since its inception,
the Company has paid quarterly cash dividends and intends to continue to do
so.
The Company is a closed-end, non-diversified management investment company
and has elected to be treated as a business development company under the 1940
Act. See "Regulation." In addition, it has elected to be treated for tax
purposes as a RIC under the Code. As a RIC, the Company is not subject to U.S.
federal income tax on any investment company taxable income (which includes,
among other things, dividends and interest reduced by deductible expenses)
that it distributes to its stockholders for its taxable year if at least 90%
of its investment company taxable income for that taxable year is distributed.
See "Federal Income Tax Considerations."
The Company was incorporated in Delaware in 1995 to acquire and expand the
specialty finance and taxicab rooftop advertising businesses of the Founding
Companies. For a description of the transactions pursuant to which these
businesses were acquired, see "Business -- Formation Transactions" and
"Certain Transactions." The Summary and Selected Consolidated Financial Data
of the Company included in this Prospectus for the period May 30, 1996
(commencement of operations) to December 31, 1996 are derived from the actual
consolidated financial position and results of operation of the Company for
that period as set forth in the Consolidated Financial Statements of the
Company included elsewhere in this Prospectus. The Pro Forma Summary and
Selected Financial Data of the Company included in this Prospectus for the
year ended December 31, 1996 and each quarter in the year ended December 31,
1996 are derived from the results of operations of each of the Founding
Companies, collectively, and are presented as if the IPO and the Acquisitions
had been effected as of January 1, 1996. In addition, Pro Forma Combined
Statements of Operations for the Company for the year ended December 31, 1996,
Pro Forma Combined Statements of Operations for each quarter in the year ended
December 31, 1996 and Financial Statements and Notes thereto for each of the
Founding Companies for the years ended December 31, 1994, 1995 and the period
ended May 29, 1996 as well as Historical Selected Financial Data for each of
the Founding Companies for the years ended December 31, 1992, 1993, 1994, 1995
and the period ended May 29, 1996 are included in this Prospectus.
19
<PAGE>
The following chart illustrates the organization of the Company:
[GRAPHIC APPEARS HERE]
Tri-Magna Corporation (MFC and Media). Prior to the Acquisitions, MFC and
Media were wholly-owned subsidiaries of Tri-Magna, which merged into Medallion
Financial in connection with the Company's acquisition of MFC and Media.
Management of the Company had operated Tri-Magna and its subsidiaries since
they were organized. MFC was incorporated in 1979 and is a closed-end,
management investment company registered under the 1940 Act. Before the
termination of the SBA's Specialized Small Business Investment Company
("SSBIC") program in September 1996, MFC was an SSBIC. Following the
termination of the SSBIC program, MFC was converted to an SBIC under an
agreement with the SBA entered into in February 1997 (the "MFC Conversion
Agreement").
Operating primarily in New York City, MFC is a well-established medallion
lender and has diversified its operations by developing a division that
originates Commercial Installment Loans financing small businesses outside of
the taxicab industry. As an SSBIC, MFC was restricted to financing small
business concerns owned and managed by persons deemed to be socially or
economically disadvantaged ("Disadvantaged Borrowers"). As an SBIC, MFC is
permitted to lend to any small business concerns meeting the size and
eligibility requirements established by the SBA rather than only small business
concerns that are owned and managed by Disadvantaged Borrowers, subject to
certain restrictions contained in the MFC Conversion Agreement. Accordingly,
MFC now has a significantly larger potential borrower base. Although Edwards
and TCC are also SBICs, unlike Edwards and TCC, MFC does not have SBA leverage
outstanding and it is not, therefore, subject to SBA restrictions on the amount
of third-party indebtedness it may incur. See "Regulation" and "Business--
Source of Funds" and "Risk Factor--Availability of Funds." MFC's assets
constituted 54.5% of the Company's assets at December 31, 1996.
Media, which was incorporated in 1994, provides taxicab rooftop advertising
and has initiated a plan to become a national provider of such advertising.
Media currently provides such advertising in New York City, Miami, Philadelphia
and Boston. Media constituted 0.5% of the Company's assets at December 31,
1996.
Edwards Capital Corp. Operating almost exclusively in New York City, Edwards
is a well-established medallion lender which has recently increased its volume
of originations of Commercial Installment Loans.
20
<PAGE>
Edwards is a closed-end, management investment company registered under the
1940 Act and is licensed as an SBIC by the SBA. Edwards' predecessor, Edwards
Capital Company, was organized in 1979 and had operated as a privately held
limited partnership from 1981 until the Company acquired substantially all of
its assets and assumed substantially all of its liabilities through Edwards.
Edwards' assets constituted 28.1% of the Company's assets at December 31,
1996.
Transportation Capital Corp. TCC is a well-established and geographically
diverse medallion lender with operations in Boston, Cambridge, Chicago and New
York City which has also recently increased its volume of originations of
Commercial Installment Loans. TCC is a closed-end, management investment
company registered under the 1940 Act. TCC was incorporated in 1979 and prior
to its acquisition by the Company, was a wholly-owned indirect subsidiary of
Leucadia National Corporation ("Leucadia"). Like MFC, TCC was licensed as an
SSBIC before the termination of the SSBIC program and is now licensed as an
SBIC under the terms of an agreement with the SBA entered into in February
1997 (the "TCC Conversion Agreement"). Accordingly, like MFC, TCC is now
permitted to make loans to borrowers other than Disadvantaged Borrowers,
subject to certain restrictions contained in the TCC Conversion Agreement. See
"Regulation." In the second quarter of 1997, the Company intends to merge TCC
into MFC to increase MFC's capital and simplify the Company's corporate
structure. See "Business--Sources of Funds" and "Risk Factor--Availability of
Funds." TCC's assets constituted 8.9% of the Company's assets at December 31,
1996.
The Company's executive offices are located at 205 East 42nd Street, Suite
2020, New York, New York 10017, and its telephone number is (212) 682-3300.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting
underwriting discounts and commissions and other offering expenses payable by
the Company (estimated to be approximately $4.1 million), are estimated to be
approximately $56.2 million based upon an assumed public offering price of
$17.25 per share (approximately $64.8 million if the Underwriters' over-
allotment option is exercised in full). The Company intends to use the net
proceeds to increase its loan portfolio, to fund possible acquisitions of
other finance companies and to provide working capital. The Company has
entered into discussions from time to time with potential acquisition
candidates; however, any ongoing discussions are preliminary and the Company
has not entered into any definitive agreements with respect to such
acquisitions at this time. Pending such use, the Company will temporarily
reduce the aggregate amount of indebtedness outstanding under its revolving
credit facilities by repaying indebtedness in the aggregate amount of $56.2
million, with interest rates ranging from 6.75% to 8.50% and with maturities
ranging from April 1997 to June 1997. The Company will then reborrow from time
to time amounts available under its existing revolving credit facilities for
the aforementioned purposes. The Company believes that the net proceeds will
be applied as set forth above within two months of the Offering. Pending such
application, the Company intends to invest the net proceeds of this Offering
in time deposits, income-producing securities with maturities of 15 months or
less that are issued or guaranteed by the federal government or agencies
thereof and high quality debt securities maturing in one year or less from the
time of investment. See "Business--Sources of Funds."
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
N-2 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, filed as part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock, reference is hereby made to the Registration
Statement, including the exhibits and schedules thereto. Statements contained
in this Prospectus as to the contents of any contract or any other document
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and, in accordance therewith, files reports, proxy
statements and other information with the Commission. The Registration
Statement and the exhibits and schedules thereto filed with the Commission, as
well as such reports, proxy statements and other information, may be
inspected, without charge, at the public reference facility maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Seven World
Trade Center, New York, New York 10048, and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. The Commission maintains a web site that
contains reports, proxy statements and other information regarding
registrants, including the Company, that file such information electronically
with the Commission. The address of the Commission's web site is
http://www.sec.gov. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Common Stock is listed on the
Nasdaq National Market, and such reports, proxy statements and other
information can also be inspected at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
22
<PAGE>
DILUTION
The net tangible book value of the Company at December 31, 1996 was $52.6
million, or $6.38 per share. "Net tangible book value per share" is the
tangible net worth (total tangible assets less total liabilities) of the
Company divided by the number of shares of Common Stock outstanding. Based
upon an assumed public offering price per share of $17.25 and after giving
effect to the sale of the Common Stock offered hereby (after deducting the
underwriters' discount and estimated offering expenses), the net tangible book
value of the Company at December 31, 1996 would have been $108.8 million, or
$9.26 per share, representing an immediate increase in net tangible book value
of $2.88 per share to existing stockholders and an immediate dilution of $7.99
per share to the investors purchasing the shares of Common Stock in the
Offering ("New Investors").
The following table illustrates this dilution to New Investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per share....................... $17.25
Net tangible book value per share before the Offering......... $6.38
Increase per share attributable to the sale of shares to New
Investors.................................................... 2.88
-----
Net tangible book value per share after the Offering.......... 9.26
------
Dilution to New Investors..................................... $ 7.99
======
</TABLE>
DISTRIBUTIONS AND PRICE RANGE OF COMMON STOCK
The Company has distributed and currently intends to continue to distribute
90% of its investment company taxable income on a quarterly basis to its
stockholders. On November 26, 1996, the Company paid its first quarterly cash
dividend of $0.20 per share and on January 30, 1997, the Company paid its
second quarterly cash dividend of $0.21 per share. Investment company taxable
income of the Company includes, among other things, dividends and interest
reduced by deductible expenses. See "Federal Income Tax Considerations." The
Company does not expect to have capital gains; however, to the extent that it
does, it will distribute them annually. The Company's ability to make dividend
payments is restricted by certain asset coverage requirements under the 1940
Act and is dependent upon maintenance of its status as a RIC under the Code.
See "Regulation" and "Federal Income Tax Considerations." The Company's
ability to make dividend payments is further restricted by certain financial
covenants contained in the Company's credit agreements, by SBA Regulations and
under the terms of the subordinated SBA debentures. The Company has adopted a
dividend reinvestment plan pursuant to which stockholders can have
distributions reinvested in additional shares of Common Stock. See "Dividend
Reinvestment Plan."
Substantially all of the Company's investment company taxable income is
expected to be comprised of cash dividends paid to it by the RIC Subsidiaries.
The RIC Subsidiaries have elected to be treated for tax purposes as RICs under
the Code and, therefore, must comply with the same income distribution
requirements that apply to the Company. As RICs, they are not subject to U.S.
federal income tax on any investment company taxable income that they
distribute to their stockholder, the Company, if at least 90% of their
respective investment company taxable income is distributed to the Company.
See "Federal Income Tax Considerations." The policy of each of the RIC
Subsidiaries is to make quarterly distributions to the Company of at least 90%
of its investment company taxable income. Substantially all of the RIC
Subsidiaries' net income is investment company taxable income and is derived
from interest paid on Medallion Loans and Commercial Installment Loans.
Media is not required to pay dividends to the Company. Media, unlike the RIC
Subsidiaries, does not qualify as a RIC under the Code and, therefore, is not
subject to RIC distribution requirements. Media is subject to U.S. federal
income tax as a corporation under the Code and pays taxes on corporate income
under the standard corporate tax rules. Media may retain all of its earnings
for funding the operation and expansion of its business. Any dividends that
are paid by Media to the Company, however, are expected to be distributed to
stockholders.
23
<PAGE>
The Common Stock is quoted on the Nasdaq National Market under the symbol
"TAXI." On April 7, 1997, the last reported sale price of the Common Stock was
$17.25 per share. The following table sets forth the range of high and low
sale prices of the Common Stock as reported on the Nasdaq National Market, the
net asset value per share, the premium of high sale price to net asset value
and the premium of low sale price to net asset value for the period from May
23, 1996, when public trading of the Common Stock commenced, through April 7,
1997. The Common Stock has historically traded at a premium to net asset value
per share. There can be no assurance, however, that such premium will be
maintained.
<TABLE>
<CAPTION>
PREMIUM OF PREMIUM OF
HIGH SALES LOW SALES
NET ASSET PRICE TO PRICE TO
SALE PRICE VALUE PER NET ASSET NET ASSET DIVIDEND
HIGH LOW SHARE(1) VALUE % VALUE % DECLARED
------- ------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1996
Second Quarter
(beginning May 23,
1996)................ $13 1/2 $11 3/4 $6.87 96.5 71.0 $ --
Third Quarter......... 15 10 7.06 112.5 41.6 0.20
Fourth Quarter........ 15 1/4 12 1/8 6.85 122.6 77.0 0.21
1997
First Quarter......... 20 1/2 13 7/8 -- -- -- --
Second Quarter
(through
April 7, 1997)....... 18 1/4 16 7/8 -- -- -- --
</TABLE>
- ----------
(1) Net Asset Value per share is determined as of the last day in the relevant
quarter and therefore may not reflect the net asset value per share on the
date of the high and low sale price. The net asset values are based on
outstanding shares at the end of each period. The Net Asset Value per
Share for the first and second quarters of 1997 have not been determined
by the Board of Directors as of the date hereof.
24
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
at December 31, 1996 and (ii) the capitalization of the Company at December
31, 1996, as adjusted to reflect the effects of the sale of 3,500,000 shares
of Common Stock offered hereby after deducting the underwriting discount and
offering expenses, at an assumed public offering price of $17.25 per share and
the application of the estimated net proceeds as set forth herein. See "Use of
Proceeds" and "Business -- Sources of Funds." This table should be read in
conjunction with the Selected Financial Data included in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Subordinated SBA debentures of subsidiaries......... $ 29,390 $ 29,390
Notes payable to bank(1)............................ 96,450 40,221
----------- -----------
Total long-term debt.............................. 125,840 69,611
Stockholders' equity:
Common Stock, $.01 par value; 15,000,000 shares
authorized; 8,250,000 shares issued and outstanding,
(11,750,000 issued and outstanding as adjusted)(2)... 82 117
Additional paid-in capital.......................... 56,360 112,554
Accumulated undistributed income.................... 45 45
----------- -----------
Total stockholders' equity........................ 56,487 112,716
----------- -----------
Total capitalization.................................. $ 182,327 $ 182,327
=========== ===========
</TABLE>
- ----------
(1) The Company intends to temporarily repay $56.2 million of indebtedness
with the proceeds of this Offering. See "Use of Proceeds."
(2) Excludes an aggregate of 218,389 shares issuable pursuant to stock options
outstanding at December 31, 1996 that vest over varying periods of time.
See "Shares Eligible for Future Sale -- Options."
25
<PAGE>
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 the others and Medallion Financial had no
operations. Accordingly, the following Selected Financial Data is comprised of
three 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 elsewhere in
this Prospectus.
The second section, Pro Forma Selected Financial Data, presents selected
unaudited financial data of the Company as if the Founding Companies had been
acquired and the IPO had been effected on January 1, 1996. It gives effect to
the application of the proceeds of the IPO and the cash acquired in the
Acquisitions. In addition, the pro forma information is based on available
information and certain assumptions and adjustments set forth in the Notes to
the "Pro Forma Combined Statement of Operations." The pro forma data are not
necessarily indicative of the future results of operations of the Company.
The third section 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 appearing elsewhere in this
Prospectus. 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
Prospectus. 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 Prospectus.
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, 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 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 Prospectus.
26
<PAGE>
MEDALLION FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL DATA
FOR THE PERIOD MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 30 TO --------------------------- MAY 30 TO
JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996
----------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Investment income......... $ 1,393 $ 4,263 $ 4,756 $ 10,412
Interest expense.......... 699 2,099 2,210 5,008
-------- -------- -------- --------
Net interest income....... 694 2,164 2,546 5,404
Equity in earnings
(losses) of
unconsolidated
subsidiary(1)............ 29 (23) (69) (63)
Other income.............. 57 235 119 411
Accretion of negative
goodwill................. 65 180 176 421
Operating expenses........ (266) (932) (1,033) (2,231)
Amortization of goodwill.. (35) (102) (122) (259)
-------- -------- -------- --------
Net investment income..... 544 1,522 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)............ $ 544 $ 1,548 $ 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
======== ======== ======== ========
<CAPTION>
MAY 30, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
----------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (IN
THOUSANDS)
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
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(UNAUDITED)
<S> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA
Return on assets(4)(5)......................................... 3.36%
Return on equity(5)(6)......................................... 11.29
Average yield, e.o.p.(7)....................................... 10.80
Average cost of funds, e.o.p.(8)............................... 7.11
Spread, e.o.p.(9).............................................. 3.69
Other income ratio(5)(10)...................................... 0.40
Operating expense ratio(5)(11)................................. 2.02
Medallion Loans as a percentage of investments................. 76.3
Commercial Installment Loans as a percentage of investments.... 23.7
Investments to assets.......................................... 93.1
Equity to assets............................................... 29.8
Debt to equity................................................. 223
SBA debt to total debt......................................... 23.4
</TABLE>
27
<PAGE>
MEDIA (1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MAY 30 TO MAY 30 TO
JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996
----------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (IN THOUSANDS)
Advertising revenue....... $151 $453 $491 $1,095
Cost of services.......... 45 216 238 499
---- ---- ---- ------
Gross margin.............. 106 237 253 596
Other operating expenses.. 72 272 315 659
---- ---- ---- ------
Income (losses) before
taxes.................... 34 (35) (62) (63)
Income taxes (benefit).... 5 (12) 7 --
---- ---- ---- ------
Net income (loss)......... $ 29 $(23) $(69) $ (63)
==== ==== ==== ======
</TABLE>
- ---------
(1) Equity in earnings (losses) of unconsolidated subsidiary represents the
net income (loss) for the period indicated from the Company's investment
in Media.
(2) Change in unrealized depreciation of investments represents the
(increase) decrease for the period in the unrealized depreciation applied
against the Company's investments to state them at fair value.
(3) Net increase in net assets resulting from operations is the sum of net
investment income, net realized gains or losses on investments and the
change in unrealized gains or losses on investments.
(4) Return on assets represents net increase in net assets resulting from
operations, for the 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
<PAGE>
MEDALLION FINANCIAL CORP.
PRO FORMA SELECTED FINANCIAL DATA(1)
(SEE PRO FORMA FINANCIAL STATEMENTS FOR ADJUSTMENTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------- YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996
--------- -------- ------------- ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Investment income....... $4,021 $4,091 $4,263 $4,756 $17,131
Interest expense........ 1,822 1,871 2,099 2,210 8,002
------ ------ ------ ------ -------
Net interest income..... 2,199 2,220 2,164 2,546 9,129
Equity in earnings
(losses) of
unconsolidated
subsidiary(2).......... (26) 2 (23) (69) (116)
Other income............ 164 170 235 119 688
Accretion of negative
goodwill............... 193 193 180 176 742
Operating expenses...... (921) (970) (932) (1,033) (3,856)
Amortization of
goodwill............... (105) (105) (102) (122) (434)
------ ------ ------ ------ -------
Net investment income... 1,504 1,510 1,522 1,617 6,153
Realized gain (loss) on
investments, net....... (4) 10 26 58 90
Change in unrealized
depreciation of
investments(3)......... 24 6 -- (46) (16)
------ ------ ------ ------ -------
Net increase in net
assets resulting from
operations(4).......... $1,524 $1,526 $1,548 $1,629 $ 6,227
====== ====== ====== ====== =======
Pro forma net increase
in net assets resulting
from operations per
share(4)............... $ 0.18 $ 0.18 $ 0.19 $ 0.20 $ 0.75
====== ====== ====== ====== =======
</TABLE>
MEDIA(2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------- YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1996
--------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (IN THOUSANDS)
Advertising revenue..... $396 $427 $453 $491 $1,767
Cost of services........ 175 154 216 238 783
---- ---- ---- ---- ------
Gross margin............ 221 273 237 253 984
Other operating
expenses............... 255 273 272 315 1,115
---- ---- ---- ---- ------
Income (losses) before
taxes.................. (34) -- (35) (62) (131)
Income taxes (benefit).. (8) (2) (12) 7 (15)
---- ---- ---- ---- ------
Net income (loss)....... $(26) $ 2 $(23) $(69) $ (116)
==== ==== ==== ==== ======
</TABLE>
- ---------
(1) Prepared as if the Company's IPO and the application of the proceeds of
the IPO (including the Acquisitions and the application of the cash
acquired in connection with the Acquisitions) occurred on January 1,
1996.
(2) Equity in earnings (losses) of unconsolidated subsidiary represents the
net income (loss) for the period indicated from the Company's investment
in Media.
(3) 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.
(4) 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. Per share data is
based upon 8,250,000 pro forma weighted average shares outstanding and
does not reflect common stock equivalents as their effect is not
material.
29
<PAGE>
SELECTED FINANCIAL DATA
TRI-MAGNA
(MFC, BUT NOT MEDIA, IS CONSOLIDATED WITH TRI-MAGNA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------- JANUARY 1 TO
1992 1993 1994 1995 MAY 29, 1996
----------- ------- ------- ------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Investment income......... $ 7,953 $ 8,333 $ 8,820 $ 9,803 $ 4,423
Interest expense.......... 3,509 3,661 4,756 6,034 2,517
------- ------- ------- ------- -------
Net interest income....... 4,444 4,672 4,064 3,769 1,906
Equity in earnings
(losses) of
unconsolidated
subsidiary(1)............ -- -- 18 126 (53)
Other income.............. 632 541 519 446 148
Total non-interest
expense.................. 2,754 3,097 2,700 2,615 1,816
Dividends paid on minority
interest................. 277 277 277 208 --
------- ------- ------- ------- -------
Net investment income..... 2,045 1,839 1,624 1,518 185
Realized gain (loss) on
investments, net......... (223) (115) (22) 61 --
Change in unrealized
depreciation of
investments(2)........... 125 (53) 58 (140) --
Net increase in net assets
resulting from
operations............... $ 1,947 $ 1,671 $ 1,660 $ 1,439 $ 185
======= ======= ======= ======= =======
SELECTED FINANCIAL RATIOS
AND OTHER DATA(3)
Return on average
assets(4)(5)............. 2.81% 2.12% 1.88% 1.50% 1.86%
Return on average
equity(5)(6)............. 17.67 15.29 15.29 12.97 16.93
Interest rate spread
Average yield(5)(7)..... 12.11 10.99 10.20 10.61 11.00
Average cost of
funds(5)(8)............ 7.44 6.09 7.00 8.26 7.56
Spread(9)............... 4.67 4.90 3.20 2.35 3.44
Other income to average
assets(5)................ 0.91 0.69 0.59 0.47 0.36
Non-interest expense to
average assets(5)(10).... 3.97 3.92 3.05 2.73 2.98
Weighted average assets... $69,401 $78,921 $88,414 $96,189 $99,197
Weighted average
investments(11).......... 65,673 75,790 86,496 92,433 96,479
Weighted average equity... 11,019 10,931 10,855 11,094 10,899
Weighted average debt..... 47,160 60,160 67,955 73,063 79,912
<CAPTION>
DECEMBER 31,(3)
------------------------------------- MAY 29,
1992 1993 1994 1995 1996(3)
----------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Medallion Loans as a
percentage of
investments.............. 81.0% 81.0% 72.4% 68.4% 67.9%
Commercial Installment
Loans as a percentage of
investments.............. 19.0 19.0 27.6 31.6 32.1
Investments to assets..... 93.8 96.4 96.7 96.3 97.0
Equity to assets.......... 15.0 12.9 11.8 17.4 16.7
Debt to equity(12)........ 259 315 356 464 482
SBA debt to total debt.... 23.8 19.8 17.5 -- --
<CAPTION>
DECEMBER 31,
-------------------------------------
1992 1993 1994 1995 MAY 29, 1996
----------- ------- ------- ------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Investments
Medallion Loans......... $56,460 $66,437 $65,424 $66,338 $64,934
Commercial Installment
Loans.................. 13,325 15,577 24,918 30,619 31,598
Unrealized depreciation of
investments.............. (775) (828) (770) (910) (910)
------- ------- ------- ------- -------
Investments, net of
unrealized depreciation
of investments........... 69,010 81,186 89,572 96,047 95,622
Total assets.............. 73,603 84,239 92,590 99,788 98,605
Notes payable............. 40,000 50,700 59,025 80,295 79,395
Subordinated SBA
debentures............... 12,500 12,500 12,500 -- --
Total liabilities......... 53,341 64,171 72,480 82,474 82,116
Minority interest......... 9,234 9,234 9,234 -- --
Total stockholders'
equity................... 11,027 10,834 10,876 17,314 16,489
</TABLE>
30
<PAGE>
MEDIA(1)
<TABLE>
<CAPTION>
NOVEMBER 22 TO YEAR ENDED JANUARY 1 TO
DECEMBER 31, DECEMBER 31, MAY 29,
1994 1995 1996
-------------- ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN
THOUSANDS)
Advertising revenue.................. $227 $1,542 $671
Cost of services..................... 83 484 284
---- ------ ----
Gross margin......................... 144 1,058 387
Other operating expenses............. 126 829 455
---- ------ ----
Income (losses) before taxes......... 18 229 (68)
Income taxes (benefit)............... -- 103 (15)
---- ------ ----
Net income (loss).................... $ 18 $ 126 $(53)
==== ====== ====
</TABLE>
- ---------
(1) Equity in earnings (losses) of unconsolidated subsidiary represents the
net income (loss) for the period earned by Tri-Magna from its investment
in Media.
(2) Change in unrealized depreciation of investments represents the
(increase) decrease for the period in the unrealized depreciation applied
against Tri-Magna's investments to state them at fair value.
(3) Unaudited.
(4) Return on average assets is calculated as the net increase in net assets
resulting from operations (excluding merger related costs) divided by the
weighted average assets for the period.
(5) Selected financial ratios are annualized for the period from January 1,
1996 to May 29, 1996.
(6) Return on average equity is calculated as the net increase in net assets
resulting from operations (excluding merger related costs) divided by the
weighted average equity for the period.
(7) Average yield is calculated as gross investment income for the period
divided by the weighted average investments for the period.
(8) Average cost of funds is calculated as interest expense for the period
divided by the weighted average debt for the period.
(9) Spread is calculated as the difference between average yield and average
cost of funds.
(10) Non-interest expense to average assets is calculated as the total non-
interest expense (excluding merger related costs) divided by the weighted
average 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.
31
<PAGE>
EDWARDS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------- JANUARY 1 TO
1992 1993 1994 1995 MAY 29, 1996
------- ------- ------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
DECEMBER 31,(2)
---------------------------------- MAY 29,
1992 1993 1994 1995 1996(2)
------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Medallion Loans as a
percentage of investments.... 98.3% 98.3% 98.3% 98.6% 98.7%
Commercial Installment Loans
as a percentage of
investments.................. 1.7 1.7 1.7 1.4 1.3
Investments to assets......... 96.7 97.0 97.5 97.1 96.7
Partners' capital to assets... 20.1 21.0 19.2 20.2 19.8
Debt to partners'
capital(11).................. 382 365 408 382 385
SBA debt to total debt........ 73.2 71.6 71.4 71.7 71.2
<CAPTION>
DECEMBER 31,
----------------------------------
1992 1993 1994 1995 MAY 29, 1996
------- ------- ------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Investments
Medallion Loans............. $42,301 $43,383 $42,740 $43,177 $43,921
Commercial Installment
Loans...................... 719 758 747 622 589
Unrealized depreciation of
investments.................. (50) (43) (20) (20) (20)
------- ------- ------- ------- -------
Investments, net of unrealized
depreciation of investments.. 42,970 44,098 43,467 43,779 44,490
Total assets.................. 44,430 45,476 44,574 45,084 46,001
Notes payable and demand
notes........................ 9,125 9,900 10,000 9,850 10,100
Subordinated SBA debentures... 24,950 24,950 24,950 24,950 24,950
Total liabilities............. 35,511 35,926 35,998 35,967 36,894
Total partners' capital....... 8,919 9,551 8,576 9,117 9,107
</TABLE>
32
<PAGE>
(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 the 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 the legal fees related to the 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 the sale of assets)
divided by the weighted average 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.
33
<PAGE>
TCC
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JANUARY 1 TO
------------------------------------- MAY 29,
1992 1993 1994 1995 1996
----------- ------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
DECEMBER 31,(4)
------------------------------------- MAY 29,
1992 1993 1994 1995 1996(4)
----------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Medallion Loans as a
percentage of
investments.............. 81.6% 85.4% 80.1% 81.5% 76.0%
Commercial Installment
Loans as a percentage of
investments.............. 18.4 14.6 19.9 18.5 24.0
Loans to assets........... 74.4 75.6 52.8 52.6 56.3
Equity to assets.......... 33.2 46.5 57.1 60.2 63.7
Debt to equity(12)........ 192 107 73 64 53
SBA debt to total debt.... 73.4 100.0 100.0 100.0 100.0
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994 1995 MAY 29, 1996
----------- ------- ------- ------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Investments
Medallion Loans......... $16,471 $15,433 $ 8,796 $ 7,988 $ 7,543
Commercial Installment
Loans.................. 3,721 2,641 2,185 1,808 2,381
Unrealized depreciation of
investments.............. (2,000) (1,768) (978) (642) (612)
------- ------- ------- ------- -------
Investments, net of
unrealized depreciation
of investments........... 18,192 16,306 10,003 9,154 9,312
Cash and cash
equivalents.............. 5,790 3,911 8,199 7,781 6,797
Total assets.............. 24,453 21,569 18,951 17,416 16,551
Notes payable and demand
notes.................... 4,132 -- -- -- --
SBA debentures............ 11,405 10,730 7,930 6,730 5,640
Total liabilities......... 16,348 11,541 8,129 6,937 6,008
Total stockholders'
equity................... 8,105 10,028 10,822 10,479 10,543
</TABLE>
34
<PAGE>
(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.
35
<PAGE>
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
Prospectus.
GENERAL
The Company's principal activity is the origination and servicing of
Medallion Loans and Commercial Installment Loans. The earnings of the Company
depend primarily on its level of net interest income, which is the difference
between interest earned on interest-earning assets consisting primarily of
Medallion Loans and Commercial Installment Loans, and the interest paid on
interest-bearing liabilities consisting primarily of credit facilities with
bank syndicates and subordinated debentures issued to or guaranteed by the
SBA. Net interest income is a function of the net interest rate spread, which
is the difference between the average yield earned on interest-earning assets
and the average interest rate paid on interest-bearing liabilities, as well as
the average balance of interest-earning assets as compared to interest-bearing
liabilities. Net interest income is affected by economic, regulatory and
competitive factors that influence interest rates, loan demand and the
availability of funding to finance the Company's lending activities. The
Company, like other financial institutions, is subject to interest rate risk
to the degree that its interest-earning assets reprice on a different basis
than its interest-bearing liabilities.
Trend in Loan Portfolio Yield. The Company's investment income is driven by
the principal amount of and yields on Medallion Loans and Commercial
Installment Loans. The following table illustrates the Company's weighted
average portfolio yield at the dates indicated:
<TABLE>
<CAPTION>
MAY 30, 1996 DECEMBER 31, 1996
-------------------------------- --------------------------------
WEIGHTED PERCENTAGE WEIGHTED PERCENTAGE
AVERAGE PRINCIPAL OF TOTAL AVERAGE PRINCIPAL OF TOTAL
YIELD AMOUNTS PORTFOLIO YIELD AMOUNTS PORTFOLIO
-------- ------------ ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Medallion Loan
Portfolio.............. 9.84% $116,398,395 77.9% 9.92% $134,614,899 76.3%
Commercial Installment
Loan Portfolio......... 13.42 33,045,702 22.1 13.51 41,925,289 23.7
------------ ----- ------------ -----
Total Portfolio......... 10.63 $149,444,097 100.0 10.80 $176,540,188 100.0
============ ===== ============ =====
</TABLE>
The weighted average yield e.o.p. of the Medallion Loan portfolio increased
eight basis points from 9.84% at May 30, 1996 to 9.92% at December 31, 1996.
Medallion Loans constituted 77.9% of the total portfolio of $149.4 million at
May 30, 1996 and 76.3% of the total portfolio of $176.5 million at December
31, 1996.(/1/) The yields on the Company's Medallion Loans have been in a
long-term decline. However, since December 31, 1994 the weighted average yield
of the Medallion Loan portfolio has stabilized and since the commencement of
the Company's operations following closing of the Acquisitions on May 29,
1996, slightly increased, resulting in slight increases in the weighted
average yield of the entire portfolio. The weighted average yield e.o.p. of
the entire portfolio increased 17 basis points from 10.63% at May 30, 1996 to
10.80% at December 31, 1996. The stabilization of the weighted average yield
of the Medallion Loan portfolio is partially the result of stabilization in
market interest rates for Medallion Loans, which began in July 1994. In
addition, since December 1994, the weighted average yield of the entire
portfolio has increased as older, lower interest rate loans in the portfolio
have matured or been pre-paid and newer, higher interest rate loans have
constituted a greater proportion of the portfolio. From inception of its
business in 1979 through 1996, the period between the origination and final
payment of all Medallion Loans originated by MFC has been estimated by the
Company to be 29 months. The Company believes that this time period varies to
some extent as a function of changes in interest rates because
- ----------
(/1/)e.o.p. or "end of period," indicates that a calculation is made at the
date indicated rather than for the period then ended.
36
<PAGE>
borrowers are more likely to exercise prepayment rights in a decreasing
interest rate environment when the interest rate payable on the borrower's
loan is high relative to prevailing interest rates and are less likely to
prepay in a rising interest rate environment.
The Company has also increased the average yield of the entire portfolio by
shifting the portfolio mix toward a higher percentage of Commercial
Installment Loans, which historically have had a yield of approximately 350
basis points higher than the Company's Medallion Loans and 500 to 700 basis
points higher than the prevailing prime rate of interest charged by major
commercial banks (the "Prime Rate"). The weighted average yield e.o.p. of the
Commercial Installment Loan portfolio increased nine basis points from 13.42%
at May 30, 1996 to 13.51% at December 31, 1996. In addition, the percentage of
the entire portfolio composed of Commercial Installment Loans increased from
22.1%, or $33.0 million, at May 30, 1996 to 23.7%, or $41.9 million, at
December 31, 1996. The Company intends to continue to increase the percentage
of Commercial Installment Loans in the total portfolio.
Trend in Interest Expense. The Company's interest expense is driven by the
interest rate payable on the Company's LIBOR-based short-term credit
facilities with bank syndicates and, to a lesser degree, fixed-rate, long-term
subordinated debentures issued to or guaranteed by the SBA. In recent years,
the Company has reduced its reliance on SBA financing and increased the
relative proportion of bank debt to total liabilities. SBA financing can offer
very attractive rates, but such financing is restricted in its application and
its availability is uncertain. In addition, SBA financing subjects its
recipients to limits on the amount of secured bank debt they may incur.
Accordingly, the Company plans to continue to limit its use of SBA funding and
will seek such funding only when advantageous, such as when SBA financing
rates are particularly attractive, and to fund loans that qualify under the
SBIA and SBA Regulations through subsidiaries already subject to SBA
restrictions. The Company believes that its transition to financing its
operations primarily with short-term LIBOR-based bank debt has generally
decreased its interest expense thus far, but has also increased the Company's
exposure to the risk of increases in market interest rates which the Company
attempts to mitigate with certain matching strategies. The Company also
expects that net interest income should increase because bank debt is more
available than SBA financing and will thus permit an increase in the size of
the loan portfolio. On March 26, 1997, the Federal Reserve System increased
the federal-funds interest rate by 25 basis points and, as a result, the
prevailing Prime Rate has generally increased by 25 basis points. If these
increases lead to a trend of higher interest rates, net interest rate spread
could decline at least until the Company is able to originate new loans at the
higher prevailing interest rates.
The Company's cost of funds is primarily driven by (i) the average maturity
of debt issued by the Company, (ii) the premium to LIBOR paid by the Company
on its LIBOR-based debt, and (iii) the ratio of LIBOR-based debt to SBA
financing. The Company incurs LIBOR-based debt for terms generally ranging
from 30-180 days. The Company's subordinated debentures issued to or
guaranteed by the SBA typically have terms of ten years. The Company's cost of
funds reflects fluctuations in LIBOR to a greater degree than in the past
because LIBOR-based debt has come to represent a greater proportion of the
Company's debt. The percentage of the Company's total indebtedness composed of
LIBOR-based indebtedness has increased from 70.4% at May 30, 1996 to 75.1% at
December 31, 1996. The Company measures its cost of funds as its aggregate
interest expense for all of its interest-bearing liabilities divided by the
face amount of such liabilities. The Company analyzes its cost of funds in
relation to the average of the 90- and 180-day LIBOR (the "LIBOR Benchmark").
The Company's average cost of funds e.o.p. increased from 7.09% or 162 basis
points over the LIBOR Benchmark of 5.47% at May 30, 1996 to 7.11%, or 153
basis points over the LIBOR Benchmark of 5.58% at December 31, 1996.
Taxicab Rooftop Advertising. In connection with its Medallion Loan finance
business, the Company also conducts a taxicab rooftop advertising business
through Media, which began operations in November 1994. Media's revenue is
affected by the number of taxicab rooftop advertising displays ("Displays")
that it owns and the occupancy rate and advertising rate of those Displays. At
December 31, 1996, Media had approximately 2,000 installed Displays
nationwide. On March 6, 1997 Media entered into an agreement with the
Metropolitan
37
<PAGE>
Taxi Board of Trade, Inc. (the "MTBOT") to provide advertising on over 1,800
New York City taxicabs affiliated with the MTBOT commencing on September 22,
1997. The effect of that agreement will be to increase the number of taxicabs
Media has under contract for rooftop advertising in New York City from
approximately 1,700 currently to approximately 3,500. As a result of this
agreement, Media will be the leading taxicab rooftop advertiser in the city.
The Company expects that Media will continue to expand its operations.
Although Media is a wholly-owned subsidiary of the Company, its results of
operations are not consolidated with the Company because Securities and
Exchange Commission regulations prohibit the consolidation of non-investment
companies, such as Media, with investment companies, such as the Company.
Factors Affecting Net Assets. Factors which affect the Company's net assets
include net realized gain/loss on investments and change in net unrealized
depreciation of investments. Net realized gain/loss on investments is the
difference between the proceeds derived upon foreclosure of a loan and the
cost basis of such loan. Change in net unrealized depreciation of investments
is the amount, if any, by which the Company's estimate of the fair market
value of its loan portfolio is below the cost basis of the loan portfolio.
Under the 1940 Act and the SBIA, the Company's loan portfolio must be recorded
at fair market value or "marked to market." Unlike certain lending
institutions, the Company is not permitted to establish reserves for loan
losses, but adjusts quarterly the valuation of its loan portfolio to reflect
the Company's estimate of the current realizable value of the loan portfolio.
Since no ready market exists for the Company's loans, fair market value is
subject to the good faith determination of the Company. In determining such
value, the Company takes into consideration factors such as the financial
condition of its borrowers, the adequacy of its collateral and the
relationships between current and projected market rates of interest and
portfolio rates of interest and maturities. Any change in the fair value of
portfolio loans as determined by the Company is reflected in net unrealized
depreciation of investments and affects net increase in net assets resulting
from operations but has no impact on net investment income or distributable
income. Therefore, if recent increases in prevailing interest rates lead to a
trend of higher interest rates, net increase in net assets resulting from
operations could decline. Upon the completion of the Acquisitions on May 29,
1996, the Company's loan portfolio was recorded on the balance sheet at fair
market value, which included $1.5 million of net unrealized depreciation, as
estimated by the Company in accordance with the 1940 Act and the purchase
method of accounting. From May 30, 1996 through December 31, 1996 there was a
$46,000 increase in net unrealized depreciation of investments. Application of
the "marked to market" policy to the Company's loan portfolio could result in
greater volatility in the Company's earnings than was the case for the
businesses acquired in the Acquisitions since they did not in all cases follow
that policy.
Recent Commencement of Operations. The Company commenced operations in
connection with the simultaneous closing of its initial public offering and
the Acquisitions on May 29, 1996. Prior to that date, the Company had no
results of operations and each of Medallion Financial, Tri-Magna, Edwards and
TCC had been operating independently of each other. The following discussion
under the caption "Consolidated Results of Operations" sets forth an analysis
of the Company's actual results of operations and assets and liabilities for
the period commencing May 30, 1996 and ending December 31, 1996. The
historical financial condition and results of operations of each of Tri-Magna,
Edwards and TCC for the period commencing January 1, 1996 and ending May 29,
1996 and the years ended December 31, 1994 and 1995 are then discussed. All
period percentages involving income statement accounts have been annualized
for discussion purposes.
CONSOLIDATED RESULTS OF OPERATIONS
For the Period May 30, 1996 (Commencement of Operations) to December 31,
1996.
Performance Summary. Since the Company's initial offering closed on May 29,
1996, investment income has been positively impacted by the strong growth of
the entire loan portfolio which was primarily driven by an increase in the
percentage of the portfolio composed of higher yielding Commercial Installment
Loans. Interest expense for the period reflected an increase in the LIBOR
Benchmark e.o.p. of 11 basis points and growth in net borrowings, which was
offset by a 9 basis point decrease in the spread over the LIBOR Benchmark
charged by the Company's banks. The positive trend in the spread between the
average yield on the entire portfolio and the average of costs of funds
contributed to the $3.7 million of net investment income earned during the
period.
38
<PAGE>
Investment Income. Investment income for the period was $10.4 million. The
Company's investment income reflects the positive impact of portfolio growth
during the period. Total portfolio growth was $27.1 million or 18.1% from
$149.4 million at May 30, 1996 to $176.5 million at December 31, 1996.
Investment income also reflects the positive impact of increases in the
average yield of the entire portfolio. Average yield e.o.p. of the entire
portfolio increased 17 basis points from 10.63% at May 30, 1996 to 10.80% at
December 31, 1996. The increase was caused by (i) a slight increase in the
average yield on Commercial Installment Loans and a shift in the portfolio mix
toward a higher percentage of Commercial Installment Loans which historically
have been originated at a yield of approximately 350 basis points higher than
Medallion Loans and 500 to 700 basis points higher than the prevailing Prime
Rate, and (ii) a slight increase in the average yield on Medallion Loans
caused by stabilization, after a sustained period of declines, in market rates
for Medallion Loans. The average yield e.o.p. of the Medallion Loan portfolio
increased eight basis points from 9.84% at May 30, 1996 to 9.92% at December
31, 1996 and the average yield of the Commercial Installment Loan portfolio
increased nine basis points from 13.42% at May 30, 1996 to 13.51% at December
31, 1996. The percentage of the portfolio composed of Commercial Installment
Loans increased from 22.1% at May 30, 1996 to 23.7% at December 31, 1996.
Interest Expense. The Company's interest expense was $5.0 million for the
period. The Company's average cost of funds e.o.p. increased from 7.09% or 162
basis points over the LIBOR Benchmark of 5.47% at May 30, 1996 to 7.11% or 153
basis points over the LIBOR Benchmark of 5.58% at December 31, 1996. The
increase in the average cost of funds e.o.p. was caused by a 11 basis point
increase in the LIBOR Benchmark, which was offset by a 9 basis point decrease
in the spread over the LIBOR Benchmark charged by the Company's banks. The
Company's net borrowings increased $4.8 million or 4.0% from $121.0 million at
May 30, 1996 to $125.8 million at December 31, 1996. Interest expense also
rose due to increased commitment fees paid to banks to establish larger credit
facilities. The increased borrowings were incurred to fund portfolio growth
and all related to LIBOR-based indebtedness which increased as a percentage of
the Company's total indebtedness from 70.4% at May 30, 1996 to 75.1% at
December 31, 1996.
Net Interest Income. Net interest income was $5.4 million for the period.
Net interest income reflects the positive impact of a 15 basis point increase
in spread e.o.p. which increased from 3.54% at May 30, 1996 to 3.69% at
December 31, 1996. The increase reflects a 17 basis point increase from May
30, 1996 to December 31, 1996 in the average yield e.o.p. of the entire
portfolio offset by a 2 basis point increase in the average cost of funds
e.o.p. from May 30, 1996 to December 31, 1996.
Equity in Earnings (Losses) of Unconsolidated Subsidiary. For the period,
Media generated advertising revenue of $1.1 million and incurred Display
rental costs of approximately $500,000, resulting in a gross margin of
approximately $600,000 or 54.4% of advertising revenue. The number of Displays
owned by Media increased from 1,670 at May 30, 1996 to approximately 2,000 at
December 31, 1996 as a result of an acquisition in July 1996. For the period,
operating expenses were $659,000 and Media generated a net loss of $63,000
which is recorded as equity in earnings or losses of unconsolidated subsidiary
on the Company's statement of operations. The loss primarily resulted from
reduced Display occupancy rates and the Company's decision to maintain
goodwill with the taxicab owners from whom it leases taxicab rooftop space by
making lease payments to such owners for unoccupied Displays that are not
otherwise required. Display occupancy declined from 73% at May 30, 1996 to 64%
at December 31, 1996. The loss also resulted from the write-off of accounts
receivable in the amount of $64,000 due under an advertising contract with a
client which filed for bankruptcy protection and costs associated with
expansion into new markets.
Other Income. The Company derived $411,000 in other income, or 0.23% of
investments for the period. Other income was primarily derived from late
charges, prepayment fees and miscellaneous income. Prepayment fees are heavily
influenced by the level and volatility of interest rates and competition.
Non-Interest Expenses. The Company had non-interest expenses of $2.2 million
for the period. Approximately $780,000, or 35.4% of non-interest expenses, was
related to salaries and benefits, $410,000, or 18.6%, consisted of
professional fees, $162,000, or 7.4% consisted of investment advisory fees.
The operating
39
<PAGE>
expense ratio was 2.02% from May 30, 1996 to December 31, 1996, on an
annualized basis, reflecting consolidation of the Company's operations,
efficiencies of scale and elimination of redundant services, facilities and
functions. The Company believes that operating expenses as a percentage of
average assets will decline as the loan portfolio increases due to economies
of scale.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill of $259,000 for the period relates to $6.5 million of
goodwill generated in the acquisitions of Edwards and TCC. Goodwill is the
amount by which the cost of acquired businesses exceeds the fair value of the
net assets acquired. Goodwill is being amortized on a straight-line basis over
15 years. Negative goodwill is the excess of fair market value of net assets
of an acquired business over the cost basis of such business. Negative
goodwill of $2.9 million was generated in the acquisition of Tri-Magna and is
being amortized on a straight-line basis over four years.
Net Realized Gain/Loss on Investments. The Company realized a net gain on
investments of $84,000 during the period. The gain was the result of the sale
of securities underlying a warrant for a gain of $157,000 and recoveries in
the amount of $32,000 on certain radio loans previously written off, offset by
the write off of certain equipment loans in the amount of $105,000.
Net Investment Income. Net investment income earned during the period was
$3.7 million reflecting the positive impact of portfolio growth and slightly
improved portfolio yield.
Net Increase in Net Assets Resulting from Operations. Net increase in net
assets resulting from operations was $3.7 million for the period and reflects
portfolio growth and favorable spread e.o.p. Return on assets and return on
equity from May 30, 1996 to December 31, 1996, on an annualized basis, were
3.36% and 11.29%, respectively, for the period ending December 31, 1996.
TRI-MAGNA RESULTS OF OPERATIONS
For the Period from January 1, 1996 to May 29, 1996.
Net Interest Income. Net interest income increased during the period due to
the higher average yield of the entire portfolio. The increased yield was
primarily driven by increases in the yields of the Medallion Loan and
Commercial Installment Loan portfolios during the period and an increase in
the proportion of the portfolio composed of Commercial Installment Loans.
Interest expense remained even during the period.
Equity in Earnings (Losses) of Unconsolidated Subsidiary. During the period,
Media generated a net loss of $53,000 which is recorded as equity in earnings
or losses of unconsolidated subsidiary on Tri-Magna's statement of operations.
The loss was in part due to an increase in expenses associated with the
opening of a maintenance facility and Media's expansion into other markets.
Other Income. Other income decreased during the period primarily due to
decreased income from the receipt of prepayment fees and late charges.
Non-interest Expense. Tri-Magna's non-interest expense increased during the
period primarily as a result of direct costs incurred in connection with the
merger of Tri-Magna and Medallion Financial.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. During the period, Tri-Magna did not incur any
realized gains or losses on investments and there was no change in net
unrealized deprecation of investments.
Comparison of the Years Ended December 31, 1994 and December 31, 1995
Net Interest Income. Net interest income decreased $295,000 or 7.3% from
$4.1 million for the year ended December 31, 1994 to $3.8 million for the year
ended December 31, 1995. The interest rate spread of 3.20% for the year ended
December 31, 1994 decreased 85 basis points to 2.35% for the year ended
December 31, 1995.
40
<PAGE>
This decrease reflected a 126 basis point increase in the average cost of
funds offset by a 41 basis point increase in the average yield of the
portfolio during the period. Tri-Magna's investment income increased $983,000
or 11.1% from $8.8 million for the year ended December 31, 1994 to $9.8
million for the year ended December 31, 1995. The increase in investment
income was the result of portfolio growth of $5.9 million or 6.8% from an
average of $86.5 million for the year ended December 31, 1994 to an average of
$92.4 million for the year ended December 31, 1995. The increase in investment
income was also the result of an increase in the average yield of the
portfolio which increased 41 basis points from 10.20% for the year ended
December 31, 1994 to 10.61% for the year ended December 31, 1995. Commercial
Installment Loans represented approximately 27.6% of the gross loan portfolio
at December 31, 1994 and 31.6% at December 31, 1995.
The increase in average yield was caused by both (i) a shift in the
portfolio mix toward a higher percentage of Commercial Installment Loans which
historically have had a yield of approximately 350 basis points higher than
Medallion Loans and (ii) an increase in the average interest rate on Medallion
Loans.
Tri-Magna's interest expense increased $1.2 million, or 26.9%, from $4.8
million for the year ended December 31, 1994 to $6.0 million for the year
ended December 31, 1995. The increase was in part the result of increased
average net borrowings of $5.1 million or 7.5% from $68.0 million for the year
ended December 31, 1994 to $73.1 million for the year ended December 31, 1995.
The increased borrowings were incurred to fund portfolio growth. Interest
expense also increased as the result of a 124 basis point increase in the
average cost of funds during the period from an average of 7.00% for the year
ended December 31, 1994 to 8.26% for the year ended December 31, 1995. Tri-
Magna's 126 basis point increase in average cost of funds was driven by a 118
basis point increase in the LIBOR Benchmark and an 8 basis point increase in
the difference between cost of funds and the LIBOR Benchmark. At December 31,
1994 and 1995, short-term LIBOR-based debt constituted 78.7% and 91.0%,
respectively, of total liabilities. Tri-Magna negotiated an increase in the
amount available under its credit facilities from $65.0 million to $85.0
million to repay $12.5 million in subordinated SBA debentures, repurchase
preferred stock from the SBA and fund portfolio growth.
Equity in Earnings of Unconsolidated Subsidiary. For the year ended December
31, 1995, Media generated advertising revenue of $1.5 million and incurred
Display rental costs of $484,000, resulting in a gross margin of $1.0 million
or 68.6% of advertising revenue. For the year ended December 31, 1995, Media
generated $126,000 in net income which is recorded as equity in earnings of
unconsolidated subsidiary on Tri-Magna's statement of operations and
represented 8.3% of Tri-Magna's net investment income. Media began active
operations in November 1994; accordingly, there were no corresponding
operating data for the year ended December 31, 1994. At December 31, 1995,
Media had 1,670 Displays.
Other Income. Tri-Magna's other income decreased $73,000 or 14.1% from
$519,000 for the year ended December 31, 1994 to $446,000 for the year ended
December 31, 1995. This decrease was primarily caused by the receipt of fewer
prepayment fees due to an increase in market rates for Medallion Loans
resulting in decreased refinancing activity.
Non-interest Expense. Tri-Magna's non-interest expense decreased $85,000 or
3.1% from $2.7 million for the year ended December 31, 1994 to $2.6 million
for the year ended December 31, 1995. The decrease was primarily due to
reduction in profit sharing payments.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. For the year ended December 31, 1995, Tri-Magna
had a realized gain on investments of $61,000 as compared to a $22,000 loss on
investments for the year ended December 31, 1994. Tri-Magna's change in net
unrealized depreciation of investments increased $198,000 or 341.4% from
$58,000 at December 31, 1994 to negative $140,000 at September 30, 1995 due to
the potential loan loss exposure associated with the increased proportion of
Commercial Installment Loans in the loan portfolio and overall portfolio
growth.
41
<PAGE>
EDWARDS HISTORICAL RESULTS OF OPERATIONS
For the Period from January 1, 1996 to May 29, 1996.
Net Interest Income. Net interest income increased slightly over the period
because of portfolio growth of $711,000 or 2.0%. This increase in interest
income was partially offset by an increase in Edwards' interest expense caused
by an increase in bank debt of $250,000 or 2.5%.
Other Income. Other income decreased during the period primarily due to a
reduction in the receipt of prepayment fees and late charges.
Non-interest Expense. Edwards' non-interest expense increased during the
period as a result of an increase in professional fees related to the sale of
Edward's assets to Medallion Financial.
Net Realized Gain/Loss on Investments. During the period, Edwards did not
incur any realized gains or losses on investments because Edwards' portfolio
consists almost entirely of Medallion Loans.
Comparison of the Years Ended December 31, 1994 and December 31, 1995
Net Interest Income. Net interest income remained essentially unchanged at
$1.6 million for the years ended December 31, 1995 and December 31, 1994. The
interest rate spread of 2.09% for the year ended December 31, 1994 decreased
13 basis points to 1.96% for the year ended December 31, 1995. The decrease
reflected a 14 basis point decrease in the average yield of the loan portfolio
and a 1 basis point decrease in the average cost of funds during the period.
Edwards' investment income decreased $17,000 or 0.4% to $4.3 million for the
year ended December 31, 1995. The decrease in investment income was the result
of the decrease in the average yield of the portfolio which decreased 14 basis
points from 10.06% for the year ended December 31, 1994 to 9.92% for the year
ended December 31, 1995. The decrease in investment income was offset by
portfolio growth of $434,000 or 1.0% from an average of $43.1 million for the
year ended December 31, 1994 to an average of $43.5 million for the year ended
December 31, 1995.
Edwards' interest expense decreased $17,000 or 0.6% to $2.7 million for the
year ended December 31, 1995. The decrease in interest expense reflected a 1
basis point decrease in the average cost of funds during the period from an
average of 7.97% for the year ended December 31, 1994 to 7.96% for the year
ended December 31, 1995. The decrease was a result of the refinancings in June
1994 of $4.6 million and September 1994 of $5.1 million of subordinated SBA
debentures at a lower interest rate and a decrease in average net borrowing of
$155,000 or 0.5% from $34.7 million for the year ended December 31, 1994 to
$34.5 million for the year ended December 31, 1995. The foregoing were offset
by an increase in interest rates on bank debt. Edwards' 1 basis point decrease
in average cost of funds was driven by a 118 basis point increase in the LIBOR
Benchmark and a 119 basis point decrease in the difference between cost of
funds and the LIBOR Benchmark. The decrease in the difference between cost of
funds and the LIBOR Benchmark was primarily the result of a reduction in the
weighted average interest rate paid on subordinated SBA debentures caused by
the refinancing of $9.7 million of such debentures. Subordinated SBA
debentures represented 69.4% of total liabilities at December 31, 1994 and
remained almost unchanged at December 31, 1995. The balance of total
liabilities is represented primarily by LIBOR-based credit facilities with
banks.
Other Income. Edwards' other income decreased $177,000 or 28.5% from
$620,000 for the year ended December 31, 1994 to $443,000 for the year ended
December 31, 1995. This decrease was primarily the result of decreased income
from servicing Medallion Loan participations. Gross loans serviced by Edwards
for third parties declined by $4.5 million from $44.3 million at December 31,
1994 to $39.8 million at December 31, 1995. Edwards typically receives
servicing fees which average 51 basis points of the principal amount of each
loan participation that it services. Other income also decreased because of a
reduction in the receipt of prepayment fees and late charges.
Non-interest Expense. Edwards' non-interest expense decreased $223,000 or
20.1% from $1.1 million for the year ended December 31, 1994 to $885,000 for
the year ended December 31, 1995. The reduction was primarily related to
decreased professional fees which were higher in 1994 primarily because of
costs associated with refinancing subordinated debentures.
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<PAGE>
Net Realized Gain/Loss on Investments. During the year ended December 31,
1994 and 1995 Edwards did not incur any realized gains or losses on
investments because Edwards' portfolio consists almost entirely of Medallion
Loans.
Extraordinary Item. Edwards incurred a prepayment premium of $526,000 in
connection with its refinancing of $4.6 million and $5.1 million of
subordinated SBA debentures on June 29, 1994 and September 28, 1994,
respectively.
TCC HISTORICAL RESULTS OF OPERATIONS
For the Period from January 1, 1996 to May 29, 1996
Net Interest Income. Net interest income increased during the period
primarily because of portfolio growth of $128,000 or 1.3%. Interest expense
decreased marginally during the period as a result of a decrease in the
principal amount of debentures payable to the SBA in the amount of $1,090,000.
The SBA debentures repaid by TCC had higher interest rates than the debentures
remaining outstanding.
Non-interest Expense. TCC's non-interest expense decreased slightly during
the period because of a reduction in operating overhead instituted in
anticipation of the acquisition by the Company.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. TCC realized a gain on investments of $5,000. Net
unrealized depreciation of investments decreased $30,000. These gains were a
result of an overall improvement in investment collateral value.
Comparison of the Years Ended December 31, 1994 and December 31, 1995
Net Interest Income. Net interest income decreased $122,000 or 8.1% from
$1.5 million for the year ended December 31, 1994 to $1.4 million for the year
ended December 31, 1995. The decrease was primarily due to loan portfolio
contraction in the amount of $1.2 million undertaken in connection with a
change in investment policy instituted by Leucadia in 1993. Under this change
in policy TCC substantially reduced Medallion Loan originations in New York
City where competition had decreased yields, and emphasized originations in
Boston, Cambridge, Chicago and Newark where yields were higher. The interest
rate spread of 6.26% for the year ended December 31, 1994 increased 118 basis
points to 7.44% for the year ended December 31, 1995. This spread increase
reflected primarily a reduction in higher interest rate subordinated SBA
debentures, resulting in a 146 basis point decrease in the average cost of
funds for the period offset by a 28 basis point decrease in the average yield
of the portfolio. TCC finances its portfolio with fixed-rate subordinated SBA
debentures rather than LIBOR-based bank debt. TCC's investment income
decreased $381,000 or 17.2% from $2.2 million for the year ended December 31,
1994 to $1.8 million for the year ended December 31, 1995. The decrease in
investment income was the result of a $591,000 or 29.5% decrease in interest
earned on the loan portfolio which contracted $4.0 million or 27.8% from an
average of $14.4 million for the year ended December 31, 1994 to an average of
$10.4 million for the year ended December 31, 1995. In addition, the average
yield of the portfolio decreased 28 basis points from 13.86% for the year
ended December 31, 1994 to 13.58% for the year ended December 31, 1995. The
decrease in interest earned on the loan portfolio was offset by a $210,000 or
97.7% increase in interest income earned on treasury bills from $215,000 at
December 31, 1994 to $425,000 at December 31, 1995 attributable to an increase
in the weighted average interest rate on treasury bills which increased 156
basis points from 3.96% at December 31, 1994 to 5.52% at December 31, 1995.
TCC's interest expense decreased $259,000 or 36.5% from $709,000 for the
year ended December 31, 1994 to $450,000 for the year ended December 31, 1995.
The decrease was in part the result of a decrease in average net borrowing of
$2.0 million or 21.4% from $9.3 million for the year ended December 31, 1994
to $7.3 million for the year ended December 31, 1995. This decrease was caused
by the repayment of subordinated SBA debentures in the amount of $1.2 million.
TCC repaid subordinated SBA debentures with higher average interest rates than
the debentures remaining outstanding; accordingly, interest expense also
decreased as the result of a 146 basis point decrease in the average cost of
subordinated SBA debentures outstanding from an average of 7.60% at December
31, 1994 to 6.14% at December 31, 1995.
43
<PAGE>
Non-interest Expense. TCC's non-interest expense increased $49,000 or 6.9%
from $711,000 for the year ended December 31, 1994 to $760,000 for the year
ended December 31, 1995. The increase was primarily due to a $124,000 increase
in pension expense. In 1994, pension expense was reduced due to the merger of
the defined benefit pension plans of TCC and Leucadia. The increase in pension
expense was offset by a $75,000 reduction in operating expenses relating to a
reduction in rent and salaries associated with the contraction of the loan
portfolio.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. TCC realized a loss on investments of $50,000 for
the year ended December 31, 1995, and a $144,000 loss on investments for the
year ended December 31, 1994. TCC's change in unrealized depreciation of
investments decreased $455,000 or 57.6% from $790,000 at December 31, 1994 to
$335,000 at December 31, 1995 due to the reduction of potential loan loss
exposure corresponding to the contraction of the loan portfolio.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity. The Company, like other financial institutions,
is subject to interest rate risk to the extent its interest-earning assets
(consisting of Medallion Loans and Commercial Installment Loans) reprice on a
different basis over time in comparison to its interest-bearing liabilities
(consisting primarily of credit facilities with bank syndicates and
subordinated SBA debentures).
A relative measure of interest rate risk can be derived from the Company's
interest rate sensitivity gap. The interest rate sensitivity gap represents
the difference between interest-earning assets and interest-bearing
liabilities which mature and/or reprice within specified intervals of time.
The gap is considered to be positive when repriceable assets exceed
repriceable liabilities and negative when the inverse situation exists. A
relative measure of interest rate sensitivity is provided by the cumulative
difference between interest sensitive assets and interest sensitive
liabilities for a given time interval expressed as a percentage of total
assets.
The following schedule of principal payments sets forth at December 31, 1996
the amount of interest-earning assets and interest-bearing liabilities
maturing or repricing within the time periods indicated. The principal amount
of Medallion Loans and Commercial Installment Loans are assigned to the time
frames in which such principal amounts are contractually obligated to be paid.
The Company has not reflected an assumed annual prepayment rate for Medallion
Loans or Commercial Installment Loans in this table.
The Company's interest rate sensitive assets were $178.2 million and
interest rate sensitive liabilities were $125.8 million at December 31, 1996.
The one year cumulative interest rate gap was negative $75.9 million, or 42.6%
of interest rate sensitive assets.
SCHEDULE OF PRINCIPAL PAYMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
MORE THAN 1 MORE THAN 2 MORE THAN 3 MORE THAN 5
LESS THAN AND LESS THAN AND LESS THAN AND LESS THAN AND LESS THAN
1 YEAR 2 YEARS 3 YEARS 5 YEARS 6 YEARS THEREAFTER TOTAL
--------- ------------- ------------- ------------- ------------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Medallion Loans and
Commercial Installment
Loans................. $ 20,406 $ 19,627 $ 32,353 $25,773 $27,692 $50,689 $176,540
Cash and cash
equivalents........... 1,665 -- -- -- -- -- 1,665
-------- -------- -------- ------- ------- ------- --------
Total.................. 22,071 19,627 32,353 25,773 27,692 50,689 178,205
-------- -------- -------- ------- ------- ------- ========
Liabilities
Revolving line of
credit................ 94,450 -- -- -- -- -- 94,450
Term loan.............. 2,000 -- -- -- -- -- 2,000
Subordinated SBA
debentures............ 1,500 3,000 -- -- 15,190 9,700 29,390
-------- -------- -------- ------- ------- ------- --------
Total.................. 97,950 3,000 -- -- 15,190 9,700 $125,840
-------- -------- -------- ------- ------- ------- ========
Interest rate gap....... $(75,879) $ 16,627 $ 32,353 $25,773 $12,502 $40,989
======== ======== ======== ======= ======= =======
Cumulative interest rate
gap.................... $(75,879) $(59,252) $(26,899) $(1,126) $11,376 $52,365
</TABLE>
44
<PAGE>
Having interest-bearing liabilities that mature or reprice more frequently
on average than assets may be beneficial in times of declining interest rates,
although such an asset/liability structure may result in declining net
earnings during periods of rising interest rates. Conversely, having interest-
earning assets that mature or reprice more frequently on average than
liabilities may be beneficial in times of rising interest rates, although this
asset/liability structure may result in declining net earnings during periods
of falling interest rates. The mismatch between maturities and interest rate
sensitivities of the Company's interest-earning assets and interest-bearing
liabilities results in interest rate risk. Abrupt increases in market rates of
interest may have an adverse impact on the Company's earnings. Accordingly, if
recent increases in prevailing interest rates lead to a trend of higher
interest rates, net interest rate spread could decline.
The effect of changes in market rates of interest is mitigated by regular
turnover of the portfolio. From inception of its business in 1979 through
1996, the period between the origination and final payments of all Medallion
Loans originated by MFC is estimated by the Company to have been 29 months on
a weighted average basis. Accordingly, the Company anticipates that
approximately 40% of the portfolio will mature or be prepaid each year. The
Company believes that the average life of its loan portfolio varies to some
extent as a function of changes in interest rates because borrowers are more
likely to exercise prepayment rights in a decreasing interest rate environment
when the interest rate payable on the borrower's loan is high relative to
prevailing interest rates and are less likely to prepay in a rising interest
rate environment.
The Company seeks to manage the exposure of the balance of the portfolio to
increases in market interest rates by entering into interest rate cap
agreements to hedge a portion of its variable-rate debt against increases in
interest rates and by incurring fixed-rate debt consisting primarily of
subordinated SBA debentures. The Company has entered into interest rate cap
agreements to limit the Company's interest rate exposure to 7.0% on $20.0
million of its LIBOR-based debt through November 16, 1997. At December 31,
1996, these caps hedged 21.2% of the Company's LIBOR-based indebtedness. In
addition, the Company manages its exposure to increases in market rates of
interest by incurring fixed rate indebtedness, such as subordinated SBA
debentures. The Company currently has outstanding subordinated SBA debentures
in the principal amount of $27.9 million with a weighted average rate of
interest of 7.30%. At December 31, 1996, subordinated SBA debentures, then
outstanding in the amount of $29.4 million, constituted 23.4% of the Company's
indebtedness.
The Company will seek to manage interest rate risk by evaluating and
purchasing, if appropriate, additional derivatives, originating adjustable-
rate loans, incurring fixed-rate indebtedness and revising, if appropriate,
its overall level of asset and liability matching. Nevertheless, the Company
accepts varying degrees of interest rate risk depending on market conditions
and believes that the resulting asset/liability interest rate mismatch results
in opportunities for higher net interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity are credit facilities with bank
syndicates, fixed rate, long-term subordinated SBA debentures that are issued
to or guaranteed by the SBA and loan amortization and prepayments. As a RIC,
the Company distributes at least 90% of its investment company taxable income;
consequently, the Company primarily relies upon external sources of funds to
finance growth. At December 31, 1996, 76.6% of the Company's $125.8 million of
debt consisted of bank debt, substantially all of which was at variable
effective rates of interest with a weighted average rate of 7.03% or 122 basis
points below the Prime Rate and 23.4% consisted of subordinated SBA debentures
with fixed rates of interest with a weighted average rate of 7.38%. The
Company is eligible to seek additional SBA funding but plans to continue to
limit its use of SBA funding and will seek such funding only when
advantageous, such as when SBA financing rates are particularly attractive, or
to fund loans that qualify under SBA regulations through Edwards and TCC which
are already subject to SBA restrictions. In the event that the Company seeks
SBA funding, no assurance can be given that such funding will be obtained. In
addition to possible additional SBA funding, an additional $10.5 million of
debt was available at December 31, 1996 at variable effective rates of
interest averaging below the Prime Rate under the Company's $105 million bank
credit facilities. The Company has observed a practice of minimizing credit
facility fees associated with the unused component of credit facilities by
keeping the unused component as small as possible and periodically increasing
the amounts available under such credit facilities only when necessary to fund
portfolio growth.
45
<PAGE>
The following table illustrates the Company's and each of the subsidiaries'
sources of available funds and amounts outstanding under credit facilities at
December 31, 1996. In addition to the following amounts, $56.2 million is
expected to be available to the Company from the proceeds of the Offering. See
"Use of Proceeds."
<TABLE>
<CAPTION>
MEDALLION
FINANCIAL MFC EDWARDS TCC TOTAL
--------- ------- --------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and cash equiva-
lents.................. $ 102 $ 676 $ 207 $ 680 $ 1,665
Revolving lines of cred-
it..................... 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% 7.06% 6.81% 7.03%
Maturity............ 12/97 6/97 4/97-7/97 4/97-12/97
Term loans.............. -- 2,000 2,000
Interest rate....... -- 7.50% 7.50%
Maturity............ -- 7/97 7/97
SBA debentures.......... 23,750(3) 5,640 29,390(3)
Average interest
rate............... 7.95% 5.00% 7.38%
Maturity............ 4/97-9/04 6/02 4/97-9/04
Total cash and remaining
amounts available under
credit facilities...... 652 8,126 2,757 680 12,215(1)(2)
Total debt outstanding.. $4,450 $79,550 $ 36,200 $5,640 $ 125,840
</TABLE>
- ----------
(1) On February 10, 1997, Medallion Financial increased the amount available
under its line of credit by $1.0 million.
(2) On January 28, 1997, MFC increased the amount available under its
revolving credit facility by $20.0 million.
(3) On April 1, 1997, $1.5 million of such debentures matured and was paid on
April 7, 1997.
Loan amortization and prepayments also provide a source of funding for the
Company. Prepayments on loans are influenced significantly by general interest
rates, Medallion Loan market rates, economic conditions and competition.
Medallion Loan prepayments have slowed since early 1994, initially because of
increases, and then stabilization, in the level of interest rates and more
recently because of an increase in the percentage of the Company's Medallion
Loans which are refinanced with the Company rather than through other sources
of financing.
Media funds its operations through internal cash flow and intercompany debt.
Media is not a RIC and, therefore, is able to retain earnings to finance
growth.
The Company believes that the net proceeds of this Offering, anticipated
borrowings under its bank credit facilities and cash flow from operations
(after distributions to stockholders) will be adequate to fund the continuing
operations of the Company's loan portfolio and advertising business for the
foreseeable future. The Company is also exploring the establishment of a
commercial paper program to reduce its cost of funds. The issuance of
commercial paper will be contingent upon the Company obtaining an investment
grade rating, among other conditions, and no assurance can be given that the
Company will be able to establish such a program.
46
<PAGE>
BUSINESS
GENERAL
The Company operates a specialty finance business and its principal focus is
the origination and servicing of Medallion Loans. The Company has been engaged
in taxicab medallion lending since 1979 and has developed a leading position
in the industry. The Company also originates and services Commercial
Installment Loans primarily secured by retail dry cleaning and coin operated
laundromat equipment. It entered into this business in 1987 in order to
diversify its lending activity. The Company has chosen to concentrate these
operations on originating loans secured by retail dry cleaning and coin
operated laundromat equipment because of certain characteristics similar to
medallion lending such as historically low repossession rates, an active
market for repossessed equipment and significant equity investments by
borrowers, that make these industries attractive candidates for profitable
lending. The Company originates and services Commercial Installment Loans to
other targeted industries and intends to use the expertise it has developed in
its areas of concentration to further expand the range of financial products
it offers as well as the industries and geographic areas it services.
As an adjunct to its finance business, the Company also operates a taxicab
rooftop advertising business. The Company believes its taxicab rooftop
advertising business is one of the largest providers in the nation of this
segment of the out-of-home advertising industry. At December 31, 1996, the
Company had approximately 2,000 installed taxicab rooftop advertising displays
(the "Displays") nationwide. The Company sells advertising space to
advertising agencies and companies promoting products. Currently, the Company
provides such advertising in New York City, Miami, Philadelphia and Boston and
intends to expand to other major metropolitan areas.
BUSINESS STRATEGY
Prior to the Company's initial public offering and the Acquisitions, each of
the Founding Companies that was engaged in specialty financing operated under
regulatory and capital constraints imposed under the SBIA and SBA Regulations.
See "Regulation."
As a result of its initial public offering and the Acquisitions, Medallion
Financial has achieved greater flexibility and resources to operate its
specialty finance business and its lending activities are subject to fewer
restrictions than was the case for each of the Founding Companies operating
separately. The Company is no longer precluded from originating loans with
flexible terms often requested by customers, including: (i) loans to borrowers
whose intended use of proceeds is not restricted to investment in their
businesses (e.g., refinancing a Medallion Loan where the proceeds are used to
purchase a home or finance an unrelated business) and (ii) loans with terms of
less than four years. Also, as a result of the termination by the SBA of its
SSBIC program and the resulting conversion of MFC and TCC from SSBICs to
SBICs, the Company has achieved further flexibility in that MFC and TCC are no
longer restricted to financing Disadvantaged Borrowers.
In addition to engaging in operations which are not subject to SBA
restrictions, the Company intends to pursue other strategies to expand its
lending activities and fund its operations as follows:
(i) develop larger Medallion Loan and Commercial Installment Loan
origination operations in cities in which it now has a modest presence,
such as Boston, Chicago, Cambridge, Newark and Hartford, as well as
continue to expand its operations in New York City, the largest taxi
medallion lending market in the U.S.;
(ii) continue to increase the percentage of its loan portfolio consisting
of higher yielding Commercial Installment Loans secured by retail dry
cleaning and coin operated laundromat equipment by generating a greater
percentage of loan referrals from existing equipment vendor relationships
and expanding the Company's referral network in the industry as well as
lending to other targeted industries;
(iii) potentially acquire other finance companies and portfolios of
Medallion Loans and Commercial Installment Loans, consistent with the
Company's experience of making secured loans to small businesses;
(iv) originate larger loans under its existing programs, decrease the
amount of loan participations that the Company sells to third parties, and
consider the repurchase of participations that the Company previously sold
to third parties;
47
<PAGE>
(v) establish a commercial paper program as a means of reducing the
Company's cost of funds, and therefore, increasing its interest rate
spread; and
(vi) operate as a Participating Lender in the SBA's Section 7(a) loan
program as a means of providing its customers a broader range of products,
including variable rate loans and to provide an opportunity for entry into
new markets. See "Business--The SBA Section 7(a) Program."
The Company also intends to expand its taxicab rooftop advertising business.
The Company believes that a significant opportunity exists to expand such
business because (i) providing taxicab rooftop advertising is a largely
unpenetrated segment of the out-of-home advertising market and (ii) many
companies that advertise nationally prefer a single provider that can deliver
the effectiveness of taxicab rooftop advertising simultaneously in several
major metropolitan markets. In addition, the Company believes that only
approximately 28% of New York City taxicabs have rooftop advertising and a
much smaller percentage of the taxicabs operating in other major metropolitan
areas nationwide have rooftop advertising.
The Company's strategy to expand its taxicab rooftop advertising business is
(i) to penetrate each of its targeted geographic markets further by securing
additional exclusive, long-term contacts with individual and taxicab fleet
owners, (ii) to add to its national advertising accounts, (iii) to acquire
other taxicab rooftop advertising businesses, (iv) to explore opportunities to
provide taxicab interior audio and visual advertising and (v) to expand
Display servicing and maintenance operations. In addition, the Company will
seek to maximize utilization rates by increasing the proportion of long-term
advertising contracts in its inventory. The Company also plans to explore
other out-of-home advertising media that would enable the Company to leverage
its relationships with its advertisers. The Company currently provides taxicab
rooftop advertising in New York City, Miami, Philadelphia and Boston and
intends to expand to other major metropolitan areas. In furtherance of its
expansion efforts, Media recently entered into an agreement to provide
advertising on 1,800 additional New York City taxicabs commencing in September
1997. The effect of this agreement will be to increase the number of taxicabs
the Company currently has under contract in New York City from approximately
1,700 to approximately 3,500. As a result of this agreement, the Company will
be the leading taxicab rooftop advertiser in the city. See "Business--Taxicab
Rooftop Advertising."
GROSS LOAN PORTFOLIO SUMMARY DATA
The following table classifies the Company's loans outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER BALANCE AVERAGE MATURITY
TYPE OF LOANS OF LOANS OUTSTANDING INTEREST RATE DATE
------------- -------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
New York City Medallion Loans... 1,354 $124,759,130 9.72% 1/97-12/15
Other Medallion Loans........... 277 9,855,769 12.51% 1/97-2/02
----- ------------
All Medallion Loans........... 1,631 134,614,899 9.92% 1/97-12/15
Dry cleaners and laundromats.... 599 34,080,398 13.70% 1/97-9/05
Other........................... 140 7,844,891 12.67% 1/97-10/02
----- ------------
Total....................... 2,370 $176,540,188 10.80% 1/97-12/15
===== ============
</TABLE>
MEDALLION LENDING
Industry Overview
The New York City Market. A New York City taxicab medallion represents the
only license to operate a taxicab and accept street hails in New York City. As
reported by the TLC, individual (owner-driver) medallions currently sell for
approximately $190,000 and corporate medallions currently sell for
approximately $215,000. According to TLC data, over the past 20 years,
medallions have appreciated in value an average of 10.2% each year. The TLC
estimates that in 1993 New York City taxicabs transported approximately 226
million people and collected in excess of $1 billion in gross revenue.
Taxicabs play a prominent role in intra-Manhattan travel. According to the
TLC, taxicabs transported 154% more passengers than Manhattan buses in 1993.
In addition, taxicabs provided 34% of all intra-Manhattan passenger trips
taken in 1993 by subway, bus, livery car or taxicab.
48
<PAGE>
Between 1977 and 1993, taxicab ridership for intra-Manhattan travel increased
by 42%, while citywide bus ridership declined by 40%. The Company believes
that much of the popularity of taxicabs can be attributed to the difficulty
and expense Manhattan residents encounter in maintaining a private automobile
in Manhattan.
The number of taxicab medallions is limited by law and until recently no new
medallions had been issued since 1937. However, in January 1996, the New York
City Council passed a law authorizing the city to sell up to 400 additional
taxicab medallions. The first 133 of such medallions were sold in May 1996 and
an additional 133 were sold in October 1996 with the balance to be sold in
either 1997 or 1998. See "Risk Factors--Taxicab Industry Regulation." The
Company believes that this sale has provided it with additional opportunities
because it has financed the purchase of a significant number of the medallions
sold. As a result of the limited supply of medallions, an active market for
medallions has developed. TLC estimates indicate that the total value of all
New York City medallions exceeds $2.5 billion. The law limiting the number of
medallions also stipulates that the ownership for the 12,053 medallions
outstanding at December 31, 1996 shall remain divided into 5,086 owner-driver
or individual medallions and 6,967 fleet or corporate medallions. Corporate
medallions are more valuable because they can be aggregated by businesses and
leased to drivers.
Based upon TLC statistics, the Company estimates that from 1989 through 1993
the number of taxicab medallions sold each year ranged from approximately 500
to 850, divided roughly equally between corporate and individual medallions.
The purchase of a taxicab medallion is frequently financed with a loan and, in
addition, there is an active refinancing market for such loans. Assuming that
approximately 75% of the purchase price of corporate medallions and
approximately 75% of the purchase price of individual medallions are typically
financed, the dollar volume of New York City financing of medallion sales
would range from approximately $72 million to $124 million a year. The Company
believes that the dollar volume of the refinancing market exceeds the dollar
volume of financing of medallion sales.
A prospective medallion owner must qualify under the medallion ownership
standards set and enforced by the TLC. These standards prohibit individuals
with criminal records from owning medallions, require that the funds used to
purchase medallions be derived from legitimate sources and mandate that
taxicab vehicles and meters meet TLC specifications. In addition, before the
TLC will approve a medallion transfer, the TLC requires a waiver from the
seller's insurer stating that there are no outstanding claims for personal
injuries in excess of insurance coverage. After the sale is approved, the
owner's taxicab is subject to quarterly TLC inspections.
The Boston and Cambridge Markets. The Company estimates that Boston
medallions currently sell for approximately $100,000. The number of Boston
medallions had been limited by law since 1930 to 1,525 medallions. In 1993,
however, the Massachusetts legislature authorized the Boston Hackney Carriage
Bureau, which regulates the issuance of new medallions, to issue 300
additional medallions, but the Bureau has only issued 40 additional medallions
which are restricted to "wheelchair accessible" taxicabs. The Company
estimates that the total value of all Boston medallions and related assets is
approximately $157 million. In addition, the Company estimates Cambridge
medallions currently sell for approximately $85,000. The number of Cambridge
medallions has been limited to 248 since 1945 by a Cambridge city ordinance;
accordingly, the Company estimates that the total value of all Cambridge
medallions and related assets is approximately $21 million.
The Chicago Market. Based on the Company's experience, Chicago medallions
currently sell for approximately $50,000. Pursuant to a 1988 municipal
ordinance, the number of outstanding medallions, which currently is capped at
5,500, has increased steadily from 4,600 in 1988 and will be increased to
5,700 in 1997. The ordinance has also required two major taxicab companies to
forfeit 1,300 medallions from 1988 through 1997. The newly issued and
forfeited medallions have been reissued for nominal consideration to new
owners by the city through a lottery. The Company estimates that the total
value of all Chicago medallions and related assets is approximately $275
million.
Market Position
The Company has originated and serviced Medallion Loans since 1979 and has
established a leading position in this industry. The Company's management has
a long history of owning, managing and financing
49
<PAGE>
taxicab fleets, taxicab medallions and corporate car services. Medallion Loans
collateralized by New York City taxicab medallions and related assets
comprised 93% of the value of the Company's Medallion Loan portfolio at
December 31, 1996. The balance consisted of Medallion Loans collateralized by
Boston, Chicago, Cambridge, Newark, Philadelphia and Hartford taxicab
medallions. The Company believes that there are significant growth
opportunities in these and other metropolitan markets nationwide.
Most New York City medallion transfers are handled through approximately 35
medallion brokers who are licensed by the TLC. In addition to brokering
medallions, these brokers also arrange TLC documentation, insurance, vehicles
and meters as well as financing. The Company has excellent relations with many
of the most active of these brokers and regularly receives referrals from
them. However, the Company receives most of its referrals from a small number
of brokers. The Company does not pay referral fees.
Loan Portfolio
Medallion Loans comprised approximately 76.3% of the Company's loan
portfolio at December 31, 1996. On that date, the Company had 1,631 Medallion
Loans outstanding ranging from $300 to $560,000 in principal amount
outstanding with an average principal amount outstanding of $83,000 and an
aggregate principal amount outstanding of $134.6 million. Substantially all of
the Company's Medallion Loans are made at fixed rates of interest in excess of
the Prime Rate. These loans generally require equal monthly payments covering
accrued interest and amortization of principal over a ten-year schedule
subject to a balloon payment of all outstanding principal after four years.
More recently, the Company has begun to originate loans with two- to four-year
maturities. Previously, the Company was not permitted under SBA Regulations to
originate loans with maturities of less than four years. Borrowers may prepay
Medallion Loans upon payment of a fee of 90 days' interest. The Company
generally retains the Medallion Loans it originates. From inception of its
business through December 31, 1996, the period between the origination and
final payment of all Medallion Loans originated by MFC has been estimated by
the Company to be 29 months on a weighted average basis. The Company believes
that this weighted average time period varies to some extent as a function of
changes in interest rates because borrowers are more likely to exercise
prepayment rights in a decreasing interest rate environment when the interest
rate payable on the borrower's loan is high relative to prevailing interest
rates and are less likely to repay in a rising interest rate environment. At
December 31, 1996, substantially all of the Company's Medallion Loans were
secured by first security interests in taxicab medallions and related assets.
The Company originates Medallion Loans at an approximate average loan-to-value
ratio of 70%. The Company estimates that the average loan to value ratio of
all of the Company's Medallion Loans at December 31, 1996 was 54%, which the
Company believes is representative of its historical average loan to value
ratio. The Company has recourse against the direct and indirect owners of the
medallion through personal guarantees. Although personal guarantees increase
the commitment of borrowers to repay their loans, there can be no assurance
that the assets available under personal guarantees would, if required, be
sufficient to satisfy the obligations secured by such guarantees.
The Company believes that its Medallion Loan portfolio is of high credit
quality because medallions have generally increased in value and are easy to
repossess and resell in an active market. While loans in Tri-Magna's portfolio
had been from time to time in arrears or default, Tri-Magna never experienced
a loss of principal on any of the $299 million in aggregate principal amount
of Medallion Loans it originated prior to the Acquisitions. In addition, from
the date of the Acquisitions through the date of this Prospectus, the Company
has not experienced any losses of principal on the Medallion Loans it has
originated. In the event of defaults by borrowers, the medallions
collateralizing such loans have been seized and, when such loans have not been
brought current, readily sold in the active market for medallions at prices at
or in excess of the amounts due.
COMMERCIAL INSTALLMENT LOANS
Overview
MFC began Commercial Installment Loan operations in 1987 to diversify its
loan portfolio which, prior to that time, consisted almost entirely of
Medallion Loans. MFC chose to concentrate these operations on
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originating loans secured by retail dry cleaning and coin operated laundromat
equipment because of certain characteristics similar to medallion lending that
make these industries attractive candidates for profitable lending. These
factors include the following (i) relatively high fixed rates of interest
ranging from approximately 500 to 700 basis points over the prevailing Prime
Rate at the time of origination, (ii) low historical repossession rates, (iii)
vendor recourse, (iv) significant equity investments by borrowers, (v) an
active market for repossessed equipment, (vi) a small average loan size of
$60,000 and (vii) collateral service life that is frequently twice as long as
the term of the loans. The Company estimates that there are approximately
4,000 retail dry cleaners and approximately 3,000 laundromats in the New York
City metropolitan area. Specialization in these industries has permitted
relatively low administrative costs because documentation and terms of credit
are standardized. Moreover, the consistency among the loans has facilitated
simplified credit review and portfolio analysis.
The Company believes that other niche industries with similar
characteristics will provide additional loan portfolio growth opportunities.
Building on the success of MFC's Commercial Installment Loan operations, the
Company has continued to expand its lending activities in this area. In
addition, the Company has recently begun to originate loans which would not
have been permitted under SBA Regulations, including loans with terms of less
than four years and loans to borrowers whose intended use of proceeds is
unrelated to their businesses (e.g., refinancing a Medallion Loan where the
proceeds are used to purchase a home). Moreover, if the Company succeeds in
its application to become a Participating Lender under the SBA's Section 7(a)
loan program, the Company anticipates that a significant proportion of the
assets of the subsidiary formed for this purpose would be allocated to the
origination of Commercial Installment Loans.
Loan Portfolio
Commercial Installment Loans comprised 23.7% of the Company's loan portfolio
at December 31, 1996. These loans finance either the purchase of the equipment
and related assets necessary to open a new business or the purchase or
improvement of an existing business. The Company has originated Commercial
Installment Loans in principal amounts ranging from $5,000 to $725,000. These
loans are generally retained by the Company and typically have maturities
ranging from one to seven years. At December 31, 1996, there were 739
Commercial Installment Loans outstanding with a balance of $41.9 million.
Loans to dry cleaners and laundromats represented 81% of the aggregate
principal amount of Commercial Installment Loans outstanding at December 31,
1996. The remaining Commercial Installment Loans are spread among other
industries including food service, private pay phone, radio broadcast and
accounts receivable financing.
The principal amount of the Company's originations of Commercial
Installments Loans has increased during the three years ended December 31,
1996. The aggregate principal amounts of such loans were $38.2 million (with
320 loans) during 1996; $24.7 million (with 350 loans) during 1995; and $24.1
million (with 339 loans) during 1994.
Commercial Installment Loans made by the Company typically require equal
monthly payments covering accrued interest and amortization of principal over
a four- to five-year term and generally can be prepaid with a fee of 90 days'
interest. At December 31, 1996, the Company's Commercial Installment Loans had
a weighted average interest rate of 13.51%. The term of, and interest rate
charged on, the Company's outstanding loans are subject to SBA Regulations.
See "Regulation." Under SBA Regulations, the maximum rate of interest
permitted on loans originated by the Company is 19%. The weighted average rate
of interest on Commercial Installment Loans exceeded the weighted average rate
of interest on Medallion Loans by 359 basis points at December 31, 1996. The
Company believes that the increased yield on Commercial Installment Loans
compensate for their higher risk relative to Medallion Loans and further
illustrate the benefits of diversification.
The Company generally originates Commercial Installment Loans at an
approximate average loan to value ratio of 70% and estimates that the average
loan to value ratio of all of the Company's Commercial Installment Loans at
December 31, 1996 was approximately 60%. Substantially all of the Company's
Commercial Installment Loans are collateralized by first security interests in
the assets being financed by the borrower. At December 31, 1996, 81% of the
aggregate principal outstanding in the Company's Commercial Installment Loan
portfolio was secured by first security interests in retail dry cleaning and
coin operated laundromat equipment
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<PAGE>
and the balance, 19%, was secured by real estate, food service equipment,
radio broadcast licenses and other equipment. In addition, the Company
requires, in substantially all cases, personal guarantees in connection with
Commercial Installment Loans. Additional security is provided by equipment
vendors, and at December 31, 1996, approximately 40% of the aggregate
principal amount of Commercial Installment Loans outstanding was secured by
full recourse guarantees from equipment vendors and approximately 5% was
secured by partial recourse guarantees from equipment vendors. The Company's
aggregate realized loss of principal on loans secured by retail dry cleaning
and coin operated laundromat equipment originated to date is $111,000 or 0.15%
of the $72.1 million in principal amount of such loans originated to date.
THE SBA SECTION 7(A) PROGRAM
In furtherance of the Company's strategy to expand its loan portfolio, the
Company has applied to the SBA for a license as a Participating Lender in the
SBA's Section 7(a) loan program. Under the Section 7(a) loan program the
United States government partially guarantees loans made by Participating
Lenders to small businesses meeting certain size and other eligibility
requirements established by the SBA. Under the Section 7(a) loan program, the
SBA's largest lending program, the SBA is authorized to guarantee up to $7.9
billion in loans in the federal fiscal year ending September 30, 1997. The SBA
guarantee is typically 75% of the principal amount of loans ranging up to $1
million. As a Participating Lender, the Company may provide a broader range of
products, including variable rate loans, to its customers in existing and new
markets while incurring a reduced level of credit risk associated with the
United States government guarantee. With the accompanying increased
flexibility in obtaining federally guaranteed loans, the Company anticipates
that it could actively expand its portfolio of smaller loans. There can be no
assurance however that the Company will be successful in its efforts to obtain
a license as a Participating Lender, and the Company may, alternatively or
additionally, pursue acquisitions of existing Participating Lenders from time
to time.
MARKETING, ORIGINATION AND LOAN APPROVAL PROCESS
The Company employs six loan officers that originate Medallion Loans and
Commercial Installment Loans. The Company's loan officers regularly receive
referrals from medallion brokers and make use of an extensive referral network
in the retail dry cleaning and coin operated laundromat industry. Equipment
vendors are the single most important source of Commercial Installment Loan
referrals and the Company attributes its excellent relations with these
vendors in part to its success in financing the purchase of retail dry
cleaning and coin operated laundromat equipment.
Each loan application is individually reviewed through analysis of a number
of factors, including loan-to-value ratios, a review of the borrower's credit
history, public records, personal interviews, trade references and personal
inspection of the premises and TLC approval, if applicable. The Company also
requires each applicant to provide personal and corporate tax returns and
premises leases or property deeds. The Company's Credit Committee establishes
loan origination criteria. Loans that conform to such criteria may be
processed by a loan officer and non-conforming loans must be approved by three
of the four members of the Company's Credit Committee.
GROSS LOANS RECEIVABLE
The following table sets forth the Company's gross loans receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Receivable
Medallion Financial.... $ -- -- $ -- -- $ -- -- $ -- -- $ 14,640 8.0%
Tri Magna (MFC)........ 69,785 53.0% 82,014 57.0% 90,343 62.0% 96,956 64.0% 99,662 57.0
Edwards................ 43,020 32.0 44,141 30.0 43,487 30.0 43,799 29.0 46,630 26.0
TCC.................... 20,192 15.0 18,074 13.0 10,981 8.0 9,797 7.0 15,608 9.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total.................. $132,997 100.0% $144,229 100.0% $144,811 100.0% $150,552 100.0% $176,540 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
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<PAGE>
During the past two years, the aggregate principal amount of loans
originated by the Company has substantially increased while realized losses of
principal have remainded constant. During the year ended December 31, 1996,
the Company originated over 1,000 loans in the aggregate principal amount of
$88.1 million. For that period, the Company's realized losses of principal
were 0.06% of its loan portfolio. During the year ended December 31, 1995, the
Company originated loans in the aggregate principal amount of $52.7 million.
For that year, the Company's realized losses of principal were 0.01% of its
loan portfolio. See Selected Financial Data of the Company for additional
information concerning the Company's loan portfolios.
LOAN ACTIVITY
The following table sets forth the Company's loans originated, renewed and
repaid on a combined basis for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated................................. $ 61,357 $ 52,714 $ 88,070
Loan repayments (including renewals)............. (60,610) (46,983) (60,569)
Decrease (increase) in unrealized depreciation... 871 195 9
Loans (written off) recovered, net............... (166) 11 5
-------- -------- --------
Increase (decrease) in loans receivable-net...... 1,452 5,937 27,515
Loans receivable-net (beginning of period)....... 141,590 143,042 148,979
-------- -------- --------
Loans receivable-net (end of period)............. $143,042 $148,979 $176,494
======== ======== ========
</TABLE>
DELINQUENCY AND LOAN LOSS EXPERIENCE
Under the Company's collection policy, when a borrower fails to make a
required monthly payment, the borrower is notified by mail after approximately
10 days, and a collection officer generally contacts the borrower if the
payment remains unpaid after 10 additional days. The Company generally follows
a practice of discontinuing the accrual of interest income on loans which are
in arrears as to interest payments for a period in excess of 90 days. The
Company delivers a default notice and begins foreclosure and liquidation
proceedings when management determines that pursuit of these remedies is the
most appropriate course of action in the circumstances.
At December 31, 1996, the Company had 88 loans with an aggregate principal
balance of $8.4 million, or 4.8% of the portfolio, for which accrued interest
and principal payments of $791,000 were delinquent for 90 days or more,
compared to 69 loans with an aggregate principal balance of $6.4 million, or
4.3% of the portfolio, for which accrued interest and principal payments of
$512,000 were delinquent for 90 days or more at December 31, 1995. Of the 88
loans which were delinquent at December 31, 1996, 55, in the aggregate
principal amount of $5.8 million, were Medallion Loans. The Company considers
a loan to be delinquent if the borrower fails to make payments for 10 days or
more; however, the Company may agree with a borrower that cannot make payments
in accordance with the original loan agreement to modify the payment terms of
the loan. Based upon the Company's assessment of its collateral position, the
Company anticipates that a substantial portion of the principal amount of its
delinquent loans would be collected upon foreclosure of such loans, if
necessary. There can be no assurance, however, that the collateral securing
such loans will be adequate in the event of foreclosure.
The Company monitors delinquent loans for possible exposure to loss. In its
analysis, the Company reviews various factors, including the value of the
collateral securing the loan and the borrower's prior payment history. Based
upon these factors and the Company's analysis of the yield and maturity of
loans in the portfolio relative to current and projected market interest
rates, the Company determines net unrealized depreciation of investments or
the amount by which the Company's estimate of the current realizable value of
its portfolio is below the cost basis thereof.
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<PAGE>
The following table sets forth the Company's unrealized depreciation of
investments and the loan loss experience on a combined basis:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
TAXICAB ROOFTOP ADVERTISING
Media provides taxicab rooftop advertising which is a relatively undeveloped
segment of the out-of-home advertising industry. Out-of-home advertising
includes (i) traditional outdoor advertising, such as billboards and posters,
(ii) transit advertising, such as taxicabs, buses, bus shelters, subway,
commuter train and airport advertising and (iii) in-store point of sale
advertising. The Company entered this business in November 1994 with the
organization of Media as a subsidiary of Tri-Magna and since that time the
business has grown rapidly. On December 31, 1996, the Company had
approximately 2,000 installed Displays nationwide. In furtherance of its
expansion efforts, in March 1997, Media entered into an agreement with the
MTBOT to provide advertising on the over 1,800 New York City taxicabs owned by
members of the MTBOT commencing on September 22, 1997. The effect of this
agreement will be to increase the number of taxicabs Media currently has under
contract in New York City from approximately 1,700 to approximately 3,500. As
a result of this agreement, Media will be the leading taxicab rooftop
advertiser in the city and one of the largest in the nation. The Company
intends to continue to expand this business through internally generated
growth and additional acquisitions of other taxicab rooftop advertising
businesses.
The Company currently provides taxicab rooftop advertising in New York City,
Miami, Philadelphia and Boston and intends to expand its operations to other
major metropolitan areas. The Company's goal is to become the leading national
provider of taxicab rooftop advertising by establishing a presence in several
major U.S. metropolitan markets. The Company also plans to explore other out-
of-home advertising media that would enable the Company to leverage its
relationships with its advertisers. The Company believes that no provider of
taxicab rooftop advertising currently operates nationwide.
Each Display is attached to the rooftop of a taxicab by the Company and the
Company also performs all ongoing Display maintenance and repair. The Display
remains the property of the Company. The Display serves as a platform or frame
for advertising copy which is preprinted on vinyl sheets with adhesive backing
and provided by the advertiser. The advertising copy adheres to the Display
and is illuminated whenever the taxicab is in operation. The vinyl sheet is
durable and is generally left on the Display for up to 90 days. The
advertising copy is replaced at the advertiser's discretion and cost when
advertising campaigns change. The standard size of the vinyl advertising copy,
14 inches high and 48 inches long, was designed to be proportionally similar
to "bulletins" or "billboards" to permit advertisers to conveniently translate
billboard copy to Display copy.
Generally, the Company enters into agreements with taxicab associations,
fleets or individuals to lease taxicab rooftop space for five-year terms. The
Company markets the Displays to companies promoting products, advertising
agencies and outdoor advertising buying agencies. Advertising contracts
generally vary from 30 days to one year and provide for monthly payments of
rent by the advertiser. The Company's advertising accounts have included HBO;
R. J. Reynolds Tobacco Company; CBS, Inc.; NEC; NYNEX Corporation; Metro-
Goldwyn-Mayer Inc.; Brown & Williamson Tobacco Corporation; Cathay Pacific
Airways Limited; Allied Domecq Retailing Limited; Ringling Bros. Barnum &
Bailey Combined Shows, Inc.; Young Men's Christian Association of Greater New
York; Luxattica Group S.P.A. and The Gap.
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<PAGE>
The Company believes the inherent in-motion nature of taxicabs and their
concentration and distribution throughout densely populated metropolitan areas
enhance their effectiveness as an advertising medium. Displays can be placed
throughout an area, effectively covering the population and providing
continuous exposure. Moreover, taxicab rooftop advertising is not zoned out of
any of the areas in New York City, such as Park Avenue and Central Park, where
stationary advertising is generally prohibited. Unlike other forms of transit
advertising in New York City such as buses, bus shelters and subway and
commuter train stations, which are prohibited from advertising tobacco
products, taxicabs are not restricted by New York City from advertising
tobacco products. In addition, the Company believes that taxicab rooftop
advertising compares favorably with other forms of outdoor advertising, which
in general have among the lowest cost-per-thousand impressions or "CPM", a
standard measurement of effectiveness among media, of all advertising media.
Historically, a substantial portion of the Company's taxicab rooftop
advertising revenue has been derived from tobacco products advertising. In
August 1996, President Clinton signed an executive order adopting rules
proposed by the FDA restricting the sale and advertising of cigarette and
smokeless tobacco products. Although certain advertising industry and tobacco
industry organizations have filed lawsuits challenging these rules and certain
members of Congress have indicated that they may sponsor legislation to
prevent these rules from going into effect, there can be no assurance that
such lawsuits will be successful or that such legislation, if proposed, will
be adopted. Further, there can be no assurance that local legislation or
regulations restricting tobacco advertising will not be adopted in the future,
or as to the effect any such legislation or the voluntarily curtailment of
advertising by tobacco companies would have on the Company. Portions of these
rules, which limit tobacco products advertising to a format consisting of
black text on a white background and require the inclusion of a statement
which identifies the product as "a nicotine-delivery device for persons over
18" apply to taxicab rooftop advertising. Certain advertisers may be unwilling
to advertise in this format; accordingly, these rules, which become effective
on August 28, 1997, could have an adverse effect upon the taxicab rooftop
advertising business of the Company. See "Risk Factors -- Government
Regulation of Tobacco Advertising."
SOURCES OF FUNDS
Overview
The Company funds its operations through credit facilities with bank
syndicates and, to a lesser degree, through fixed rate, long-term subordinated
debentures issued to or guaranteed by the SBA. The determination of funding
sources is established by the Company's management, based upon analysis of the
respective financial and other costs and burdens associated with funding
sources. At December 31, 1996, 76.6% of the Company's $125.8 million of debt
consisted of bank debt, substantially all of which was at variable effective
rates of interest averaging below the Prime Rate. An additional $10.5 million
of debt was available at December 31, 1996 at variable effective rates of
interest averaging below the Prime Rate under the Company's $105.0 million in
bank credit facilities. On January 28, 1997, MFC increased the amount
available under its revolving credit facilities by $20.0 million and Medallion
Financial increased the amount available under its line of credit by $1.0
million on February 10, 1997. In addition, 23.4% of the Company's debt
consisted of subordinated SBA debentures, with fixed rates of interest with a
weighted average rate of 7.38%. SBA financing offers attractive long-term
fixed rates. At December 31, 1996, the interest rate payable on newly issued
subordinated SBA debentures was 8.08%. However, SBA financing subjects its
recipients to limits on the amount of secured bank debt they may incur.
Accordingly, the Company plans to limit its use of SBA funding and will seek
such funding only when advantageous, such as to fund loans that qualify under
SBA Regulations through Edwards and TCC which are already subject to SBA
restrictions. A table appearing under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" illustrates each of the Founding Companies' sources of
available funds at December 31, 1996.
The Company intends to establish a commercial paper program at MFC to reduce
its cost of funds. The issuance of commercial paper will be contingent upon
MFC obtaining an investment grade rating, among other conditions, and in an
effort to secure this rating, the Company intends to merge TCC into MFC to
increase MFC's capital base. Because MFC does not have any outstanding SBA
debentures, MFC is not currently subject
55
<PAGE>
to SBA limitations on the amount of bank debt that MFC can incur. After the
merger, MFC will hold TCC's SBA debentures and ordinarily this would result in
the imposition of limitations on the amount of third party bank debt that MFC
could incur. MFC, however, intends to enter into an agreement with the SBA
permitting MFC to continue to incur an unlimited amount of third party bank
debt but providing that the debentures acquired by MFC from TCC will be
secured by Commercial Installment Loans on a pari passu basis with the
Company's third party bank debt. If the Company does not enter into such
agreement, the Company currently plans to pay all outstanding SBA subordinated
debentures of TCC and thereby, eliminate the SBA restrictions on third party
debt for MFC. There can be no assurance that the Company will be able to enter
into such an agreement with the SBA on terms acceptable to the Company or that
MFC will be able to establish a commercial paper program.
The Company funds its fixed rate loans with variable rate bank debt and
fixed rate subordinated SBA debentures. The mismatch between maturities and
interest-rate sensitivities of these balance sheet items results in interest
rate risk. See "Risk Factors--Interest Rate Spread." The Company seeks to
manage its exposure to increases in market rates of interest to an acceptable
level by (i) purchasing interest rate caps to hedge a portion of its variable
rate debt against increases in interest rates, (ii) incurring fixed-rate debt
and (iii) originating adjustable rate loans. Nevertheless, the Company accepts
varying degrees of interest rate risk depending on market conditions and
believes that the resulting asset/liability interest rate mismatch results in
opportunities for higher net interest income. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset/Liability
Management."
Medallion Financial Funding
Medallion Financial has a $5.0 million revolving line of credit with a bank.
At December 31, 1996, $4.5 million was outstanding under this facility,
bearing interest at the rate of 6.84%. On February 10, 1997, Medallion
Financial increased the amount available under its line of credit by $1.0
million.
Edwards Funding
Edwards has a $15.0 million revolving line of credit with a bank syndicate.
At December 31, 1996, $12.5 million was outstanding under this facility,
bearing interest at a rate of 6.81%. Under an agreement with the SBA, Edwards
is restricted from borrowing more than $12.7 million in bank debt without the
prior approval of the SBA.
As an SBIC, Edwards is eligible to obtain low cost financing from the SBA
through the issuance of subordinated SBA debentures. Edwards has debentures
outstanding in the principal amount of $23.8 million and intends to seek to
issue additional subordinated SBA debentures. SBA Regulations limit the amount
of subordinated SBA debentures or "leverage" SBICs may issue. Generally, under
SBA Regulations, the maximum principal amount of subordinated SBA debentures
Edwards is permitted to issue is equal to 300% of its private or non-SBA paid-
in capital and paid-in surplus ("Leveragable Capital"). SBA Regulations
generally also limit the aggregate amount of leverage SBICs under common
control, such as Edwards, MFC and TCC, have
outstanding to no more than $90 million. Accordingly, Edwards, MFC and TCC
collectively may not issue subordinated SBA debentures in an aggregate amount
that exceeds $90 million and at December 31, 1996, the aggregate amount
outstanding was $29.4 million. The interest rates payable on outstanding
subordinated SBA debentures at December 31, 1996 ranged from 5.00% to 9.80%
with a weighted average of 7.38%.
At December 31, 1996, Edwards had Leveragable Capital of $9.6 million and
had issued $23.8 million in principal amount of subordinated SBA debentures
that carry fixed rates of interest and have ten-year terms. These debentures
have maturities ranging from April 1, 1997 to September 1, 2004 and rates of
interest varying from 7.15% to 9.80% per annum. On April 1, 1997, $1.5 million
of such subordinated SBA debentures matured and on April 7, 1997, such amount
was paid. Subject to the limitations discussed above, Edwards was eligible on
December 31, 1996, to issue $4.9 million in aggregate principal amount of
additional subordinated SBA debentures.
56
<PAGE>
MFC Funding
Subsequent to December 31, 1996, MFC increased its revolving bank lines of
credit by $20.0 million to $105.0 million. MFC has a credit facility with a
bank syndicate consisting of an $85.0 million revolving line of credit and a
$2.0 million term loan. Amounts outstanding under the revolving line of credit
bear interest at the agent bank's prime rate or, at MFC's option, a rate based
on LIBOR. At December 31, 1996, the average interest rate was 7.06% which was
119 basis points below the Prime Rate and 148 basis points above LIBOR
Benchmark as of such date. The revolving line of credit is secured by all of
MFC's assets and matures on June 30, 1997. As of December 31, 1996, there was
an outstanding balance of $77.6 million under the revolving line of credit.
The term loan bears interest at the rate of 7.50% and matures on July 31,
1997.
TCC Funding
Prior to its conversion to an SBIC on February 11, 1997, TCC was eligible to
obtain low cost financing from the SBA through the issuance of subordinated
SBA debentures and the issuance of non-voting cumulative preferred stock to,
or guaranteed by, the SBA. As of December 31, 1996, TCC had $5.6 million of
subordinated SBA debentures outstanding and no preferred stock outstanding. At
December 31, 1996 the interest rate payable on subordinated SBA debentures was
5.0%. As a result of an SBA subsidy program available to SSBICs, the effective
interest rate on subordinated SBA debentures issued by TCC prior to its
conversion to an SBIC was 3% below the stated interest rate for the first five
years such debentures are outstanding. As an SBIC, TCC is no longer eligible
to issue non-voting cumulative preferred stock. TCC is, however, still
eligible to obtain low cost financing from the SBA through the issuance of
subordinated SBA debentures and TCC intends to seek to issue additional
subordinated SBA debentures, but the interest on such debentures will not be
subsidized by the SBA. SBA Regulations limit the amount of subordinated SBA
debentures or "leverage" SBICs may issue and the "300% of leveragable capital"
and the $90 million limit on the aggregate amount of leverage permitted for
SBICs under common control referred to above also apply. At December 31, 1996,
the interest rate payable on newly issued subordinated SBA debentures was
8.08%.
At December 31, 1996, TCC had Leveragable Capital of $7.5 million and had
issued $5.6 million in principal amount of subordinated SBA debentures that
have fixed rates of interest, ten-year terms and may be prepaid after five
years without penalty. The interest rate payable on these debentures is 5.00%
per annum through June 1, 1997, 8.00% per annum thereafter and they mature on
June 1, 2002. Future issuances of subordinated SBA debentures by TCC,
including any refinancing or rollover of currently outstanding subordinated
SBA debentures, are also limited by the SBA to the aggregate amount of TCC's
outstanding non-Medallion Loans and the aggregate amount of non-Medallion
Loans originated in connection with such financing. At December 31, 1996, TCC
had $9.1 million in principal amount of non-Medallion Loans outstanding.
Subject to the foregoing limitations, TCC was eligible on December 31, 1996,
to issue $16.8 million of additional subordinated SBA debentures.
Preferred Stock Repurchase Agreements
MFC and TCC have repurchased all of their previously issued preferred stock
from the SBA for an aggregate price of $4.4 million, representing a discount
of 65.0% from the original aggregate issuance price of $12.6 million. The
repurchase price discount of $8.2 million reflects the below market 3.00%
dividend rate and the fact that the preferred stock was not subject to
mandatory redemption at any time. The repurchase has resulted in the
termination of SBA limits on the amount of secured bank debt MFC can incur and
a realized gain in retained earnings in the amount of the repurchase discount
which will be accreted to paid-in capital on a straight-line basis over 60
months, commencing August 12, 1994. However, if MFC or TCC is liquidated or
loses its SBA license during the accretion period, the SBA will receive the
remaining unaccreted amount of the realized gain attributable to the
subsidiary liquidating or losing its license. The proposed merger of TCC and
MFC will not trigger the repayment of such amount. At December 31, 1996, the
aggregate remaining unaccreted amount of the realized gain for MFC and TCC was
$4.6 million.
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<PAGE>
COMPETITION
Banks, credit unions and finance companies, some of which are SBICs, compete
with the Company in originating Medallion Loans and Commercial Installment
Loans. Finance subsidiaries of equipment manufacturers also compete with the
Company. Many of these competitors have greater resources than the Company and
certain competitors are subject to less restrictive regulations than the
Company. As a result, there can be no assurance that the Company will be able
to identify and complete the financing transactions that will permit it to
compete successfully. The Company's taxicab rooftop advertising business
competes with other taxicab rooftop advertisers as well as all segments of the
out-of-home advertising industry and other types of advertising media,
including cable and network television, radio, newspapers, magazines and
direct mail marketing. Many of these competitors have greater financial
resources than the Company and offer several forms of advertising as well as
production facilities.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 33 employees. The
Company believes that its relations with its employees are good, but that its
future success will depend, in part, on its ability to continue to recruit,
retain and motivate qualified personnel at all levels.
58
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The Company's investment objectives are to provide a high level of current
income for its stockholders through quarterly distributions, consistent with
preservation of capital, as well as long term growth of net asset value. The
Company seeks to achieve its investment objectives by maximizing net interest
income and fee income from operations and expanding operations. There can be
no assurance that the Company will achieve its investment objectives.
The Company's only fundamental policies, that is, policies that cannot be
changed without the approval of the holders of a majority of the Company's
outstanding voting securities, as defined under the 1940 Act, are the
restrictions described in the following seven paragraphs. A "majority of the
Company's outstanding voting securities" as defined under the 1940 Act means
the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than 50% of
the outstanding shares. The other policies and investment restrictions
referred to in this Prospectus, including the Company's investment objectives,
are not fundamental policies of the Company and may be changed by the
Company's Board of Directors without stockholder approval. Unless otherwise
noted, whenever an investment policy or limitation states a maximum percentage
of the Company's assets that may be invested in any security or other asset,
or sets forth a policy regarding quality standards, such standard or
percentage limitation will be determined immediately after and as a result of
the Company's acquisition of such security or other asset. Accordingly, any
subsequent change in values, assets, or other circumstances will not be
considered when determining whether the investment complies with the Company's
investment policies and limitations. The Company's fundamental policies are as
follows:
1. The Company will at all times conduct its business so as to retain its
status as a business development company under the 1940 Act. In order to
retain that status, the Company may not acquire any assets (other than non-
investment assets necessary and appropriate to its operations as a business
development company) if, after giving effect to such acquisition, the value
of its "Qualifying Assets," as such term is described under the caption
"Regulation," amount to less than 70% of the value of its total assets. The
Company believes that the securities it has acquired in connection with the
acquisition of the Founding Companies, as well as temporary investments it
makes with its funds, will generally be assets of the type listed in
Section 55(a) of the 1940 Act ("Qualifying Assets").
2. MFC, TCC, Edwards, and any subsidiaries of the Company organized in
the future that are SBA licensees, may issue the maximum principal amount
of subordinated SBA debentures and preferred stock permitted under the SBIA
and SBA Regulations. As SBICs, MFC, Edwards and TCC are not permitted to
issue preferred stock to the SBA and the maximum principal amount of
subordinated SBA debentures they are each permitted to issue is equal to
300% of their respective Leveragable Capital (generally non-SBA paid-in
capital and paid-in surplus). See "Regulation." In addition, SBA
Regulations also limit the aggregate principal amount of subordinated SBA
debentures or "leverage" SBICs under common control, such as the RIC
Subsidiaries, may have outstanding to no more than $90.0 million. At
December 31, 1996, TCC and Edwards had, in aggregate, $29.4 million in
principal amount of subordinated debentures outstanding. At that date, TCC
and Edwards had, in aggregate, $17.0 million in Leveragable Capital and
accordingly the maximum aggregate principal amount of additional SBA
leverage TCC and Edwards could issue on that date was $21.7 million. At
December 31, 1996, MFC had Leveragable Capital of $14.1 million but had no
subordinated SBA debentures outstanding and has no intention of issuing
any; however, MFC reserves the right to issue subordinated SBA debentures
to the maximum extent permitted under the SBIA or SBA Regulations.
3. The Company may borrow funds and issue "senior securities" to the
maximum extent permitted under the 1940 Act. As a business development
company, the Company may issue senior securities if, immediately after such
issuance, the senior securities will have an asset coverage of at least
200%. Under the 1940 Act, subordinated debentures issued to or guaranteed
by the SBA and preferred stock issued to the SBA by the RIC Subsidiaries
may be considered senior securities issued by the Company requiring asset
coverage of 200%; however, pursuant to an exemptive order of the
Commission, such debentures and preferred stock are exempt from the asset
coverage requirements of the 1940 Act.
59
<PAGE>
4. The Company will not (i) underwrite securities issued by others
(except to the extent that it may be considered an "underwriter" within the
meaning of the Securities Act in the disposition of restricted securities),
(ii) purchase or sell real estate or real estate mortgage loans unless
acquired as a result of ownership of securities or other instruments
(except that the Company may purchase and sell real estate or interests in
real estate in connection with the orderly liquidation of investments or
the foreclosure of mortgages held by the Company), (iii) engage in short
sales of securities, (iv) purchase securities on margin (except to the
extent that it may purchase securities with borrowed money), (v) write or
buy put or call options or (vi) engage in the purchase or sale of
commodities or commodity contracts, including futures contracts (except
where necessary in working out distressed loan or investment situations).
The Company and the RIC Subsidiaries may purchase interest rate caps and
swaps covering up to 100% of their variable rate debt. In addition, the
Company may sponsor the securitization of loan portfolios.
5. The Company and the RIC Subsidiaries may originate loans and loans
with equity features. To the extent permitted under SBA Regulations, the
Company may also make loans as permitted (i) under the 1996 Plan, (ii)
under the Director Plan and plans providing for options for disinterested
directors that might be adopted by the Company in the future and (iii) to
officers and directors for the purchase of Common Stock. The Company holds
all of the outstanding common stock of the Founding Companies and may
organize additional subsidiaries in the future. The Company may acquire
restricted securities of small businesses.
6. Each RIC Subsidiary shall not originate loans to, or invest in the
securities of, any entity if, immediately after such loan or investment,
more than 5% of the total assets of the RIC Subsidiary originating such
loan or making such investment (taken at current value) would be loaned to,
or invested in the securities of such entity, or acquire more than 10% of
the outstanding voting securities of any issuer, provided that this
limitation does not apply to obligations issued or guaranteed as to
interest and principal by the U.S. Government or its agencies or
instrumentalities or to repurchase agreements secured by such obligations,
and that up to 25% of each RIC Subsidiary's total assets (at current value)
may be invested without regard to this limitation.
7. The Company and the RIC Subsidiaries shall lend or invest at least
25.5% of their total assets (taken at current value) to or in entities
primarily engaged in the taxicab industry and shall not lend or invest more
than 25.0% of their total assets (taken at current value) to or in entities
primarily engaged in any other single industry, provided that this
limitation does not apply to obligations issued or guaranteed as to
interest and principal by the U.S. Government or its agencies or
instrumentalities or to repurchase agreements secured by such obligations
or to bank money-market instruments.
PORTFOLIO TURNOVER
During the year ended December 31, 1994, the Company originated loans
totalling $61.4 million in aggregate principal amount and experienced
prepayments totalling $60.6 million in aggregate principal amount. During the
year ended December 31, 1995, the Company originated loans totalling $52.7
million in aggregate principal amount and experienced prepayments totalling
$46.9 million in aggregate principal amount. During the year ended December
31, 1996, the Company originated loans totalling $88.1 million in aggregate
principal amount and experienced prepayments totalling $60.6 million in
aggregate principal amount. All borrowers have the right to prepay loans made
by the Company at any time. Although the Company experiences more prepayments
when interest rates are falling and fewer prepayments when interest rates are
rising, the Company is unable to predict the level of prepayments it will
experience during any period of time.
THE INVESTMENT ADVISER
The Company is managed by its executive officers under the supervision of
its Board of Directors. In addition, under the terms of a sub-advisory
agreement (the "Sub-Advisory Agreement") between the Company and FMC, the
Company has retained FMC to consult with management upon reasonable request in
the review and refinement of the Company's strategies.
Myron Cohen, Robert Fanger and Michael Miller control FMC and will provide
the advisory services to the Company on behalf of FMC. They had served as
directors and executive officers of Tri-Magna and MFC since
60
<PAGE>
inception and, along with Alvin Murstein, comprised Tri-Magna's Executive
Committee. Messrs. Cohen, Fanger and Miller ceased to hold their offices with
Tri-Magna and MFC upon the closing of the Acquisitions. Upon the request of
the officers of the Company, FMC consults with respect to strategic decisions
concerning originations, credit quality assurance, development of financial
products, leverage, funding, geographic and product diversification, the
repurchase of participations, acquisitions, regulatory compliance and
marketing.
Under the Sub-Advisory Agreement, the Company pays FMC monthly in arrears,
as compensation for the services rendered by it, a fee of $18,750. Unless
earlier terminated as described below, the Sub-Advisory Agreement will remain
in effect until May 1998 and from year to year thereafter only if approved
annually by (i) a majority of the non-interested directors of the Company and
(ii) the Board of Directors, or by a majority of the outstanding voting
securities of the Company, as defined in the 1940 Act. The Sub-Advisory
Agreement may be terminated without penalty on 60 days' written notice by
either party or by vote of a majority of the outstanding voting securities of
the Company, as defined in the 1940 Act, and will terminate if assigned. Under
the Sub-Advisory Agreement, FMC will not be liable for any loss suffered by
the Company, except a loss resulting from FMC's willful malfeasance, bad faith
or gross negligence.
The Murstein Trusts entered into an escrow agreement with FMC on May 29,
1996. Under the escrow agreement, the Murstein Trusts deposited into escrow
163,636 shares of Common Stock. Subject to certain limitations, the Murstein
Trusts agreed to maintain in escrow Common Stock worth 200% of the advisory
fees payable by the Company under the Sub-Advisory Agreement during the first
48 months of service, thereby assuring FMC of the payment of $900,000 in
advisory fees. In the event that the Company or its stockholders terminate or
do not renew the Sub-Advisory Agreement during this period for any reason
other than (i) breach of the Sub-Advisory Agreement by FMC or (ii) FMC's
willful malfeasance, bad faith or gross negligence, the escrow agent will
assign to FMC Common Stock in escrow equal in value to the amount of the fees
payable over the balance of the 48-month period. If the value of the Common
Stock required to be deposited in escrow is less than the value of the fees
payable, FMC will have no further recourse against the Murstein Trusts.
61
<PAGE>
MANAGEMENT
The business and affairs of the Company are managed under the direction of
its Board of Directors. The Board of Directors is divided into three classes,
each with a term of three years. Only one class of directors stands for
election in any year. Messrs. Kreitman and Rudnick are in the first class and
stand for election in 1997; Messrs. Cuomo and Andrew Murstein are in the
second class and stand for election in 1998 and Messrs. Alvin Murstein and
Ward are in the third class and stand for election in 1999. The Board of
Directors has two committees, a Compensation Committee comprised of Messrs.
Kreitman, Alvin Murstein and Ward and an Audit Committee comprised of Messrs.
Kreitman, Rudnick and Ward. The directors will each be paid $10,000 for each
year they serve and shall each receive $2,000 for each Board meeting attended
and $1,000 for each committee meeting attended and are reimbursed for expenses
relating thereto. The Board of Directors elects the Company's officers who
serve at the pleasure of the Board of Directors.
The Company's directors and officers are as set forth below.
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) HELD WITH THE COMPANY
---------------- --- ---------------------------------
<C> <C> <S>
Alvin Murstein*....... 62 Chairman, Chief Executive Officer and Director
Andrew Murstein*...... 32 President, Chief Operating Officer and Director
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
Mario M. Cuomo........ 64 Director
Stanley Kreitman...... 65 Director
David L. Rudnick...... 56 Director
Benjamin Ward......... 70 Director
</TABLE>
- ----------
An asterisk (*) indicates an "interested person" as such term is defined in
(S) 2(a)(19) of the 1940 Act.
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. 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 its 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.
62
<PAGE>
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-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 has been 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.
Mario M. Cuomo served as Governor of the State of New York from January 1983
through 1994. Governor Cuomo has been a partner in the law firm of Willkie
Farr & Gallagher since February 1995. Willkie Farr & Gallagher serves as
counsel to the Underwriters in connection with this Offering. Mr. Cuomo
received a B.A., summa cum laude, from St. John's University and a J.D., magna
cum laude, from St. John's University School of Law.
Stanley Kreitman serves as Vice Chairman of Manhattan Associates, an
investment banking company. Mr. Kreitman served as a Director of Tri-Magna
from 1991 until May 1996. Mr. Kreitman served as President of the United
States Banknote Corporation, a securities printing company, from 1975 until
his retirement in 1994. Mr. Kreitman is Chairman of the Board of Trustees of
the New York Institute of Technology. Mr. Kreitman received an A.B. from New
York University and an M.B.A. from New York University Graduate School of
Business.
David L. Rudnick serves as President of Century Properties, Inc., a national
commercial real estate concern. Mr. Rudnick joined Century Properties, Inc. in
1966. Mr. Rudnick was a director of West Side Federal Savings & Loan
Association. Mr. Rudnick received an A.B. in economics from Harvard University
and an M.B.A. from Columbia University Graduate School of Business. Mr.
Rudnick is Andrew Murstein's father-in-law.
Benjamin Ward served as a Director of Tri-Magna from 1992 until May 1996.
Mr. Ward served as Police Commissioner of New York City from 1984 until 1989.
Mr. Ward received a B.A. in sociology, magna cum laude, from Brooklyn College
and a J.D. from Brooklyn Law School.
63
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the most highly
compensated executive officers of the Company (the "Named Executive Officers")
for the period from May 30, 1996 through December 31, 1996, (the "Period"). No
director received compensation in excess of $60,000 for the Period. The
Company does not have a pension plan, but has established a 401K plan that
does not provide for matching contributions. Options to purchase a total of
16,969 shares of Common Stock were granted to the directors of the Company
during the Period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
COMPENSATION FOR THE PERIOD AWARDS
----------------------------------- ------------
SECURITIES
OTHER PERIOD UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION ($) OPTIONS
- --------------------------- --------- -------- ---------------- ------------
<S> <C> <C> <C> <C>
Alvin Murstein................ $151,667 -- --
Chairman and Chief Executive
Officer
Andrew Murstein............... 90,417 -- --
President
Daniel F. Baker............... 75,833 $45,000 -- 68,182
Treasurer and Chief Financial
Officer
Michael Fanger................ 84,583 15,000 -- 68,182
Executive Vice President
Michael Kowalsky.............. 87,500 -- -- 45,456
Executive Vice President
</TABLE>
The following table sets forth certain information regarding options granted
during the Period by the Company to the following Named Executive Officers:
OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES STOCK PRICE APPRECIATION FOR
UNDERLYING PERCENT OF TOTAL EXERCISE OR OPTION TERM(2)
OPTIONS OPTIONS GRANTED BASE PRICE EXPIRATION -----------------------------
NAME GRANTED(#) TO EMPLOYEES ($/SHARE)(1) DATE 5%($) 10%($)
- ---- ---------- ---------------- ------------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Alvin Murstein.......... -- -- -- --
Andrew Murstein......... -- -- -- --
Daniel F. Baker......... 68,182(3) 33.85% $11.00 5/22/06 $ 471,672 $1,195,310
Michael Fanger.......... 68,182(3) 33.85 11.00 5/22/06 471,672 1,195,310
Michael Kowalsky........ 45,456(4) 22.57 11.00 5/22/06 314,457 796,897
</TABLE>
- ----------
(1) The exercise price of these options is equal to the fair market value of
the Company's Common Stock on the date of grant, as determined by the
Company's Board of Directors.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the price of the underlying Common Stock. No gain to the optionees
is possible without an increase in price of the underlying Common Stock,
which will benefit all stockholders proportionately.
(3) Options granted under the 1996 Plan. These shares vest in five equal
annual installments beginning May 22, 1997.
(4) Options granted under the 1996 Plan. These shares vest in twelve equal
quarterly installments beginning August 22, 1996.
64
<PAGE>
The following table sets forth certain information concerning exercisable
and unexercisable stock options held by the following Named Executive Officers
in the Period:
AGGREGATED OPTION EXERCISES IN THE PERIOD AND
YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
YEAR-END YEAR-END(2)
----------------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Alvin Murstein.......... -- --
Andrew Murstein......... -- --
Daniel F. Baker......... -- 68,182 -- $289,774
Michael Fanger.......... -- 68,182 -- 289,774
Michael Kowalsky........ 7,576 37,880 $32,198 160,990
</TABLE>
- ----------
(1) No options were exercised during the Period by the Named Executive
Officers.
(2) Based on the difference between closing price of the underlying shares of
Common Stock on December 31, 1996 as reported by the Nasdaq National
Market ($15.25) and the option exercise price ($11.00).
EMPLOYMENT AGREEMENTS
In May 1996, Alvin Murstein and Andrew Murstein entered into employment
agreements with the Company. The agreements automatically renew annually for a
five-year term unless either party terminates the agreement. The agreements
contain non-competition covenants in favor of the Company. Michael Kowalsky
has entered into an employment agreement with the Company which became
effective in May 1996. This agreement includes a three-year term and contains
non-competition covenants in favor of the Company.
1996 STOCK OPTION PLAN
The 1996 Plan was adopted by the Board of Directors, including a majority of
the non-interested directors, in 1996. The 1996 Plan authorizes the grant of
incentive stock options within the meaning of Section 422 of the Code and non-
qualified stock options for the purchase of an aggregate of 750,000 shares
(subject to adjustment for stock splits and similar capital changes) of Common
Stock to employees of the Company. As of April 4, 1997, under the 1996 Plan,
no non-qualified options to purchase shares of Common Stock had been granted
and incentive stock options to purchase 201,420 shares of Common Stock had
been granted. Accordingly, as of April 4, 1997, 548,580 shares of Common Stock
were available for future awards under the 1996 Plan.
In May 1996, Daniel F. Baker, the Treasurer and Chief Financial Officer,
Michael Fanger, an Executive Vice President and Michael Kowalsky, an Executive
Vice President, were granted stock options exercisable for 68,182, 68,182 and
45,456 shares of Common Stock, respectively. These options become exercisable
commencing on May 23, 1997 in five equal annual installments at an exercise
price per share of $11.00, except in the case of Mr. Kowalsky's shares which
vest in twelve equal quarterly installments commencing on August 22, 1996. In
addition, on November 29, 1996, a group of officers and employees were granted
stock options exercisable for 19,600 shares of Common Stock at an exercise
price of $14.375. These options become exercisable on November 29, 1997.
The Board of Directors has appointed the Compensation Committee of the Board
of Directors to administer the 1996 Plan. Awards of options under the 1996
Plan are granted at the discretion of the Compensation Committee, which
determines the eligible persons to whom, and the times at which, awards shall
be granted, the type of award to be granted, and all other related terms,
conditions and provisions of each award granted. In addition, all questions of
interpretation of the 1996 Plan are determined by the Compensation Committee.
65
<PAGE>
NON-INTERESTED DIRECTORS STOCK OPTION PLAN
In order to attract and retain highly qualified directors, and to ensure
close identification of interests between non-interested directors and the
Company's stockholders, the Board of Directors of the Company adopted and the
stockholders approved the Director Plan, which provides for the automatic
grant of options to directors of the Company who are not employees, officers
or interested persons of the Company (an "Eligible Director"). In accordance
with the provisions of the 1940 Act, the automatic grant of options under the
Director Plan did not occur until after the date of the approval of the plan
by the Commission. The Commission approved the Director Plan on December 23,
1996 (the "Approval Date").
The Director Plan provides that Eligible Directors serving on the Company's
Board of Directors prior to the Approval Date will each automatically receive
on the Approval Date the grant of an option to purchase the number of shares
of Common Stock determined by dividing $100,000 by the fair market value of
the Common Stock on the Approval Date and multiplying the resulting quotient
by a fraction representing the portion of a three-year term that the director
has been elected to serve. Options to purchase a total of 16,969 shares of
Common Stock at an option exercise price of $13.75 were granted to the
Eligible Directors on the Approval Date. These options begin to become
exercisable on the date of the Company's 1997 annual meeting of stockholders.
With respect to any Eligible Director who is elected or reelected as a
director of the Company after the Approval Date, such director will
automatically receive on the date of such election an option to purchase the
number of shares of Common Stock determined by dividing $100,000 by the fair
market value of the Common Stock on the date of such election.
The total number of shares which may be granted from time to time under the
Director Plan is 100,000 shares. The Director Plan is administered by a
committee of the Board of Directors comprised of directors who are not
eligible for grants or awards of options under the Director Plan. Options
granted under the Director Plan will be exercisable at a price equal to the
fair market value of the shares at the time the option is granted. Options
become exercisable with respect to one third of such shares granted on the
date of each annual stockholders meeting following the date on which the
option was granted, so long as the optionee remains an Eligible Director. No
option may be exercised more than five years after the date on which it is
granted. The number of shares available for options, the number of shares
subject to outstanding options and their exercise prices will be adjusted for
changes in outstanding shares such as stock splits and combinations of shares.
Shares purchased upon exercise of options, in whole or in part, must be paid
for in cash or by means of unrestricted shares of Common Stock or any
combination thereof. Currently, 83,031 shares of Common Stock are reserved for
future grants under the Director Plan.
Options granted under the Director Plan will not be transferable other than
by the laws of descent and during the optionee's life may be exercised only by
the optionee. All rights to exercise options will terminate after the optionee
ceases to be an Eligible Director for any reason, other than death, three
months following the date such director ceases to be an Eligible Director. If
the optionee dies before expiration of the option, his legal successors may
have the right to exercise the option in whole or in part within one year of
death.
The Director Plan may be terminated at any time by the Board of Directors,
and will terminate ten years after the effective date of the Director Plan.
The Board of Directors may not materially increase the number of shares
authorized under the plan or materially increase the benefits accruing to
participants under the plan without the approval of the stockholders of the
Company.
401(k) PLAN
In 1996, the Company became a participating employer in the Medallion
Funding Corp. 401(k) Investment Plan (the "401(k) Plan") which covers all full
and part-time employees of the Company who have attained the age of 21 and
have a minimum of one-half year of service. Under the 401(k) Plan, an employee
may elect to defer not less than 1.0% and no more than 15.0% of the total
annual compensation that would otherwise be paid to the employee, provided,
however, that employees' contributions may not exceed certain maximum amounts
determined under Section 402(g) of the Code. Employee contributions are
invested in various mutual funds, according to the directions of the employee.
At this time, employee contributions are not matched by the Company, but they
may be in the future.
66
<PAGE>
PRINCIPAL STOCKHOLDERS
At April 4, 1997 of the 15,000,000 shares of Common Stock authorized, there
were 8,250,000 shares of Common Stock outstanding and 24 holders of record.
The following table sets forth certain ownership information with respect to
the Common Stock for (i) those persons who directly or indirectly beneficially
own 5% or more of the outstanding Common Stock and (ii) all officers and
directors as a group.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL OWNERSHIP
PERCENTAGE OWNED
-----------------------------------
TYPE OF OWNERSHIP BEFORE AFTER
NAME AND ADDRESS (RECORD/BENEFICIAL/BOTH) SHARES OFFERING OFFERING
- ---------------- ------------------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Alvin Murstein(1)....... Both 1,340,000 16.24% 11.40%
205 East 42nd Street,
Suite 2020
New York, NY 10017
Andrew Murstein Family Beneficial 1,250,000 15.15 10.64
Trust(2)...............
205 East 42nd Street,
Suite 2020
New York, NY 10017
All officers and -- 2,632,424 31.74 22.40
directors as a group...
(10 persons)(3)
Janus Capital Beneficial 748,300 9.07 6.37
Corporation(4).........
100 Fillmore Street
Denver, CO 80206
The Capital Group Beneficial 646,500 7.83 5.50
Companies, Inc.(5).....
333 South Hope Street
Los Angeles, CA 90071
John Hancock Advisers, Beneficial 503,100 6.09 4.28
Inc.(6)................
John Hancock Place
Boston, MA 02117
</TABLE>
- ----------
(1) Includes 1,250,000 shares owned by the Alvin Murstein Second Family Trust
of which Alvin Murstein is a trustee and beneficiary.
(2) Andrew Murstein is a trustee and beneficiary of the Andrew Murstein Family
Trust.
(3) Includes (i) 1,250,000 shares owned by the Andrew Murstein Family Trust,
(ii) 1,250,000 shares owned by the Alvin Murstein Family Trust, (iii)
90,000 shares owned by Alvin Murstein and (iv) 42,424 shares issuable upon
the exercise of outstanding options exercisable on or before June 3, 1997.
(4) Janus Capital Corporation ("Janus Capital") beneficially owns shares held
by several affiliated investment management companies that beneficially
own 748,300 shares of Common Stock. One such affiliate, the Janus Venture
Fund, beneficially owns 449,950 shares of Common Stock. Thomas H. Bailey
is President, Chairman and a stockholder of Janus Capital and may also be
deemed to beneficially own all 748,300 shares.
(5) The Capital Group Companies, Inc. beneficially owns shares held by several
affiliated investment management companies that beneficially own 646,500
shares of Common Stock. One such affiliate, The Capital Guardian Trust
Company, beneficially owns 575,000 shares of Common Stock.
(6) John Hancock Advisers, Inc. ("JHA") beneficially owns shares held by
several affiliated investment management companies that beneficially own
503,100 shares of Common Stock. Through their parent or subsidiary
relationship to JHA, John Hancock Mutual Life Insurance Company, John
Hancock Subsidiaries, Inc., John Hancock Asset Management and The Berkeley
Financial Group may also be deemed to beneficially own these shares.
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CERTAIN TRANSACTIONS
Approximately $13.4 million of the net proceeds from the Company's initial
public offering were used by the Company to acquire Tri-Magna. Of this amount,
approximately $1.7 million, representing 12.7% of the Tri-Magna purchase
price, was paid to certain stockholders of Tri-Magna who are officers,
directors or 5.0% stockholders of the Company as follows: Alvin Murstein--$1.4
million; Andrew Murstein--$105,000; Marie Russo--$24,000; Michael Fanger--
$92,660; Stanley Kreitman--$10,000 and Benjamin Ward--$10,000. Alvin Murstein
used all of the net proceeds from his sale of Tri-Magna common stock to the
Company to purchase shares of Common Stock of the Company at the initial
public offering price per share of $11.00. In addition, approximately $2.5
million, representing 18.7% of the Tri-Magna purchase price was paid to
certain stockholders of Tri-Magna who were also directors and officers of Tri-
Magna as follows: Myron Cohen--$652,000; Robert Fanger--$686,000; Richard
Giesser--$253,000; Barnet Lieberman--$212,000; Michael Miller--$663,980 and T.
Lincoln Morison, Jr.--$10,000. Messrs. Cohen, Fanger, Giesser, Lieberman,
Miller and Morison did not become officers, directors or 5.0% stockholders of
the Company. As discussed in the following paragraph, Messrs. Cohen, Fanger
and Miller are officers, directors and stockholders of FMC.
In May 1996, the Company and FMC entered into the Sub-Advisory Agreement.
Under the Sub-Advisory Agreement, the Company pays FMC monthly in arrears, as
compensation for the services rendered by FMC, a fee of $18,750. Myron Cohen,
Robert Fanger and Michael Miller control FMC. They had served as directors and
executive officers of Tri-Magna and MFC since inception and, along with Alvin
Murstein, comprised Tri-Magna's Executive Committee. Messrs. Cohen, Fanger and
Miller ceased to hold their offices with Tri-Magna and MFC when these business
were acquired by the Company in May 1996. Subject to certain limitations, the
Murstein Trusts have agreed to maintain in escrow Common Stock worth 200% of
the advisory fees payable by the Company under the Sub-Advisory Agreement
during the first 48 months of service, thereby assuring FMC of the payment of
$900,000 in advisory fees. In the event that the Company or its stockholders
terminate or do not renew the Sub-Advisory Agreement during this period for
any reason other than (i) breach of the Sub-Advisory Agreement by FMC or (ii)
FMC's willful malfeasance, bad faith or gross negligence, the escrow agent
will assign to FMC Common Stock in escrow equal in value to the amount of the
fees payable over the balance of the 48-month period. If the value of the
Common Stock required to be deposited in escrow is less than the value of the
fees payable, FMC will have no further recourse against the Murstein Trusts.
See "Investment Objectives, Policies and Restrictions--The Investment
Adviser."
Mario M. Cuomo is a director of the Company and a partner in the law firm of
Willkie Farr & Gallagher which serves as counsel to the Underwriters in
connection with the Offering.
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DETERMINATION OF NET ASSET VALUE
The net asset value per share of Common Stock is determined quarterly, as
soon as practicable after and as of the end of each calendar quarter, by
dividing the value of total assets minus liabilities and negative goodwill by
the total number of shares of Common Stock outstanding on a fully diluted
basis at that date.
A substantial portion of the Company's assets consists of the loans held in
the portfolios of the RIC Subsidiaries. The RIC Subsidiaries' respective
Boards of Directors value their respective loans in connection with their
respective determinations of net asset value. The net asset value per share of
each subsidiary's common stock is determined quarterly, as soon as practicable
after and as of the end of each calendar quarter, by dividing the value of
total assets minus liabilities by the total number of shares outstanding on a
fully diluted basis at that date.
In making its valuation determination, each of the Boards of Directors of
the RIC Subsidiaries adhere to a valuation policy approved by the SBA and
adopted by such Board of Directors. In calculating the value of the relevant
subsidiary's total assets, loans are valued at fair value as determined in
good faith by that subsidiary's Board of Directors. In making such
determinations, the Board of Directors value loans and nonconvertible debt
securities for which there exists no public trading market at cost plus
amortized original issue discount, if any, unless adverse factors lead to a
determination of a lesser value, at which time net unrealized depreciation of
investments would be recognized. Convertible debt securities and warrants are
valued to reflect the worth of the underlying equity security less the
conversion or exercise price. In valuing equity securities for which there
exists no public trading market, investment cost is presumed to represent fair
value except in cases where the valuation policy provides that the Board of
Directors may determine fair value on the basis of (i) financings by
unaffiliated investors, (ii) a history of positive cash flow from operations
for two years using conservative financial measures such as earnings ratios or
cash flow multiples, (iii) the market value of comparable companies which are
publicly traded (discounted for illiquidity) and (iv) other pertinent factors.
A substantial portion of each of the RIC Subsidiaries' assets consists of
loans carried at fair values determined by such subsidiary's Board of
Directors. The determination of fair values involves subjective judgment not
susceptible to substantiation by auditing procedures performed by independent
public accountants. Accordingly, under current standards, the accountants'
opinion on the Financial Statements included in this Prospectus refers to the
uncertainty with respect to the possible effect on such Financial Statements
of such valuations.
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DIVIDEND REINVESTMENT PLAN
Pursuant to the Company's Dividend Reinvestment Plan (the "Reinvestment
Plan"), a stockholder whose shares are registered in his own name can have all
distributions reinvested in additional shares of Common Stock by The First
National Bank of Boston (the "Plan Agent") if the stockholder enrolls in the
Reinvestment Plan by delivering an Authorization Form to the Plan Agent prior
to the corresponding dividend declaration date. The Plan Agent will effect
purchases of Common Stock under the Reinvestment Plan in the open market.
Holders of Common Stock who do not elect to participate in the Reinvestment
Plan will receive all distributions in cash paid by check mailed directly to
the stockholder of record (or if the Common Stock is held in street or other
nominee name, then to the nominee) as of the relevant record date, by the Plan
Agent, as dividend disbursing agent. Stockholders whose shares are held in the
name of a broker or nominee or stockholders transferring such an account to a
new broker or nominee should contact the broker or nominee to determine
whether and how they may participate in the Reinvestment Plan.
The Plan Agent serves as agent for the holders of Common Stock in
administering the Reinvestment Plan. After the Company declares a dividend,
the Plan Agent will, as agent for the participants, receive the cash payment
and use it to buy Common Stock on the Nasdaq National Market or elsewhere for
the participants' accounts. The price of the shares will be the average market
price at which such shares were purchased by the Plan Agent.
Participants in the Reinvestment Plan may withdraw from the Reinvestment
Plan upon written notice to the Plan Agent. Such withdrawal will be effective
immediately if received not less than ten days prior to a dividend record
date; otherwise, it will be effective the day after the related dividend
distribution date. When a participant withdraws from the Reinvestment Plan or
upon termination of the Reinvestment Plan as provided below, certificates for
whole shares of Common Stock credited to his or her account under the
Reinvestment Plan will be issued and a cash payment will be made for any
fractional share of Common Stock credited to such account.
The Plan Agent will maintain each participant's account in the Reinvestment
Plan and will furnish monthly written confirmations of all transactions in
such account, including information needed by the stockholder for personal and
tax records. Common Stock in the account of each Reinvestment Plan participant
will be held by the Plan Agent in non-certificated form in the name of such
participant. Proxy materials relating to stockholders' meetings of the Company
will include those shares purchased as well as shares held pursuant to the
Reinvestment Plan.
In the case of participants whose beneficially owned shares are held in the
name of banks, brokers or other nominees, the Plan Agent will administer the
Reinvestment Plan on the basis of the number of shares of Common Stock
certified from time to time by the record holders as the amount held for the
account of such beneficial owners. Shares of Common Stock may be purchased by
the Plan Agent through any of the Underwriters, acting as broker or, after the
completion of the Offering, dealer.
The Plan Agent's fees for the handling or reinvestment of dividends and
other distributions will be paid by the Company. Each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of
distributions. There are no other charges to participants for reinvesting
distributions.
Distributions are taxable whether paid in cash or reinvested in additional
shares, and the reinvestment of distributions pursuant to the Reinvestment
Plan will not relieve participants of any U.S. federal income tax or state
income tax that may be payable or required to be withheld on such
distributions. See "Federal Income Tax Considerations."
Experience under the Reinvestment Plan may indicate that changes are
desirable. Accordingly, the Company reserves the right to amend or terminate
the Reinvestment Plan as applied to any distribution paid subsequent to
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written notice of the change sent to all stockholders of the Company at least
90 days before the record date for such distribution.
The Reinvestment Plan also may be amended or terminated by the Plan Agent by
at least 90 days' written notice to all stockholders of the Company. All
correspondence concerning the Reinvestment Plan should be directed to, and
additional information can be obtained from, the Plan Agent at 150 Royall
Street, Canton, Massachusetts 02021 (telephone 617-575-3170).
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of material federal income tax considerations is based
on current law and does not purport to deal with all aspects of taxation that
may be relevant to particular stockholders in light of their personal
investment or tax circumstances, or to certain types of stockholders
(including insurance companies, financial institutions, non-profit
institutions, ERISA plans and broker-dealers) subject to special treatment
under the federal income tax laws. Each prospective purchaser is advised to
consult his own tax adviser regarding the specific tax consequences to him of
the purchase, ownership and sale of the shares.
The Company has elected and qualified to be taxed as a RIC under Sections
851 through 855 of the Code. The Company operates in a manner that permits it
to satisfy the requirements for taxation as a RIC under the applicable
provisions of the Code, but no assurance can be given that it will operate in
a manner so as to remain qualified. The sections of the Code relating to
qualification and operation as a RIC are highly technical and complex. The
following sets forth the material aspects of the Code sections that govern the
federal income tax treatment of a RIC and its stockholders. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations thereunder, and administrative and judicial interpretations
thereof.
In brief, if certain detailed conditions of the Code are met, business
development companies, such as the Company, that otherwise would be treated
for federal income tax purposes as corporations are generally not taxed at the
corporate level on their "investment company taxable income" that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder
levels) that generally results from the use of corporate investment vehicles.
A RIC is, however, generally subject to federal income tax at regular
corporate rates on undistributed investment company taxable income.
Furthermore, in order to avoid a 4% nondeductible federal excise tax on
undistributed income and capital gains, the Company must distribute (or be
deemed to have distributed) by December 31 of each year at least 98% of its
ordinary income for such year, at least 98% of its capital gain net income
(which is the excess of its capital gain over its capital loss and is
generally computed on the basis of the one-year period ending on October 31 of
such year) and any amounts that were not distributed in the previous calendar
year and on which no income tax has been paid.
If the Company fails to qualify as a RIC in any year, it will be subject to
federal income tax as if it were a domestic corporation, and its stockholders
will be taxed in the same manner as stockholders of ordinary corporations. In
this event, the Company could be subject to potentially significant tax
liabilities and the amount of cash available for distribution to its
stockholders could be reduced.
REQUIREMENTS FOR QUALIFICATION
The Code defines the term "RIC" to include a domestic corporation that has
elected to be treated as a business development company under the 1940 Act and
meets certain requirements. These requirements include that (a) the company
derive at least 90% of its gross income for each taxable year from dividends,
interest,
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interest payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities or foreign currencies, or other
income derived from its business of investing in such stocks, securities or
currencies; (b) the company derives less than 30% of its gross income for each
taxable year from the sale or other disposition of any of the following that
are held for less than three months: (i) stock or securities and (ii) certain
other financial interests (the "short-short test"); and (c) the company
diversifies its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the value of its total assets is represented by
(A) cash, and cash items (including receivables), U.S. Government securities
and securities of other RICs, and (B) other securities limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
total assets of the company and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of total
assets is invested in the securities (other than U.S. Government securities or
securities of other RICs) of any one issuer or two or of more issuers
controlled by the company and engaged in the same, similar or related trades
or businesses. The foregoing diversification requirements under the Code could
restrict the Company's expansion of its taxicab rooftop advertising business.
See "Risk Factors--Possible Loss of Pass-Through Tax Treatment."
Furthermore, in order to qualify as a RIC under the Code, a company also
must distribute to its stockholders in each taxable year at least 90% of (a)
its investment company taxable income and (b) the excess of its tax-exempt
interest income over certain disallowed deductions.
TAXATION OF THE COMPANY
So long as the Company satisfies the above requirements, neither the
investment company taxable income it distributes to stockholders nor any net
capital gain that is distributed to stockholders subjects the Company to
federal income tax. Investment company taxable income and/or net capital gains
that are retained by the Company are subject to federal income tax at
corporate income tax rates; provided, however, that to the extent that the
Company retains any net long-term capital gains, it may designate them as
"deemed distributions" and pay a tax thereon for the benefit of its
stockholders. The Company distributes to its stockholders for each of its
taxable years substantially all of its investment company taxable income and
may or may not distribute any capital gains.
If the Company acquires debt obligations that were originally issued at a
discount, or that bear interest rates that do not call for payments at fixed
rates (or certain "qualified variable rates") at regular intervals over the
life of the obligation, it will be required to include as interest income each
year a portion of the "original issue discount" that accrues over the life of
the obligation regardless of whether it receives the income, and it will be
obligated to make distributions accordingly. In this event, the Company may
borrow funds or sell assets to meet the distribution requirements. However,
under the 1940 Act, the Company will not be permitted to make distributions to
stockholders while senior securities are outstanding unless it meets certain
asset coverage requirements. If the Company is unable to make the required
distributions, it may fail to qualify as a RIC or may be subject to the
nondeductible 4% excise tax. Furthermore, the SBA restricts the distributions
that may be made to an amount equal to undistributed net realized earnings
less the allowance for unrealized loan losses (which in the case of the
Company is included in unrealized depreciation).
TAXATION OF STOCKHOLDERS
As long as the Company qualifies as a RIC, distributions made to its taxable
domestic stockholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) will be taken into account by them
as ordinary income. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Company's actual net long-term capital gain for the taxable year)
without regard to the period for which the stockholder has held its stock.
Corporate stockholders however, are subject to tax on capital gain dividends
at the same rate as ordinary income. To the extent that the Company makes
distributions in excess of current and accumulated earnings and profits, these
distributions are treated first as a tax-free return of capital to the
stockholder, reducing the tax basis of a stockholder's Common
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Stock by the amount of such distribution (but not below zero), with
distributions in excess of the stockholders's tax basis taxable as capital
gains (if the Common Stock is held as a capital asset). In addition, any
dividends declared by the Company in October, November or December of any year
and payable to a stockholder of record on a specific date in any such month
shall be treated as both paid by the Company and received by the stockholder
on December 31 of such year, provided that the dividend is actually paid by
the Company during January of the following calendar year. Stockholders may
not include in their individual income tax returns any net operating losses or
capital losses of the Company.
If the Company chooses to retain and pay tax on any net capital gain rather
than distribute such gain to its stockholders, the Company will designate such
deemed distribution in a written notice to stockholders prior to the
expiration of 60 days after the close of the taxable year. Each stockholder
would then be treated for federal income tax purposes as if the Company had
distributed to such stockholder on the last day of its taxable year the
stockholder's pro rata share of the net long-term capital gain retained by the
Company and the stockholder had paid its pro rata share of the taxes paid by
the Company and reinvested the remainder in the Company.
In general, if a stockholder holds Common Stock as a capital asset, such
stockholder will recognize short-term capital gain or loss if such stock were
held for one year or less (after applying certain holding period rules) and
long-term capital gain or loss if such stock were held for more than one year.
BACKUP WITHHOLDING
The Company reports to its domestic stockholders and to the Internal Revenue
Service the amount of dividends paid during each calendar year and the amount
of tax withheld, if any, with respect thereto. Under backup withholding rules,
a stockholder may be subject to backup withholding at the rate of 31% with
respect to dividends paid unless such stockholder (a) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (b) provides a taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A stockholder that
does not provide the Company with its correct taxpayer identification number
may also be subject to penalties imposed by the Internal Revenue Service. Any
amount paid as backup withholding will be creditable against the stockholder's
federal income tax liability.
OTHER TAX CONSIDERATIONS
Reinvestment Plan
Stockholders participating in the Reinvestment Plan will be deemed to have
received the gross amount of any cash distributions which would have been paid
by the Company to such stockholders had they not elected to participate. These
deemed distributions will be treated as actual distributions from the Company
to the participating stockholders and will retain the character and tax effect
applicable to distributions from the Company generally. Participants in the
Reinvestment Plan are subject to federal income tax on the amount of the
deemed distributions to the extent that such distributions represent dividends
or gains, even though they receive no cash. Shares of Common Stock received
under the Reinvestment Plan will have a holding period beginning with the day
after purchase, and a tax basis equal to their cost (which is the gross amount
of the deemed distribution). See "Dividend Reinvestment Plan."
State, Local and Foreign Taxes
The Company and its stockholders may be subject to state, local or foreign
taxation in various jurisdictions, including those in which it or they
transact business or reside. The state, local and foreign tax treatment of the
Company and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisers regarding the effect of state, local and
foreign tax laws on an investment in the Common Stock of the Company.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 1,000,000 shares of
preferred stock, par value $.01 per share (the "Preferred Stock") and
15,000,000 shares of Common Stock, par value $.01 per share. Upon completion
of the Offering, the Company will have outstanding 11,750,000 shares of Common
Stock (12,275,000 shares of Common Stock if the Underwriters' over-allotment
option is exercised in full) and no shares of Preferred Stock. As of April 4,
1997, there were no shares of Preferred Stock outstanding and 8,250,000 shares
of Common Stock outstanding and 24 record holders.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of the Common Stock are entitled to such dividends as may be declared
in the discretion of the Board of Directors out of funds legally available
therefor. See "Distributions and Price Range of Common Stock." Holders of
Common Stock are entitled to share ratably in the net assets of the Company
upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any Preferred Stock then outstanding. The
holders of Common Stock have no preemptive rights to purchase shares of stock
of the Company. Shares of Common Stock are not subject to any redemption
provisions and are not convertible into any other securities of the Company.
All outstanding shares of Common Stock are, and the shares of Common Stock to
be issued pursuant to the Offering will be upon payment therefor, fully paid
and non-assessable.
PREFERRED STOCK
Subject to the asset coverage requirements of the 1940 Act, Preferred Stock
may be issued from time to time by the Board of Directors as shares of one or
more classes or series. Subject to the provisions of the Company's Certificate
and limitations prescribed by law, the Board of Directors is expressly
authorized to adopt resolutions to issue the shares, to fix the number of
shares and to change the number of shares constituting any series, and to
provide for or change the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any class or series of the
Preferred Stock, in each case without any further action or vote by the
stockholders. The Company has no current plans to issue any shares of
Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of shares of the Preferred Stock pursuant to the
Board of Directors' authority described above may adversely affect the rights
of the holders of Common Stock. For example, Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Certificate and under Delaware law, directors of
the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in
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connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
for dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
AUTHORIZED AND OUTSTANDING COMMON STOCK
The following table illustrates authorized and outstanding securities of the
Company on April 4, 1997:
AUTHORIZED AND OUTSTANDING SECURITIES
<TABLE>
<CAPTION>
AMOUNT HELD BY
THE COMPANY
AMOUNT OR FOR AMOUNT
ITLE OF CLASST AUTHORIZED ITS ACCOUNT OUTSTANDING
- -------------- ---------- -------------- -----------
<S> <C> <C> <C>
Common Stock.............................. 15,000,000 -- 8,250,000
Preferred Stock........................... 1,000,000 -- --
</TABLE>
DELAWARE LAW AND CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
THE BY-LAWS
The Company's Certificate and By-Laws include provisions that could make
more difficult the acquisition of the Company by means of a merger, tender
offer, a proxy contest or otherwise. These provisions, as described below, are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control
of the Company first to negotiate with the Company. These provisions may also,
however, inhibit a change in control of the Company in circumstances that
could give the holders of the Common Stock the opportunity to realize a
premium over the then prevailing market price of the Common Stock. In
addition, such provisions could adversely affect the market price for the
Common Stock. The Company believes that the benefits of increased protection
of its potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiations with respect to such proposals could result in an improvement of
their terms.
The Certificate and the By-Laws provide that the Board of Directors (the
"Board") be divided into three classes of directors, with the term of each
class expiring in a different year. See "Management." The By-Laws provide that
the number of directors will be fixed from time to time exclusively by the
Board, but shall consist of not more than 15 nor less than three directors. A
majority of the Board then in office has the sole authority to fill any
vacancies on the Board. The Certificate provides that directors may be removed
only by the affirmative vote of holders of at least 75% of the voting power of
all of the then outstanding shares of stock entitled to vote generally in the
election of directors ("Voting Stock"), voting together as a single class.
The Certificate provides that stockholder action can be taken only at an
annual or special meeting of stockholders and prohibits stockholder action by
written consent in lieu of a meeting. The Certificate and By-Laws provide that
special meetings of stockholders can be called by the Chairman of the Board of
the Company, pursuant to a resolution approved by a majority of the total
number of directors which the Company would have if there were no vacancies on
the Board, or by the stockholders owning at least 20% of the stock entitled to
vote at the meeting. The business permitted to be conducted at any special
meeting of stockholders is limited to the business brought before the meeting
by the Chairman of the Board, or at the request of a majority of the members
of the Board, or as specified in the stockholders' notice of a meeting.
The By-Laws set forth an advance notice procedure with regard to the
nomination, other than by or at the direction of the Board, of candidates for
election as directors and with regard to business brought before an annual
meeting of stockholders of the Company.
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The Certificate and By-Laws contain provisions requiring the affirmative
vote of the holders of at least 75% of the Voting Stock, voting together as a
single class, to amend certain provisions of the Certificate relating
primarily to anti-takeover provisions and to the limitations on director
liability and to amend the By-Laws.
The Certificate empowers the Board, when considering a tender offer or
merger or acquisition proposal, to take into account factors in addition to
potential economic benefits to stockholders. Such factors may include
(i) comparison of the proposed consideration to be received by stockholders in
relation to the then current market price of the capital stock, the estimated
current value of the Company in a freely negotiated transaction, and the
estimated future value of the Company as an independent entity; (ii) the
impact of such a transaction on the customers and employees of the Company,
and its effect on the communities in which the Company operates; and (iii) the
ability of the Company to fulfill its objectives under applicable statutes and
regulations.
The Certificate prohibits the Company from purchasing any shares of the
Company's stock from any person, entity or group that beneficially owns 5% or
more of the Company's Voting Stock at a price exceeding the average closing
price for the 20 trading days prior to the purchase date, unless a majority of
the Company's disinterested stockholders approve the transaction. This
restriction on purchases by the Company does not apply to any offer to
purchase shares of a class of the Company's stock which is made on the same
terms and conditions to all holders of that class of stock, to any purchase of
stock owned by such a 5% stockholder occurring more than two years after such
stockholder's last acquisition of the Company's stock, to any purchase of the
Company's stock in accordance with the terms of any stock option or employee
benefit plan, or to any purchase at prevailing market prices pursuant to a
stock purchase program.
Section 203 of the Delaware General Corporation Law ("DGCL") is applicable
to corporations organized under the laws of the State of Delaware. Subject to
certain exceptions set forth therein, Section 203 of the DGCL provides that a
corporation shall not engage in any business combination with any "interested
stockholder" for a three-year period following the date that such stockholder
becomes an interested stockholder unless (a) prior to such date, the Board of
Directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (b) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding certain shares) or (c) on or
subsequent to such date, the business combination is approved by the Board of
Directors of the corporation and by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the interested
stockholder. Except as specified therein, an interested stockholder is defined
to mean any person that (i) is the owner of 15% or more of the outstanding
voting stock of the corporation, or (ii) is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within three years immediately prior to the
relevant date, and the affiliates and associates of such person referred to in
clause (i) or (ii) of this sentence. Under certain circumstances, Section 203
of the DGCL makes it more difficult for an interested stockholder to effect
various business combinations with a corporation for a three-year period,
although the stockholders may, by adopting an amendment to the corporation's
certificate of incorporation or by-laws, elect not to be governed by this
section, effective twelve months after adoption. The Company's Certificate and
By-Laws do not exclude the Company from the restrictions imposed under Section
203 of the DGCL. It is anticipated that the provisions of Section 203 of the
DGCL may encourage companies interested in acquiring the Company to negotiate
in advance with the Board.
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<PAGE>
REGULATION
The Company is a closed-end, non-diversified management investment company
that has elected to be treated as a business development company and, as such,
is subject to regulation under the 1940 Act. The 1940 Act contains
prohibitions and restrictions relating to transactions between investment
companies and their affiliates, principal underwriters and affiliates of those
affiliates or underwriters. In addition, the 1940 Act provides that the
Company may not change the nature of its business so as to cease to be, or to
withdraw its election as, a business development company unless so authorized
by the vote of a "majority of the Company's outstanding voting securities," as
defined under the 1940 Act.
The Company is permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock (collectively, "senior
securities," as defined under the 1940 Act) senior to the shares of Common
Stock offered hereby if the Company's asset coverage of such indebtedness and
all senior securities is at least 200% immediately after each such issuance.
Subordinated SBA debentures and preferred stock guaranteed by or issued to the
SBA by the RIC Subsidiaries, are not subject to this asset coverage test. In
addition, while senior securities are outstanding, provision must be made to
prohibit the declaration of any dividend or other distribution to stockholders
(except stock dividends) or the repurchase of such securities or shares unless
the Company meets the applicable asset coverage ratios at the time of the
declaration of the dividend or distribution or repurchase.
Under the 1940 Act, a business development company may not acquire any asset
other than Qualifying Assets unless, at the time the acquisition is made,
certain Qualifying Assets represent at least 70% of the value of the company's
total assets. The principal categories of Qualifying Assets relevant to the
proposed business of the Company are the following:
(1) Securities purchased in transactions not involving a public offering
from the issuer of such securities, which issuer is an eligible portfolio
company. An "eligible portfolio company" is defined in the 1940 Act as any
issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company other than an SBIC wholly-owned by
the business development company; and
(c) satisfies one or more of the following requirements:
(i) issuer does not have a class of securities with respect to
which a broker or dealer may extend margin credit; or
(ii) issuer is controlled by a BDC and the BDC has an affiliated
person serving as a director of issuer;
(iii) issuer has total assets of not more than $4 million and
capital and surplus (stockholders' equity less retained earnings) of
not less than $2 million, or such other amounts as the Commission
may establish by rule or regulation; or
(iv) issuer meets such requirements as the Commission may
establish from time to time by rule or regulation.
(2) Securities for which there is no public market and which are
purchased in transactions not involving a public offering from the issuer
of such securities where the issuer is an eligible portfolio company which
is controlled by the BDC.
(3) Securities received in exchange for or distributed on or with respect
to securities described in (1) or (2) above, or pursuant to the exercise of
options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
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<PAGE>
In addition, a business development company must have been organized (and
have its principal place of business) in the United States for the purpose of
making investments in the types of securities described in (1) or (2) above.
In order to count securities as Qualifying Assets for the purpose of the 70%
test, the business development company must either control the issuer of the
securities or must make available to the issuer of the securities significant
managerial assistance; except that, where the business development company
purchases such securities in conjunction with one or more other persons acting
together, one of the other persons in the group may make available the
required managerial assistance. The Company believes that the common stock of
the Founding Companies held are Qualifying Assets.
Edwards is an SBIC and, as explained in further detail below, MFC and TCC
were formerly SSBICs and were converted to SBICs under Conversion Agreements
entered into with the SBA in February 1997. The SBIA authorizes the
organization of SBICs as vehicles for providing equity capital, long term
financing and management assistance to small business concerns. A small
business concern, as defined in the SBIA and the SBA Regulations, is a
business that is independently owned and operated and which is not dominant in
its field of operation. In addition, at the end of each fiscal year, at least
20% of the total amount of loans made since April 25, 1994 by each SBIC must
be made to a subclass of small business concerns that (i) have a net worth,
together with any affiliates, of $6 million or less and average annual net
income after U.S. federal income taxes for the preceding two years of $2
million or less (average annual net income is computed without the benefit of
any carryover loss), or (ii) satisfy alternative criteria under SBA
Regulations that focus on the industry in which the business is engaged and
the number of persons employed by the business or its gross revenues. SBA
Regulations also prohibit an SBIC from providing funds to a small business
concern for certain purposes, such as relending and reinvestment.
Prior to the enactment of the Small Business Programs Improvement Act of
1996 (the "Improvement Act"), the SBIA authorized the organization of SSBICs
as vehicles for providing the same forms of assistance as SBICs provide to
small business concerns which are at least 50% owned and managed by persons
whose participation in the free enterprise system is hampered because of
social or economic disadvantages. Disadvantaged Borrowers include African
Americans, Asian Sub-Continent Americans, Eskimos, Hispanic Americans, Native
Americans, Vietnam War era veterans and other groups identified by the SBA. A
small business concern must either (i) have a tangible net worth, together
with any affiliates, of $18 million or less and an average annual net income
after U.S. federal income taxes for the preceding two years of $6 million or
less (average annual net income is computed without the benefit of any
carryover loss) or (ii) satisfy alternative criteria under the SBA Regulations
that focus on the industry in which the business is engaged and the number of
persons employed by the business or its gross revenues.
The Improvement Act, which became effective on September 30, 1996,
effectively terminated the SSBIC program by repealing the provisions of the
SBIA which authorized SSBICs. Following the enactment of the Improvement Act
and termination of the SSBIC program, the SBA established procedures for
existing SSBICs to convert to SBICs. In February 1997, MFC and TCC each
entered into an agreement with the SBA whereby MFC and TCC were converted to
SBICs subject to certain conditions imposed by the SBA. Under the MFC
Conversion Agreement, MFC is authorized to make loans to borrowers other than
Disadvantaged Borrowers provided that, at the time of such loan, MFC has in
its portfolio outstanding loans to Disadvantaged Borrowers with an aggregate
cost basis equal to or exceeding the value of the unamortized repurchase
discount under the preferred stock repurchase agreement between MFC and the
SBA. At December 31, 1996 the amount of such unamortized repurchase discount
was $3.2 million and MFC had outstanding loans to Disadvantaged Borrowers with
an aggregate cost basis equal to $100.5 million. Likewise, under the TCC
Conversion Agreement, TCC is authorized to make loans to persons other than
Disadvantaged Borrowers provided that, at the time of such loan, TCC has in
its portfolio loans outstanding to Disadvantaged Borrowers with an aggregate
cost basis equal to the sum of (i) the principal amount of TCC's outstanding
SBA debentures which are subsidized by the SBA; (ii) the value of the
unamortized repurchase discount under the preferred stock repurchase agreement
between TCC and the SBA; and (iii) the amount of any unamortized preferred
stock dividends under the preferred stock purchase agreement. At December 31,
1996, (i) the principal amount of TCC's outstanding subsidized SBA debentures
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<PAGE>
was $5.6 million, (ii) the amount of the unamortized repurchase discount was
$1.4 million, and (iii) the amount of unamortized preferred stock dividends
was $99,000, for a sum total of approximately $7.1 million. At December 31,
1996, TCC had outstanding loans to Disadvantaged Borrowers with an aggregate
cost basis of $16.2 million.
Under current SBA Regulations and subject to local usury laws, the maximum
rate of interest that MFC, TCC or Edwards may charge may not exceed (i) the
higher of 19% and (ii) the sum of (a) the higher of (I) that company's
weighted average cost of qualified borrowings, as determined under SBA
Regulations, or (II) the current subordinated SBA debenture rate, plus (b)
11%, rounded off to the next lower eighth of one percent. The maximum rate of
interest permitted on loans originated by the RIC Subsidiaries is 19%. At
December 31, 1996, the Company's outstanding Medallion Loans had a weighted
average rate of interest of 9.92% and outstanding Commercial Installment Loans
had a weighted average rate of interest of 13.51%. SBA Regulations also
require that each loan originated by SBICs have a term of between five years
and 20 years.
The SBA restricts the ability of SBICs to repurchase their capital stock, to
retire their subordinated SBA debentures and to lend money to their officers,
directors and employees or invest in affiliates thereof. The SBA also
prohibits, without prior SBA approval, a "change of control" or transfers
which would result in any person (or group of persons acting in concert)
owning 10% or more of any class of capital stock of an SBIC. A "change of
control" is any event which would result in the transfer of the power, direct
or indirect, to direct the management and policies of an SBIC, whether through
ownership, contractual arrangements or otherwise.
Under SBA Regulations, without prior SBA approval, loans by licensees with
outstanding SBA leverage to any single small business concern may not exceed
20.0% of an SBIC's Leveragable Capital. Under the terms of their respective
Conversion Agreement, however, MFC and TCC are authorized to make loans to
Disadvantaged Borrowers in amounts not exceeding 30% of their respective
Leveragable Capital.
SBICs must invest funds that are not being used to make loans in investments
permitted under SBA Regulations. These permitted investments include direct
obligations of, or obligations guaranteed as to principal and interest by, the
government of the United States with a term of 15 months or less and deposits
maturing in one year or less issued by an institution insured by the FDIC. The
percentage of an SBIC's assets so invested will depend on, among other things,
loan demand, timing of equity infusions and SBA funding and availability of
funds under credit facilities.
SBICs may purchase voting securities of small business concerns in
accordance with SBA Regulations. SBA Regulations prohibit SBICs from
controlling a small business concern except where necessary to protect an
investment. SBA Regulations presume control when SBICs purchase (i) 50% or
more of the voting securities of a small business concern if the small
business concern has less than 50 stockholders or (ii) more than 20% (and in
certain situations up to 25%) of the voting securities of a small business
concern if the small business concern has 50 or more stockholders.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market, or
the perception that such sales could occur, could adversely affect market
prices prevailing from time to time. As described below, only a limited number
of shares will be available for sale shortly after the Offering because of
certain contractual and legal restrictions on resale. Sales of substantial
amounts of Common Stock in the public market after these restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of the Offering, the Company will have outstanding
11,750,000 shares of Common Stock (12,275,000 if the Underwriter's over-
allotment option is exercised in full). Of these shares, 5,660,000 shares and
the 3,500,000 shares offered hereby (4,025,000 if the Underwriters' over-
allotment option is exercised in full) will be freely tradable without
restriction or registration under the Securities Act (except to the extent
purchased by affiliates of the Company).
SALES OF RESTRICTED SHARES
Of the remaining 2,590,000 shares (the "Restricted Shares") , 2,500,000
shares were issued and sold by the Company in private transactions in reliance
upon exemptions from registration under the Securities Act and are restricted
securities under Rule 144 of the Securities Act. These shares were issued and
sold at the Company's inception on October 23, 1995 at their fair value at the
time of $2,000 or, after giving effect to a 12,500 for one stock split in May
1996, less than one cent per share. All of the Restricted Shares are subject
to Lock-up Agreements until May 23, 1998 as described below. Upon the
expiration of the Lock-up Period, the Restricted Shares will be eligible for
sale pursuant to the recently amended Rule 144. Accordingly they will become
eligible for sale subject to the Rule 144 resale limitations, including the
volume restrictions discussed in the following paragraph, 90 days after this
Prospectus.
Restricted Shares may not be sold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, including pursuant to Rule 144. In general, under the recently
amended Rule 144 which becomes effective on April 29, 1997, a person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year, including affiliates of the Company, would be
entitled to sell in brokers' transactions or to market makers within any
three-month period a number of Restricted Shares that does not exceed the
greater of one percent (1%) of the then outstanding shares of the Company's
Common Stock (approximately 117,500 shares, based on the number of shares
outstanding after the Offering assuming no exercise of the Underwriters' over-
allotment option) or the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the date
on which notice of the sale is filed with the Commission. Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Company.
Restricted Shares held by affiliates of the Company eligible for sale in the
public market under Rule 144 are subject to the foregoing volume limitations
and other restrictions. Affiliates may sell shares not constituting Restricted
Shares only in accordance with the foregoing volume limitations and other Rule
144 restrictions, but without regard to the holding period.
A person who is not an affiliate of the Company at any time during the 90
days preceding a sale, and who has beneficially owned Restricted Shares for at
least two years, would be entitled to sell such Restricted Shares under the
recently amended Rule 144(k) without regard to the availability of current
public information, volume limitations, manner of sale provisions or notice
requirements. No stockholder of the Company will have held Common Stock for
two years until October 23, 1997.
Rule 144A provides a non-exclusive safe harbor exemption from the
registration requirements of the Securities Act for specified resales of
restricted securities to certain institutional investors. Rule 144A allows
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unregistered resales of restricted securities to a qualified institutional
buyer, which generally includes an entity, acting for its own account or the
account of other qualified institutional buyers, that in the aggregate owns
and invests on a discretionary basis at least $100 million in securities of
unaffiliated issuers. Rule 144A does not extend an exemption to the offer or
sale of securities that, when issued, were of the same class as securities
listed on a national securities exchange or quoted in an automated interdealer
quotation system. Because the Restricted Shares, when they were issued, were
not of the same class as any listed or quoted securities, all of such
securities are eligible for resale under Rule 144A.
LOCK-UP AGREEMENTS
Pursuant to Lock-up Agreements with Alvin and Andrew Murstein and the
Murstein Trusts, all of the 2,500,000 Restricted Shares are subject to certain
resale restrictions in addition to those imposed under Rule 144. Each party to
these Lock-up Agreements has agreed that he will not, directly or indirectly,
offer for sale, sell, contract to sell, grant an option to purchase or
otherwise dispose of any shares of the Company's Common Stock, except (i)
shares escrowed by the Murstein Trusts for the benefit of FMC or (ii) gifts to
family members or charitable institutions, provided that such family member or
charitable institution agrees to be bound by such Lock-up Agreement, until May
23, 1998 without the prior written consent of Furman Selz LLC. The consent of
Furman Selz LLC will not affect the resale restrictions under Rule 144. In
addition, the Company and all of the Company's other officers and directors
have agreed that for a period of 90 days following the date of this
Prospectus, they will not, without the prior written consent of Furman Selz
LLC, directly or indirectly, offer for sale, sell, contract to sell, or grant
any option to purchase or otherwise dispose of any shares of the Common Stock,
except in the case of the Company, options granted under the 1996 Plan or the
Director Plan or shares issued pursuant to the exercise of outstanding
options. See "Underwriting."
OPTIONS
In May 1996, Daniel F. Baker, the Treasurer and Chief Financial Officer,
Michael Fanger, an Executive Vice President and Michael Kowalsky, an Executive
Vice President, were granted stock options exercisable for 68,182, 68,182 and
45,456 shares of Common Stock respectively. The exercise price per share for
such shares was $11.00. These options become exercisable in five equal annual
installments commencing in May 1997, except in the case of Mr. Kowalsky whose
options shall become exercisable in twelve equal quarterly installments
commencing on August 22, 1997. In addition, on November 29, 1996, a group of
officers and employees were granted stock options exercisable for 19,600
shares of Common Stock, at an exercise price of $14.375. These options become
exercisable on November 29, 1997. The Company reserved a total of 750,000
shares of Common Stock for issuance with respect to the future grant of
options under the 1996 Plan. Of these shares, the Company has granted options
to purchase 201,420 shares of Common Stock, leaving 548,580 shares of Common
Stock for future grants under the 1996 Plan.
In addition, a total of 100,000 additional shares of Common Stock have been
reserved for issuance with respect to the grant of options under the Director
Plan. In December 1996, the Company's four disinterested directors were
granted stock options to purchase 16,969 shares of Common Stock, which was
determined by dividing $100,000 by the fair market value of the Common Stock
on the date the plan was approved ($13.75) by the Commission and multiplying
the resulting quotient by a fraction representing the portion of a three-year
term that the director has been elected to serve. Disinterested directors
elected or reelected in the future will receive a similar grant upon election
or reelection. As of April 4, 1997, 83,031 shares of Common Stock are reserved
for future grants under the Director Plan.
The Company filed a registration statement under the Securities Act to
register shares reserved for issuance under the 1996 Plan. The Company expects
to file a registration statement under the Securities Act to register shares
reserved for issuance under the Director Plan. Shares issued upon exercise of
outstanding stock options after the effective date of such registration
statement generally will be tradable without restriction under the Securities
Act.
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UNDERWRITING
Furman Selz LLC, Bear, Stearns & Co. Inc., EVEREN Securities, Inc. and J.C.
Bradford & Co. are acting as representatives (the "Representatives") of each
of the underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in the underwriting agreement dated as of the date hereof
(the "Underwriting Agreement"), the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, the aggregate
number of shares of Common Stock set forth opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Furman Selz LLC................................................
Bear, Stearns & Co. Inc........................................
EVEREN Securities, Inc.........................................
J.C. Bradford & Co.............................................
---------
Total 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by counsel
and various other conditions. The nature of the Underwriters' obligations is
such that they are committed to purchase all of the above shares if any are
purchased. The Underwriters propose to offer the shares of Common Stock
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share to
certain other dealers. After the Offering, the offering price and other
selling terms may be changed by the Representatives.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Company's Common Stock at levels above those which might otherwise prevail
in the open market, including by entering stabilizing bids or effecting
syndicate covering transactions. A stabilizing bid means the placing of any
bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Company's Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate. Such transactions may be effected on the Nasdaq National Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
The Company has granted to the Underwriters an option, expiring 30 days from
the date of this Prospectus, to purchase up to 525,000 additional shares of
Common Stock on the same terms as set forth on the cover page
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of this Prospectus, solely to cover over-allotments, if any, incurred in the
sale of the shares of Common Stock offered hereby. If the Underwriters
exercise the option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase such number of additional shares of Common
Stock as is proportionate to such Underwriter's initial commitment to purchase
shares from the Company.
Since December 1994, EVEREN Securities, Inc. has provided financial advisory
services to the Company with respect to the Acquisitions, the structure of the
Company, the capital markets and the Company's initial public offering of
Common Stock. For these services, the Company paid EVEREN Securities, Inc. a
financial advisory fee of $225,000.
Pursuant to Lock-up Agreements with Alvin and Andrew Murstein and the
Murstein Trusts, all of the 2,500,000 Restricted Shares are subject to certain
resale restrictions in addition to those imposed under Rule 144. Each party to
these Lock-up Agreements has agreed that he will not, directly or indirectly,
offer for sale, sell, contract to sell, grant an option to purchase or
otherwise dispose of any shares of the Company's Common Stock, except (i)
shares escrowed by the Murstein Trusts for the benefit of FMC or (ii) gifts to
family members or charitable institutions, provided that such family member or
charitable institution agrees to be bound by such Lock-up Agreement, until May
23, 1998 without the prior written consent of Furman Selz LLC. The consent of
Furman Selz LLC will not affect the resale restrictions under Rule 144. In
addition, the Company and all of the Company's other officers and directors
have agreed that for a period of 90 days following the date of this
Prospectus, they will not, without the prior written consent of Furman Selz
LLC, directly or indirectly, offer for sale, sell, contract to sell, or grant
any option to purchase or otherwise dispose of any shares of the Common Stock,
except in the case of the Company, options granted under the 1996 Plan or the
Director Plan or shares issued pursuant to the exercise of outstanding
options.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"TAXI."
The principal address of Furman Selz LLC is 230 Park Avenue, New York, New
York 10169, the principal address of Bear, Stearns & Co. Inc. is 245 Park
Avenue, New York, New York 10167, the principal address of EVEREN Securities,
Inc. is 77 West Wacker Drive, Chicago, Illinois 60601 and the principal
address of J.C. Bradford & Co. is 330 Commerce Street, Nashville, Tennessee
37201.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING
AGENT AND REGISTRAR
The First National Bank of Boston, 150 Royall Street, Canton, Massachusetts
02021, serves as the custodian, transfer agent, dividend disbursing agent and
registrar for the Company's Common Stock.
REPORTS TO STOCKHOLDERS
The Company furnishes its stockholders with annual reports containing
audited financial statements and quarterly reports containing unaudited
consolidated financial information for the first three quarters of each fiscal
year.
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VALIDITY OF SHARES
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Palmer & Dodge LLP, Boston, Massachusetts, and for the
Underwriters by Willkie Farr & Gallagher, New York, New York. Mario M. Cuomo,
a partner in the firm of Willkie Farr & Gallagher, is a director of the
Company.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1995 including the consolidated summary of investments as of December 31,
1996, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the period May 30, 1996 (commencement
of operations) to December 31, 1996; the consolidated balance sheets of Tri-
Magna as of May 29, 1996 and December 31, 1995 including the consolidated
summary 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 period ended May 29, 1996 and each of the two years ended
December 31, 1995; the balance sheets of Edwards as of May 29, 1996 and
December 31, 1995 including the schedules 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 period ended May 29, 1996 and the
year ended December 31, 1995; the balance sheets of TCC as of May 29, 1996 and
December 31, 1995 including the schedule of investments other than investments
in affiliates and schedule of loans as of May 29, 1996 and December 31, 1995,
and the related statements of operations, changes in shareholders' equity and
cash flows for the period ended May 29, 1996 and the year ended December 31,
1995, included in this Prospectus have been so included in reliance on the
report of Arthur Andersen LLP, Boston, Massachusetts independent accountants,
given on the authority of that firm as experts in auditing and accounting. The
statements of operations, changes in partners' capital and cash flows of
Edwards for the year ended December 31, 1994 included in this Prospectus have
been so included in reliance on the report of Friedman, Alpren & Green LLP,
New York, New York, independent accountants, given on the authority of that
firm as experts in accounting and auditing. The statements of operations,
shareholders' equity, and cash flows for the year ended December 31, 1994 for
TCC included in this Prospectus have been included herein in reliance on the
report of Coopers & Lybrand LLP, New York, New York, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
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MEDALLION FINANCIAL CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MEDALLION FINANCIAL CORP.
Report of Arthur Andersen LLP, Independent Public Accountants............ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statement of Operations for the Period May 30, 1996
(Commencement of Operations) through December 31, 1996.................. F-4
Consolidated Statement of Shareholders' Equity for the Period May 30,
1996
(Commencement of Operations) through December 31, 1996.................. F-5
Consolidated Statement of Cash Flows for the Period May 30, 1996
(Commencement of Operations) through December 31, 1996.................. F-6
Notes to Consolidated Financial Statements............................... F-8
MEDALLION FINANCIAL CORP.
Introduction to Pro Forma Combined Statement of Operations............... F-21
Pro Forma Combined Statement of Operations for the year ended December
31, 1996 and each quarter in the year ended December 31, 1996
(unaudited)............................................................. F-22
Notes to the Unaudited Pro Forma Combined Statement of Operations........ F-23
TRI-MAGNA CORPORATION AND SUBSIDIARIES
Report of Arthur Andersen LLP, Independent Public Accountants............ F-24
Consolidated Balance Sheets as of May 29, 1996 and December 31, 1995..... F-25
Statements of Operations for the Period Ended May 29, 1996 and the years
ended
December 31, 1995 and 1994.............................................. F-26
Statements of Shareholders' Equity for the Period Ended May 29, 1996 and
the years ended
December 31, 1995 and 1994.............................................. F-27
Consolidated Statements of Cash Flows for the Period Ended May 29, 1996
and the years ended December 31, 1995 and 1994.......................... F-28
Notes to Consolidated Financial Statements............................... F-29
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP)
Report of Arthur Andersen LLP, Independent Public Accountants............ F-39
Report of Friedman, Alpren & Green LLP, Independent Public Accountants... F-40
Balance Sheets as of May 29, 1996 and December 31, 1995.................. F-41
Statements of Operations for the Period ended May 29, 1996 and the years
ended
December 31, 1995 and 1994.............................................. F-42
Statements of Changes in Partners' Capital for the Period Ended May 29,
1996 and the years ended December 31, 1995 and 1994..................... F-43
Statements of Cash Flows for the Period Ended May 29, 1996 for the years
ended
December 31, 1995 and 1994.............................................. F-44
Notes to Financial Statements............................................ F-45
TRANSPORTATION CAPITAL CORP.
Report of Arthur Andersen LLP, Independent Public Accountants............ F-52
Report of Coopers & Lybrand LLP, Independent Public Accountants.......... F-53
Balance Sheets as of May 29, 1996 and December 31, 1995.................. F-54
Statements of Operations for the Period Ended May 29, 1996 and the years
ended
December 31, 1995 and 1994.............................................. F-55
Statements of Changes in Shareholders' Equity for Period Ended May 29,
1996 and the years ended December 31, 1995 and 1994..................... F-56
Statements of Cash Flows for the Period Ended May 29, 1996 and the years
ended
December 31, 1995 and 1994.............................................. F-57
Notes to Financial Statements............................................ F-58
</TABLE>
F-1
<PAGE>
MEDALLION FINANCIAL CORP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Medallion Financial Corp.:
We have audited the accompanying consolidated balance sheets of Medallion
Financial Corp. (a Delaware Corporation) and Subsidiaries as of December 31,
1996 and 1995, including the consolidated schedule of investments as of
December 31, 1996, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the period May 30, 1996
(commencement of operations) to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included the confirmation of loans receivable as of December 31,
1996 by correspondence with the borrowers. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
As explained in Note 2, investments consist of loans valued at $176,493,888
(93% of total assets) as of December 31, 1996, whose values have been
estimated by the Board of Directors in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation, the
Board of Directors' estimate of values may differ significantly from the
values that would have been used had a ready market for the loans existed, and
the differences could be material.
In our opinion, the consolidated balance sheets referred to above presents
fairly, in all material respects, the financial position of Medallion
Financial Corp. and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the period May 30, 1996
(commencement of operations) to December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 19, 1997
F-2
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Investments (Note 2)
Medallion loans................................... $134,614,899 $ --
Commercial installment loans...................... 41,925,289 --
------------ --------
Gross investments.................................. 176,540,188 --
Unrealized depreciation of investments............ (46,300) --
------------ --------
Net investments.................................... 176,493,888 --
Investment in unconsolidated subsidiary (Note 4)... 937,000 --
------------ --------
Total investments.................................. $177,430,888 $ --
Cash............................................... 1,664,603 2,000
Accrued interest receivable........................ 1,696,584 --
Fixed assets, net.................................. 89,815 --
Goodwill, net (Note 2)............................. 6,250,636 --
Other assets....................................... 2,491,974 716,217
------------ --------
Total assets....................................... $189,624,500 $718,217
============ ========
LIABILITIES
Accounts payable and accrued expenses.............. $ 1,844,033 $716,217
Dividends payable.................................. 1,849,225 --
Accrued interest payable........................... 1,086,247 --
Notes payable to banks and demand notes (Note 5)... 96,450,000 --
SBA debentures payable (Note 6).................... 29,390,000 --
------------ --------
Total liabilities.................................. $130,619,505 $716,217
------------ --------
Negative goodwill, net (Note 2)..................... 2,517,716 --
------------ --------
Commitments and contingencies (Note 8)
SHAREHOLDERS' EQUITY (Notes 1 and 10)
Preferred Stock (1,000,000 shares of $.01 par value
stock authorized--none outstanding)............... $ -- $ --
Common stock (15,000,000 shares of $.01 par value
stock authorized--8,250,000 and 2,500,000 shares
outstanding at December 31, 1996 and 1995,
respectively...................................... 82,500 25,000
Capital in excess of par value..................... 56,359,555 (23,000)
Accumulated undistributed income................... 45,224 --
------------ --------
Total shareholders' equity......................... 56,487,279 2,000
------------ --------
Total liabilities and shareholders' equity......... $189,624,500 $718,217
============ ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
Investment income:
Interest income on investments................................... $10,374,238
Interest income on treasury bills................................ 37,603
-----------
Total investment income......................................... 10,411,841
-----------
Interest expense:
Notes payable to bank............................................ 3,631,746
SBA debentures................................................... 1,376,747
-----------
Total interest expense.......................................... 5,008,493
-----------
Net interest income.............................................. 5,403,348
-----------
Non-interest income:
Equity in losses of unconsolidated subsidiary.................... (63,000)
Accretion of negative goodwill................................... 421,435
Other Income..................................................... 410,991
-----------
Total non-interest income....................................... 769,426
-----------
Expenses:
Administration and advisory fees................................. 161,886
Professional fees................................................ 410,420
Salaries and benefits............................................ 779,445
Other operating expenses......................................... 879,187
Amortization of goodwill......................................... 259,260
-----------
Total expenses.................................................. 2,490,198
-----------
Net investment income............................................ 3,682,576
Increase in net unrealized depreciation.......................... (46,300)
Net realized gain on investments................................. 84,447
-----------
Net increase in net assets resulting from operations............. $ 3,720,723
===========
Net increase in net assets resulting from operations per common
share........................................................... $ 0.45
===========
Weighted average shares and common share equivalents
outstanding..................................................... 8,276,250
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
CAPITAL
SHARES OF COMMON STOCK IN EXCESS ACCUMULATED
COMMON STOCK $.01 PAR OF PAR UNDISTRIBUTED
OUTSTANDING VALUE VALUE INCOME
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1995 (Note 1)............ 2,500,000 $25,000 $ (23,000) $ --
Issuance of common stock
under offering (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
========= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations............. $ 3,720,723
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by (used for) operating
activities:
Depreciation and amortization................................... 14,500
Increase in equity in earnings (losses) of unconsolidated
subsidiary..................................................... 63,000
Amortization of goodwill........................................ 259,260
Increase in unrealized depreciation............................. 46,300
Decrease (increase) in accrued interest receivable.............. (301,310)
Decrease (increase) in other assets............................. (1,933,829)
Increase (decrease) in accounts payable and accrued expenses.... 371,503
Accretion of negative goodwill.................................. (421,435)
Increase (decrease) in accrued interest payable................. (553,280)
------------
Net cash provided by (used for) operating activities........... $ 1,265,432
------------
Cash Flows from Investing Activities:
Originations of loans (investments)............................. $(71,419,455)
Proceeds from sales and maturities of loans (investments)....... 44,323,364
Payment for purchase of Tri-Magna, net.......................... (11,848,283)
Payment for purchase of Edwards Capital Company................. (15,624,995)
Payment for purchase of TCC, net................................ (3,748,576)
Capital expenditures............................................ (89,928)
------------
Net cash provided by (used for) investing activities........... $(58,407,873)
------------
Cash Flows from Financing Activities:
Proceeds of notes payable to banks.............................. $ 6,050,000
Repayment of notes payable to SBA............................... (1,200,000)
Payment of declared dividends to former shareholders............ (542,012)
Payment of declared dividends to present shareholders........... (1,650,000)
Proceeds from initial public offering, net of expenses.......... 56,147,056
------------
Net cash provided by (used for) financing activities........... $ 58,805,044
------------
Net Increase (Decrease) in Cash.................................. $ 1,662,603
Cash, beginning of period........................................ 2,000
------------
Cash, end of period.............................................. $ 1,664,603
============
Supplemental Information:
Cash paid during the period for interest........................ $ 5,561,773
============
Supplemental Information of Non-Cash Investing and Financing
Activities:
Note received for exercise of warrant........................... $ 157,000
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
FROM MAY 30, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
Supplemental Schedule of Non-Cash Investing and Financing Activities:
In conjunction with the Acquisitions, liabilities were assumed as follows:
<TABLE>
<CAPTION>
TRI-MAGNA EDWARDS CAPITAL COMPANY TCC
----------- ----------------------- -----------
<S> <C> <C> <C>
Fair value of assets acquired,
other than cash.............. $97,808,510 $51,356,894 $ 9,714,029
----------- ----------- -----------
Cash acquired................. 1,529,717 -- 6,797,183
Cash paid..................... 13,378,000 15,624,995 10,545,759
----------- ----------- -----------
Cash paid, net............... 11,848,283 15,624,995 3,748,576
----------- ----------- -----------
Negative Goodwill............. 2,939,085 -- --
----------- ----------- -----------
Liabilities assumed........... $83,021,142 $35,731,899 $ 5,965,453
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) FORMATION OF MEDALLION FINANCIAL CORP.
Medallion Financial Corp. (the Company) is a closed-end management
investment company organized as a Delaware corporation in 1995. The Company
has elected to be regulated as a business development company under the
Investment Company Act of 1940, as amended (the 1940 Act). On May 29, 1996,
the Company completed an initial public offering (the Offering) of its common
stock, issued and sold 5,750,000 shares at $11.00 per share and split the
existing 200 shares of common stock outstanding into 2,500,000 shares. All
share and related amounts in the accompanying financial statements have been
restated to reflect this stock split. Offering costs incurred by the Company
in connection with the sale of shares totaling $7,102,944 were recorded as a
reduction of capital upon completion of the Offering. These costs were
recorded, net of $200,000 payable by Tri-Magna Corporation and subsidiaries
(Tri-Magna) in accordance with the Merger Agreement. In parallel with the
Offering, the Company merged with Tri-Magna; acquired substantially all of the
assets and assumed certain liabilities of Edwards Capital Company, a limited
partnership; and acquired all of the outstanding voting stock of
Transportation Capital Corp. (TCC) (collectively, the Acquisitions) (see Note
3). The assets acquired and liabilities assumed from Edwards Capital Company,
were acquired and assumed by Edwards Capital Corporation (Edwards), a newly
formed and wholly-owned subsidiary of the Company. As a result of the merger
with Tri-Magna in accordance with the Merger Agreement dated December 21, 1995
between the Company and Tri-Magna, Medallion Funding Corp. (MFC) and Medallion
Taxi Media, Inc. (Media), formerly subsidiaries of Tri-Magna, became wholly-
owned subsidiaries of the Company. In connection with the Acquisitions, the
Company has applied for and received the Acquisition Order under the 1940 Act
from the Securities and Exchange Commission. The Company also received
approval from the Small Business Administration (SBA) for these transactions.
Tri-Magna was a closed-end management investment company registered under
the 1940 Act and was the sole shareholder of MFC and Media. MFC is a closed-
end management investment company registered under the 1940 Act and is
licensed as a specialized small business investment company (SSBIC) by the
SBA. As an adjunct to MFC's taxicab medallion finance business, Media operates
a taxicab rooftop advertising business.
Edwards is licensed as a small business investment company (SBIC) by the SBA
and is registered as a closed-end management investment company under the 1940
Act.
TCC, a wholly-owned subsidiary of the Company, is licensed as an SSBIC by
the SBA and is registered as a closed-end management investment company
registered under the 1940 Act.
(2) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company primarily engages, directly and/or through its principal
subsidiaries, in the business of making loans to small businesses and, to a
lesser degree, in the business of taxicab rooftop advertising. The Company
originates and services loans financing the purchase of taxicab medallions and
related assets (medallion loans). The Company also originates and services
commercial installment loans to small businesses in other targeted industries
(commercial installment loans). While medallion and commercial installment
loans are originated substantially in the metropolitan New York area, the
Company also finances medallion loans in the Boston, Cambridge, Massachusetts
and Chicago areas.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practices in the investment
companies industry. The preparation of financial statements in conformity with
generally accepted accounting principles require the Company to make estimates
and assumptions that affect the reporting and disclosure of assets and
liabilities, including those that are of a
F-8
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
contingent nature, at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates. The significant accounting and reporting
policies of the Company are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of Medallion
Financial Corp. and its wholly-owned subsidiaries (except for Media)
commencing with the period from the closing of the Offering and Acquisitions
to December 31, 1996. Prior to the Acquisitions, Medallion Financial Corp. had
no operations and each of the subsidiaries had been operating independently of
each other. All significant inter-company balances and transactions have been
eliminated. All references in the notes to the consolidated financial
statements for the period ended December 31, 1996 refer to the period from May
30, 1996 to December 31, 1996.
The Company's investment in Media is accounted for under the equity method.
As a non-investment company, Media cannot be consolidated with the Company,
which is an investment company under the 1940 Act. Refer to Note (4) for the
presentation of financial information for Media.
Investments
The Company's loans, net of participations, are considered investments under
the 1940 Act and are recorded at fair value. Loans are valued at cost less
unrealized depreciation. Since no ready market exists for these loans, the
fair value is determined in good faith by the Board of Directors. In
determining the fair value, the Company and Board of Directors consider
factors such as the financial condition of the borrower, the adequacy of the
collateral, individual credit risks, historical loss experience and the
relationships between current and projected market rates and portfolio rates
of interest and maturities.
The Company's investments consist primarily of long-term loans to persons
defined by SBA regulations as being socially or economically disadvantaged, or
to entities that are at least 50% owned by such persons. Approximately 76% of
the Company's loan portfolio at December 31, 1996 have arisen in connection
with the financing of taxicab medallions, taxicabs and related assets,
substantially all in the metropolitan New York area. These loans are secured
by the medallions, taxicabs and related assets and are personally guaranteed
by the borrowers, or in the case of corporations, personally guaranteed by the
owners. The remaining portion of the Company's portfolio represents loans to
various commercial enterprises, including dry cleaners, garages, gas stations
and laundromats. These loans are secured by various equipment and/or real
estate and are generally guaranteed by the owners, and in certain cases, by
the equipment dealers. These loans are made primarily in the metropolitan New
York City area.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of related loans. At December 31,
1996, net deferred costs totaled $567,204. Amortization expense for the period
ended December 31, 1996 was $161,977.
Loans are placed on non-accrual status, with the reversal of all uncollected
accrued interest, when there is doubt as to the collectibility of interest or
principal or if loans are 90 days or more past due unless they are both fully
collateralized and in the process of collection. Interest received on non-
accrual loans is recognized as income when collected. At December 31, 1996,
total non-accrual loans were $2,450,702. For the period ended December 31,
1996, the amount of interest income on non-accrual loans that would have been
recognized if the loans had been paying in accordance with their original
terms was $111,209.
F-9
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
The principal portion of loans serviced for others by the Company at
December 31, 1996 amounted to approximately $60,160,000.
Unrealized Depreciation and Realized Gains/Losses on Investments
The change in unrealized depreciation of investments is the amount by which
the fair value estimated by the Company is less than the cost basis of the
loan portfolio. Realized gains or losses on investments consist of the excess
of the proceeds derived upon foreclosure over the cost basis of a loan, write-
offs of loans or assets acquired in satisfaction of loans, net of recoveries.
For the period ended December 31, 1996, gross realized gains on investments
were $189,000 and gross realized losses on investments were $105,000 and the
increase in net unrealized depreciation was $46,300. Total unrealized
depreciation was $1,568,717 on total investments of $176,493,888 at December
31, 1996, of which $1,522,417 existed at the date of the Company's
acquisitions (see Note 3).
Goodwill
Cost of purchased businesses in excess of the fair value of net assets
acquired ("goodwill") is being amortized on a straight-line basis over 15
years. The excess of fair value of net assets over cost of business acquired
("negative goodwill") is being accreted on a straight-line basis over
approximately 4 years.
The Company reviews its goodwill and negative goodwill for events or changes
in circumstances that may indicate that the carrying amount of the assets may
not be recoverable, and if appropriate, reduces the carrying amount through a
charge to income.
Federal Income Taxes
It is the Company's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies, which require the
Company to distribute at least 90% of its investment company taxable income to
its shareholders. Therefore, no provision for federal income taxes has been
made in the accompanying financial statements.
Media, as a non-investment company, has elected to be taxed as a regular
corporation. Refer to Note (4) for financial information for Media.
Net Increase in Net Assets Resulting from Operations Per Share
Net increase in net assets resulting from operations per share is computed
using the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents consist primarily of
dilutive outstanding stock options computed under the treasury stock method.
Recent Accounting Developments
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of." This statement
requires a review for impairment of long-lived assets and certain identifiable
intangibles to be held and used by an entity whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. An impairment would be estimated if the sum of the expected
future cash flows to result from the use and eventual disposition of the asset
is less than the carrying amount of the asset. The adoption of this statement
did not have a significant impact on the Company's financial position or
results of operations.
F-10
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which establishes a fair
value-based method of accounting for stock options and similar equity
instruments of employee stock compensation plans. This statement allows the
option of adopting the new fair value method or to measure compensation cost
for those plans using the current intrinsic value-based method as prescribed
by Accounting Principles Board Opinion No. 25 (APB Opinion No. 25),
"Accounting for Stock Issued to Employees." Under this statement, the use of
intrinsic value-based method, requires pro forma disclosure of net income and
earnings per share as if the fair value-based method had been adopted. The
Company opted to adopt the pro forma disclosure provisions of SFAS No. 123.
See pro forma information in Note (7).
On March 3, 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement establishes standards for the computation and presentation of
earnings per share and applies to entities with publicly held common stock or
potential common stock. The new statement which supersedes APB Opinion No. 15,
is effective for financial statements for both interim and annual periods
ending after December 15, 1997. Early adoption is not permitted. This
statement when adopted, will require the restatement of prior years' earnings
per share. Management expects that the adoption of this new statement will not
have a material impact on the Company's previously disclosed earnings per
share.
(3) THE ACQUISITIONS
The Acquisitions were accounted for under the purchase method of accounting.
Under this accounting method, the Company has recorded as its cost the fair
value of the acquired assets and liabilities assumed. The difference between
the cost of acquired companies and the sum of the fair values of tangible and
identifiable intangible assets less liabilities assumed was recorded as
goodwill or negative goodwill. The fair value of these assets and liabilities
is summarized as follows:
<TABLE>
<CAPTION>
TRI-MAGNA EDWARDS CAPITAL COMPANY TCC
------------ ----------------------- -----------
<S> <C> <C> <C>
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
============ ============ ===========
</TABLE>
- ----------
* Net of unrealized depreciation of investments of $1,522,417.
F-11
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
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 from operations.. 6,227,027 5,925,731
Net increase in net assets resulting from operations
per share............................................ $ 0.75 $ 0.72
Pro forma shares, outstanding......................... 8,250,000 8,250,000
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
---------- --------
<S> <C> <C>
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
========== ========
</TABLE>
F-12
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
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:
<TABLE>
<CAPTION>
SEVEN FIVE
MONTHS MONTHS YEAR
ENDED ENDED ENDED PERIOD ENDED
DECEMBER 31, MAY 29, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1994
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
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
========== ======== ========== ========
</TABLE>
On July 25, 1996, Media purchased all of the assets of See-Level Management,
Inc. and See-Level Advertising, Inc. (consisting of 450 taxicab rooftop
advertising display units and certain contracts for advertising and fleet
rental) for $700,000. In addition, the owners of these entities entered into
noncompete and consulting agreements with Media for a period of 2.5 years.
During 1996 the Company contributed $1,000,000 in capital to Media to fund
this purchase.
(5) NOTES PAYABLE TO BANKS AND DEMAND NOTES
Short-term borrowings consisted of the following at:
<TABLE>
<CAPTION>
DESCRIPTION DECEMBER 31, 1996
----------- -----------------
<S> <C>
Revolving Credit Agreements............................. $94,450,000
Term Loan Agreement..................................... 2,000,000
-----------
Total................................................... $96,450,000
===========
</TABLE>
Borrowings under these agreements are secured by all assets of the Company.
Revolving Credit Agreements
On March 27, 1992 (and as subsequently amended), MFC entered into a
committed revolving credit agreement (the Revolver) with a group of banks. MFC
extended the Revolver until June 30, 1997 at an aggregate credit commitment
amount of $85,000,000 pursuant to the Renewal and Extension Agreement dated
June 28, 1996. The Revolver may be extended annually thereafter upon the
option of the participating banks and acceptance by MFC. Should any
participating bank not extend its committed amount, the Revolver agreement
provides that each bank shall extend a term loan equal to its share of the
principal amount outstanding of the revolving credit note. Maturity of the
term note shall be the earlier of two years or any other date on which it
becomes payable in accordance with the Revolver agreement. Interest and
principal payments are paid monthly. Interest is calculated monthly at either
the bank's prime rate or a rate based on the adjusted London Interbank
F-13
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Offered Rate of interest (LIBOR) at the option of MFC. Substantially all
promissory notes evidencing MFC's investments are held by a bank, as
collateral agent under the agreement. MFC is required to pay an annual
facility fee of 1/4% on March 31, 1997 on the Revolver aggregate commitment.
Outstanding borrowings under the Revolver were $77,550,000 at December 31,
1996, at a weighted average interest rate of 7.1%. MFC is required under the
Revolver to maintain minimum tangible net assets of $19,000,000 and certain
financial ratios, as defined therein. The Revolver agreement contains other
restrictive covenants, including a limitation of $500,000 for capital
expenditures. At December 31, 1996, MFC was in compliance with all its terms.
Edwards has $15,000,000 in lines of credit with five banks. Interest is
charged at Edwards' option, at either the lenders' prime rate or at a rate
based on the adjusted LIBOR. The amount of borrowings outstanding under the
lines of credit was $12,450,000 at December 31, 1996, at a weighted average
interest rate of 6.8%. Edwards is required to maintain under a promissory note
agreement with two of the five banks, a minimum tangible net-worth of
$8,750,000; a minimum tangible net worth plus subordinated debt of $32,000,000
and certain financial ratios, as defined therein. At December 31, 1996,
Edwards was in compliance with all its terms.
Under an agreement with the SBA, Edwards is restricted from borrowing more
than $12,700,000 in bank debt without the prior approval of the SBA. In
addition, all bank indebtedness is senior to SBA-guaranteed indebtedness
pursuant to the SBA rules and regulations.
On December 1, 1996, Medallion Financial Corp. entered into a revolving
credit agreement with a bank. The agreement provides for short-term borrowings
up to $5,000,000. The revolving credit borrowings, at the option of Medallion
Financial Corp. are at the bank's prime rate or at a rate based on the
adjusted LIBOR. Medallion Financial Corp. is required to pay a facility fee of
1/4% of the commitment. Outstanding borrowings under this agreement were
$4,450,000 at December 31, 1996, at a weighted average interest rate of 6.8%.
The weighted average interest rate for the Company's outstanding borrowings
at December 31, 1996 was 7.0%. During the seven month period ended December
31, 1996, the Company's weighted average borrowings were $82,980,000 with a
weighted average interest rate of 7.5%. The maximum outstanding borrowings of
the Company were $94,550,000 at any month end in the seven month period ending
December 31, 1996.
Term Loan Agreement
MFC has an existing term loan agreement (Term Loan) with a bank in the
amount of $2,000,000, all of which was outstanding at December 31, 1996.
Interest payments at a fixed rate of 7.5% are due quarterly. The weighted
average interest rate paid on such borrowings was 7.5%, during the seven month
period ended December 31, 1996. The Term Loan matures in July, 1997.
Interest Rate Cap Agreements
On April 7, 1995, MFC entered into three interest rate cap agreements to
reduce the impact of changes in interest rates on its floating rate long-term
debt. These agreements limit the Company's maximum LIBOR exposure on
$20,000,000 of MFC's revolving credit facility to 7.5%. The premiums paid
under these agreements were $46,875, $31,000 and $46,687, respectively. The
premiums have been capitalized and are being amortized over the two-year term
of the agreements, which expires on April 7, 1997. The Company is exposed to
credit loss in the event of nonperformance by the counterparties on these
interest rate cap agreements. The Company does not anticipate nonperformance
by any of these parties.
On November 16, 1995, MFC entered into three additional interest rate cap
agreements to reduce the impact of changes in interest rates on its floating
rate long-term debt. These agreements limit the Company's maximum
F-14
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
LIBOR exposure on an additional $20,000,000 of its revolving credit facility
to 7.0%. The premiums paid under these agreements were $13,000, $25,000 and
$12,500, respectively. The premiums have been capitalized and are being
amortized over the two-year terms of the agreements, which expire on November
16, 1997. The Company is exposed to credit loss in the event of nonperformance
by the counterparties on these interest rate cap agreements. The Company does
not anticipate nonperformance by any of these parties.
(6) SBA DEBENTURES PAYABLE
Outstanding subordinated debentures are as follows at December 31, 1996:
<TABLE>
<CAPTION>
DUE DATE AMOUNT INTEREST RATE
- -------- ----------- -------------
<S> <C> <C> <C>
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% thereafter)
September 1, 2002............... 3,500,000 7.15
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
===========
</TABLE>
The SBA imposes certain restrictions, among others, including transfers of
stock and payments of dividends by its licensees, to which the Company is
subject.
(7) STOCK OPTIONS
The Company has a stock option plan (1996 Stock Option Plan) available to
grant both incentive and nonqualified stock options to employees. The 1996
Stock Option Plan, which was approved by the Board of Directors and
stockholders on May 22, 1996, provides for the issuance of a maximum of
750,000 shares of common stock of the Company. The Plan is administered by the
Compensation Committee of the Board of Directors. The option price per share
may not be less than the current market value of the Company's share of common
stock on the date the option is granted. The term and vesting periods of the
options are determined by the Compensation Committee, provided that the
maximum term of an option may not exceed a period of ten years.
A Director Stock Option Plan was also approved by the Board of Directors and
stockholders on May 22, 1996 and by the Securities and Exchange Commission on
December 23, 1996. The Director Plan provides for the issuance of a maximum of
100,000 shares of common stock of the Company. The grants of stock options
under the Director Plan are automatic as provided in the Director Plan. The
option price per share may not be less than the current market value of the
Company's share of common stock on the date the option is granted. Options
granted under the Director Plan are exercisable annually, as defined in the
Director Plan. The term of the options may not exceed five years. Under the
Director Plan, 16,969 shares have been granted as of December 31, 1996. The
options outstanding have an exercise price of $13.75.
The Company records stock compensation in accordance with APB Opinion No. 25
(see Note 2). Had compensation cost for stock options been determined based on
the fair value at the date of grant for awards in
F-15
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
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:
<TABLE>
<CAPTION>
SEVEN MONTH PERIOD ENDED
DECEMBER 31, 1996
------------------------
<S> <C>
Net increase in net assets resulting from operations:
As reported........................................ $3,720,723
Pro Forma.......................................... $3,696,480
Net increase in net assets resulting from operations
per share:
As reported........................................ $ 0.45
Pro Forma.......................................... $ 0.45
</TABLE>
The following table presents the activity for the stock option program under
the 1996 Stock Option Plan and the Director Stock Option Plan for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER EXERCISE PRICE AVERAGE
OF OPTIONS PER SHARE EXERCISE PRICE
---------- ---------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1995... -- -- --
Granted............................ 218,389 $11.00 - $14.375 $11.52
Canceled........................... -- -- --
Exercised.......................... -- -- --
------- ---------------- ------
Outstanding at December 31, 1996... 218,389 $11.00 - $14.375 $11.52
Options exercisable at December 31,
1996.............................. 7,576 $11.00 $11.00
</TABLE>
At December 31, 1996, 181,820 of the 218,389 options outstanding have an
exercise price of $11.00 with a weighted average remaining contractual life of
9.4 years. Of these options, 7,576 are exercisable at a weighted average
exercise price of $11.00. The remaining 36,569 options have exercise prices
ranging from $13.75 to $14.375 with a weighted average remaining contractual
life of 4.9 years. None of these options was exercisable at December 31, 1996.
The weighted average fair value of options granted during the period ended
December 31, 1996 was $3.20 per share. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants during the
period ended December 31, 1996:
<TABLE>
<S> <C>
Risk-free interest rate............................................. 6.4%
Expected dividend yield............................................. 4.6%
Expected life in years.............................................. 5.8
Expected volatility................................................. 36.7%
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
In May 1996, the Company entered into a sub-advisory agreement (the Sub-
Advisory Agreement) with FMC Advisers, Inc. (FMC) in which FMC provides
advisory services to the Company. Under the Sub-Advisory Agreement, the
Company pays FMC a monthly fee for services rendered of $18,750. FMC will
regularly consult with management of the Company with respect to strategic
decisions concerning originations, credit quality assurance, development of
financial products, leverage, funding, geographic and product diversification,
the repurchase of participations, acquisitions, regulatory compliance and
marketing. Unless terminated earlier as
F-16
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
described below, the Sub-Advisory Agreement will remain in effect for a period
of two years until May 1998. The term will continue from year to year
thereafter, if approved annually by (i) a majority of the Company's
noninterested directors and (ii) the Board of Directors, or by a majority of
the Company's outstanding voting securities, as defined in the 1940 Act. The
Sub- Advisory Agreement will be terminable without penalty to the Company on
60 days' written notice by either party or by vote of a majority of the
outstanding voting securities of the Company, and will terminate if assigned
by FMC. Two trusts affiliated with two officers, directors and shareholders of
the Company have agreed to personally assure FMC of payment for the first 48
months of service under the Sub-Advisory Agreement pursuant to an escrow
arrangement under which they have maintained in escrow common stock of the
Company worth 200% of the advisory fees remaining to be paid by the Company to
FMC during the first 48 months of service under the Sub-Advisory Agreement,
thereby assuring FMC of the payment of $900,000 in advisory fees. Advisory
fees incurred during the seven month period ended December 31, 1996 were
$131,250.
The Company has employment agreements with certain key officers for a term
of five years. Annually, the employment period will renew for a new five-year
term unless prior to the end of the first year, either the Company or the
executive provides notice to the other party of its intention not to extend
the employment period beyond the current five-year term. In the event of a
change in control, as defined, during the employment period, the agreements
provide for severance compensation to the executive in an amount equal to the
balance of the salary, bonus and value of fringe benefits which the executive
would be entitled to receive for the remainder of the employment period.
In the normal course of business, there are outstanding commitments and
contingent liabilities that are not reflected in the consolidated financial
statements. At December 31, 1996, the Company had unfunded loan commitments of
approximately $3,815,292, which bear interest at rates ranging from 8.75% to
16.00%.
The Company has operating lease agreements for its executive and general
offices expiring in December 1997, as amended. The existing leases call for an
aggregate annual rental of approximately $235,000, subject to certain
escalation clauses. Rent expense for the seven month period ended December 31,
1996 was $165,002. The Company is currently in the process of evaluating
various alternatives for leased office space. Management does not expect that
the terms of a new lease will have a material impact on rent expense.
The Company and its subsidiaries become defendants to various legal
proceedings arising from the normal course of business. In the opinion of
management based upon the advice of legal counsel, there is no proceeding
pending, or to the knowledge of management threatened, which in the event of
an adverse decision, would result in a material adverse impact in the
financial condition or results of operations of the Company.
(9) RELATED PARTY TRANSACTIONS
Two directors, officers and shareholders of Medallion Financial Corp. are
also directors of wholly-owned subsidiaries, MFC, Edwards, TCC and Media.
Officer salaries are set by the Board of Directors. Directors who are not
officers receive an annual fee of $10,000 plus a fee of $2,000 per meeting.
Directors who are members of the committees of the Board receive $1,000 for
each meeting attended. Total director fees and officer compensation were
$37,542 and $588,065, respectively, during the period ended December 31, 1996.
(10) SHAREHOLDERS' EQUITY
On May 29, 1996, the Company issued and sold 5,750,000 shares at $11.00 per
share in an Offering and split the existing 200 shares of common stock
outstanding into 2,500,000 shares. All references to the amount and number of
shares outstanding in the accompanying financial statements have been restated
to reflect the stock
F-17
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
split. The proceeds from the Offering were used to purchase all of the
outstanding stock of Tri-Magna and TCC and acquire substantially all of the
assets and assume certain liabilities of Edwards Capital Company. Refer to
Notes (1) and (3) for a discussion of the Offering and the Acquisitions.
In 1995, MFC and TCC repurchased and retired all of their previously issued
3% preferred stock from the SBA at a discount of 65% ($8,201,266) for an
aggregate price of $4,416,067, under the SBA preferred stock repurchase
agreements. Under the repurchase agreements, the SBA retains a liquidating
interest in the amount of the discount on the repurchase, which expires on a
straight line basis over five years or on a later date if an event of default,
as defined in the agreements, has occurred and such default has not been cured
or waived. Upon the occurrence of any event of default, the SBA's liquidating
interest will become fixed at the level immediately preceding the event of
default and will not accrete further until the default is cured or waived. In
the event of MFC's or TCC's liquidation, the unexpired portion ($4,580,561 at
December 31, 1996) of the liquidating interest becomes immediately payable to
the SBA. The Company does not anticipate the occurrence of an event that would
result in any amount being due to the SBA.
In accordance with Statement of Position 93-2, "Determination, Disclosure
and Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies," $292,999 has been reclassified
from accumulated undistributed income to capital in excess of par value on the
accompanying consolidated balance sheet. This reclassification has no impact
on the Company's total shareholders' equity and is designed to present the
Company's capital accounts on a tax basis.
(11) OTHER OPERATING EXPENSES
The major components of other operating expenses for the period ended
December 31, 1996 were:
<TABLE>
<S> <C>
Office expenses..................... $254,715
Insurance........................... 254,440
Rent................................ 165,002
Other............................... 205,030
--------
$879,187
========
</TABLE>
(12) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Investment Plan (the "401(k) Plan") which covers
all full and part-time employees of the Company who have attained the age of
21 and have a minimum of one-half year of service. Under the 401(k) Plan, an
employee may elect to defer not less than 1% and no more than 15% of the total
annual compensation that would otherwise be paid to the employee, provided,
however, that employees' contributions may not exceed certain maximum amounts
determined under the Internal Revenue Code. Employee contributions are
invested in various mutual funds, according to the directions of the employee.
The Company intends to provide for employer matching contributions, at the
discretion of the Board of Directors, in 1997.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments, whether assets, liabilities or off-balance sheet commitments, if
practicable. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments. Fair value estimates which
were derived from broker quotes cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument.
F-18
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
In addition, SFAS 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
(a) Investments As described in Note 2, the carrying amount of
investments is the estimated fair value of such investments.
(b) Notes payable to banks and demand notes -- Due to the short-term
nature of these instruments, the carrying amount approximates fair value.
(c) Commitments to Extend Credit -- The fair value of commitments to
extend credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and present creditworthiness of the counterparties. For fixed
rate loan commitments, fair value also includes a consideration of the
difference between the current levels of interest rates and the committed
rates. At December 31, 1996, the estimated fair value of these off-balance
sheet instruments was not material.
(d) Interest Rate Cap Agreements -- The fair value is estimated based on
market prices or dealer quotes. At December 31, 1996, the estimated fair
value of these off-balance sheet instruments was not material.
(e) Debentures Payable to SBA -- The fair value of the debentures payable
to SBA is estimated based upon current market interest rates for similar
debt.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ------------
<S> <C> <C>
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
</TABLE>
(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.
F-19
<PAGE>
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF BALANCE
LOANS OUTSTANDING RATE
--------- ------------ --------------
<S> <C> <C> <C>
1 $ 60,754 5.000%
11 548,641 7.000-7.700
19 3,150,172 8.000-8.200
18 1,901,132 8.250
7 487,074 8.300
12 758,448 8.370
6 304,843 8.400-8.440
24 3,205,029 8.500
9 689,313 8.600
10 892,704 8.625
13 376,064 8.700
49 5,379,874 8.750
12 672,116 8.720
108 11,322,414 9.000
2 235,992 9.120
157 15,042,298 9.250
5 1,036,661 9.320-9.380
248 26,661,479 9.500
1 170,000 9.600
94 9,208,547 9.750
29 2,789,612 9.800-9.900
207 18,467,948 10.000
76 6,640,204 10.250
5 462,805 10.370-10.3750
47 4,855,909 10.500
30 2,592,974 10.750
1 50,983 10.900
164 10,290,809 11.000
17 1,483,897 11.250-11.900
107 5,910,504 12.000
11 1,014,949 12.500
3 351,109 12.750-12.950
254 10,113,883 13.000
4 633,040 13.250
56 2,914,663 13.500
5 128,772 13.550-13.750
166 8,044,479 14.000
11 176,089 14.050-14.300
36 3,064,635 14.500
11 354,145 14.750-14.950
262 11,806,060 15.000
11 610,583 15.200-15.250
9 590,210 15.500
8 511,816 15.750-15.950
15 745,357 16.000
5 160,939 16.500
4 202,387 16.640-16.950
1 24,750 17.000
3 193,142 18.000
6 205,193 19.000
----- ------------
Total 2,370 $177,495,401 10.800%
=====
Plus: Origination costs, net... 567,204
------------
Investments at cost.......... 178,062,605
Less: Unrealized depreciation
on investments................ (1,568,717)
------------
Investments at directors'
valuation................... $176,493,888
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
MEDALLION FINANCIAL CORP.
INTRODUCTION TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
The following unaudited pro forma combined statements of operations for the
year ended December 31, 1996 and each quarter in the year ended December 31,
1996 have been prepared to reflect the IPO, the application of the proceeds of
the IPO (including the Acquisitions and the application of the cash acquired
in connection with the Acquisitions) and the adjustments described in the
accompanying notes. The pro forma combined financial information is based on
the historical statement of operations of Medallion Financial from May 30,
1996 (commencement of operations) to December 31, 1996 and Tri-Magna, Edwards
and TCC from January 1, 1996 to May 29, 1996 and should be read in conjunction
with those financial statements and the notes thereto, as well as the
estimates and assumptions set forth below and in the notes to the pro forma
combined statement of operations. The pro forma combined statements of
operations were prepared as if the IPO and application of the proceeds of the
IPO occurred on January 1, 1996.
Pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The pro
forma combined financial information is not necessarily indicative of the
results of operations which actually would have occurred if such transactions
had been consummated on January 1, 1996, nor does it purport to represent the
Company's future results of operations. Neither expected benefits and cost
reductions anticipated by the Company nor future corporate costs that are not
under contract have been reflected in the accompanying pro forma financial
statements.
F-21
<PAGE>
MEDALLION FINANCIAL CORP.
PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND EACH QUARTER IN THE
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4
------------------------------------------ ----------------------------------------- ------------- ------------
CONSOLIDATED CONSOLIDATED
COMBINED ADJUSTMENTS PRO FORMA COMBINED ADJUSTMENTS PRO FORMA THREE MONTH THREE MONTH
THREE MONTH FOR IPO THREE MONTH THREE MONTH FOR IPO THREE MONTH PERIOD ENDED PERIOD ENDED
PERIOD ENDED AND USE OF PERIOD ENDED PERIOD ENDED AND USE OF PERIOD ENDED SEPTEMBER 30, DECEMBER 31,
MARCH 31, 1996 PROCEEDS MARCH 31, 1996 JUNE 30, 1996 PROCEEDS JUNE 30, 1996 1996 1996
-------------- ----------- -------------- ------------- ----------- ------------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest Income
on Investments.. $3,983 $ -- $3,983 $4,057 $ -- $4,057 $4,255 $4,756
Interest Income
on Treasury
Bills........... 91 (53)(c) 38 94 (60)(c) 34 8 --
------ ----- ------ ------ ------ ------ ------ ------
Total Investment
Income......... 4,074 (53) 4,021 4,151 (60) 4,091 4,263 4,756
------ ----- ------ ------ ------ ------ ------ ------
INTEREST EXPENSE
Notes Payable to
Bank............ 1,718 (482)(b) 1,236 1,586 (288)(b) 1,298 1,536 1,588
SBA Debentures... 586 -- 586 573 -- 573 563 622
------ ----- ------ ------ ------ ------ ------ ------
Total Interest
Expense........ 2,304 (482) 1,822 2,159 (288) 1,871 2,099 2,210
------ ----- ------ ------ ------ ------ ------ ------
Net Interest In-
come............ 1,770 429 2,199 1,992 228 2,220 2,164 2,546
------ ----- ------ ------ ------ ------ ------ ------
NON-INTEREST IN-
COME
Equity in
earnings
(losses) of
unconsolidated
subsidiary...... (26) -- (26) 2 -- 2 (23) (69)
Accretion of
Negative
Goodwill........ -- 193(a) 193 64 129 (a) 193 180 176
Other Income..... 164 -- 164 170 -- 170 235 119
------ ----- ------ ------ ------ ------ ------ ------
Total Non-
Interest
Income......... 138 193 331 236 129 365 392 226
------ ----- ------ ------ ------ ------ ------ ------
EXPENSES
Professional
Fees............ 183 (46)(e) 137 212 (31)(e) 181 150 183
Salaries and Ben-
efits........... 412 (82)(d) 386 448 (55)(d) 431 348 333
56 (d) 38 (d)
Other Operating
Expenses........ 432 (19)(f) 398 1,314 (12)(f) 358 434 517
(15)(g) (10)(g)
(934)(i)
Amortization of
Goodwill........ -- 105 (a) 105 35 70 (a) 105 102 122
------ ----- ------ ------ ------ ------ ------ ------
Total Expenses.. 1,027 (1) 1,026 2,009 (934) 1,075 1,034 1,155
------ ----- ------ ------ ------ ------ ------ ------
Net Investment
Income before
income taxes.... 881 623 1,504 219 1,291 1,510 1,522 1,617
Income Taxes..... 88 (88)(h) -- 56 (56)(h) -- -- --
------ ----- ------ ------ ------ ------ ------ ------
Net Investment
Income after
income taxes.... 793 711 1,504 163 1,347 1,510 1,522 1,617
Change in
unrealized
depreciation.... 24 -- 24 6 -- 6 -- (46)
Net realized gain
(loss) on
investments..... (4) -- (4) 10 -- 10 26 58
------ ----- ------ ------ ------ ------ ------ ------
Net Increase in
Net Assets
resulting from
Operations...... $ 813 $ 711 $1,524 $ 179 $1,347 $1,526 $1,548 $1,629
====== ===== ====== ====== ====== ====== ====== ======
Pro forma net
increase in net
assets resulting
from operations
per share (j)... $ 0.18 $ 0.18 $ 0.19 $ 0.20
====== ====== ====== ======
<CAPTION>
ANNUAL
------------
PRO FORMA
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
INVESTMENT INCOME
Interest Income
on Investments.. $17,051
Interest Income
on Treasury
Bills........... 80
------------
Total Investment
Income......... 17,131
------------
INTEREST EXPENSE
Notes Payable to
Bank............ 5,658
SBA Debentures... 2,344
------------
Total Interest
Expense........ 8,002
------------
Net Interest In-
come............ 9,129
------------
NON-INTEREST IN-
COME
Equity in
earnings
(losses) of
unconsolidated
subsidiary...... (116)
Accretion of
Negative
Goodwill........ 742
Other Income..... 688
------------
Total Non-
Interest
Income......... 1,314
------------
EXPENSES
Professional
Fees............ 651
Salaries and Ben-
efits........... 1,498
Other Operating
Expenses........ 1,707
Amortization of
Goodwill........ 434
------------
Total Expenses.. 4,290
------------
Net Investment
Income before
income taxes.... 6,153
Income Taxes..... --
------------
Net Investment
Income after
income taxes.... 6,153
Change in
unrealized
depreciation.... (16)
Net realized gain
(loss) on
investments..... 90
------------
Net Increase in
Net Assets
resulting from
Operations...... $ 6,227
============
Pro forma net
increase in net
assets resulting
from operations
per share (j)... $ 0.75
============
</TABLE>
F-22
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS (ALL DOLLARS
IN THOUSANDS).
(a) Adjustments to record the amortization of the goodwill (excess of cost
over the fair value of net assets of business acquired) and accretion of
negative goodwill (excess of fair value of net assets over cost of business
acquired), respectively, recorded in purchase accounting related to the
goodwill resulting from the Edwards and TCC acquisitions and the negative
goodwill arising in the acquisition of Tri-Magna. The goodwill related to
Edwards and TCC is being amortized on a straight line basis over 15 years, and
the negative goodwill related to Tri-Magna is being accreted on a straight
line basis over approximately 4 years.
(b) Adjustment to reflect the reduction in bank debt interest expense
resulting from the repayment of a portion of bank debt bearing interest at a
weighted average rate of 7.60% per annum from the net proceeds of the IPO and
the cash acquired in the acquisitions. The repayment of bank debt is equal to
$20,800. In addition, an adjustment was made for the interest expense savings
on the repayment of a Tri-Magna loan ($3,232) due upon consummation of the
IPO.
(c) Adjustment to reflect the reduction in interest income related to the
payment of $7,000 of excess cash in conjunction with the paydown of bank debt,
bearing interest at an assumed rate of approximately 4% per annum,
respectively.
(d) Adjustment to reflect the reduction in executive compensation and
pension expense, as a result of the elimination of three senior vice president
executive positions at Tri-Magna.
(e) Adjustment to reflect the increase in salaries and benefits expense due
to the investment advisory fees to be paid monthly, in arrears, to FMC
Advisers, Inc. This increase in expense is partially offset by the reduction
in professional fee expense due to the elimination of the management agreement
previously in place with the parent company of TCC.
(f) Adjustment to eliminate certain operating expenses of Edwards. These
expenses will not recur, as the related assets and liabilities were not
acquired by the Company as part of the acquisition of Edwards. These expenses
include the elimination of depreciation and the elimination of amortization of
deferred financing costs.
(g) Adjustment to eliminate certain operating expenses of Tri-Magna in
connection with the accounting for the Company's negative goodwill. These
expenses will not recur, as the related assets were written off by the Company
as part of the acquisition, including the elimination of Tri-Magna's
depreciation.
(h) Adjustment to eliminate income and other corporate tax expenses for TCC
and Edwards. Both companies intend to be treated as regulated investment
companies, and therefore, no taxes will be assessed to them.
(i) Adjustment to eliminate merger related costs expensed by Tri-Magna and
Edwards prior to the Acquisitions. Such expenses would have been expensed in
1995 if the Acquisitions had occurred on January 1, 1996.
(j) Calculated using pro forma shares outstanding of 8,250,000 and does not
reflect common share equivalents as their effect is not material.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Tri-Magna Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Tri-Magna
Corporation (a Delaware corporation) and subsidiaries (collectively referred
to as the Company) as of May 29, 1996 and December 31, 1995, including the
consolidated schedules of investments as of May 29, 1996 and December 31,
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for the five-month period ended May 29, 1996 and each of
the two years in the period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As explained in Note 2, the consolidated financial statements include loans
receivable valued at $95,621,617 (97% of total assets) and at $96,046,416 (96%
of total assets) as of May 29, 1996 and December 31, 1995, respectively, whose
values have been estimated by the Board of Directors in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values
that would have been used had a ready market for the loans existed, and the
differences could be material.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tri-Magna
Corporation and subsidiaries as of May 29, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the five-month period
ended May 29, 1996 and each of the two years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 26, 1997
F-24
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 29,
1995 1996
------------ -----------
<S> <C> <C>
ASSETS
Investments (Note 2)............................... $96,956,416 $96,531,617
Less unrealized depreciation on 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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
---------------------- MAY 29,
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Investment Income
Interest on investments.................. $8,820,273 $9,802,560 $4,423,396
---------- ---------- ----------
Total Investment Income................. 8,820,273 9,802,560 4,423,396
---------- ---------- ----------
Interest Expense
Interest on SBA debentures............... 974,105 780,254 --
Interest on bank debt (Note 3)........... 3,781,910 5,253,924 2,516,914
---------- ---------- ----------
Total Interest Expense.................. 4,756,015 6,034,178 2,516,914
---------- ---------- ----------
Net Interest Income...................... 4,064,258 3,768,382 1,906,482
---------- ---------- ----------
Non-Interest Income
Equity in earnings (losses) of
unconsolidated subsidiary (Note 2)...... 18,379 125,956 (53,022)
Other income............................. 519,030 446,209 148,125
---------- ---------- ----------
Total Non-Interest Income............... 537,409 572,165 95,103
---------- ---------- ----------
Expenses
Administration and advisory fees......... 33,905 13,149 3,671
Legal and accounting fees................ 367,484 344,311 144,562
Directors' fee (Note 8).................. 76,500 46,000 15,022
Officers' and employees' salaries........ 1,028,627 1,086,569 501,063
Employee benefit plans (Note 7).......... 136,000 70,008 44,000
Merger related costs (Note 5)............ -- -- 584,000
Other operating expenses................. 1,057,797 1,054,757 524,242
---------- ---------- ----------
Total Expenses.......................... 2,700,313 2,614,794 1,816,560
---------- ---------- ----------
Dividends paid on minority interest...... 277,020 207,774 --
---------- ---------- ----------
Net Investment Income.................... 1,624,334 1,517,979 185,025
---------- ---------- ----------
Realized and Unrealized Gain (Loss) on In-
vestments
Realized gain (loss) on investments (Note
6)...................................... (21,938) 61,194 --
Change in unrealized depreciation (Note
6)...................................... 58,000 (140,000) --
---------- ---------- ----------
Net Realized and Unrealized Gain (Loss)
on Investments.......................... 36,062 (78,806) --
---------- ---------- ----------
Net Increase in Net Assets resulting from
Operations............................... $1,660,396 $1,439,173 $ 185,025
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES OF CAPITAL ACCUMULATED RESTRICTED
COMMON STOCK COMMON STOCK IN EXCESS UNDISTRIBUTED CAPITAL
OUTSTANDING $.01 PAR VALUE OF PAR VALUE INCOME (LOSS) SURPLUS
------------ -------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 665,900 $6,659 $11,227,341 $ (399,918) $ --
Dividends paid,
common................ -- -- -- (1,668,050) --
Distributable net
income................ -- -- -- 1,602,396 --
Sale of common stock... 3,000 30 49,470 -- --
Change in unrealized
depreciation.......... -- -- -- 58,000 --
------- ------ ----------- ----------- ----------
Balance at December 31,
1994................... 668,900 $6,689 $11,276,811 $ (407,572) $ --
Dividends declared,
common................ -- -- -- (1,003,349) --
Distributable net
income................ -- -- -- 1,579,173 --
SOP 93-2 Cumulative
reclassification (Note
5).................... -- -- (682,570) 682,570 --
Gain on minority
interest buyback (Note
4).................... -- -- -- -- 6,002,100
Change in unrealized
depreciation.......... -- -- -- (140,000) --
------- ------ ----------- ----------- ----------
Balance at December 31,
1995................... 668,900 $6,689 $10,594,241 $ 710,822 $6,002,100
Dividends declared,
common
(Note 5).............. -- -- -- (1,010,242) --
Distributable net
income................ -- -- -- 185,025 --
SOP 93-2
reclassification
(Note 5).............. -- -- (26,974) 26,974 --
Change in unrealized
depreciation.......... -- -- -- -- --
------- ------ ----------- ----------- ----------
Balance at May 29,
1996................... 668,900 $6,689 $10,567,267 $ (87,421) $6,002,100
======= ====== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
-------------------------- MAY 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Increase in Net Assets resulting
from Operations..................... $ 1,660,396 $ 1,439,173 $ 185,025
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization....... 64,848 43,594 19,929
Change in unrealized depreciation... (58,000) 140,000 --
Realized loss (gain) on
investments........................ 21,938 (61,194) --
(Increase) decrease in investment in
unconsolidated subsidiary.......... (19,379) (125,956) 53,022
(Increase) decrease in accrued
interest receivable................ (64,697) (66,252) (25,723)
Decrease (increase) in other
assets............................. (99,434) (794,721) 165,111
Increase (decrease) in accounts
payable and accrued expenses....... (90,565) 1,036,580 70,303
Increase (decrease) in dividends
payable minority interest.......... (69,255) (69,255) --
Increase (decrease) in accrued
interest payable................... 143,725 257,330 (70,587)
------------ ------------ -----------
Net cash provided by operating
activities........................ 1,489,577 1,799,299 397,080
Cash Flows from Investing Activities:
Increase in investments.............. (33,103,213) (30,667,520) (7,252,488)
Proceeds from investment maturities
and terminations.................... 24,753,080 24,114,690 7,677,287
Proceeds from liquidation of other
assets.............................. 414,884 144,100 --
Capital expenditures................. (6,991) (16,378) (6,198)
------------ ------------ -----------
Net cash provide by (used for)
investing activities.............. (7,942,240) (6,425,108) 418,601
Cash Flows from Financing Activities:
Proceeds from (payments of) notes
payable to banks.................... 8,325,000 21,269,900 (900,000)
Payments of SBA debentures........... -- (12,500,000) --
Buyback of minority interest......... -- (3,231,900) --
Sale of common stock................. 49,500 -- --
Dividends paid on common stock....... (1,668,050) (1,003,349) (468,230)
------------ ------------ -----------
Net cash provided by (used for)
financing activities................. 6,706,450 4,534,651 (1,368,230)
------------ ------------ -----------
Net Increase (Decrease) in Cash....... 253,787 (91,158) (552,549)
Cash, beginning of period............. 1,014,537 1,268,324 1,177,166
------------ ------------ -----------
Cash, end of period................... $ 1,268,324 $ 1,177,166 $ 624,617
============ ============ ===========
Supplemental Information:
Cash paid during the period for
interest (Includes dividends paid on
minority interest).................. $ 4,958,565 $ 6,053,877 $ 2,587,501
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 29, 1996
(1) ORGANIZATION
On February 3, 1989, Tri-Magna Corporation, a newly formed Delaware
corporation, (referred to as Tri-Magna or the Parent Company) and its
subsidiary, Medallion Funding Corp. (Medallion) entered into an Agreement and
Plan of Share Exchange (the Share Exchange). Tri-Magna and its wholly-owned
subsidiaries Medallion, F.A.P. Holding Corp. (FAP) and Medallion Taxi Media,
Inc. (Media) are collectively referred to as the Company. Under the Share
Exchange, 100 shares of common stock of the Parent Company were exchanged for
each of the outstanding shares of common stock of Medallion. On May 18, 1989,
the shareholders of Medallion voted in favor of the Share Exchange Plan. This
transaction was accounted for as a pooling of interests.
The Parent Company was formed in January 1989 for the purpose of acquiring
all of the outstanding shares of Medallion common stock pursuant to the Share
Exchange. The Parent Company is a closed-end, diversified management
investment company registered under the Investment Company Act of 1940 (the
1940 Act), and has elected to be treated as a regulated investment company
under the Internal Revenue Code of 1986, as amended.
Medallion was formed in 1979 for the purpose of operating as a Specialized
Small Business Investment Company (SSBIC), licensed, regulated and financed in
part by the U.S. Small Business Administration (SBA). Medallion was granted a
license to operate as a SSBIC by the SBA on June 23, 1980. On February 2,
1982, Medallion registered as a closed-end, nondiversified investment company
under the 1940 Act.
On June 22, 1992, Medallion established a wholly-owned subsidiary, FAP. This
subsidiary was established for the purpose of acquiring and managing property
purchased in foreclosure from Medallion.
On August 23, 1994, Media, a New York corporation was formed. Media is
engaged in the outdoor media advertising business and is a wholly-owned
subsidiary of Tri-Magna. On May 29, 1996, Tri-Magna was acquired by Medallion
Financial Corp., pursuant to a merger agreement dated December 21, 1995. Under
the merger agreement, all of the Company's outstanding shares of capital stock
was canceled in exchange for $20.00 per share.
The accompanying consolidated financial statements include the accounts of
Tri-Magna and Medallion after elimination of all intercompany amounts. (See
Note 2)
The consolidated balance sheet as of May 29, 1996 and consolidated
statements of operations, shareholders' equity and cash flows for the period
ended May 29, 1996 include the accounts of Tri-Magna and Medallion prior to
the consummation of the merger with Medallion Financial Corp. on May 29, 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company, which conform with
generally accepted accounting policies and accounting principles and
procedures generally accepted in the investment company industry, include the
following:
Investments
Medallion's investments consist primarily of long-term loans to persons
defined by SBA regulations as being socially or economically disadvantaged, or
to entities that are at least 50% owned by such persons. Approximately 68% of
Medallion's loan portfolio at December 31, 1995, and May 29, 1996 have arisen
in connection with the financing of taxicab medallions, taxicabs and related
assets, substantially all in the
F-29
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
metropolitan New York area. These loans are secured by the medallions,
taxicabs and related assets and are personally guaranteed by the borrowers, or
in the case of corporations, personally guaranteed by the owners. The
remaining portion of Medallion's portfolio represents loans to various
commercial enterprises, including dry cleaners, garages, gas stations and
laundromats. These loans are secured by various equipment and/or real estate
and are generally guaranteed by the owners, and in certain cases, by the
equipment dealers. These loans are made primarily in the metropolitan New York
City area.
Tri-Magna began funding loans in March, 1995. As of December 31, 1995 and
May 29, 1996, Tri-Magna has funded 50 loans totaling $4,272,212 and 51 loans
totaling $4,752,212, respectively. Of these amounts, Tri-Magna participated
out a total of $2,538,721 and $2,922,721, respectively.
Under the 1940 Act, the Company's long-term loans are considered investments
and are recorded at their fair value. Since no ready market exists for these
loans, fair value is determined by the Board of Directors in good faith. In
determining fair value, the directors take into consideration the financial
condition of the borrower, the adequacy of the collateral, and the
relationships between market rates and portfolio rates. Loans were valued at
cost, less unrealized depreciation of $910,000 at December 31, 1995 and May
29, 1996. The directors have determined that this valuation approximates fair
value.
The principal portion of loans serviced for others by the Company at
December 31, 1995 and May 29, 1996 amounted to approximately $15,799,777 and
$20,793,093, respectively.
The Company offsets loan origination fees against related direct loan
origination costs. The net amount is deferred and amortized over the life of
the loan. At December 31, 1995 and May 29, 1996, the net deferred asset
totaled $293,400 and $324,438, respectively. Amortization expense was $22,117,
$84,684 and $83,229 for the years ended December 31, 1994 and 1995, and period
ended May 29, 1996, respectively.
Investment in Unconsolidated Subsidiary
Tri-Magna owns 100% of the outstanding stock of Media. Tri-Magna's
investment in Media is accounted for under the equity method because as a non-
investment company, Media, cannot be consolidated with an investment company,
Tri-Magna. Financial information for Media is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 29,
BALANCE SHEET 1995 1996
------------- ------------ --------
<S> <C> <C>
Cash............... $ -- $110,182
Accounts
receivable........ 214,238 285,696
Equipment, net..... 559,786 526,846
Other.............. 55,720 36,504
--------- --------
Total Assets....... $ 829,744 $959,228
========= ========
Notes payable...... $ 275,000 275,000
Notes payable to
parent............ -- 443,651
Accrued expenses... 409,409 148,264
--------- --------
Total Liabilities.. 684,409 866,915
--------- --------
Common stock....... 1,000 1,000
Retained earnings.. 144,335 91,313
--------- --------
Total equity....... 145,335 92,313
--------- --------
Total Liabilities
and Shareholders
equity............ $ 829,744 $959,228
========= ========
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, PERIOD ENDED
STATEMENT OF ------------------- MAY 29,
OPERATIONS 1994 1995 1996
------------ -------- ---------- ------------
<S> <C> <C> <C>
Advertising revenue..................... $227,756 $1,542,013 $671,148
Cost of services........................ 83,341 483,721 283,891
-------- ---------- --------
Gross margin............................ 144,415 1,058,292 387,257
Other operating expenses................ 126,036 829,293 455,278
-------- ---------- --------
Income (loss) before taxes.............. 18,379 228,999 (68,021)
Income taxes............................ -- 103,043 (14,999)
-------- ---------- --------
Net income (loss)....................... $ 18,379 $ 125,956 $(53,022)
======== ========== ========
</TABLE>
F-30
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
On March 8, 1995, Tri-Magna guaranteed a demand loan for Media. At December
31, 1995 and May 29, 1996, $275,000 was outstanding at an interest rate of
2.00% over prime or (10.50%) and (10.25%) interest rate, respectively. The
loan matured in June 1996 and was paid in full.
Federal Income Taxes
It is the Company's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies, which require the
Company to distribute at least 90% of its investment company taxable income to
its shareholders. Therefore, no provision for federal income tax has been
made.
FAP and Media have elected to be taxed as regular corporations and, for the
year ended December 31, 1995, recorded a provision for income taxes totaling
approximately $103,000. For the period ended May 29, 1996 both entities
incurred operating losses and required no provision for income taxes. The
provision (benefit) for income taxes are reflected in equity in earnings of
unconsolidated subsidiary on the accompanying consolidated statement of
operations.
Income Recognition
When, in the judgment of management, collection of any portion of the
interest or principal amount of a receivable is in doubt, accrual of interest
income is discontinued, and interest is recorded when received. At December
31, 1995 and May 29 , 1996, nonaccrual loans totaled approximately $1,299,357
and $1,903,843, respectively, and the related foregone interest income
amounted to approximately $218,853 and $106,856, respectively. Additionally,
at December 31, 1995 and May 29, 1996, restructured loans totaled
approximately $380,002 of which $0 was included in nonaccrual loans,
respectively. Other income on the accompanying consolidated statements of
operations consists of late fees, prepayment penalties and fee income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(3) NOTES PAYABLE TO BANKS
At December 31, 1995 and May 29, 1996, the Company had outstanding bank
borrowings under the following agreements:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 29,
DESCRIPTION 1995 1996
- ----------- ------------ -----------
<S> <C> <C>
Revolving Credit Agreement............................ $73,150,000 $72,250,000
Term Loan Agreements.................................. 5,231,900 5,231,900
Short-Term Note....................................... 1,913,000 1,913,000
----------- -----------
Total................................................. $80,294,900 $79,394,900
=========== ===========
</TABLE>
Borrowings under these agreements are secured by all assets of the Company.
F-31
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
Revolving Credit Agreement
On March 27, 1992 (and as subsequently amended), the Company entered into a
committed revolving credit agreement (the Revolver) with a group of banks. The
Company extended the Revolver until June 30, 1997 at an aggregate credit
commitment amount of $78,000,000 pursuant to the Renewal and Extension
Agreement dated March 29, 1996. The Revolver may be extended annually
thereafter upon the option of the participating banks and acceptance by the
Company. Should any participating bank not extend its committed amount, the
Revolver agreement provides that each bank shall extend a term loan equal to
its share of the principal amount outstanding of the revolving credit note.
Maturity of the term note shall be the earlier of two years or any other
date on which it becomes payable in accordance with the Revolver. Interest and
principal payments are to be made monthly. Interest is calculated monthly at
either the bank's prime rate or a rate based on the adjusted London Interbank
Offered Rate of interest (LIBOR) at the option of the Company. Substantially
all promissory notes evidencing the Company's investments are held by a bank,
as collateral agent under the agreement. Outstanding borrowings under the
Revolver were $73,150,000 and $72,250,000, at December 31, 1995 and May 29,
1996, at an average interest rate of 7.40% and 6.87%, respectively. During the
year ended December 31, 1995 and for the period ended May 29, 1996, the
Company's weighted average borrowings were approximately $62,203,800 and
$73,180,000 and the maximum outstanding borrowings were $73,150,000 and
$74,150,000, respectively. The weighted average interest rates on the weighted
average borrowings were 7.64% and 7.44% during the year ended December 31,
1995 and the period ended May 29, 1996, respectively.
The Company is required to pay an annual facility fee of 1/4% effective
prospectively as of March 28, 1995 on the Revolver aggregate commitment. For
the year ended December 31, 1994 and up through March 27, 1995, the Company
was required to pay an annual facility fee of 3/8%. Additionally, effective
prospectively as of September 29, 1995, the Company is required to pay an
additional annual fee of $62,500.
Term Loan Agreements
At December 31, 1995 and May 29, 1996, the Company had borrowed a total of
$2,000,000 under a term loan agreement (Term Loan) with a bank. The $2,000,000
was outstanding at December 31, 1995 and May 29, 1996. During 1995, the fixed
interest rate of 5.88% was increased to 7.5%. Interest payments are due
quarterly. The weighted average interest rate paid on such borrowings was
6.68% and 7.50%, during the year ended December 31, 1995 and period ended May
29, 1996, respectively. The total term borrowings outstanding at May 29, 1996
under this agreement are due in July 1997.
On September 29, 1995, Tri-Magna entered into a $3,231,900 term loan with a
certain bank maturing on May 31, 1996. Interest is paid monthly at the prime
rate. The loan is secured by all assets of Tri-Magna. The proceeds of this
loan were invested in Medallion as a capital contribution to facilitate the
repurchase of its preferred stock from the SBA. (See Notes 4 and 10)
Short-Term Note
On December 19, 1994, Tri-Magna entered into a demand promissory note
(Demand Note) with a certain bank. On September 1, 1995, the Demand Note was
converted into a $2,000,000 short-term secured note (Short-Term Note) which
matures on August 31, 1996. Interest is calculated monthly at either the
bank's prime rate or a rate based upon adjusted LIBOR at the option of the
Company. Substantially all promissory notes evidencing Tri-Magna's investments
are pledged to the bank as collateral. The Company is required to pay an
annual facility fee of 1/4% effective prospectively as of September 29, 1995
on the aggregate amount of the note. Outstanding
F-32
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
borrowings under the Short-Term Note were $1,913,000 at December 31, 1995 and
May 29, 1996, at an average interest rate of 7.59% and 6.84%, respectively.
During the year ended December 31, 1995 and period ended May 29, 1996, Tri-
Magna's weighted average borrowings were approximately $1,025,500 and
$1,902,820 and the maximum outstanding borrowings were $1,913,000. The
weighted average interest rate on such borrowings was 8.49% and 8.45% during
the year ended December 31, 1995 and period ended May 29, 1996, respectively.
Interest Rate Cap Agreements
On April 7, 1995, the Company entered into three interest rate cap
agreements to reduce the impact of changes in interest rates on its floating
rate long-term debt. These agreements limit the Company's maximum LIBOR
exposure on $20,000,000 of its revolving credit facility to 7.5%. The premiums
paid under these agreements were $46,875, $31,000 and $46,687, respectively.
The premiums have been capitalized and are being amortized over the two-year
term of the agreements, which expires on April 7, 1997. The Company is exposed
to credit loss in the event of nonperformance by the counterparties on these
interest rate cap agreements. The Company does not anticipate nonperformance
by any of these parties.
On November 16, 1995, the Company entered into three additional interest
rate cap agreements to reduce the impact of changes in interest rates on its
floating rate long-term debt. These agreements limit the Company's maximum
LIBOR exposure on an additional $20,000,000 of its revolving credit facility
to 7.0%. The premiums paid under these agreements were $13,000, $25,000 and
$12,500, respectively. The premiums have been capitalized and are being
amortized over the two-year terms of the agreements, which expire on November
16, 1997. The Company is exposed to credit loss in the event of nonperformance
by the counterparties on these interest rate cap agreements. The Company does
not anticipate nonperformance by any of these parties.
(4) MINORITY INTEREST
On September 29, 1995, Medallion repurchased and retired all of its 3%
preferred stock owned by the SBA at a discount of 65%, under an SBA preferred
stock repurchase agreement. The effective date of the buyback was August 12,
1994. The purchase price of the preferred stock was $3,231,900. The amount of
the discount, $6,002,100, was recorded as an increase in capital in an account
separate from other paid-in capital accounts, as restricted capital surplus
account. Under the repurchase agreement, the SBA retains a liquidating
interest in the amount of the discount on the repurchase, which expires on a
straight line basis over five years or on a later date if an event of default,
as defined in the agreement, has occurred and such default has not been cured
or waived. Upon the occurrence of any event of default, the SBA's liquidating
interest will become fixed at the level immediately preceding the event of
default and will not accrete further until the default is cured or waived.
While the liquidating interest expires over a five-year period, the balance
in the restricted capital surplus account remains unchanged in accordance with
the SBA requirements. The SBA requires this treatment because the additional
equity obtained as a result of the repurchase transaction is subject to
certain restrictions that remain even after the liquidated interest has been
eliminated. In the event of Medallion's liquidation, the unexpired portion of
the liquidating interest becomes immediately payable to the SBA.
At December 31, 1995 and May 29, 1996, the unaccreted amount of the SBA's
liquidating interest in the restricted capital surplus was $4,351,523 and
$3,851,348, respectively.
(5) SHAREHOLDERS' EQUITY
As discussed in Note (4), under the terms of the preferred stock repurchase
agreement with the SBA, a change in ownership of the Company could result in
the unexpired portion of the liquidating interest becoming
F-33
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
payable to the SBA. This provision was waived and the merger transaction with
Medallion Financial Corp. was approved by the SBA.
Direct costs associated with the merger agreement with Medallion Financial
Corp., previously deferred by the Company, were expensed on May 29, 1996.
Total direct costs charged to results of operations were $584,000.
On May 29, 1996, the Company declared an additional and liquidation dividend
of $0.81 per share totaling $542,012, payable on May 29, 1996 to the
shareholders at record as of such date.
In accordance with Statement of Position 93-2, "Determination, Disclosure
and Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies," a cumulative amount of
$709,544 has been reclassified from capital in excess of par value to
accumulated undistributed income on the accompanying consolidated balance
sheets. This reclassification has no impact on the Company's total
shareholders' equity and is designed to present the Company's capital accounts
on a tax basis.
(6) REALIZED LOSSES (GAINS) AND UNREALIZED DEPRECIATION ON INVESTMENTS
A summary of realized losses and unrealized depreciation on investments for
the period ended May 29, 1996 and the years ended December 31, 1995 and 1994
is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED DECEMBER 31,
MAY 29, ------------------------
UNREALIZED DEPRECIATION 1996 1995 1994
----------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Balance at Beginning of Period....... $(910,000) $ (770,000) $ (828,000)
Change in Unrealized Depreciation.... -- (140,000) 58,000
--------- ----------- -----------
Balance at End of Period............. $(910,000) $ (910,000) $ (770,000)
========= =========== ===========
</TABLE>
For the period ended May 29, 1996 and the years ended December 31, 1995 and
1994, realized losses and (gains) were $0, $(61,194), and $21,938,
respectively.
(7) EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution employee benefit plan, the
Medallion Funding Corp. Profit-Sharing Retirement Plan (the Profit-Sharing
Plan), under which substantially all Tri-Magna and Medallion employees and
officers are covered.
In addition, prior to March 31, 1996, the Company also maintained a defined
contribution employee pension plan, the Medallion Funding Corp. Pension Plan,
(the Pension Plan).
The Company's management acts as trustee of both Plans. Under the Profit-
Sharing Plan, voluntary employee as well as Company contributions are allowed.
Under the Pension Plan, the Company contributed up to 10% of each participants
annual compensation. Total employer contributions to both Plans is limited to
the lesser of 10% of each participant's compensation or $10,000, annually. On
March 31, 1996, the Pension Plan was terminated by the Board of Directors. The
Company contributions, at participants' option were transferred to other
plans.
The expense for employee benefit plans was approximately $70,000, $136,000
and $44,000 for the years ended December 31, 1995 and 1994 and the period
ended May 29, 1996, respectively.
F-34
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
(8) TRANSACTIONS WITH RELATED PARTIES
Certain officers and directors of Medallion are also shareholders of Tri-
Magna. Officers' salaries are set by the Board of Directors. Directors who are
not officers receive a fee of $1,000 per meeting. Directors who are members of
committees receive $500 for each meeting attended. Directors who are members
of the independent committee receive $1,000 for each meeting attended. One
loan receivable has been guaranteed by a related party.
(9) COMMITMENTS AND CONTINGENCIES
At December 31, 1995, and May 29, 1996, the Company's unfunded commitments
were approximately $2,447,800 for 35 loans and $2,958,900 for 29 loans,
respectively, that bear interest at rates ranging from 9.0% to 16.0% and 9.3%
to 15.0%, respectively.
The Company has operating lease agreements for its executive and general
offices, expiring in December 1997, as amended. The leases call for an
aggregate annual rental of approximately $235,000, subject to certain
escalation clauses. During the years ended December 31, 1995 and 1994, and
period ended May 29, 1996, rental expenses totaled $194,279, $195,777 and
$94,422, respectively, and are included in other operating expenses.
The Company is a party to various legal proceedings arising from the normal
course of business, none of which, in management's opinion, is expected to
have a material adverse impact on the Company's financial position or results
of operations.
(10) SUBSEQUENT EVENTS
On June 28, 1996 and January 28, 1997, Medallion increased the amount
available under the Revolver by $7,000,000 and $20,000,000, respectively. The
aggregate commitments under the Revolver was $85,000,000 and $105,000,000 at
such dates, respectively. Subsequent to the merger of Tri-Magna into Medallion
Financial Corp. on May 29, 1996 the Term Loan of $3,231,900 was paid in full.
The $2,000,000 Short-Term Note was assumed by Medallion Financial Corp. and
was converted into a $5,000,000 revolving credit agreement on December 1,
1996.
As a result of the merger of Tri-Magna into Medallion Financial Corp.,
Medallion became a wholly-owned subsidiary of Medallion Financial Corp. On
February 11, 1997 the SBA approved an amendment to the charters of Medallion
and another wholly-owned subsidiary, Transportation Capital Corp. (TCC),
converting these subsidiaries from SSBICs to SBICs. The conversion eliminates
the restriction for Medallion and TCC to lend only to individuals as being
socially or economically disadvantaged, or to small business concerns that are
at least 50% owned by such persons, as defined in the SBIA, subject to certain
restrictions.
Effective January 1, 1997, Medallion Financial Corp. decided to merge all of
the assets and liabilities of TCC into Medallion, subject to the approval of
the SBA. This is expected to occur by the end of the second quarter of 1997.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments, whether assets, liabilities or off-balance sheet commitments, if
practicable. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments. Fair value estimates which
were derived from broker quotes cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument.
F-35
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
In addition, SFAS 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
Investments--As described in Note 2, the carrying amount of investments is
the estimated fair value of such investments.
Notes payable to banks and demand notes--Due to the short-term nature of
these instruments, the carrying amount approximates fair value.
Commitments to Extend Credit--The fair value of commitments to extend credit
is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also includes a consideration of the difference
between the current levels of interest rates and the committed rates. At May
29, 1996, the estimated fair value of these off-balance sheet instruments was
not material.
Interest Rate Cap Agreements--The fair value is estimated based on market
prices or dealer quotes. At May 29, 1996, estimated fair value of these off-
balance sheet instruments was not material.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MAY 29, 1996
--------------------------- ---------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Investments............. $96,046,416 $96,046,416 $95,621,617 $95,621,617
Financial liabilities:
Notes payable to banks
and demand notes....... $80,294,900 $80,294,900 $79,394,900 $79,394,900
</TABLE>
F-36
<PAGE>
TRI-MAGNA CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
MAY 29, 1996
<TABLE>
<CAPTION>
NUMBER BALANCE INTEREST
OF LOANS OUTSTANDING RATE
-------- ----------- -----------
<S> <C> <C> <C>
2 $ 92,529 5.00%-7.00%
16 3,625,886 8.00
3 287,797 8.25
18 2,783,824 8.50
10 901,136 8.63
12 981,255 8.75
55 6,751,204 9.00
99 8,133,949 9.25
122 14,125,122 9.50
2 114,819 9.63
32 3,825,894 9.75
119 10,989,259 10.00
30 3,236,713 10.25
40 3,994,604 10.50
29 2,628,392 10.75
1 59,382 10.90
43 3,983,410 11.00
6 356,496 11.25-11.50
2 146,961 11.75
53 3,878,890 12.00
7 448,314 12.50
3 369,083 12.75-12.95
99 5,177,644 13.00
2 372,799 13.25
22 1,165,954 13.50
3 46,411 13.75-13.87
97 4,612,518 14.00
4 105,443 14.05-14.30
19 1,163,039 14.50
7 213,388 14.75-14.84
224 9,955,553 15.00
8 687,574 15.20
7 208,929 15.25
5 88,044 15.50
1 100,239 15.75
11 325,999 16.00
5 193,989 16.50-18.00
2 74,737 19.00
----- -----------
Total: 1,220 $96,207,179 10.92%
=====
Plus: Loan Origination Costs,
Net............................. 324,438
-----------
Total Investments at Cost...... $96,531,617
Less: Unrealized depreciation on
investments..................... (910,000)
-----------
Total Investments at directors'
valuation..................... $95,621,617
===========
</TABLE>
F-37
<PAGE>
TRI-MAGNA CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER BALANCE INTEREST
OF LOANS OUTSTANDING RATE
-------- ----------- --------
<S> <C> <C> <C> <C>
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
===========
</TABLE>
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Edwards Capital Company:
We have audited the accompanying balance sheet of Edwards Capital Company (a
New York limited partnership), including the schedule of loans as of May 29,
1996 and December 31, 1995, and the related statements of operations, changes
in partners' capital and cash flows for the five month period ended May 29,
1996 and the year ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As explained in Note 1, the financial statements include finance receivables
valued at $44,490,149 (97% of total assets) as of May 29, 1996 and at
$43,778,791 (97% of total assets) as of December 31, 1995, the values of which
have been estimated by the General Partner in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values
that would have been used had a ready market for the loans existed, and the
differences could be material.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Edwards Capital Company as
of May 29, 1996 and December 31, 1995 and, the results of its operations and
its cash flows for the five month period ended May 29, 1996 and year ended
December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 26, 1997
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Edwards Capital Company:
We have audited the accompanying statement of income of Edwards Capital
Company (a limited partnership) and the related statements of changes in
partners' capital and cash flows for the year 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 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 operations and cash flows of Edwards
Capital Company for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.
/s/ Friedman, Alpren & Green LLP
New York, New York
January 28, 1995
F-40
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 29,
1995 1996
------------ -----------
<S> <C> <C>
ASSETS
Cash................................................. $ 115,571 $ 437,886
Finance Receivables:
Medallions.......................................... 43,177,063 43,920,609
Other, less allowance for doubtful 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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED
-------------------------- MAY 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED
-------------------------- MAY 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED
------------------------- MAY 29,
1994 1995 1996
------------ ----------- ------------
<S> <C> <C> <C>
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) provided by
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
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
MAY 29, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Edwards Capital Company (the Partnership) is organized under the laws of the
State of New York as a Small Business Investment Company, subject to the rules
and regulations of the Federal Small Business Administration (the SBA). The
Partnership's principal activity is the financing of loans collateralized by
New York City taxicab medallions.
The Partnership has one General Partner and six classes of limited partners.
Allocations of income or loss and cash distributions are based on formulas, as
set forth in the Partnership Agreement. The formulas utilize the average prime
rate for the year, net cash receipts, as defined, and the weighted average
capital for each class of partner.
On May 29, 1996, substantially all assets and certain liabilities of the
Partnership were acquired by Medallion Financial Corp., pursuant to an asset
purchase agreement dated February 21, 1996, for a purchase price of
$15,624,995.
The balance sheet as of May 29, 1996 and statements of operations, changes
in partners' capital and cash flows for the period ended May 29, 1996 included
the accounts of the Partnership prior to the consummation of the sale to
Medallion Financial Corp. on May 29, 1996.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Finance Receivables and the Allowance for Doubtful Accounts
Finance receivables, net of participation sold to others and an allowance
for doubtful accounts, are stated at fair value. The fair value of such loans
is determined in good faith by the General Partner. The allowance for doubtful
accounts is maintained at a level that, in the General Partner's judgment, is
adequate to absorb losses inherent to the portfolio.
Finance receivables collateralized by New York City taxicab medallions are
considered fully collectible, as the value of the collateral is deemed
sufficient to assure full collection in the event of foreclosure. At December
31, 1995 and May 29, 1996, there is an allowance for doubtful accounts on
receivables collateralized by radio rights, as the value of the collateral on
certain loans is deemed insufficient.
The allowance is reviewed and adjusted periodically by the General Partner
on the basis of available information, including the fair value of the
underlying collateral; individual credit risks; past loss experience; the
volume, composition and growth of the portfolio; and current and projected
financial and economic conditions.
Interest is continued to be recognized as income on all finance receivables
that are past due, as to principal and interest, when the value of the
underlying collateral is deemed sufficient to assure full collection of the
principal and associated interest in the event of foreclosure. At December 31,
1995 and May 29, 1996, the value of the underlying collateral on finance
receivables was deemed adequate.
F-45
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
The principal amount of loans serviced for others at December 31, 1995 and
May 29, 1996, amounted to approximately $30,995,006 and $ 34,084,479,
respectively.
Deferred Financing Costs
Costs incurred in connection with obtaining subordinated debenture financing
have been deferred and are being amortized on the effective interest rate
method over the terms of the loans.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed on an
accelerated method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the estimated useful life of the asset or, if
less, the life of the lease.
Origination Fees
Origination fees (included in other income) for loans are deferred and
amortized on a straight-line basis over the terms of the loans. At December
31, 1995, loan origination fees were fully amortized.
Income Taxes
The Partnership is not a taxpaying entity for income tax purposes, and
accordingly, no provision has been made for income taxes. The partners'
allocable shares of the Partnership's taxable income or loss are reportable on
their income tax returns. A provision is made for New York City unincorporated
business tax.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.
(2) FINANCE RECEIVABLES
Finance receivables are interest-bearing loans that are secured by mortgages
collateralized by New York City taxicab medallion rights, taxicabs or radio
group rights, and the personal guarantees of individuals or stockholders of
corporate borrowers.
Maximum original terms of finance receivables at December 31, 1995 and May
29, 1996 are as follows:
(ROUNDED TO 000'S)
<TABLE>
<CAPTION>
DECEMBER 31, MAY 29,
1995 1996
------------ -----------
<S> <C> <C>
60 months......................................... $42,307,000 $39,961,000
84 months......................................... 1,027,000 754,000
120 months........................................ 465,000 3,795,000
----------- -----------
$43,799,000 $44,510,000
=========== ===========
</TABLE>
F-46
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
Contractual maturities of finance receivables at December 31, 1995 and May
29, 1996 are approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 29,
1995 1996
------------ -----------
<S> <C> <C>
1996.............................................. $ 2,623,000 $ 374,000
1997.............................................. 4,482,000 993,000
1998.............................................. 7,046,000 3,098,000
1999.............................................. 15,329,000 13,582,000
2000.............................................. 11,450,000 14,591,000
Thereafter........................................ 2,869,000 11,872,000
----------- -----------
$43,799,000 $44,510,000
=========== ===========
</TABLE>
Actual maturities may differ, as loans are often paid in advance of their
maturities, and loans with participation sold to others contain subordinate
prepayment provisions. During the year ended December 31, 1995 and the period
ended May 29, 1996, the collections of loans and prepayments totaled
approximately $8,037,000 and $2,053,000, respectively.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1995 and May
29, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 29,
1995 1996
------------ --------
<S> <C> <C>
Furniture and Equipment............................. $162,700 $162,700
Leasehold Improvements.............................. 38,063 38,063
-------- --------
200,763 200,763
Less -- Accumulated Depreciation and Amortization... 133,937 140,407
-------- --------
$ 66,826 $ 60,356
======== ========
</TABLE>
(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.
F-47
<PAGE>
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:
<TABLE>
<CAPTION>
INTEREST
DUE DATE RATE AMOUNT
-------- -------- -----------
<S> <C> <C>
September 1, 1996..................................... 8.75% $ 1,200,000
April 1, 1997......................................... 8.95 1,500,000
June 1, 1998.......................................... 9.80 3,000,000
September 1, 2002..................................... 7.15 3,500,000
September 1, 2002..................................... 7.15 6,050,000
June 1, 2004.......................................... 7.80 4,600,000
September 1, 2004..................................... 8.20 5,100,000
-----------
$24,950,000
===========
</TABLE>
(6) RELATED PARTY TRANSACTIONS
The law firm of Herrick, Feinstein LLP provides legal services to the
Partnership and subleases office space to it under a lease that commenced on
June 1, 1992 and expires on April 30, 1997. The lease requires minimum annual
rental payments of $40,000 and additional rentals based on increases in real
estate taxes and operating expenses over base period amounts. It is cancelable
by the firm upon giving 60 days' notice. Certain principals of the firm are
limited partners of the Partnership and are shareholders of the corporate
General Partner of the Partnership.
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED
------------------------- MAY 29,
1994 1995 1996,
------------ ------------ ------------
<S> <C> <C> <C>
Rent expense........................ $ 39,996 $ 39,996 $16,342
Legal fees.......................... 288,985 92,501 9,926
------------ ------------ -------
$ 328,981 $ 132,497 $26,268
============ ============ =======
</TABLE>
During the year ended December 31, 1995 and the period ended May 29, 1996,
legal fees of $225,000 and $125,000, respectively were incurred and accrued to
Herrick, Feinstein in connection with the sale of assets by the Partnership to
Medallion Financial Corp. These costs were charged to operations on May 29,
1996.
(7) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, there are outstanding commitments and
contingent liabilities that are not reflected in the financial statements.
At December 31, 1995 and May 29, 1996, the Partnership had an operating
lease for office space which expires on April 30, 1997 (Note 6).
F-48
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
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:
<TABLE>
<CAPTION>
MAY 29, 1996
---------------------------
CARRYING AMOUNT FAIR VALUE
--------------- -----------
<S> <C> <C>
Financial assets
Finance receivables......................... $44,490,149 $44,490,149
Financial liabilities
Subordinated debentures payable............. 24,950,000 24,950,000
Bank loans payable.......................... 10,100,000 10,100,000
</TABLE>
F-49
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS
MAY 29, 1996
The distribution of loans at May 29, 1996 by rate of interest is as follows:
<TABLE>
<CAPTION>
NUMBER BALANCE INTEREST
OF LOANS OUTSTANDING RATE
-------- ----------- --------
<S> <C> <C>
9 $ 532,000 7.70%
5 200,000 8.00
2 300,988 8.20
12 800,000 8.25
13 722,000 8.38
6 239,000 8.40
5 214,473 8.44
4 184,000 8.50
4 161,200 8.60
13 375,000 8.70
15 974,750 8.75
9 507,500 8.88
51 3,485,039 9.00
2 239,768 9.13
15 2,028,924 9.25
2 265,658 9.39
83 8,876,722 9.60
3 789,656 9.63
62 7,584,689 9.75
3 214,887 9.80
1 18,125 9.88
19 2,602,540 9.90
50 6,464,952 10.00
29 3,636,894 10.25
4 476,062 10.38
6 618,236 10.50
9 736,561 11.00
2 185,620 11.25
2 295,394 11.50
2 144,062 11.75
2 363,586 12.00
1 2,033 12.50
2 117,611 13.25
1 36,910 13.50
1 58,196 13.55
1 12,966 14.00
2 44,147 15.00
--- -----------
452 $44,510,149 9.58%
===
Less: Allowance for Doubtful Accounts on Radio
Loans............................................ (20,000)
-----------
$44,490,149
===========
</TABLE>
F-50
<PAGE>
EDWARDS CAPITAL COMPANY
(A LIMITED PARTNERSHIP)
SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS
DECEMBER 31, 1995
The distribution of loans at December 31, 1995 by rate of interest is as
follows:
<TABLE>
<CAPTION>
NUMBER BALANCE INTEREST
OF LOANS OUTSTANDING RATE
-------- ----------- --------
<S> <C> <C>
1 $ 570,207 7.820%
17 1,132,000 8.250
6 239,000 8.300
8 392,000 8.375
7 515,461 8.440
4 200,000 8.490
14 475,750 8.500
4 161,200 8.600
2 368,000 8.750
1 605,265 8.780
9 507,500 8.875
49 2,729,873 9.000
12 746,361 9.125
15 1,957,713 9.250
2 280,012 9.385
65 6,982,190 9.500
6 447,920 9.600
3 793,091 9.625
52 7,336,160 9.750
2 168,256 9.800
15 1,858,397 9.900
49 6,225,055 10.000
41 5,241,320 10.250
5 600,951 10.375
10 862,401 10.500
2 122,266 10.750
12 862,662 11.000
3 191,531 11.250
2 297,291 11.500
4 256,300 11.750
6 373,899 12.000
1 4,110 12.500
2 125,942 13.250
1 36,910 13.500
1 58,196 13.550
1 14,831 14.000
2 11,874 14.500
2 46,896 15.000
--- -----------
438 $43,798,791 9.695%
===
Less Allowance for
Doubtful Accounts on Radio Loans................. (20,000)
-----------
$43,778,791
===========
</TABLE>
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Transportation Capital Corp.:
We have audited the accompanying balance sheets of Transportation Capital
Corp. (a New York corporation) as of December 31, 1995, and May 29, 1996,
including the schedule of investments other than investments in affiliates and
schedule of loans as of December 31, 1995 and May 29, 1996, the related
statements of operations, changes in shareholders' equity and cash flows for
the year ended December 31, 1995 and the five month period ended May 29, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As explained in Note 1, the financial statements include loans receivable
valued at $9,154,139 (53% of total assets) as of December 31, 1995 and at
$9,312,331 (56% of total assets) as of May 29, 1996, whose values have been
estimated by the Board of Directors in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation,
those estimated values may differ significantly from the values that would
have been used had a ready market for the loans existed, and the differences
could be material.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transportation Capital
Corp. as of December 31, 1995 and May 29, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1995 and the
five month period ended May 29, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 26, 1997
F-52
<PAGE>
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
F-53
<PAGE>
TRANSPORTATION CAPITAL CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 29,
1995 1996
------------ -----------
<S> <C> <C>
ASSETS
Loans Receivable.................................... $ 9,796,728 $ 9,924,748
Allowance for Loan Losses........................... (642,589) (612,417)
----------- -----------
Loans receivable, at fair value.................... 9,154,139 9,312,331
Cash and Cash Equivalents........................... 7,780,717 6,797,183
Accrued Interest Receivable......................... 133,722 118,384
Furniture, Fixtures and Leasehold Improvements, at
cost, less accumulated depreciation $12,256 and
$14,122............................................ 16,253 14,387
Other Assets........................................ 72,877 62,394
Deferred Income Taxes............................... 257,900 246,365
----------- -----------
Total Assets........................................ $17,415,608 $16,551,044
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures payable to the Small Business
Administration.................................... $ 6,730,000 $ 5,640,000
Accrued interest payable........................... 35,071 139,068
Accrued dividend payable........................... -- 116,725
Accrued expenses................................... 171,888 111,960
----------- -----------
Total Liabilities................................... 6,936,959 6,007,753
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
3% Cumulative preferred stock, $1,000 par value--
Authorized--9,000 shares
Issued and outstanding--none....................... -- --
Common stock, $.125 par value--
Authorized--5,000,000 shares
Issued and outstanding--100 shares................. 13 13
Additional paid-in capital.......................... 7,749,456 7,749,456
Restricted contributed capital surplus.............. 2,199,166 2,199,166
Accumulated undistributed net investment income..... 5,060,597 5,104,110
Accumulated net realized loan losses................ (4,144,594) (4,141,637)
Net unrealized depreciation on loans................ (385,989) (367,817)
----------- -----------
Total Shareholders' Equity.......................... 10,478,649 10,543,291
----------- -----------
Total Liabilities and Shareholders' Equity.......... $17,415,608 $16,551,044
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
TRANSPORTATION CAPITAL CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------ MAY 29,
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
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
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
TRANSPORTATION CAPITAL CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK RESTRICTED UNDISTRIBUTED ACCUMULATED
------------------------ --------------------- ADDITIONAL CONTRIBUTED NET NET
SHARES SHARES PAID-IN CAPITAL INVESTMENT REALIZED
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL SURPLUS INCOME LOAN LOSSES
----------- ----------- ----------- -------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1993........... 3,383 1/3 $ 3,383,333 2,486,804 $310,851 $6,250,529 $ -- $5,124,014 $(4,032,628)
Merger of TCC
Purchase Co.... -- -- (2,486,704) (310,838) 314,760 -- -- --
Net investment
income......... -- -- -- -- -- -- 453,622 --
Net realized
loan losses.... -- -- -- -- -- -- -- (84,310)
Net change in
unrealized
depreciation on
loans.......... -- -- -- -- -- -- -- --
---------- ----------- ---------- -------- ---------- ---------- ---------- -----------
Balance,
December 31,
1994........... 3,383 1/3 $ 3,383,333 100 $ 13 $6,565,289 $ -- $5,577,636 $(4,116,938)
Net investment
income......... -- -- -- -- -- -- 356,310 --
Net realized
loan losses.... -- -- -- -- -- -- -- (27,656)
Net change in
unrealized
depreciation on
loans.......... -- -- -- -- -- -- -- --
Capital
contribution... -- -- -- -- 310,818 -- -- --
Capitalization
of accumulated
undistributed
net investment
income......... -- -- -- -- 873,349 -- (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 $5,060,597 $(4,144,594)
Net investment
income......... -- -- -- -- -- -- 160,238 --
Net realized
loan gains..... -- -- -- -- -- -- -- 2,957
Preferred
dividends
declared....... (116,725) --
Net change in
unrealized
depreciation on
loans.......... -- -- -- -- -- -- -- --
---------- ----------- ---------- -------- ---------- ---------- ---------- -----------
Balance, May 29,
1996........... -- $ -- 100 $ 13 $7,749,456 $2,199,166 $5,104,110 $(4,141,637)
========== =========== ========== ======== ========== ========== ========== ===========
<CAPTION>
NET
UNREALIZED TOTAL
DEPRECIATION SHAREHOLDERS'
ON LOANS EQUITY
------------- -------------
<S> <C> <C>
Balance,
December 31,
1993........... $(1,007,933) $10,028,166
Merger of TCC
Purchase Co.... -- 3,922
Net investment
income......... -- 453,622
Net realized
loan losses.... -- (84,310)
Net change in
unrealized
depreciation on
loans.......... 420,583 420,583
------------- -------------
Balance,
December 31,
1994........... $ (587,350) $10,821,983
Net investment
income......... -- 356,310
Net realized
loan losses.... -- (27,656)
Net change in
unrealized
depreciation on
loans.......... 201,361 201,361
Capital
contribution... -- 310,818
Capitalization
of accumulated
undistributed
net investment
income......... -- --
Repurchase of 3%
preferred
stock.......... -- (1,184,167)
------------- -------------
Balance,
December 31,
1995........... $ (385,989) $10,478,649
Net investment
income......... -- 160,238
Net realized
loan gains..... -- 2,957
Preferred
dividends
declared....... -- (116,725)
Net change in
unrealized
depreciation on
loans.......... 18,172 18,172
------------- -------------
Balance, May 29,
1996........... $ (367,817) $10,543,291
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
TRANSPORTATION CAPITAL CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED DECEMBER 31, MAY 29,
-------------------------- ------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
MAY 29, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Transportation Capital Corp. (the Company), a New York corporation, was an
indirect wholly owned subsidiary of Leucadia National Corporation (Leucadia)
and is licensed by the Small Business Administration (SBA) to operate as a
specialized small business investment company (SSBIC) under the Small Business
Investment Act of 1958, as amended. Effective on May 29, 1996, the Company was
acquired by Medallion Financial Corp. and registered as a closed-end
management investment under the Investment Company Act of 1940, as amended
(the 1940 Act). The balance sheet as of May 29, 1996 and statements of
operations, changes in shareholders' equity and cash flows for the period
ended May 29, 1996 included the accounts of the Company prior to the
consummation of the acquisition by Medallion Financial Corp. on May 29, 1996.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loans and the Allowance for Loan Losses
Loans, net of participation sold to other lenders and an allowance for
possible losses, are stated at fair value. The fair value of such loans is
determined in good faith by the Board of Directors. The allowance for loan
losses is maintained at a level that, in the Board of Director's judgment, is
adequate to absorb losses inherent in the portfolio.
The allowance is reviewed and adjusted periodically by the Board of
Directors on the basis of available information, including the fair value of
the underlying collateral; individual credit risks; past loss experience; the
volume, composition and growth of the portfolio; and current and projected
economic conditions. Assets acquired in satisfaction of loans are carried at
estimated net realizable value.
A fully collateralized loan is placed on nonearning status once it becomes
180 days past due as to principal and interest. Loans that are not fully
collateralized are placed on nonearning status when they are 90 days past due
as to principal or interest. Interest on nonearning loans is recognized as
income when collected.
Realized Loan Losses
Realized loan losses consist of write-offs of loans or assets acquired in
satisfaction of loans, net of recoveries.
Unrealized Depreciation on Loans
All unrealized changes in the value of loans, including the provision for
losses, are included in the caption net change in unrealized depreciation on
loans, which is net of income tax effect. Net unrealized depreciation on loans
at December 31, 1995 and May 29, 1996 is net of deferred income taxes of
$256,600 and $244,600, respectively.
F-58
<PAGE>
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
Depreciation and Amortization
Depreciation and amortization of furniture, fixtures, office equipment and
leasehold improvements is computed using straight-line and accelerated methods
at rates adequate to allocate the cost of applicable assets over their
estimated useful lives or, if less, the term of the lease. Depreciation and
amortization amounted to $4,296, $3,925 and $1,866 for the years ended
December 31, 1995 and 1994 and period ended May 29, 1996, respectively.
Income Taxes
For the period ended May 29, 1996, the Company's results of operations was
reported in the consolidated federal income tax return filed by Leucadia. The
Company and Leucadia were operating under a tax sharing agreement pursuant to
which the Company made payments to (or receives payments from) Leucadia
consisting of the tax liability that the Company would incur if it filed a
separate federal income tax return.
The Company provided for income taxes using the liability method under
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Under the liability method, deferred income taxes are provided
at the statutory rates for differences between the tax and accounting bases of
substantially all assets and liabilities and for carryforwards. A valuation
allowance is provided if deferred tax assets are not considered more likely
than not to be realized.
Cash and Cash Equivalents
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents and
loan receivables.
The Company considers short-term instruments with original maturities of
three months or less, measured from their acquisition date, to be cash
equivalents. Cash and cash equivalents consist of cash in banks and U.S.
Treasury bills at market value.
Noncash Investing Activities
During the years ended 1995 and 1994 and period ended May 29, 1996, the
Company refinanced loans amounting to $740,826, $1,041,933 and $1,696,715,
respectively.
(2) LOANS RECEIVABLE
Nonearning and reduced rate loans outstanding were approximately $88,200 and
$86,800 at December 31, 1995 and May 29, 1996, respectively. At December 31,
1995 and May 29, 1996, there were no commitments to loan additional funds to
borrowers whose loans were classified as nonearning or reduced rate.
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
--------------------- MAY 29,
1994 1995 1996
---------- --------- ------------
<S> <C> <C> <C>
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
========== ========= ========
</TABLE>
F-59
<PAGE>
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
(3) DEBENTURES PAYABLE TO THE SMALL BUSINESS ADMINISTRATION
Debentures payable to the SBA at December 31, 1995 and May 29, 1996
consisted of subordinated debentures with the following maturities and
interest rates (interest is payable semi-annually):
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AT
-------------------------------
DECEMBER 31, MAY 29,
1995 1996 DUE DATE INTEREST RATE
------------ ---------- -------- ----------------
<S> <C> <C> <C>
$1,090,000 $ -- 05/07/96 7.375% per annum
5,640,000 5,640,000 06/01/02 5.000% per annum
---------- ---------- through 5/31/97,
8% thereafter
$6,730,000 $5,640,000
========== ==========
</TABLE>
Under the terms of the subordinated debentures, the Company may not
repurchase or retire any of its capital stock, make any distributions to its
shareholders other than dividends out of accumulated undistributed net
investment income (as computed in accordance with SBA regulations) or increase
salaries under certain conditions without the prior written approval of the
SBA.
(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.
F-60
<PAGE>
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
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.
(5) INCOME TAXES
The provisions (benefits) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
------------------ MAY 29,
1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
F-61
<PAGE>
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
The following is a reconciliation of income taxes at the expected statutory
federal income tax to the actual income tax provision (benefit):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
----------------- MAY 29,
1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C>
Net investment income --
Expected federal income tax.................... $270,834 $212,851 $ 93,277
State income taxes, net of federal income tax
benefit....................................... 59,542 56,084 21,913
Other.......................................... 12,572 788 (1,084)
-------- -------- --------
$342,948 $269,723 $114,106
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
------------------ MAY 29,
1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C>
Net realized loan (losses)gains --
Expected federal income tax.................. $(48,980) $(17,019) $ 1,784
State income taxes, net of federal income tax
benefit..................................... (10,768) (5,380) 567
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 income tax
benefit..................................... 46,926 19,932 1,792
Other........................................ 54,078 (21) (50)
-------- -------- -------
$369,700 $133,900 $12,000
======== ======== =======
</TABLE>
The principal components of the deferred tax asset at December 31, 1995 and
May 29, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MAY 29, 1996
--------------------------- ---------------------------
FEDERAL STATE TOTAL FEDERAL STATE TOTAL
-------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Allowance for loan loss-
es..................... $198,800 $57,800 $256,600 $189,480 $55,120 $244,600
Interest................ 2,300 600 2,900 2,450 710 3,160
Depreciation............ (1,300) (300) (1,600) (1,080) (315) (1,395)
-------- ------- -------- -------- ------- --------
$199,800 $58,100 $257,900 $190,850 $55,515 $246,365
======== ======= ======== ======== ======= ========
</TABLE>
The Company believes it is more likely than not that the recorded deferred
tax asset will be realized; such realization is expected to result principally
from taxable income generated by profitable operations.
(6) TRANSACTIONS WITH AFFILIATES
In May 1994, the Company entered into a one-year management agreement with a
subsidiary of Leucadia pursuant to which the subsidiary agreed to perform
certain general, administrative and accounting functions for an annual fee of
$180,000 with subsequent annual increases to be determined according to
increases in the consumer price index. This agreement continued in full force
and effect after the initial one-year term upon approval on an annual basis by
the Company's Board of Directors. This agreement was terminated by both
parties, without payment of any penalty, on May 29, 1996.
F-62
<PAGE>
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
Amounts charged to results of operations under this arrangement were
$182,815 and $180,000 during the years ended December 31, 1995 and 1994 and
$76,760 during the period ended May 29, 1996.
(7) DIRECTORS' AND OFFICERS' COMPENSATION
Directors' Compensation amounted to $3,000, $6,900, and $1,300 and Officers'
compensation amounted to $182,709, $159,466 and $58,170, during the years
ended December 31, 1995 and 1994 and period ended May 29, 1996, respectively.
(8) PENSION PLAN
The Company provided pension benefits to its employees through Leucadia's
defined benefit pension plan, as a result of the merger of the Company's
defined benefit plan into Leucadia's plan effective on December 31, 1994. The
merger of the defined benefit plans resulted in a reduction in pension expense
for the Company in 1994. During the year ended December 31, 1995 and period
ended May 29, 1996, the Company made contributions to Leucadia's plan based on
its allocable share of expenses in the amounts of $10,676 and $3,750,
respectively.
(9) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingent liabilities that are not reflected in the financial statements. At
December 31, 1995 and May 29, 1996, the Company had outstanding loan
commitments of $403,000 and $395,300, respectively, which bear interest at
rates ranging from 12% to 14%. Management does not expect any material losses
to result from these matters.
At December 31, 1995 and May 29, 1996, the Company had operating leases for
office space expiring in August 1996 and future minimum annual rental
commitments were $19,800 and $2,000, respectively. In addition, the Company
was subject to additional rent based upon increases in the Consumer Price
Index.
There are various lawsuits pending against the Company. In the opinion of
management, after consultation with counsel, it is remote that losses, if any,
arising from such claims will be material to the financial position or results
of operations of the Company.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about certain financial
instruments, whether or not recognized on the balance sheet. Where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In addition, SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Therefore, the aggregate fair value amounts presented do not
purport to represent and should not be considered representative of the
underlying market or franchise value of the Company.
The methods and assumptions used to estimate the fair value of each class of
the financial instruments are described below:
Loans Receivable -- As described in Note 1, the carrying amount of loans
receivable is the estimated fair value of such loans.
F-63
<PAGE>
TRANSPORTATION CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MAY 29, 1996
Cash and Cash Equivalents -- For short-term investments, the carrying amount
approximates fair value.
Debentures Payable to SBA -- The fair value of the debentures payable to SBA
is estimated based upon current market interest rates for similar debt.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MAY 29, 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets --
Loans receivable................... $9,154,139 $9,154,139 $9,312,331 $9,312,331
Cash and cash equivalents.......... 7,780,717 7,780,717 6,797,183 6,797,183
Financial liabilities --
Debentures payable to SBA.......... 6,730,000 7,189,000 5,640,000 5,954,000
</TABLE>
(11) SUBSEQUENT EVENTS
On February 11, 1997, the SBA approved an amendment to the charter of the
Company, converting the Company from a SSBIC to a SBIC. The conversion
eliminates the restriction for the Company to lend only to individuals as
being socially or economically disadvantaged, or to small business concerns
that are at least 50% owned by such persons, as defined in the SBIA subject to
certain restrictions.
Effective January 1, 1997, Medallion Financial Corp. decided to merge all of
the assets and liabilities of the Company into Medallion Funding Corp., a
wholly owned subsidiary of Medallion Financial Corp., subject to the approval
of the SBA. Medallion Financial Corp. expects to complete the merger by the
end of the second quarter of 1997.
F-64
<PAGE>
TRANSPORTATION CAPITAL CORP.
SCHEDULE OF INVESTMENTS OTHER THAN INVESTMENTS IN AFFILIATES
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MAY 29, 1996
----------------------------------------- -----------------------------------------
NUMBER NUMBER
OF PRINCIPAL OF PRINCIPAL
LOANS BY COLLATERAL TYPE LOANS BALANCE FAIR VALUE BOOK VALUE LOANS BALANCE FAIR VALUE BOOK VALUE
------------------------ ------ ---------- ---------- ---------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MEDALLIONS:
New York............... 17 $ 797,932 $ 797,932 $ 797,932 12 $ 618,280 $ 618,280 $ 618,280
Boston................. 80 3,400,557 3,400,557 3,400,557 75 3,131,238 3,131,238 3,131,238
Cambridge.............. 45 1,984,198 1,971,598 1,971,598 48 2,291,251 2,287,851 2,287,851
Chicago................ 87 1,647,561 1,647,561 1,647,561 94 2,029,924 2,023,624 2,023,624
Newark................. 12 158,157 156,836 156,836 8 91,342 91,342 91,342
--- ---------- ---------- ---------- --- ---------- ---------- ----------
Total medallions....... 241 7,988,405 7,974,484 7,974,484 237 8,162,035 8,152,335 8,152,335
NEW YORK RADIO CARS..... 35 599,694 238,198 238,198 32 535,696 201,605 201,605
MINUTEMAN RECEIVABLES... 3 1,217,371 950,199 950,199 2 1,231,012 962,386 962,386
OTHERS.................. -- -- -- -- -- -- -- --
--- ---------- ---------- ---------- --- ---------- ---------- ----------
Subtotal............... 279 9,805,470 9,162,881 9,162,881 271 9,928,743 9,316,326 9,316,326
RECEIVABLE FOR
FORECLOSURE EXPENSES... -- 10,144 10,144 10,144 -- 8,766 8,766 8,766
UNAPPLIED COLLECTIONS... -- (18,886) (18,886) (18,886) -- (12,761) (12,761) (12,761)
--- ---------- ---------- ---------- --- ---------- ---------- ----------
Total loans receivable,
net................... 279 $9,796,728 $9,154,139 $9,154,139 271 $9,924,748 $9,312,331 $9,312,331
=== ========== ========== ========== === ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statement.
F-65
<PAGE>
TRANSPORTATION CAPITAL CORP.
SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS
MAY 29, 1996
It is the Company's policy to make loans to persons who qualify under Small
Business Administration regulations as socially or economically disadvantaged
and to entities which are at least 50%-owned by such persons.
Substantially all of the Company's loans are for the purpose of financing
the purchase of New York City, Boston, Cambridge, Chicago and Newark taxi
medallions, taxi cabs, car radio rights, radio cars and related assets (the
Collateral). It is the Company's policy that these loans are collateralized by
a first priority perfected security interest in the collateral.
The distribution of loans at May 29, 1996 by rate of interest is as follows:
<TABLE>
<CAPTION>
NUMBER BALANCE INTEREST
OF LOANS OUTSTANDING RATE
-------- ----------- --------
<S> <C> <C>
2 $ 106,941 9.50%
3 119,292 10.00
2 288,838 10.50
28 1,326,481 11.00
38 667,453 12.00
2 52,028 12.50
66 1,793,509 13.00
2 6,978 13.25
47 1,768,645 13.50
3 88,268 13.75
41 1,942,791 14.00
11 157,874 14.25
5 1,265,835 14.50
1 54,236 14.75
13 166,207 15.00
3 19,576 15.75
1 10,609 16.00
2 57,670 16.50
1 35,512 16.75
--- ---------
271 9,928,743 13.08%
===
RECEIVABLES FOR FORECLOSURE EXPENSES................... 8,766
UNAPPLIED COLLECTIONS.................................. (12,761)
----------
$9,924,748
==========
<CAPTION>
PERCENT
--------
<S> <C> <C>
COMPOSITION OF LOAN PORTFOLIO:
New York medallions................................... 618,280 6.22%
New York radios and others............................ 535,696 5.40
New York minuteman receivables........................ 1,231,012 12.40
Newark medallions..................................... 91,342 0.92
Boston medallions..................................... 3,131,238 31.54
Cambridge medallions.................................. 2,291,251 23.08
Chicago medallions.................................... 2,029,924 20.44
---------- ------
Total composition of loan portfolio.................. $9,928,743 100.00%
========== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
SCHEDULE OF LOANS TO SMALL BUSINESS CONCERNS
DECEMBER 31, 1995
The distribution of loans at December 31, 1995 by rate of interest is as
follows:
<TABLE>
<CAPTION>
NUMBER BALANCE INTEREST
OF LOANS OUTSTANDING RATE
-------- ----------- --------
<S> <C> <C>
2 $ 115,650 9.50%
3 125,384 10.00
10 361,560 11.00
51 1,231,411 12.00
2 64,923 12.50
48 1,234,511 13.00
4 22,065 13.25
50 1,740,372 13.50
5 210,120 13.75
50 2,516,760 14.00
18 393,213 14.25
6 1,254,777 14.50
1 55,707 14.75
16 217,328 15.00
2 65,072 15.50
4 27,918 15.75
1 13,296 16.00
2 61,934 16.50
3 88,006 16.75
1 5,463 17.00
----------
279 9,805,470 13.46
===
RECEIVABLES FOR FORECLOSURE EXPENSES................... 10,144
UNAPPLIED COLLECTIONS.................................. (18,886)
----------
$9,796,728
==========
<CAPTION>
PERCENT
--------
<S> <C> <C>
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%
========== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
INSIDE BACK COVER
Graphic Material. Description: Five tables of financial trends from 1991 through
1996: (i) Total Gross Loans Serviced for Third Parties and Medallion Loans and
Commercial Installment Loans, (ii) Price of New York City Medallions, (iii)
Total Medallion and Commercial Installment Loan Portfolio, (iv) Total Commercial
Installment Loan Portfolio and (v) Gross Loans Serviced for Third Parties.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY MEDALLION FINANCIAL CORP. OR BY ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER AT ANY TIME IMPLIES THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 11
The Company................................................................ 19
Use of Proceeds............................................................ 22
Additional Information..................................................... 22
Dilution................................................................... 23
Distributions and Price Range of Common Stock.............................. 23
Capitalization............................................................. 25
Selected Financial Data.................................................... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 36
Business................................................................... 47
Investment Objectives, Policies and
Restrictions.............................................................. 59
Management................................................................. 62
Principal Stockholders..................................................... 67
Certain Transactions....................................................... 68
Determination of Net Asset Value........................................... 69
Dividend Reinvestment Plan................................................. 70
Federal Income Tax Considerations.......................................... 71
Description of Capital Stock............................................... 74
Regulation................................................................. 77
Shares Eligible for Future Sale............................................ 80
Underwriting............................................................... 82
Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar............................................ 83
Reports to Stockholders.................................................... 83
Validity of Shares......................................................... 84
Experts.................................................................... 84
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,500,000 SHARES
[LOGO] MEDALLION
Financial Corp.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------------
PROSPECTUS
----------------
FURMAN SELZ
BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
J.C. BRADFORD & CO.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART C
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements.
The following financial statements are included in the Prospectus on the
identified pages.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MEDALLION FINANCIAL CORP.
Report of Arthur Andersen LLP, Independent Public Accountants............ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statement of Operations for the Period May 30, 1996
(Commencement of Operations) through December 31, 1996.................. F-4
Consolidated Statement of Shareholders' Equity for the Period May 30,
1996
(Commencement of Operations) through December 31, 1996.................. F-5
Consolidated Statement of Cash Flows for the Period May 30, 1996
(Commencement of Operations) through December 31, 1996.................. F-6
Notes to Consolidated Financial Statements............................... F-8
MEDALLION FINANCIAL CORP.
Introduction to Pro Forma Combined Statement of Operations............... F-21
Pro Forma Combined Statement of Operations for the year ended December
31, 1996 and each quarter in the year ended December 31, 1996
(unaudited)............................................................. F-22
Notes to the Unaudited Pro Forma Combined Statement of Operations........ F-23
TRI-MAGNA CORPORATION AND SUBSIDIARIES
Report of Arthur Andersen LLP, Independent Public Accountants............ F-24
Consolidated Balance Sheets as of May 29, 1996 and December 31, 1995..... F-25
Statements of Operations for the Period Ended May 29, 1996 and the years
ended
December 31, 1995 and 1994.............................................. F-26
Statements of Shareholders' Equity for the Period Ended May 29, 1996 and
the years ended
December 31, 1995 and 1994.............................................. F-27
Consolidated Statements of Cash Flows for the Period Ended May 29, 1996
and the years ended December 31, 1995 and 1994.......................... F-28
Notes to Consolidated Financial Statements............................... F-29
EDWARDS CAPITAL COMPANY (A LIMITED PARTNERSHIP)
Report of Arthur Andersen LLP, Independent Public Accountants............ F-39
Report of Friedman, Alpren & Green LLP, Independent Public Accountants... F-40
Balance Sheets as of May 29, 1996 and December 31, 1995.................. F-41
Statements of Operations for the Period ended May 29, 1996 and the years
ended
December 31, 1995 and 1994.............................................. F-42
Statements of Changes in Partners' Capital for the Period Ended May 29,
1996 and the years ended December 31, 1995 and 1994..................... F-43
Statements of Cash Flows for the Period Ended May 29, 1996 for the years
ended
December 31, 1995 and 1994.............................................. F-44
Notes to Financial Statements............................................ F-45
TRANSPORTATION CAPITAL CORP.
Report of Arthur Andersen LLP, Independent Public Accountants............ F-52
Report of Coopers & Lybrand LLP, Independent Public Accountants.......... F-53
Balance Sheets as of May 29, 1996 and December 31, 1995.................. F-54
Statements of Operations for the Period Ended May 29, 1996 and the years
ended
December 31, 1995 and 1994.............................................. F-55
Statements of Changes in Shareholders' Equity for Period Ended May 29,
1996 and the years ended December 31, 1995 and 1994..................... F-56
Statements of Cash Flows for the Period Ended May 29, 1996 and the years
ended
December 31, 1995 and 1994.............................................. F-57
Notes to Financial Statements............................................ F-58
</TABLE>
II-1
<PAGE>
2. Exhibits.
<TABLE>
<C> <S>
a. --Medallion Financial Corp. Restated Certificate of Incorporation. Filed
as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
b. --Medallion Financial Corp. Restated By-Laws. Filed as Exhibit b to the
Company's Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
e. --Medallion Financial Corp. Dividend Reinvestment Plan. Filed as Exhibit
10.42 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
f.1 --Debenture due June 1, 1998 in the amount of $3,000,000 issued by Edwards
Capital Company and payable to Chemical Bank under the Trust Agreement.
Filed as Exhibit f.3 to the Company's Registration Statement on Form N-2
filed on February 26, 1996 (File No. 333-1670) and incorporated by
reference herein.
f.2 --Debenture due September 1, 2002 in the amount of $3,500,000 issued by
Edwards Capital Company and payable to Chemical Bank as Trustee under the
Amended and Restated Trust Agreement dated March 1, 1990 among the
Trustee, the U.S. Small Business Administration and SBIC Funding
Corporation (the "Amended Trust Agreement"). Filed as Exhibit f.4 to the
Company's Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
f.3 --Debenture due September 1, 2002 in the amount of $6,050,000 issued by
Edwards Capital Company and payable to Chemical Bank under the Amended
Trust Agreement. Filed as Exhibit f.5 to the Company's Registration
Statement on Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
f.4 --Debenture due June 1, 2004 in the amount of $4,600,000 issued by Edwards
Capital Company and payable to Chemical Bank under the Amended Trust
Agreement. Filed as Exhibit f.6 to the Company's Registration Statement
on Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
f.5 --Debenture due September 1, 2004 in the amount of $5,100,000 issued by
Edwards Capital Company and payable to Chemical Bank under the Amended
Trust Agreement. Filed as Exhibit f.7 to the Company's Registration
Statement on Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
f.6 --Letter Agreement, dated September 8, 1992, between the U.S. Small
Business Administration and Edwards Capital Company regarding limit on
incurrence of senior indebtedness, as amended on January 17, 1996. Filed
as Exhibit f.8 to the Company's Registration Statement on Form N-2 filed
on February 26, 1996 (File No. 333-1670) and incorporated by reference
herein. Letter dated September 19, 1996 from the U.S. Small Business
Administration to Edwards Capital Corp. amending such Letter Agreement.
Filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 filed on March 31, 1997 (File No. 0-27812)
and incorporated by reference herein.
f.7 --Debenture due June 1, 2002 in the amount of $5,640,000 issued by
Transportation Capital Corp. and payable to Chemical Bank under the
Amended Trust Agreement. Filed as Exhibit f.10 to the Company's
Registration Statement on Form N-2 filed on February 26, 1996 (File No.
333-1670) and incorporated by reference herein.
g. --Sub-Advisory Agreement between Medallion Financial Corp. and FMC
Advisers, Inc. dated May 29, 1996. Filed as Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
filed on March 31, 1997 (File No. 0-27812) and incorporated by reference
herein.
h.1 --Form of Underwriting Agreement. Filed herewith.*
h.2 --Form of Master Agreement Among Underwriters. Filed herewith.*
h.3 --Form of Master Selected Dealer Agreement. Filed herewith.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
i.1 --Medallion Financial Corp. 1996 Stock Option Plan. Filed as Exhibit
i.1 to the Company's Registration Statement on Form N-2 filed on
February 26, 1996 (File No. 333-1670) and incorporated by reference
herein.
<C> <S>
i.2 --Medallion Financial Corp. 401(k) Investment Plan. Filed as Exhibit
i.2 to the Company's Registration Statement on Form N-2 filed on
February 26, 1996 (File No. 333-1670) and incorporated by reference.
i.3 --Medallion Financial Corp. 1996 Non-Employee Directors Stock Option
Plan. Filed as Exhibit 10.44 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 filed on March 31, 1997
(File No. 0-27812) and incorporated by reference herein.
k.1 --Stock Purchase Agreement among Medallion Financial Corp.,
Transportation Capital Corp., LNC Investments, Inc., Leucadia, Inc.
and Leucadia National Corporation, dated February 12, 1996*. Filed as
Exhibit k.1 to the Company's Registration Statement on Form N-2 filed
on February 26, 1996 (File No. 333-1670) and incorporated by
reference herein.
k.1(i) --Amendment Number 1 to Stock Purchase Agreement among Medallion
Financial Corp. Transportation Capital Corp., LNC Investments, Inc.,
Leucadia, Inc. and Leucadia National Corporation dated April 30,
1996. Filed as Exhibit k.1(i) to the Company's Registration Statement
on Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
k.2 --Asset Purchase Agreement between Medallion Financial Corp., and
Edwards Capital Company, dated February 21, 1996. Filed as Exhibit
k.2 to the Company's Registration Statement on Form N-2 filed on
February 26, 1996 (File No. 333-1670) and incorporated by reference
herein.
k.2(i) --Amendment Number 1 to Asset Purchase Agreement between Medallion
Financial Corp. and Edwards Capital Company dated April 30, 1996.
Filed as Exhibit k.2(i) to the Company's Registration Statement on
Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
k.3(i) --Agreement of Merger between Medallion Financial Corp. and Tri-Magna
Corporation, dated December 21, 1995, as amended on February 22,
1996. Filed as Exhibit k.3(i) to the Company's Registration Statement
on Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
k.3(ii) --Amendment Number 2 to Agreement of Merger between Medallion
Financial Corp. and Tri-Magna Corporation, dated April 26, 1996.
Filed as Exhibit k.3(ii) to the Company's Registration Statement on
Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
k.4 --Promissory Note from Edwards Capital Company payable to Israel
Discount Bank of New York. Filed as Exhibit k.4 to the Company's
Registration Statement on Form N-2 filed on February 26, 1996 (File
No. 333-1670) and incorporated by reference herein.
k.5 --Schedule of Promissory Notes from Edwards Capital Company payable to
Israel Discount Bank of New York. Filed as Exhibit k.5 to the
Company's Registration Statement on Form N-2 filed on February 26,
1996 (File No. 333-1670) and incorporated by reference herein.
k.6 --Secured Note from Edwards Capital Company payable to Sterling
National Bank & Trust Company of New York. Filed as Exhibit k.6 to
the Company's Registration Statement on Form N-2 filed on February
26, 1996 (File No. 333-1670) and incorporated by reference herein.
k.7 --Schedule of Secured Notes from Edwards Capital Company payable to
Sterling ational Bank & Trust Company of New York. Filed as Exhibit
k.7 to the Company's Registration Statement on Form N-2 filed on
February 26, 1996 (File No. 333-1670) and incorporated by reference
herein.
k.8 --Promissory Note dated July 31, 1993 in the principal amount of
$5,000,000 from Edwards Capital Company payable to NatWest Bank N.A.
(formerly National Westminster Bank USA) as endorsed by Endorsement
No. 1 dated July 31, 1994 and Endorsement No. 2 dated July 31, 1995.
Filed as Exhibit k.8 to the Company's Registration Statement on Form
N-2 filed on February 26, 1996 (File No. 333-1670) and incorporated
by reference herein.
k.9 --Committed Line of Credit Agreement in the principal amount of
$3,000,000 dated as of July 29, 1993, as amended May 31, 1994,
October 31, 1994 and September 30, 1995 between Edwards Capital
Company and Bank Hapoalim B.M. Filed as Exhibit k.9 to the Company's
Registration Statement on Form N-2 filed on February 26, 1996 (File
No. 333-1670) and incorporated by reference herein.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
k.10 --Inter-Creditor Agreement among and between Edwards Capital Company and
Bank Hapoalim B.M., Chemical Bank, Israel Discount Bank of New York,
NatWest Bank N.A. (formerly National Westminster Bank USA), Marine
Midland Bank and Sterling National Bank & Trust Company of New York
dated as of May 14, 1991. Filed as Exhibit k.10 to the Company's
Registration Statement on Form N-2 filed on February 26, 1996 (File No.
333-1670) and incorporated by reference herein.
<C> <S>
k.11 --Continuing General Security Agreement between NatWest Bank N.A.
(formerly National Westminster Bank USA) and Edwards Capital Company
dated June 17, 1987. Filed as Exhibit k.12 to the Company's Registration
Statement on Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
k.12 --General Loan and Security Agreement between Sterling National Bank &
Trust of New York and Edwards Capital Company dated May 1, 1991. Filed
as Exhibit k.13 to the Company's Registration Statement on Form N-2
filed on February 26, 1996 (File No. 333-1670) and incorporated by
reference herein.
k.13 --General Security Agreement between Israel Discount Bank of New York and
Edwards Capital Company dated May 2, 1991. Filed as Exhibit k.14 to the
Company's Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
k.14 --Term Note in the principal amount of $2,000,000 dated July 16, 1990 as
amended March 27, 1992, July 16, 1993 and July 16, 1995 from Medallion
Funding Corp. payable to NatWest Bank N.A. (formerly National
Westminster Bank USA). Filed as Exhibit k.18 to the Company's
Registration Statement on Form N-2 filed on February 26, 1996 (File No.
333-1670) and incorporated by reference herein.
k.15 --Loan Agreement dated as of March 27, 1992 among Medallion Funding
Corp., the banks signatory thereto and NatWest Bank N.A. (formerly
National Westminster Bank USA), as amended March 31, 1993, September 29,
1993, March 31, 1994, September 29, 1995 and March 28, 1996. Filed as
Exhibit k.19 to the Company's Registration Statement on Form N-2 filed
on February 26, 1996 (File No. 333-1670) and incorporated by reference
herein. Amendment Five dated January 28, 1997 amending such Loan
Agreement. Filed as Exhibit 10.6 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 filed on March 31, 1997 (File
No. 0-27812) and incorporated by reference herein.
k.16 --Security Agreement between Medallion Funding Corp. and NatWest Bank
N.A. (formerly National Westminster Bank USA) dated as of March 27, 1992
for the benefit of the banks signatory to the Loan Agreement dated as of
March 27, 1992, among Medallion Funding Corp., the banks signatory
thereto and NatWest Bank N.A. (formerly National Westminster Bank USA).
Filed as Exhibit k.20 to the Company's Registration Statement on Form N-
2 filed on February 26, 1996 (File No. 333-1670) and incorporated by
reference herein.
k.17 --Specialized Small Business Investment Company 3.0% Preferred Stock
Repurchase Agreement dated as of August 12, 1994 between Medallion
Funding Corp. and the U.S. Small Business Administration. Filed as
Exhibit k.28 to the Company's Registration Statement on Form N-2 filed
on February 26, 1996 (File No. 333-1670) and incorporated by reference
herein.
k.18 --Specialized Small Business Investment Company 3.0% Preferred Stock
Repurchase Agreement dated as March 22, 1995 between Transportation
Capital Corp. and the U.S. Small Business Administration as amended by
letter agreement dated June 1, 1995. Filed as Exhibit k.29 to the
Company's Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
k.19 --Employment Agreement between Medallion Financial Corp and Alvin
Murstein dated May 29, 1996. Filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 filed on
March 31, 1997 (File No. 0-27812) and incorporated by reference herein.
k.20 --Employment Agreement between Medallion Financial Corp. and Andrew
Murstein dated May 29, 1996. Filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 filed on
March 31, 1997 (File No. 0-27812) and incorporated by reference herein.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
k.21 --Agreement between Medallion Taxi Media, Inc., See-Level Advertising,
Inc. and See-Level Management, Inc. dated July 25, 1996. Filed as
Exhibit 10.21 to the Company's Report on Form 10-Q for the quarterly
period ended September 30, 1996 (File No. 0-27812) and incorporated
herein by reference.
<C> <S>
k.22 --Agreement between Medallion Taxi Media, Inc. and Glenn Grumman dated
July 25, 1996. Filed as Exhibit 10.22 to the Company's Report on Form
10-Q for the quarterly period ended September 30, 1996 (File No. 0-
27812) and incorporated herein by reference.
k.23 --Security Agreement dated October 31, 1996 between First Bank of the
Americas and Edwards Capital Corp. Filed as Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996 filed on March 31, 1997 (File No. 0-27812) and incorporated by
reference herein.
k.24 --Master Grid Note (Secured Revolving Line of Credit) dated October 31,
1996 in the amount of $3,000,000 from Edwards Capital Corp. payable to
First Bank of the Americas. Filed as Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 filed on
March 31, 1997 (File No. 0-27812) and incorporated by reference herein.
k.25 --Letter Agreement dated December 1, 1996 between Fleet Bank, N.A. and
Medallion Financial Corp., as amended February 10, 1997. Filed as
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
k.26 --Revolving Credit Note dated December 1, 1996 in the amount of
$6,000,000 from Medallion Financial Corp. payable to Fleet Bank, N.A.,
endorsed by Endorsement No. 1 dated February 10, 1997. Filed as Exhibit
10.26 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
k.27 --Security Agreement dated December 1, 1996 between Fleet Bank, N.A. and
Medallion Financial Corp. Filed as Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 filed on March
31, 1997 (File No. 0-27812) and incorporated by reference herein.
k.28 --Revolving Credit Note dated January 28, 1997 in the amount of
$25,000,000 from Medallion Funding Corp. payable to Fleet Bank, N.A.
Filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 filed on March 31, 1997 (File No. 0-
27812) and incorporated by reference herein.
k.29 --Revolving Credit Note dated January 28, 1997 in the amount of
$22,500,000 from Medallion Funding Corp. payable to The First National
Bank of Boston. Filed as Exhibit 10.29 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 filed on March 31, 1997
(File No. 0-27812) and incorporated by reference herein.
k.30 --Revolving Credit Note dated January 28, 1997 in the amount of
$15,000,000 from Medallion Funding Corp. payable to Harris Trust and
Savings Bank. Filed as Exhibit 10.30 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 filed on March 31, 1997
(File No. 0-27812) and incorporated by reference herein.
k.31 --Revolving Credit Note dated January 28, 1997 in the amount of
$12,500,000 from Medallion Funding Corp. payable to Bank of Tokyo-
Mitsubishi Trust Company. Filed as Exhibit 10.31 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 filed on March
31, 1997 (File No. 0-27812) and incorporated by reference herein.
k.32 --Revolving Credit Note dated January 28, 1997 in the amount of
$10,000,000 from Medallion Funding Corp. payable to Israel Discount Bank
of New York. Filed as Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 filed on March 31, 1997
(File No. 0-27812) and incorporated by reference herein.
k.33 --Revolving Credit Note dated January 28, 1997 in the amount of
$10,000,000 from Medallion Funding Corp. payable to European American
Bank. Filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 filed on March 31, 1997 (File No.
0-27812) and incorporated by reference herein.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
k.34 --Revolving Credit Note dated January 28, 1997 in the amount of
$10,000,000 from Medallion Funding Corp. payable to Bank Leumi Trust
Company of New York. Filed as Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 filed on March
31, 1997 (File No. 0-27812) and incorporated by reference herein.
<C> <S>
k.35 --Letter Agreement, dated February 21, 1997, between Medallion Funding
Corp. and the U.S. Small Business Administration regarding the
conversion of Medallion Funding Corp. from a specialized small business
investment company to a small business investment company. Filed as
Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
k.36 --Letter Agreement, dated February 21, 1997, between Transportation
Capital Corp. and the U.S. Small Business Administration regarding the
conversion of Transportation Capital Corp. from a specialized small
business investment company to a small business investment company.
Filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 filed on March 31, 1997 (File No. 0-
27812) and incorporated by reference herein.
k.37 --Agreement between Medallion Taxi Media, Inc. and Metropolitan Taxicab
Board of Trade, Inc. dated March 6, 1997. Filed as Exhibit 10.37 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996 filed on March 31, 1997 (File No. 0-27812) and incorporated by
reference herein.
l. --Opinion and consent of Palmer & Dodge LLP. Filed herewith.*
n.1 --Consent of Arthur Andersen LLP relating to its report concerning
Medallion Financial Corp. dated February 19, 1997. Filed herewith.*
n.2 --Consent of Arthur Andersen LLP relating to its report concerning Edward
Capital Company dated March 26, 1997. Filed herewith.*
n.3 --Consent of Arthur Andersen LLP relating to its report concerning
Transportation Capital Corp. dated March 26, 1997. Filed herewith.*
n.4 --Consent of Arthur Andersen LLP relating to its report concerning Tri-
Magna Corporation dated March 26, 1997. Filed herewith.*
n.5 --Consent of Coopers & Lybrand LLP relating to its report concerning
Transportation Capital Corp. dated October 24, 1995. Filed herewith.*
n.6 --Consent of Friedman, Alpren & Green LLP relating to its report
concerning Edward Capital Company dated January 28, 1995. Filed
herewith.
p.1 --Subscription Agreement between the Alvin Murstein Second Family Trust
and Medallion Financial Corp. Filed as Exhibit p.1 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and incorporated
by reference herein.
p.2 --Subscription Agreement between the Andrew Murstein Family Trust and
Medallion Financial Corp. Filed as Exhibit p.2 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and incorporated
by reference herein.
r. --Medallion Financial Corp. Financial Data Schedule. Filed herewith.*
</TABLE>
- ----------
* Filed herewith.
ITEM 25. MARKETING ARRANGEMENTS
See Section 12 of the Underwriting Agreement which is filed as Exhibit h.1
hereto, Sections 12 and 15 of the Master Agreement Among Underwriters which is
filed as Exhibit h.2 hereto and Section 3(c) of the Master Selected Dealer
Agreement which is filed as Exhibit h.3 hereto.
Certain persons participating in this Offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Common Stock of
the Company, including by entering stabilizing bids or effecting syndicate
covering transactions. For a description of these activities, see
"Underwriting."
II-6
<PAGE>
Pursuant to Lock-up Agreements with Alvin and Andrew Murstein and the
Murstein Trusts, all of the 2,500,000 Restricted Shares are subject to certain
resale restrictions in addition to those imposed under Rule 144. Each party to
these Lock-up Agreements has agreed that he will not, directly or indirectly,
offer for sale, sell, contract to sell, grant an option to purchase or
otherwise dispose of any shares of the Company's Common Stock, except (i)
shares escrowed by the Murstein Trusts for the benefit of FMC or (ii) gifts to
family members or charitable institutions, provided that such family member or
charitable institution agrees to be bound by such Lock-up Agreement, until May
23, 1998 without the prior written consent of Furman Selz LLC. The consent of
Furman Selz LLC will not affect the resale restrictions under Rule 144. In
addition, the Company and all of the Company's other officers and directors
have agreed that for a period of 90 days following the date of this
Prospectus, they will not, without the prior written consent of Furman Selz
LLC, directly or indirectly, offer for sale, sell, contract to sell, or grant
any option to purchase or otherwise dispose of any shares of the Common Stock,
except in the case of the Company, options granted under the 1996 Plan or the
Director Plan or shares issued pursuant to the exercise of outstanding
options.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses expected to be
incurred in connection with the Offering:
<TABLE>
<CAPTION>
SEC registration fee................................................... $ 20,812
<S> <C>
NASD fees.............................................................. 6,950
Nasdaq additional listing fee.......................................... 17,500
Blue Sky fees and expenses............................................. 8,050
Accounting fees and expenses........................................... 250,000
Legal fees and expenses................................................ 250,000
Printing and engraving fees............................................ 100,000
Registrar and transfer agent's fees.................................... 2,500
Miscellaneous fees and expenses........................................ 168,188
--------
Total.............................................................. $825,000
========
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
<TABLE>
<S> <C>
MEDALLION FINANCIAL CORP.
_______________________________|________________________________
| | | |
Medallion Funding Medallion Media, Inc. Edwards Capital Transportation Capital
Corp. Company Corp.
</TABLE>
All of the subsidiaries are 100.0% owned by Medallion Financial and they are
Delaware corporations. The financial statements for Edwards Capital Company
and Transportation Capital Corp. are included in the Prospectus which forms a
part of this Registration Statement. The financial statements of Medallion
Funding Corp. are consolidated with the financial statements of Tri-Magna
Corporation included in the Prospectus. Summary financial statements of
Medallion Media, Inc. are included in the notes to the financial statements of
Tri-Magna Corporation and have not been consolidated because Medallion Media,
Inc. is not an investment company and its results of operations may not be
consolidated with the results of operations of Tri-Magna Corporation which is
an investment company.
II-7
<PAGE>
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
The following table sets forth the number of record holders of the Company's
Common Stock as of April 4, 1997.
<TABLE>
<CAPTION>
NAME OF CLASS NUMBER OF RECORD HOLDERS
--------------------------- ------------------------
<S> <C>
Common Stock, $.01 par value per share 24
</TABLE>
ITEM 29. INDEMNIFICATION
Section 145 of the Delaware General Corporation Law grants the Company the
power to indemnify each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason
of the fact that he is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgements, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Company, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful,
provided, however, no indemnification shall be made in connection with any
proceeding brought by or in the right of the Company where the person involved
is adjudged to be liable to the Company except to the extent approved by a
court. Article TENTH of the Company's Certificate of Incorporation as
currently in effect provides that the Company shall, to the fullest extent
permitted by the Delaware General Corporation Law, as amended from time to
time, indemnify each person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Company, or is or was serving, or has agreed to serve, at the
request of the Company, as a director, officer or trustee of, or in a similar
capacity with, another corporation, partnership, joint venture, trust or other
enterprise. The indemnification provided for in Article TENTH is expressly not
exclusive of any other rights to which those seeking indemnification may be
entitled under any law, agreement or vote of stockholders or disinterested
directors or otherwise, and shall inure to the benefit of the heirs, executors
and administrators of such persons. Article TENTH permits the Board of
Directors to authorize the grant of indemnification rights to other employees
and agents of the Company and such rights may be equivalent to, or greater or
less than, those set forth in Article TENTH.
Article V, Section 2 of the Company's By-Laws provides that the Company
shall have the power to purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Company, or
is or was serving at the request of the Company, as a director, officer or
trustee of, or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against and incurred by such person in any such capacity.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
Article NINTH of the Company's Certificate of Incorporation eliminates a
director's personal liability for monetary damages to the Company and its
stockholders for breaches of fiduciary duty as a director, except to the
extent that the elimination or limitation of liability is not then permitted
under the Delaware General Corporation Law.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Information as to the directors and officers of FMC Advisers, Inc. is
included in its Form ADV filed with the Commission (File No. 801-50981), as
amended as of the date hereof, and is incorporated herein by reference.
II-8
<PAGE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
The Company maintains at its principal office physical possession of each
account, book or other document required to be maintained by Section 31(a) of
the 1940 Act as applicable, pursuant to Section 64 of the 1940 Act.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(1) The Company hereby undertakes:
(a) to suspend the Offering until the Prospectus is amended if (1)
subsequent to the effective date of this Registration Statement, its net asset
value declines more than ten percent from its net asset value as of the
effective date of this Registration Statement or (2) the net asset value
increases to an amount greater than its net proceeds as stated in the
Prospectus.
(b) that, for the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Company under Rule 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of the time
it was declared effective; and
(c) that, for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the provisions of the Certificate of Incorporation and
By-Laws, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication for such issue.
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, AND STATE OF
NEW YORK, ON THE 9TH DAY OF APRIL, 1997.
Medallion Financial Corp.
/s/ Alvin Murstein
By: _______________________________
Alvin MursteinChairman and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED; AND EACH OF THE UNDERSIGNED OFFICERS
AND DIRECTORS OF MEDALLION FINANCIAL CORP., HEREBY SEVERALLY CONSTITUTE AND
APPOINT ALVIN MURSTEIN, ANDREW MURSTEIN, STEVEN N. FARBER AND STANLEY KELLER,
AND EACH OF THEM, TO SIGN FOR HIM, AND IN HIS NAME IN THE CAPACITY INDICATED
BELOW, ALL AMENDMENTS, INCLUDING POST-EFFECTIVE AMENDMENTS, TO SUCH
REGISTRATION STATEMENT AND ANY RELATED RULE 462(b) REGISTRATION STATEMENT OR
AMENDMENT THERETO, HEREBY RATIFYING AND CONFIRMING SUCH SIGNATURES AS THEY MAY
BE SIGNED BY SUCH ATTORNEYS TO SUCH REGISTRATION STATEMENTS AND ANY AND ALL
AMENDMENTS THERETO.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSON IN THE
CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
/s/ Alvin Murstein Chairman and Chief April 9, 1997
- ------------------------------- Executive Officer
Alvin Murstein (Principal Executive
Officer)
/s/ Andrew Murstein President, Chief Operating April 9, 1997
- ------------------------------- Officer and Director
Andrew Murstein
/s/ Daniel F. Baker Treasurer and Chief April 9, 1997
- ------------------------------- Financial Officer
Daniel F. Baker (Principal Financial and
Accounting Officer)
/s/ Mario M. Cuomo Director April 9, 1997
- -------------------------------
Mario M. Cuomo
/s/ Stanley Kreitman Director April 9, 1997
- -------------------------------
Stanley Kreitman
/s/ David L. Rudnick Director April 9, 1997
- -------------------------------
David L. Rudnick
/s/ Benjamin Ward Director April 9, 1997
- -------------------------------
Benjamin Ward
II-10
<PAGE>
EXHIBIT INDEX
2. Exhibits.
<TABLE>
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a. --Medallion Financial Corp. Restated Certificate of Incorporation.
Filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 filed on March 31, 1997 (File
No. 0-27812) and incorporated by reference herein.
b. --Medallion Financial Corp. Restated By-Laws. Filed as Exhibit b to
the Company's Registration Statement on Form N-2 filed on February
26, 1996 (File No. 333-1670) and incorporated by reference herein.
e. --Medallion Financial Corp. Dividend Reinvestment Plan. Filed as
Exhibit 10.42 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 filed on March 31, 1997 (File No. 0-
27812) and incorporated by reference herein.
f.1 --Debenture due June 1, 1998 in the amount of $3,000,000 issued by
Edwards Capital Company and payable to Chemical Bank under the
Trust Agreement. Filed as Exhibit f.3 to the Company's
Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
f.2 --Debenture due September 1, 2002 in the amount of $3,500,000
issued by Edwards Capital Company and payable to Chemical Bank as
Trustee under the Amended and Restated Trust Agreement dated March
1, 1990 among the Trustee, the U.S. Small Business Administration
and SBIC Funding Corporation (the "Amended Trust Agreement").
Filed as Exhibit f.4 to the Company's Registration Statement on
Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
f.3 --Debenture due September 1, 2002 in the amount of $6,050,000
issued by Edwards Capital Company and payable to Chemical Bank
under the Amended Trust Agreement. Filed as Exhibit f.5 to the
Company's Registration Statement on Form N-2 filed on February 26,
1996 (File No. 333-1670) and incorporated by reference herein.
f.4 --Debenture due June 1, 2004 in the amount of $4,600,000 issued by
Edwards Capital Company and payable to Chemical Bank under the
Amended Trust Agreement. Filed as Exhibit f.6 to the Company's
Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
f.5 --Debenture due September 1, 2004 in the amount of $5,100,000
issued by Edwards Capital Company and payable to Chemical Bank
under the Amended Trust Agreement. Filed as Exhibit f.7 to the
Company's Registration Statement on Form N-2 filed on February 26,
1996 (File No. 333-1670) and incorporated by reference herein.
f.6 --Letter Agreement, dated September 8, 1992, between the U.S. Small
Business Administration and Edwards Capital Company regarding
limit on incurrence of senior indebtedness, as amended on January
17, 1996. Filed as Exhibit f.8 to the Company's Registration
Statement on Form N-2 filed on February 26, 1996 (File No. 333-
1670) and incorporated by reference herein. Letter dated September
19, 1996 from the U.S. Small Business Administration to Edwards
Capital Corp. amending such Letter Agreement. Filed as Exhibit 4.7
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
f.7 --Debenture due June 1, 2002 in the amount of $5,640,000 issued by
Transportation Capital Corp. and payable to Chemical Bank under
the Amended Trust Agreement. Filed as Exhibit f.10 to the
Company's Registration Statement on Form N-2 filed on February 26,
1996 (File No. 333-1670) and incorporated by reference herein.
g. --Sub-Advisory Agreement between Medallion Financial Corp. and FMC
Advisers, Inc. dated May 29, 1996. Filed as Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
</TABLE>
<PAGE>
<TABLE>
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<C> <S> <C>
h.1 --Form of Underwriting Agreement. Filed herewith.*
h.2 --Form of Master Agreement Among Underwriters and the Amendment
thereto effective as of March 4, 1997. Filed herewith.*
h.3 --Form of Master Selected Dealer Agreement and the Amendment
thereto effective as of
March 4, 1997. Filed herewith.*
<CAPTION>
i.1 --Medallion Financial Corp. 1996 Stock Option Plan. Filed as
Exhibit i.1 to the Company's Registration Statement on Form N-
2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
<C> <S> <C>
i.2 --Medallion Financial Corp. 401(k) Investment Plan. Filed as
Exhibit i.2 to the Company's Registration Statement on Form N-
2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference.
i.3 --Medallion Financial Corp. 1996 Non-Employee Directors Stock
Option Plan. Filed as Exhibit 10.44 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 filed
on March 31, 1997 (File No. 0-27812) and incorporated by
reference herein.
k.1 --Stock Purchase Agreement among Medallion Financial Corp.,
Transportation Capital Corp., LNC Investments, Inc., Leucadia,
Inc. and Leucadia National Corporation, dated February 12,
1996*. Filed as Exhibit k.1 to the Company's Registration
Statement on Form N-2 filed on February 26, 1996 (File No.
333-1670) and incorporated by reference herein.
k.1(i) --Amendment Number 1 to Stock Purchase Agreement among
Medallion Financial Corp. Transportation Capital Corp., LNC
Investments, Inc., Leucadia, Inc. and Leucadia National
Corporation dated April 30, 1996. Filed as Exhibit k.1(i) to
the Company's Registration Statement on Form N-2 filed on
February 26, 1996 (File No. 333-1670) and incorporated by
reference herein.
k.2 --Asset Purchase Agreement between Medallion Financial Corp.,
and Edwards Capital Company, dated February 21, 1996. Filed as
Exhibit k.2 to the Company's Registration Statement on Form N-
2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
k.2(i) --Amendment Number 1 to Asset Purchase Agreement between
Medallion Financial Corp. and Edwards Capital Company dated
April 30, 1996. Filed as Exhibit k.2(i) to the Company's
Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
k.3(i) --Agreement of Merger between Medallion Financial Corp. and
Tri-Magna Corporation, dated December 21, 1995, as amended on
February 22, 1996. Filed as Exhibit k.3(i) to the Company's
Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
k.3(ii) --Amendment Number 2 to Agreement of Merger between Medallion
Financial Corp. and Tri-Magna Corporation, dated April 26,
1996. Filed as Exhibit k.3(ii) to the Company's Registration
Statement on Form N-2 filed on February 26, 1996 (File No.
333-1670) and incorporated by reference herein.
k.4 --Promissory Note from Edwards Capital Company payable to
Israel Discount Bank of New York. Filed as Exhibit k.4 to the
Company's Registration Statement on Form N-2 filed on February
26, 1996 (File No. 333-1670) and incorporated by reference
herein.
k.5 --Schedule of Promissory Notes from Edwards Capital Company
payable to Israel Discount Bank of New York. Filed as Exhibit
k.5 to the Company's Registration Statement on Form N-2 filed
on February 26, 1996 (File No. 333-1670) and incorporated by
reference herein.
k.6 --Secured Note from Edwards Capital Company payable to Sterling
National Bank & Trust Company of New York. Filed as Exhibit
k.6 to the Company's Registration Statement on Form N-2 filed
on February 26, 1996 (File No. 333-1670) and incorporated by
reference herein.
k.7 --Schedule of Secured Notes from Edwards Capital Company
payable to Sterling ational Bank & Trust Company of New York.
Filed as Exhibit k.7 to the Company's Registration Statement
on Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
k.8 --Promissory Note dated July 31, 1993 in the principal amount of
$5,000,000 from Edwards Capital Company payable to NatWest Bank
N.A. (formerly National Westminster Bank USA) as endorsed by
Endorsement No. 1 dated July 31, 1994 and Endorsement No. 2 dated
July 31, 1995. Filed as Exhibit k.8 to the Company's Registration
Statement on Form N-2 filed on February 26, 1996 (File No. 333-
1670) and incorporated by reference herein.
k.9 --Committed Line of Credit Agreement in the principal amount of
$3,000,000 dated as of July 29, 1993, as amended May 31, 1994,
October 31, 1994 and September 30, 1995 between Edwards Capital
Company and Bank Hapoalim B.M. Filed as Exhibit k.9 to the
Company's Registration Statement on Form N-2 filed on February
26, 1996 (File No. 333-1670) and incorporated by reference
herein.
<CAPTION>
k.10 --Inter-Creditor Agreement among and between Edwards Capital
Company and Bank Hapoalim B.M., Chemical Bank, Israel Discount
Bank of New York, NatWest Bank N.A. (formerly National
Westminster Bank USA), Marine Midland Bank and Sterling National
Bank & Trust Company of New York dated as of May 14, 1991. Filed
as Exhibit k.10 to the Company's Registration Statement on Form
N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
<C> <S> <C>
k.11 --Continuing General Security Agreement between NatWest Bank N.A.
(formerly National Westminster Bank USA) and Edwards Capital
Company dated June 17, 1987. Filed as Exhibit k.12 to the
Company's Registration Statement on Form N-2 filed on February
26, 1996 (File No. 333-1670) and incorporated by reference
herein.
k.12 --General Loan and Security Agreement between Sterling National
Bank & Trust of New York and Edwards Capital Company dated May 1,
1991. Filed as Exhibit k.13 to the Company's Registration
Statement on Form N-2 filed on February 26, 1996 (File No. 333-
1670) and incorporated by reference herein.
k.13 --General Security Agreement between Israel Discount Bank of New
York and Edwards Capital Company dated May 2, 1991. Filed as
Exhibit k.14 to the Company's Registration Statement on Form N-2
filed on February 26, 1996 (File No. 333-1670) and incorporated
by reference herein.
k.14 --Term Note in the principal amount of $2,000,000 dated July 16,
1990 as amended March 27, 1992, July 16, 1993 and July 16, 1995
from Medallion Funding Corp. payable to NatWest Bank N.A.
(formerly National Westminster Bank USA). Filed as Exhibit k.18
to the Company's Registration Statement on Form N-2 filed on
February 26, 1996 (File No. 333-1670) and incorporated by
reference herein.
k.15 --Loan Agreement dated as of March 27, 1992 among Medallion
Funding Corp., the banks signatory thereto and NatWest Bank N.A.
(formerly National Westminster Bank USA), as amended March 31,
1993, September 29, 1993, March 31, 1994, September 29, 1995 and
March 28, 1996. Filed as Exhibit k.19 to the Company's
Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
Amendment Five dated January 28, 1997 amending such Loan
Agreement. Filed as Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 filed on March
31, 1997 (File No. 0-27812) and incorporated by reference herein.
k.16 --Security Agreement between Medallion Funding Corp. and NatWest
Bank N.A. (formerly National Westminster Bank USA) dated as of
March 27, 1992 for the benefit of the banks signatory to the Loan
Agreement dated as of March 27, 1992, among Medallion Funding
Corp., the banks signatory thereto and NatWest Bank N.A.
(formerly National Westminster Bank USA). Filed as Exhibit k.20
to the Company's Registration Statement on Form N-2 filed on
February 26, 1996 (File No. 333-1670) and incorporated by
reference herein.
k.17 --Specialized Small Business Investment Company 3.0% Preferred
Stock Repurchase Agreement dated as of August 12, 1994 between
Medallion Funding Corp. and the U.S. Small Business
Administration. Filed as Exhibit k.28 to the Company's
Registration Statement on Form N-2 filed on February 26, 1996
(File No. 333-1670) and incorporated by reference herein.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
k.18 --Specialized Small Business Investment Company 3.0% Preferred
Stock Repurchase Agreement dated as March 22, 1995 between
Transportation Capital Corp. and the U.S. Small Business
Administration as amended by letter agreement dated June 1, 1995.
Filed as Exhibit k.29 to the Company's Registration Statement on
Form N-2 filed on February 26, 1996 (File No. 333-1670) and
incorporated by reference herein.
k.19 --Employment Agreement between Medallion Financial Corp and Alvin
Murstein dated May 29, 1996. Filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
k.20 --Employment Agreement between Medallion Financial Corp. and
Andrew Murstein dated May 29, 1996. Filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
<CAPTION>
k.21 --Agreement between Medallion Taxi Media, Inc., See-Level
Advertising, Inc. and See-Level Management, Inc. dated July 25,
1996. Filed as Exhibit 10.21 to the Company's Report on Form 10-Q
for the quarterly period ended September 30, 1996 (File No. 0-
27812) and incorporated herein by reference.
<C> <S> <C>
k.22 --Agreement between Medallion Taxi Media, Inc. and Glenn Grumman
dated July 25, 1996. Filed as Exhibit 10.22 to the Company's
Report on Form 10-Q for the quarterly period ended September 30,
1996 (File No. 0-27812) and incorporated herein by reference.
k.23 --Security Agreement dated October 31, 1996 between First Bank of
the Americas and Edwards Capital Corp. Filed as Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
k.24 --Master Grid Note (Secured Revolving Line of Credit) dated
October 31, 1996 in the amount of $3,000,000 from Edwards Capital
Corp. payable to First Bank of the Americas. Filed as Exhibit
10.24 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 filed on March 31, 1997 (File No. 0-
27812) and incorporated by reference herein.
k.25 --Letter Agreement dated December 1, 1996 between Fleet Bank, N.A.
and Medallion Financial Corp., as amended February 10, 1997.
Filed as Exhibit 10.25 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1996 filed on March 31, 1997
(File No. 0-27812) and incorporated by reference herein.
k.26 --Revolving Credit Note dated December 1, 1996 in the amount of
$6,000,000 from Medallion Financial Corp. payable to Fleet Bank,
N.A., endorsed by Endorsement No. 1 dated February 10, 1997.
Filed as Exhibit 10.26 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1996 filed on March 31, 1997
(File No. 0-27812) and incorporated by reference herein.
k.27 --Security Agreement dated December 1, 1996 between Fleet Bank,
N.A. and Medallion Financial Corp. Filed as Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
k.28 --Revolving Credit Note dated January 28, 1997 in the amount of
$25,000,000 from Medallion Funding Corp. payable to Fleet Bank,
N.A. Filed as Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 filed on March 31,
1997 (File No. 0-27812) and incorporated by reference herein.
k.29 --Revolving Credit Note dated January 28, 1997 in the amount of
$22,500,000 from Medallion Funding Corp. payable to The First
National Bank of Boston. Filed as Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
filed on March 31, 1997 (File No. 0-27812) and incorporated by
reference herein.
</TABLE>
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<TABLE>
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<C> <S> <C>
k.30 --Revolving Credit Note dated January 28, 1997 in the amount of
$15,000,000 from Medallion Funding Corp. payable to Harris Trust
and Savings Bank. Filed as Exhibit 10.30 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 filed on
March 31, 1997 (File No. 0-27812) and incorporated by reference
herein.
k.31 --Revolving Credit Note dated January 28, 1997 in the amount of
$12,500,000 from Medallion Funding Corp. payable to Bank of
Tokyo-Mitsubishi Trust Company. Filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
k.32 --Revolving Credit Note dated January 28, 1997 in the amount of
$10,000,000 from Medallion Funding Corp. payable to Israel
Discount Bank of New York. Filed as Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
k.33 --Revolving Credit Note dated January 28, 1997 in the amount of
$10,000,000 from Medallion Funding Corp. payable to European
American Bank. Filed as Exhibit 10.33 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 filed on
March 31, 1997 (File No. 0-27812) and incorporated by reference
herein.
<CAPTION>
k.34 --Revolving Credit Note dated January 28, 1997 in the amount of
$10,000,000 from Medallion Funding Corp. payable to Bank Leumi
Trust Company of New York. Filed as Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
<C> <S> <C>
k.35 --Letter Agreement, dated February 21, 1997, between Medallion
Funding Corp. and the U.S. Small Business Administration
regarding the conversion of Medallion Funding Corp. from a
specialized small business investment company to a small business
investment company. Filed as Exhibit 10.35 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
filed on March 31, 1997 (File No. 0-27812) and incorporated by
reference herein.
k.36 --Letter Agreement, dated February 21, 1997, between
Transportation Capital Corp. and the U.S. Small Business
Administration regarding the conversion of Transportation Capital
Corp. from a specialized small business investment company to a
small business investment company. Filed as Exhibit 10.36 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 filed on March 31, 1997 (File No. 0-27812) and
incorporated by reference herein.
k.37 --Agreement between Medallion Taxi Media, Inc. and Metropolitan
Taxicab Board of Trade, Inc. dated March 6, 1997. Filed as
Exhibit 10.37 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 filed on March 31, 1997 (File No. 0-
27812) and incorporated by reference herein.
l. --Opinion and consent of Palmer & Dodge LLP. Filed herewith.*
n.1 --Consent of Arthur Andersen LLP relating to its report concerning
Medallion Financial Corp. dated February 19, 1997. Filed
herewith.*
n.2 --Consent of Arthur Andersen LLP relating to its report concerning
Edward Capital Company dated March 26, 1997. Filed herewith.*
n.3 --Consent of Arthur Andersen LLP relating to its report concerning
Transportation Capital Corp. dated March 26, 1997. Filed
herewith.*
n.4 --Consent of Arthur Andersen LLP relating to its report concerning
Tri-Magna Corporation dated March 26, 1997. Filed herewith.*
n.5 --Consent of Coopers & Lybrand LLP relating to its report
concerning Transportation Capital Corp. dated October 24, 1995.
Filed herewith.*
n.6 --Consent of Friedman, Alpren & Green LLP relating to its report
concerning Edward Capital Company dated January 28, 1995. Filed
herewith.*
p.1 --Subscription Agreement between the Alvin Murstein Second Family
Trust and Medallion Financial Corp. Filed as Exhibit p.1 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
p.2 --Subscription Agreement between the Andrew Murstein Family Trust
and Medallion Financial Corp. Filed as Exhibit p.2 to the
Company's Registration Statement on Form N-2 (File No. 333-1670)
and incorporated by reference herein.
r. --Medallion Financial Corp. Financial Data Schedule. Filed
herewith.*
</TABLE>
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* Filed herewith.
<PAGE>
EXHIBIT 99.H1
3,500,000 Shares
MEDALLION FINANCIAL CORP.
Common Stock
(Par Value $.01 Per Share)
UNDERWRITING AGREEMENT
----------------------
April __, 1997
FURMAN SELZ LLC
BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
J.C. BRADFORD & CO.
As Representatives of the several Underwriters
named on Schedule I hereto
c/o Furman Selz LLC
230 Park Avenue
New York, New York 10169
Dear Sirs:
Introductory. Medallion Financial Corp., a Delaware corporation (the
------------
"Company"), proposes to sell, pursuant to the terms of this Agreement, to the
several underwriters named on Schedule I hereto (the "Underwriters," or each, an
"Underwriter", which term shall also include any underwriter substituted as
hereinafter provided in Section 12), an aggregate of 3,500,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"). The
3,500,000 shares so proposed to be sold are hereinafter referred to as the "Firm
Shares." The Company also proposes to sell to the Underwriters, upon the terms
and conditions set forth in Section 3 hereof, up to an additional 525,000 shares
of Common Stock (the "Option Shares"). The Firm Shares and the Option Shares
are hereinafter referred to collectively as the "Shares." Furman Selz LLC
("Furman Selz"), Bear, Stearns & Co. Inc. ("Bear Stearns") EVEREN Securities,
Inc. ("Everen") and J.C. Bradford & Co. ("Bradford") and are acting as
representatives of the several Underwriters and in such capacity are hereinafter
referred to collectively as the "Representatives." Capitalized terms used in
this Agreement without definition have the meanings specified in the Prospectus
(as hereinafter defined).
<PAGE>
2. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement on Form N-2 (File No. 333-____) with
respect to the Shares has been prepared in conformity in all material
respects with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the rules and regulations (the "Securities Act
Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and the Investment Company Act of 1940, as
amended (the "Investment Company Act" and, together with the Securities
Act, the "Acts"), and the rules and regulations thereunder (the "Investment
Company Act Rules and Regulations" and, together with the Securities Act
Rules and Regulations, the "Rules and Regulations"); such registration
statement has been filed with the Commission under the Securities Act and
has been declared effective by the Commission under the Securities Act and
no post-effective amendment to such registration statement has been filed
as of the date of this Agreement; one or more amendments to such
registration statement, including in each case an amended preliminary
prospectus, copies of which amendments have heretofore been delivered to
you, have been so prepared and filed. The term "Registration Statement"
means such registration statement, as amended, at the time it was declared
effective by the Commission and shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below. If it is contemplated, at the time this
Agreement is executed, that a post-effective amendment to the registration
statement will be filed and must be declared effective before the offering
of the Shares may commence, the term "Registration Statement" as used in
this Agreement means the registration statement as amended by said post-
effective amendment. The term "Registration Statement" as used in this
Agreement shall also include any registration statement relating to the
Shares that is filed and declared effective pursuant to Rule 462(b) under
the Securities Act. The term "Prospectus" as used in this Agreement means
the prospectus as first filed pursuant to Rule 497(b), (c) or (h) under the
Securities Act, except that if any revised prospectus shall be provided to
the Underwriters by the Company in conformity with this Agreement for use
in connection with the offering of the Shares which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 497(b), (c) or (h) under the
Securities Act), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the Underwriters
for such use. The term "Preliminary Prospectus" as used in this Agreement
means the prospectus subject to completion in the form included in
[Amendment No. 1] to the Registration Statement at the time of the initial
filing of [Amendment No. 1] to the Registration Statement with the
Commission, and as such prospectus shall have been amended from time to
time prior to the date of the Prospectus and any prospectus filed by the
Company with the consent of the Representatives pursuant to Rule 497(a)
under the Securities Act. No document has been or will be prepared or
distributed in reliance on Rule 434 under the Securities Act. For purposes
of the following representations and warranties, to the extent reference is
made to the Prospectus and at the relevant time the Prospectus is not
-2-
<PAGE>
yet in existence, such reference shall be deemed to be to the most recent
Preliminary Prospectus.
(b) Neither the Commission nor any state regulatory authority has issued
or, to the Company's knowledge, threatened to issue any order preventing or
suspending the use of any Preliminary Prospectus, and, at its date of
issue, each Preliminary Prospectus conformed in all material respects with
the requirements of the Acts and did not include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and, when the
Registration Statement became effective and at all times subsequent thereto
up to and including the Closing Dates (as defined in Section 3 hereof) the
Registration Statement and the Prospectus at the time the Registration
Statement became effective (unless the term "Prospectus" refers to a
prospectus which has been provided to the Underwriters by the Company for
use in connection with the offering of the Shares which differs from the
Prospectus on file at the Commission at the time the Registration Statement
became effective, in which case at the time it is first provided to the
Underwriters for such use) and at the Closing Dates, conformed or will
conform, as the case may be, in all material respects to the requirements
of the Acts and the Registration Statement and the Prospectus at such times
did not or will not, as the case may be, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that the foregoing representations, warranties and agreements
shall not apply to information contained in or omitted from any Preliminary
Prospectus or the Registration Statement or the Prospectus or any amendment
thereto in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter, directly or
through the Representatives, specifically for use in the preparation
thereof; there is no franchise, lease, contract, agreement or other
document required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which
is not described or filed therein as required and the exhibits that have
been filed are complete and correct copies of the documents of which they
purport to be copies; and all descriptions of any such franchises, leases,
contracts, agreements or other documents contained in the Registration
Statement are accurate and complete descriptions of such documents in all
material respects and fairly present the information required to be shown
with respect thereto by Form N-2 under the Act.
(c) The Company and each of Medallion Funding Corp., Medallion Media,
Inc., Edwards Capital Corp. and Transportation Capital Corp. (together, the
"Subsidiaries") have been duly organized and are validly existing and in
good standing as corporations under the laws of their respective
jurisdictions of organization, and have the corporate power and authority
to own or lease their properties and to conduct their respective businesses
as described in the Prospectus; the Company and each of the Subsidiaries
are in possession of and operating in compliance in all material respects
with all franchises, grants, registrations, qualifications, authorizations,
licenses, permits, easements, consents, certificates and orders required
for the conduct of their respective businesses as now being
-3-
<PAGE>
conducted and as described in the Registration Statement and the
Prospectus, or for the ownership, leasing and operation of their respective
properties, all of which are valid and in full force and effect and no such
franchise, grant, registration, consent, certificate or order contains a
materially burdensome restriction not adequately disclosed in the
Registration Statement or the Prospectus; and the Company and each of the
Subsidiaries are duly qualified to do business and are in good standing as
foreign corporations in all jurisdictions where their respective ownership
or leasing of properties or the conduct of their respective businesses
requires such qualification and in which the failure to so qualify would
have a Material Adverse Effect (as defined in subsection 2(i)).
(d) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, (i) neither the Company
nor any of the Subsidiaries has incurred any material liabilities or
obligations, direct or contingent, or entered into any other transactions
not in the ordinary course of business, (ii) there has not been any
material adverse change or development involving a material prospective
change in the condition (financial or otherwise), properties, business,
management, prospects, net worth, capital stock, investment objectives,
investment policies or results of operations of the Company and the
Subsidiaries taken as a whole, or any change in the capital stock, or
material change in the short-term or long-term debt, of the Company and the
Subsidiaries taken as a whole and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company [or the
Subsidiaries on any class of their respective capital stock].
(e) The financial statements, together with the related notes and
schedules, of the Company set forth in the Prospectus and elsewhere in the
Registration Statement fairly present, on the basis stated in the
Registration Statement, the financial position and the results of
operations and changes in financial position of the Company at the
respective dates or for the respective periods therein specified. Such
statements and related notes and schedules have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as otherwise noted therein). The
selected financial and statistical data set forth in the Prospectus under
the caption "Selected Financial Data" fairly present, on the basis stated
in the Prospectus, the information set forth therein and have been prepared
in conformity with the requirements of the Securities Act and the
Securities Act Rules and Regulations. The pro forma financial statements
and other pro forma financial information included in the Registration
Statement and the Prospectus present fairly the information shown therein,
have been prepared in accordance with the Commission's rules and guidelines
with respect to pro forma financial statements, have been properly compiled
on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and
the adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein.
(f) Arthur Andersen LLP, Friedman Alpren & Green LLP and Coopers &
Lybrand LLP, who have expressed opinions on the audited financial
statements and related schedules included in the Registration Statement and
the Prospectus are
-4-
<PAGE>
independent certified public accountants as required by the Securities Act
and the Securities Act Rules and Regulations.
(g) The Company's capitalization conforms to the description thereof in
the Prospectus and has been duly authorized and validly issued and are
fully paid and nonassessable and has been issued in compliance with all
federal and state securities laws and was not issued in violation of or
subject to any preemptive rights or similar rights to subscribe for or
purchase securities. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and related notes
thereto included in the Prospectus, neither the Company nor the
Subsidiaries has outstanding any options or warrants to purchase, or any
preemptive rights or other rights to subscribe for or to purchase any
securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of their respective capital stock or any such
options, rights, convertible securities or obligations. The description of
the Company's stock option and other stock plans or arrangements, and the
options or other rights granted thereunder, as set forth in the Prospectus,
accurately and fairly presents in all material respects the information
required to be shown with respect to such plans, arrangements, options and
rights. All shares of capital stock of each Subsidiary are owned, directly
or indirectly, by the Company free and clear of any liens, encumbrances,
equities or claims.
(h) The Shares to be issued and sold by the Company to the Underwriters
hereunder have been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein, will be duly and
validly issued, fully paid and nonassessable, free of any preemptive or
similar rights and will conform to the description thereof in the
Prospectus, and good and marketable title to the Shares will pass to the
Underwriters on the Closing Dates free and clear of any lien, encumbrance,
security interest, claim or restriction whatsoever except for (a) those
restrictions imposed under the Company's credit agreements filed as
exhibits to the Registration Statement and (b) those restrictions imposed
generally under the Investment Company Act, the Investment Company Act
Rules and Regulations, the SBIA and the SBA Regulations.
(i) There are no legal or governmental proceedings pending to which the
Company or any of the Subsidiaries or any of their affiliated persons, as
defined under the Investment Company Act, is a party or of which any
property of the Company or any Subsidiary or any of their affiliated
persons is subject, which, if determined adversely to the Company or any
Subsidiary or any of their affiliated person, might individually or in the
aggregate (i) prevent or materially and adversely affect the transactions
contemplated by this Agreement, (ii) suspend the effectiveness of the
Registration Statement, (iii) prevent or suspend the use of the Preliminary
Prospectus in any jurisdiction or (iv) result in a Material Adverse Effect
(as defined below); and to the Company's knowledge no such proceedings are
threatened or contemplated against the Company or any Subsidiary or any of
their affiliated persons by governmental authorities or others. Except as
disclosed in the Prospectus, the Company is not a party nor subject to the
provisions of any material injunction, judgment, decree or order of any
court, regulatory body or other governmental agency or body. "Material
Adverse Effect" means, when used in connection with the
-5-
<PAGE>
Company and the Subsidiaries, any development, change or effect that could
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), properties, business, management, prospects, net
worth or results of operations of the Company and the Subsidiaries taken as
a whole had been consummated.
(j) Neither the Company nor any of the Subsidiaries is in violation of
its respective charter, by-laws or other organizational documents or in
default in the performance of any note or other evidence of indebtedness or
any indenture, mortgage, deed of trust, note agreement or other contract,
lease or other instrument to which it is a party or by which it is bound,
or to which any of its property or assets is subject other than defaults
which would not, individually or in the aggregate, result in a Material
Adverse Effect and, as of the Closing Dates, no condition or event shall
have occurred which, with notice or a lapse of time or both, would
constitute a default under such instruments or agreements or result in the
imposition of any penalty or acceleration of any indebtedness other than
such defaults, penalties or acceleration which would not, individually or
in the aggregate, result in a Material Adverse Effect.
(k) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein will not result in a
breach or violation of any of the terms or provisions of or constitute a
default under any note or other evidence of indebtedness or any indenture,
mortgage, deed of trust, note agreement or other contract, lease or
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their properties is or may be bound, the
certificate of incorporation, by-laws or other organizational documents of
the Company or any of the Subsidiaries, or any law, order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Company or any of the Subsidiaries or any of their properties and
will not result in the creation of any lien, charge or encumbrance upon the
assets of the Company or the Subsidiaries.
(l) Other than those obtained prior to the date hereof, no consent,
approval, authorization or order of any court or governmental agency or
body is required for the consummation by the Company of the transactions
contemplated by this Agreement, except such as may be required by the SBA,
as described in subsection 2(m), the National Association of Securities
Dealers, Inc. (the "NASD") or the securities or "Blue Sky" laws of any
jurisdiction in connection with the purchase and distribution of the Shares
by the Underwriters.
(m) The Company has duly elected to be treated by the Commission under
the Investment Company Act as a business development company and all
required action has been taken by the Company under Section 54 of the
Investment Company Act to qualify the Company as a business development
company [and under the Acts to make the public offering and consummate the
sale of the Shares as provided in this Agreement.]
(n) The Company intends to direct the investment of the proceeds of the
Offering (as defined in the Prospectus) in such a manner as to comply with
the requirements of
-6-
<PAGE>
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
and, immediately after the First Closing Date, the Company and the RIC
Subsidiaries will each be eligible to qualify as a regulated investment
company under Subchapter M of the Code.
(o) The Company has the full corporate power and authority to enter
into this Agreement and to perform its obligations hereunder (including to
issue, sell and deliver the Shares), and this Agreement has been duly and
validly authorized, executed and delivered by the Company.
(p) The Company and the Subsidiaries are in compliance with, and
conduct their respective businesses in conformity with, all applicable
federal, state, local and foreign laws, rules and regulations of any court
or governmental agency or body except non-compliance which would not result
in a Material Adverse Effect; to the knowledge of the Company, other than
as set forth in the Registration Statement and the Prospectus, no
prospective change in any of such federal, state, local or foreign laws,
rules or regulations has been adopted which, when made effective, would
have a Material Adverse Effect.
(q) The Company and the Subsidiaries have filed all necessary federal,
state, local and foreign income, payroll, franchise and other tax returns
and have paid all taxes shown as due thereon or with respect to any of
their properties, and there is no tax deficiency that has been, or to the
knowledge of the Company is likely to be, asserted against the Company or
any of the Subsidiaries or any of their respective properties or assets
that would have a Material Adverse Effect.
(r) No person or entity has the right to require registration of shares
of Common Stock or other securities of the Company because of the filing or
effectiveness of the Registration Statement or otherwise.
(s) Neither the Company nor the Subsidiaries nor any of their
respective officers, directors or any of their affiliated persons has taken
or will take, directly or indirectly, any action designed or intended to
stabilize or manipulate the price of any security of the Company, or which
caused or resulted in, or which might in the future reasonably be expected
to cause or result in, stabilization or manipulation of the price of any
security of the Company.
(t) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark
registrations, tradenames, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectus as being owned by them or any of
them or necessary for the conduct of their respective businesses, and the
Company is not aware of any claim to the contrary or any challenge by any
other person to the rights of the Company and the Subsidiaries with respect
to the foregoing. The Company's and the Subsidiaries' businesses as now
conducted and as proposed to be conducted do not and will not infringe or
conflict with in any material respect any patents, trademarks, service
marks, tradenames, copyrights, trade secrets, licenses or any other
intellectual property or franchise right of any person. No claim has been
made against the
-7-
<PAGE>
Company or any Subsidiary alleging the infringement by the Company or any
Subsidiary of any patent, trademark, servicemark, tradename, copyright,
trade secret, license in or other intellectual property right or franchise
right of any person.
(u) The Company and the Subsidiaries have performed all material
obligations required to be performed by them under all contracts required
by Item 24 of Form N-2 under the Securities Act to be filed as exhibits to
the Registration Statement, and neither the Company, any of the
Subsidiaries nor any other party to such contract is in default under or in
breach of any such obligations except such as would not result in a
Material Adverse Effect. Neither the Company nor any of the Subsidiaries
has received any notice of such default or breach.
(v) Neither the Company or any of the Subsidiaries is involved in any
labor dispute which would result in the Material Adverse Effect nor, to the
Company's knowledge, is any such dispute threatened. Neither the Company
nor any of the Subsidiaries is aware that (i) any executive, key employee
or significant group of employees of the Company or any of the Subsidiaries
plans to terminate employment with the Company or any of the Subsidiaries
or (ii) any such executive or key employee is subject to any noncompete,
nondisclosure, confidentiality, employment, consulting or similar agreement
that would be violated by the present or proposed business activities of
the Company or the Subsidiaries. Neither the Company nor any Subsidiary
has or expects to have any liability for any prohibited transaction or
funding deficiency or any complete or partial withdrawal liability with
respect to any pension, profit sharing or other plan which is subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
to which the Company or any Subsidiary makes or ever has made a
contribution and in which any employee of the Company or any Subsidiary is
or has ever been a participant. With respect to such plans, the Company
and each Subsidiary are in compliance in all material respects with all
applicable provisions of ERISA.
(w) The Company has obtained the written agreement described in Section
8(k) of this Agreement from each of its officers, directors and holders of
Common Stock listed on Schedule II hereto.
(x) The Company and the Subsidiaries have, and the Company and the
Subsidiaries as of the Closing Dates will have, good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned or proposed to be owned by them, in each case free
and clear of all liens, charges, encumbrances and defects except as
disclosed in the Prospectus or such as would not have a Material Adverse
Effect, and any real property and buildings held under lease by the Company
and the Subsidiaries or proposed to be held after giving effect to the
transactions described in the Prospectus are, or will be as of the Closing
Dates, held by them under valid, subsisting and enforceable leases with
such exceptions as would not have a Material Adverse Effect, in each case
except as described in or contemplated by the Prospectus .
-8-
<PAGE>
(y) The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are customary in the businesses in which they are engaged
or propose to engage after giving effect to the transactions described in
the Prospectus; and neither the Company nor any Subsidiary has any reason
to believe that it will not be able to renew such insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue their business at a cost that
would not have a Material Adverse Effect.
(z) Other than as contemplated by this Agreement or as disclosed in the
Prospectus, there is no broker, finder or other party that is entitled to
receive from the Company or the Subsidiaries any brokerage or finders' fee
or other fee or commission as a result of any of the transactions
contemplated by this Agreement.
(aa) The Company has complied with all applicable provisions of Section
517.075 of the Florida Statutes (Chapter 92-198; Laws of Florida).
(bb) Neither the Company or any of the Subsidiaries, nor any director,
officer, agent or employee acting on behalf of the Company or the
Subsidiaries has (i) used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expense relating to
political activity, (ii) made any direct or indirect unlawful payment to
any foreign or domestic government official or employee from corporate
funds, (iii) violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977 or (iv) made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
(cc) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization,
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(dd) To the Company's knowledge, neither the Company, any of the
Subsidiaries nor any employee or agent of the Company or any of the
Subsidiaries has made any payment of funds of the Company or any of the
Subsidiaries or received or retained any funds in violation of any law,
rule or regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(ee) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters in connection
to this Agreement or the transactions contemplated hereby shall be deemed
to be a representation and warranty by the Company as to the matters
covered thereby.
-9-
<PAGE>
3. Purchase by, and Sale and Delivery to, the Underwriters Closing
----------------------------------------------------------------
Dates.
- --------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters the Firm Shares, and the
Underwriters agree, severally and not jointly, to purchase the Firm Shares from
the Company, the number of Firm Shares to be purchased by each Underwriter being
set opposite its name on Schedule I, subject to adjustment in accordance with
Section 12 hereof.
(b) The purchase price per share to be paid by the Underwriters to the
Company will be $ _____ per share (the "Purchase Price").
(c) The Company will deliver the Firm Shares to the Representatives for
the respective accounts of the several Underwriters (in the form of definitive
certificates) issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 noon, New York City time, on the second full business day preceding the
First Closing Date or, if no such direction is received, in the names of the
respective Underwriters or in such other names as Furman Selz may designate
(solely for the purpose of administrative convenience) and in such denominations
as Furman Selz may determine, against payment of the aggregate Purchase Price
therefor by federal funds wire transfer (same day funds) to an account or
accounts previously designated in writing by the Company, all at the offices of
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York,
New York 10022. The time and date of the delivery and closing shall be at 10:00
a.m., New York City time, on ______, 1997, in accordance with Rule 15c6-1 of the
Exchange Act. [The Company will bear the one-day cost of funds of Furman Selz
in providing the aggregate Purchase Price in same day funds, rather than next
day funds.] The time and date of such payment and delivery are herein referred
to as the "First Closing Date." The First Closing Date and the location of
delivery of, and the form of payment for, the Firm Shares may be varied by
agreement between the Company and Furman Selz. The First Closing Date may be
postponed pursuant to the provisions of Section 12.
(d) The Company shall make the certificates for the Firm Shares
available to the Representatives for examination on behalf of the Underwriters
not later than 10:00 a.m., New York City time, on the business day preceding the
First Closing Date at the offices of Furman Selz LLC, 230 Park Avenue, New York,
New York 10169.
(e) It is understood that Furman Selz, Bear Stearns, Everen or
Bradford, individually and not as Representatives of the several Underwriters,
may (but shall not be obligated to) make payment to the Company on behalf of any
Underwriter or Underwriters, for the Shares to be purchased by such Underwriter
or Underwriters. Any such payment by Furman Selz, Bradford or Everen shall not
relieve such Underwriter or Underwriters from any of its or their other
obligations hereunder.
(f) The several Underwriters propose to make a public offering of the
Firm Shares (other than to residents of or in any jurisdiction in which
qualification of the Firm Shares is
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<PAGE>
required and has not become effective) at the public offering price and upon the
other terms set forth in the Prospectus as soon after the effectiveness of the
Registration Statement as in their judgment is advisable. The Representatives
shall promptly advise the Company of the making of the public offering.
(g) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Shares as contemplated by the Prospectus,
the Company hereby grants to the Underwriters an option to purchase, severally
and not jointly, up to the aggregate number of shares of Option Shares. The
price per share to be paid for the Option Shares shall be the Purchase Price.
The option granted hereby may be exercised as to all or any part of the Option
Shares at any time, but only once, not more than 30 days subsequent to the
effective date of this Agreement. No Option Shares shall be sold and delivered
unless the Firm Shares previously have been, or simultaneously are, sold and
delivered. The right to purchase the Option Shares or any portion thereof may be
surrendered and terminated at any time prior to exercise upon notice by the
Underwriters to the Company. The option granted hereby may be exercised by the
Underwriters by giving written notice from Furman Selz to the Company setting
forth the number of Option Shares to be purchased by them and the date and time
for delivery of and payment for the Option Shares. Each date and time for
delivery of and payment for the Option Shares (which may be the First Closing
Date, but not earlier) is herein called the "Option Closing Date" and shall in
no event be earlier than two business days nor later than five business days
after written notice is given. The Option Closing Date and the First Closing
Date are herein collectively called the "Closing Dates." All purchases of Option
Shares from the Company shall be made on a pro rata basis. Option Shares shall
be purchased for the account of each Underwriter in the same proportion as the
number of Firm Shares set forth opposite such Underwriter's name on Schedule I
hereto bears to the total number of Firm Shares (subject to adjustment by the
Underwriters to eliminate odd lots). Upon exercise of the option by the
Underwriters, the Company agrees to sell to the Underwriters the number of
Option Shares set forth in the written notice of exercise and the Underwriters
agree, severally and not jointly and subject to the terms and conditions herein
set forth, to purchase the number of such shares determined as aforesaid. The
Company will deliver the Option Shares to the Underwriters (in the form of
definitive certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 noon, New York City time, on the second full business day preceding the
Option Closing Date or, if no such direction is received, in the names of the
respective Underwriters or in such other names as Furman Selz may designate
(solely for the purpose of administrative convenience) and in such denominations
as Furman Selz may determine, against payment of the aggregate Purchase Price
therefor by certified or official bank check or checks in New York Clearing
House funds (next day funds), payable to the order of the Company all at the
offices of Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street,
New York, New York 10022. The Company shall make the certificates for the Option
Shares available to the Underwriters for examination not later than 10:00 a.m.,
New York City time, on the business day preceding the Option Closing Date at the
offices of Furman Selz, 230 Park Avenue, New York, New York 10169. The Option
Closing Date and the location of delivery of, and the form of payment for, the
Option Shares may be varied by agreement between the Company and Furman Selz.
The Option Closing Date may be postponed pursuant to the provisions of Section
12.
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<PAGE>
4. Covenants and Agreements of the Company. The Company covenants and
---------------------------------------
agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives have
determined not to proceed pursuant to Rule 430A, use its best efforts to
cause the Registration Statement to become effective, (ii) if the Company
and the Representatives have determined to proceed pursuant to Rule 430A,
use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and Rule 497 of
the Securities Act Rules and Regulations and (iii) if the Company and the
Representatives have determined to deliver Prospectuses pursuant to Rule
434 of the Securities Act Rules and Regulations, to use its best efforts to
comply with all the applicable provisions thereof. The Company will advise
the Representatives promptly as to the time at which the Registration
Statement becomes effective, will advise the Representatives promptly of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for such purposes, and will use its best efforts to prevent the
issuance of any such stop order, and to obtain as soon as possible the
lifting thereof, if issued. The Company will advise the Representatives
promptly of the receipt of any comments of the Commission or any request by
the Commission for any amendment of or supplement to the Registration
Statement or the Prospectus or for additional information and will not at
any time file any amendment to the Registration Statement or supplement to
the Prospectus which shall not previously have been submitted to the
Representatives a reasonable time prior to the proposed filing thereof or
to which the Representatives shall reasonably object in writing or which is
not in compliance with the Acts. The Company will advise the
Representatives promptly of receipt by the Company or any representative or
attorney of the Company of any other communication from the Commission
relating to (i) the Company, if received during the time a Prospectus
relating to the Shares is required to be delivered under the Securities
Act, or (ii) the Registration Statement, any Preliminary Prospectus, the
Prospectus or the transactions contemplated by this Agreement.
(b) The Company will promptly prepare and file with the Commission any
amendments or supplements to the Registration Statement or the Prospectus
which in the judgment of the Company or in the reasonable opinion of the
Representatives may be necessary to enable the several Underwriters to
continue the distribution of the Shares and will use its best efforts to
cause the same to become effective as promptly as possible.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Shares is required to be
delivered under the Securities Act any event relating to or affecting the
Company or any of the Subsidiaries occurs as a result of which the
Prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or if it is necessary at any
time to amend the Prospectus to comply with the Acts, the Company will
promptly notify the Representatives thereof and will prepare an
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<PAGE>
amended or supplemented prospectus which will correct such statement or
omission; and in case any Underwriter is required to deliver a prospectus
relating to the Shares nine months or more after the effective date of the
Registration Statement in connection with the initial sale of any Shares
which such Underwriter purchased from the Company pursuant to this
Agreement, the Company upon the request of the Representatives but at the
expense of such Underwriter will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the requirements
of Section 10(a)(3) of the Securities Act.
(d) The Company will deliver to the Representatives, at or before the
Closing Dates, copies of the Registration Statement as originally filed
with the Commission, and all amendments thereto including all financial
statements and exhibits thereto, and will deliver to the Representatives
such number of copies of the Registration Statement, including such
financial statements but without exhibits, and all amendments thereto, as
the Representatives may reasonably request. The Company will deliver or
mail to or upon the order of the Representatives, from time to time until
the effective date of the Registration Statement, as many copies of the
Preliminary Prospectus as the Representatives may reasonably request. The
Company will deliver or mail to or upon the order of the Representatives on
the date of the public offering, and thereafter from time to time during
the period when delivery of a prospectus relating to the Shares is required
under the Securities Act, as many copies of the Prospectus, in final form
or as thereafter amended or supplemented as the Representatives may
reasonably request.
(e) The Company will make generally available to its shareholders as
soon as practicable, but not later than 15 months after the effective date
of the Registration Statement, an earnings statement which will be in
reasonable detail (but which need not be audited) and which will comply
with Section 11(a) of the Securities Act, covering a period of at least 12
months beginning after the "effective date" (as defined in Rule 158 under
the Securities Act) of the Registration Statement.
(f) The Company will furnish to its shareholders annual reports
containing financial statements audited by independent certified public
accountants and with quarterly summary financial information in reasonable
detail which may be unaudited. During the period of five years from the
date hereof, the Company will deliver to the Representatives and, upon
request, to each of the other Underwriters, as soon as they are available,
copies of each annual report of the Company and each other report furnished
by the Company to its shareholders and will deliver to the Representatives,
(i) as soon as they are available, copies of any other reports (financial
or other) which the Company shall publish or otherwise make available to
its shareholders as such, (ii) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the Commission
or any national securities exchange or the Nasdaq National Market and (iii)
from time to time such other information concerning the Company as the
Representatives may reasonably request. So long as the Company has active
subsidiaries, such financial statements will be on a consolidated basis to
the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its shareholders generally. Separate
financial
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<PAGE>
statements shall be furnished for all subsidiaries whose accounts are not
consolidated but which at the time are significant subsidiaries as defined
in the Securities Act Rules and Regulations.
(g) The Company will use its best efforts to cause the Shares to be
duly appropriate for quotation on the Nasdaq National Market prior to the
First Closing Date.
(h) The Company will maintain a transfer agent and registrar for its
Common Stock.
(i) The Company will not, without the prior written consent of Furman
Selz, offer, sell, assign, transfer, encumber, contract to sell, grant an
option to purchase or otherwise dispose of any shares of Common Stock or
securities convertible into or exercisable or exchangeable for Common Stock
(including, without limitation, Common Stock of the Company which may be
deemed to be beneficially owned by the Company in accordance with the
Securities Act Rules and Regulations) during the 180 days following the
date of the Prospectus first filed pursuant to Rule 497(b), (c) or (h),
other than (i) the Company's sale of Shares hereunder and the Company's
issuance of Common Stock upon the exercise of stock options which are
outstanding on the First Closing Date or described in the Prospectus and
(ii) the Company's issuance of stock options which are described in the
Prospectus.
(j) The Company will apply the net proceeds from the sale of the Shares
as set forth in the description under the caption "Use of Proceeds" in the
Prospectus.
(k) The Company will supply the Representatives with copies of all
written correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Shares under the
Securities Act and the Nasdaq National Market.
(l) Prior to the Closing Dates, the Company will furnish to the
Representatives, as soon as they have been prepared, copies of any
unaudited interim consolidated financial statements of the Company and its
subsidiaries for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
(m) Prior to the Closing Dates, unless required under the Acts or the
Rules and Regulations, the Company will issue no press release or other
communications directly or indirectly and hold no press conference with
respect to the Company or any of its subsidiaries, the financial condition,
results of operation, business, prospects, assets or liabilities of any of
them, or the offering of the Shares, without the prior written consent of
the Representatives, which shall not be unreasonably withheld. For a
period of 12 months following the Closing Date, the Company will use its
best efforts to provide to the Representatives copies of each press release
or other public communications with respect to the financial condition,
results of operations, business, prospects, assets or liabilities of
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<PAGE>
the Company [at least 24 hours prior to the public issuance thereof or such
longer advance period as may reasonably be practicable.]
(n) During the period of five years hereafter, the Company will furnish
to the Representatives, and upon request of the Representatives, to each of
the Underwriters, (i) as soon as practicable after the end of each fiscal
year, copies of the annual report of the Company containing the balance
sheet of the Company as of the close of such fiscal year and statements of
income, shareholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's independent certified public accountants,
(ii) as soon as practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q,
Report on Form 8-K or other report filed by the Company with the
Commission, or the Nasdaq National Market or any national securities
exchange, (iii) as soon as available, copies of any report or communication
of the Company mailed generally to holders of its Common Stock and (iv) all
public reports and all reports and financial statements furnished by the
Company to the Commission pursuant to the Investment Company Act and the
Investment Company Act Rules and Regulations thereunder.
5. Payment of Expenses. The Company will pay or cause to be paid
-------------------
(directly or by reimbursement) all costs, fees and expenses incurred in
connection with and expenses incident to the performance of the obligations of
the Company under this Agreement, as follows: (i) all expenses and taxes
incident to the issuance and delivery of the Shares to the Representatives, (ii)
all expenses incident to the registration of the Shares under the Securities
Act, (iii) the costs of preparing stock certificates (including printing and
engraving costs), (iv) all fees and expenses of the registrar and transfer agent
of the Shares, (v) all necessary issue, transfer and other stamp taxes in
connection with the issuance and sale of the Shares to the Underwriters, (vi)
all fees and expenses of the Company's counsel and the Company's independent
certified public accountants, (vii) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement, each Preliminary Prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements provided for herein, the Master Agreement Among Underwriters between
the Representatives and the Underwriters, the Master Selected Dealer Agreement,
the Blue Sky memoranda and this Agreement, (viii) all filing fees, reasonable
attorneys' fees and expenses incurred by the Company or the Underwriters in
connection with exemptions from qualifying or registering (or obtaining
qualification or registration of) all or any part of the Shares for offer and
sale and determination of its eligibility for investment under the Blue Sky or
other securities laws of such jurisdictions as the Representatives may
designate, (ix) all fees and expenses paid or incurred in connection with
filings made with the NASD, (x) all fees and expenses paid or incurred in
connection with the listing of the Shares on the Nasdaq National Market and (xi)
all other costs, fees and expenses incurred by the Company incident to the
performance of the Company's obligations hereunder which are not otherwise
specifically provided for in this Section; provided that, except as provided in
Section 11, the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Shares which
they may sell, and the expenses of advertising any offering of the Shares made
by the Underwriters.
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<PAGE>
Indemnification and Contribution.
-----------------------------------
(a) The Company shall indemnify and hold harmless each Underwriter, its
officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of the Shares), to which that Underwriter,
officer, employee or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto or, (ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be stated therein
or necessary to make the statements therein not misleading, and shall reimburse
each Underwriter and each such officer, employee or controlling person promptly
upon demand for any legal or other expenses reasonably incurred by that
Underwriter, officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
------------------
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of, or is based upon,
any untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for inclusion
therein. The foregoing indemnity agreement is in addition to any liability
which the Company may otherwise have to any Underwriter or to any officer,
employee or controlling person of that Underwriter.
The foregoing indemnity agreement with respect to any Preliminary
Prospectus, Prospectus or Registration Statement shall not inure to the benefit
of any Underwriter (its officers and employees or any person who controls such
Underwriter within the meaning of the Securities Act) from whom the person
asserting any such loss, claims, damages or liabilities purchased Shares if a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, at or prior to the written
confirmation of the sale of such Shares to such person and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability; provided, that the Company has complied with
--------
its obligation under subsection 4(d) of this Agreement to provide copies of the
Prospectus to the Representatives.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, each of its officers who signed the Registration
Statement, each of its directors, and each person, if any, who controls the
Company within the meaning of the Securities Act, from and
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<PAGE>
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof, to which the Company or any such director, officer or
controlling person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (ii) the omission or
alleged omission to state in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any amendment or supplement thereto, any
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company through the Representatives by or on behalf of that Underwriter
specifically for inclusion therein, and shall promptly reimburse the Company and
any such director, officer or controlling person for any legal or other expenses
reasonably incurred by the Company or any such director, officer or controlling
person in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses are
incurred. The foregoing indemnity agreement is in addition to any liability
which any Underwriter may otherwise have to the Company or any such director,
officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section 6
of notice of any claim or the commencement of any action, the indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under this Section 6, notify the indemnifying party in writing of the
claim or the commencement of that action, provided, however, that the failure to
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notify the indemnifying party shall not relieve it from any liability which it
may have under this Section 6 except to the extent it has been materially
prejudiced by such failure and, provided further, that the failure to notify the
indemnifying party shall not relieve it from any liability which it may have to
an indemnified party otherwise than under this Section 6. If any such claim or
action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
(x) the Representatives shall have the right to employ counsel to represent
jointly the Representatives and those other Underwriters and their respective
officers, employees and controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Underwriters against the Company under this Section 6 if, in the
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<PAGE>
reasonable judgment of the Representatives, it is advisable for the
Representatives and those Underwriters, officers, employees and controlling
persons to be jointly represented by separate counsel, and in that event the
fees and expenses of such separate counsel shall be paid by the Company and (y)
the Company shall have the right to employ counsel to represent the Company, its
officers, directors, and controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Company against the Underwriters under this Section 6 if, in the reasonable
judgment of the Company, it is advisable for the Company, its officers,
directors and controlling persons to be represented by separate counsel, and in
that event the fees and expenses of such separate counsel shall be paid by the
Underwriters. In no event shall the Company or the Underwriters, as the case may
be, be liable for the fees and expenses of more than one such separate counsel
in connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. No indemnifying party shall (i) without the prior written consent
of the indemnified parties (which consent shall not be unreasonably withheld),
settle or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding, or (ii) be liable for any settlement of any such action
effected without its written consent (which consent shall not be unreasonably
withheld), but if settled with the consent of the indemnifying party or if there
be a final judgment of the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 6 shall for any
reason be unavailable to or insufficient to hold harmless an indemnified party
under Section 6(a) or 6(b) in respect of any loss, claim, damage or liability,
or any action in respect thereof, referred to therein, then each indemnifying
party shall, in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability, or action in respect thereof, (i) in such proportion
as shall be appropriate to reflect the relative benefits received by the Company
on the one hand and the Underwriters on the other from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other with respect to
the statements or omissions which resulted in such loss, claim, damage or
liability, or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other with respect to such offering shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Shares purchased under this Agreement (after deducting expenses) received by the
Company, on the one hand, and the total underwriting discounts and commissions
received by the Underwriters with respect to the Shares purchased under this
Agreement, on the other hand, bear to the total net proceeds from the offering
of the Shares under this Agreement, in each case as set forth in the table on
the cover page of the Prospectus. The relative fault shall be determined by
reference to whether the untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 6(d)
were to be determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take into account the equitable considerations referred to
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<PAGE>
herein. The amount paid or payable by an indemnified party as a result of the
loss, claim, damage or liability, or action in respect thereof, referred to
above in this Section 6 shall be deemed to include, for purposes of this Section
6(d), any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 6(d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public was
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise paid or become liable to pay by reason of any untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 6(d) are several in proportion to their
respective underwriting obligations and not joint.
(e) The Underwriters severally confirm and the Company acknowledges
that the first sentence of the last paragraph on the cover page of the
Prospectus, concerning conditions of sale; the last three sentences of the
second paragraph under the caption "Underwriting" in the Prospectus, concerning
the terms of the offering by the Underwriters; and the eighth paragraph under
the caption "Underwriting" in the Prospectus, concerning accounts over which the
Underwriters exercise discretionary authority constitute the only information
furnished in writing to the Company through the Representatives by or behalf of
any Underwriter specifically for inclusion in the Registration Statement and
Prospectus.
7. Survival of Indemnities, Representations, Warranties, etc. The
----------------------------------------------------------
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company and the several Underwriters, as set forth in
this Agreement or made by them respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement or any investigation made by or on behalf of any Underwriter,
the Company or any of its officers or directors or any controlling person, and
shall survive delivery of and payment for the Shares.
8. Conditions of Underwriters' Obligations. The respective obligations
---------------------------------------
of the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of the
Closing Dates, of the representations and warranties made herein by the Company,
to compliance at and as of the Closing Dates by the Company with its covenants
and agreements herein contained and other provisions hereof to be satisfied at
or prior to the Closing Dates, and to the following additional conditions:
(a) The Registration Statement shall have become effective and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge
of the Company or the Representatives, shall be threatened by the
Commission, and any request for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable satisfaction
of the Representatives. Any filings of the Prospectus, or any supplement
thereto, required pursuant to Rule 497 or Rule 434 of the Securities Act
Rules and
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<PAGE>
Regulations, shall have been made in the manner and within the
time period required by Rule 497 and Rule 434 of the Securities Act Rules
and Regulations, as the case may be.
(b) There shall not have occurred any Material Adverse Effect or any
change in the investment objectives, investment policies, capital stock,
short-term or long-term debt of the Company and the Subsidiaries taken as a
whole, such that (i) the Registration Statement or the Prospectus, or any
amendment or supplement thereto, contains an untrue statement of fact
which, in the opinion of the Representatives, is material, or omits to
state a fact which, in the opinion of the Representatives, is required to
be stated therein or is necessary to make the statements therein not
misleading in any material respect or (ii) it is unpracticable in the
reasonable judgment of the Representatives to proceed with the public
offering or purchase the Shares as contemplated hereby.
(c) No legal or governmental action, suit or proceeding affecting the
Company which is material and adverse to the Company or which affects or
may affect the Company's ability to perform its obligations under this
Agreement shall have been instituted or threatened and there shall have
occurred no material adverse development in any existing such action, suit
or proceeding.
(d) At the time of execution of this Agreement, the Representatives
shall have received from Arthur Andersen LLP, independent certified public
accountants, a "cold comfort" letter, dated the date hereof, in form and
substance satisfactory to the Underwriters.
(e) The Representatives shall have received from Arthur Andersen LLP,
independent certified public accountants, letters, dated the Closing Dates,
to the effect that such accountants reaffirm, as of the Closing Dates, and
as though made on the Closing Dates, the statements made in the letter
furnished by such accountants pursuant to paragraph (f) of this Section 8.
(f) The Representatives shall have received from Palmer & Dodge LLP,
counsel for the Company, an opinion, dated the Closing Dates, addressed to
the Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) The Company and each of the Subsidiaries has been duly
incorporated and are validly existing and in good standing as
corporations under the laws of their respective jurisdictions of
incorporation and have the corporate power and authority to own or
lease their properties and to conduct their respective businesses as
described in the Prospectus. To such counsel's knowledge, the Company
and each of the Subsidiaries are duly qualified to do business and are
in good standing as foreign corporations in all jurisdictions where
their respective ownership or leasing of properties or the conduct of
their respective businesses requires such qualification, except where
the failure to be so qualified would not have a Material Adverse
Effect.
-20-
<PAGE>
(ii) The Company has full corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold hereunder. The Company
has full corporate power and authority to execute, deliver and perform
its obligations under each of the Acquisition Agreements.
(iii) This Agreement has been duly authorized, executed and
delivered by the Company.
(iv) The Company has authorized and outstanding capital stock
as set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Common Stock have been duly
authorized; the outstanding shares of the Company's Common Stock have
been duly authorized and validly issued and are fully paid and
nonassessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares are in
due and proper form; the Shares have been duly authorized and will be
validly issued, fully paid and nonassessable when issued and paid for
as contemplated by this Agreement; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue or
sale thereof.
(v) To such counsel's knowledge, (a) there are no outstanding
securities of the Company or the Subsidiaries convertible or
exchangeable into or evidencing the right to purchase or subscribe for
any shares of capital stock of the Company or the Subsidiaries and
except as disclosed in the Prospectus, there are no outstanding or
authorized options, warrants or rights of any character obligating the
Company or the Subsidiaries to issue any shares of its capital stock
or any securities convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of such stock; and (b)
there is no holder of any securities of the Company or the
Subsidiaries or any other person who has the right, contractual or
otherwise, to cause the Company to sell or otherwise issue to them, or
to permit them to underwrite the sale of, any of the Shares or the
right to have any Common Stock or other securities of the Company
included in the Registration Statement or the right, as a result of
the filing of the Registration Statement, to require registration
under the Securities Act of any Common Stock or other securities of
the Company.
(vi) The Registration Statement and all post-effective
amendments thereto, if any, have become effective under the Securities
Act; any and all filings, if any, required by Rules 497, 434 and 430A
of the Securities Act Rules and Regulations have been made; and, to
the knowledge of such counsel, no stop order proceedings with respect
thereto have been instituted or are pending or threatened under the
Securities Act; any required filing of the Prospectus and any
supplement thereto pursuant to Rule 497 of the Securities Act Rules
and Regulations has been made in the manner and within the time period
required by Rule 497.
-21-
<PAGE>
(vii) The Registration Statement and the Prospectus, and each
amendment or supplement thereto, comply as to form in all material
respects with the requirements of the Acts and the applicable rules
and regulations thereunder (except that such counsel need express no
opinion as to the financial statements and related schedules or
financial and statistical data included therein).
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not result in a breach or violation of any of the terms or provisions
of, or constitute a default under, the charter, by-laws or other
organizational documents of the Company or the Subsidiaries, or any
agreement or instrument filed as an exhibit to the Registration
Statement to which the Company or any of the Subsidiaries is a party
or by which the Company or any of the Subsidiaries may be bound, or,
to such counsel's knowledge, any order of any court or governmental
agency or body having jurisdiction over the Company or any of the
Subsidiaries or any of their respective properties except to the
extent that any such conflict, breach, violation or default would not
have a Material Adverse Effect.
(x) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
SBA, the NASD or as required by state securities and Blue Sky laws or
regulations, as to which such counsel need express no opinion) except
such as have been obtained or made.
(xi) The Company has duly elected to be treated under the
Investment Company Act as a business development company and all
required action has been taken by the Company under the Acts to make
the public offering and consummate the sale of the Shares as provided
in this Agreement; the provisions of the corporate charter and by-laws
of the Company and the Subsidiaries and the investment policies and
restrictions described in the Prospectus comply with the requirements
of the Investment Company Act.
(xii) The Shares are duly approved, subject to official notice
of issuance, for quotation on the Nasdaq National Market and a
registration statement has been filed pursuant to Section 12 of the
Exchange Act for the Shares and has been declared effective.
In rendering such opinion Palmer & Dodge LLP may (i) as to matters
governed by the laws of states or jurisdictions other than the Commonwealth
of Massachusetts or the General Corporation Law of the State of Delaware,
render such opinion as if the laws of
-22-
<PAGE>
the Commonwealth of Massachusetts governed, (ii) rely as to matters
governed by the SBIA and the rules, regulations, policies and procedures of
the SBA, on the opinion of Reid & Priest LLP, and (iii) rely as to matters
of fact, upon certificates of officers of the Company, provided that copies
of such opinion and certificates are provided to the Representatives. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, or
any amendment thereto (except as to the financial statements and related
schedules or financial and statistical data included therein, with respect
to which such counsel need express no belief), as of the time it became
effective under the Securities Act, as of the First Closing Date or the
Option Closing Date, as applicable, contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading and (ii) the Prospectus, or any supplement thereto, on the
date it was filed pursuant to the Securities Act Rules and Regulations and
as of the First Closing Date or the Option Closing Date, as applicable,
contained or contains, an untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements,
in the light of the circumstances under which they are made, not misleading
(except that such counsel need express no belief as to financial statements
and related schedules or financial and statistical data included therein).
With respect to such statement, Palmer & Dodge LLP may state that their
belief is based upon the procedures set forth therein, but is without
independent check and verification.
(g) The Representatives shall have received from Willkie Farr &
Gallagher, counsel for the Underwriters, their opinion or opinions dated
the First Closing Date with respect to the incorporation of the Company,
the validity of the Shares, the Registration Statement and the Prospectus
and such other related matters as they may reasonably request, and the
Company shall have furnished to such counsel such documents as they may
request for the purpose of enabling them to pass upon such matters. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, or
any amendment thereto (except as to the financial statements and related
schedules or financial data included therein, with respect to which such
counsel need express no belief), as of the time it became effective under
the Securities Act, as of the First Closing Date or the Option Closing
Date, as applicable, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was
filed pursuant to the Securities Act Rules and Regulations and as of the
First Closing Date or the Option Closing Date, as applicable, contained or
contains, an untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading
(except that such counsel need express no belief as to financial statements
and related schedules or financial data included therein). With respect to
such statement, Willkie Farr & Gallagher may state that their belief is
based upon the procedures set forth therein, but is without independent
check and verification.
-23-
<PAGE>
(h) The Representatives shall have received a certificate, dated the
Closing Dates, of the chief executive officer or the President and the
chief financial or accounting officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the best of the
knowledge of the signers, no proceedings for that purpose have been
instituted or are pending or contemplated under the Securities Act;
(ii) Neither any Preliminary Prospectus, as of its date, nor
the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, as of the respective times when the Registration
Statement became effective and at all times subsequent thereto up to
the delivery of such certificate, included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(iii) The representations and warranties of the Company in this
Agreement are true and correct at and as of the Closing Dates, and the
Company has complied with all the agreements and performed or
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Dates; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (i) neither
the Company nor any of the Subsidiaries has incurred any material
liabilities or obligations, direct or contingent, or entered into any
other transactions not in the ordinary course of business, (ii) there
has not been any material adverse change in the condition (financial
or otherwise), properties, business, management, prospects, net worth,
capital stock, investment objectives, investment policies or results
of operations of the Company and the Subsidiaries taken as a whole, or
any change in the capital stock, or material change in the short-term
or long-term debt, of the Company and the Subsidiaries taken as a
whole and (iii) there has been no dividend or distribution of any kind
declared, paid or made by the Company or the Subsidiaries on any class
of their respective capital stock.
(i) The Company shall have furnished to the Representatives such
additional certificates as the Representatives may have reasonably
requested as to the accuracy, at and as of the Closing Dates, of the
representations and warranties made herein by it and as to compliance at
and as of the Closing Dates by it with its covenants and agreements herein
contained and other provisions hereof to be satisfied at or prior to the
Closing Dates, and as to satisfaction of the other conditions to the
obligations of the Underwriters hereunder.
(j) The Representatives shall have received the written agreements of
the officers, directors and holders of Common Stock listed on Schedule II
that each will not, except as
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<PAGE>
stated therein, offer, sell, assign, transfer, encumber, contract to sell,
grant an option to purchase or otherwise dispose of any shares of Common
Stock (including, without limitation, Common Stock of the Company which may
be deemed to be beneficially owned by such persons in accordance with the
Securities Act Rules and Regulations) during the period of time specified
in Schedule II following the date of the Prospectus first filed pursuant to
Rule 497(b), (c) or (h), without the prior written consent of Furman Selz.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are reasonably
satisfactory in form and substance to the Representatives. The Company will
furnish to the Representatives conformed copies of such opinions, certificates,
letters and other documents as the Representatives shall reasonably request. If
any of the conditions hereinabove provided for in this Section shall not have
been satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company of such termination
in writing at or prior to the Closing Dates, but Furman Selz shall be entitled
to waive any of such conditions on behalf of the Underwriters.
9. Effective Date. This Agreement shall become effective immediately
--------------
as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other
provisions, at 11:00 a.m. New York City time on the first full business day
following the effectiveness of the Registration Statement or at such earlier
time after the Registration Statement becomes effective as the Representatives
may determine on and by notice to the Company or by release of any of the Shares
for sale to the public. For the purposes of this Section 9, the Shares shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Shares or upon written notice from the
Representatives (i) advising Underwriters that the Shares are released for
public offering or (ii) offering the Shares for sale to securities dealers,
whichever may occur first.
10. Termination. This Agreement (except for the provisions of
-----------
Section 5) may be terminated by the Company at any time before it becomes
effective in accordance with Section 9 by notice to the Representatives and may
be terminated by the Representatives at any time before it becomes effective in
accordance with Section 9 by notice to the Company. In the event of any
termination of this Agreement under this or any other provision of this
Agreement, there shall be no liability of any party to this Agreement to any
other party, other than as provided in Sections 5, 6 and 11 and other than as
provided in Section 12 as to the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the First Closing
Date or, as relates to the Option Shares only, prior to any Option Closing Date
trading in securities generally or on the Nasdaq National Market shall have been
suspended or minimum prices shall have been established on such market, or a
banking moratorium shall have been declared by New York or United States
authorities, (ii) if at or prior to the First Closing Date or any Option Closing
Date there shall have been (A) a major outbreak or significant escalation of
hostilities between the United States and any foreign power or any other
insurrection or armed conflict involving the United States or (B) any material
adverse change in financial markets or any calamity or crisis which, in the
judgment of the Representatives, makes it impractical or inadvisable to offer or
sell
-25-
<PAGE>
the Firm Shares or Option Shares, as applicable, on the terms contemplated
by the Prospectus, (iii) if there shall be any litigation or proceeding, pending
or threatened to which the Company is a party, which in the reasonable judgment
of the Representatives, makes it impracticable to offer or deliver the Firm
Shares or Option Shares, as applicable, on the terms contemplated by the
Prospectus or (iv) if there shall have occurred any of the events specified in
the immediately preceding clauses (i) - (iii) together with any other such event
that makes it, in the judgment of the Representatives, impracticable to offer or
deliver the Firm Shares or Option Shares, as applicable, on the terms
contemplated by the Prospectus.
11. Reimbursement of Underwriters. Notwithstanding any other provisions
-----------------------------
hereof, if this Agreement shall not become effective by reason of any election
of the Company pursuant to the first paragraph of Section 10 or shall be
terminated by the Representatives under Section 8 or Section 10, the Company
will bear and pay the expenses specified in Section 5 hereof and, in addition to
its obligations pursuant to Section 6 hereof, the Company will reimburse the
reasonable out-of-pocket expenses of the several Underwriters (including
reasonable fees and disbursements of counsel for the Underwriters) incurred in
connection with this Agreement and the proposed purchase of the Shares, and
promptly upon demand the Company will pay such amounts to you as
Representatives.
12. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall default in its or their obligations to purchase Shares hereunder and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10% of the total number of Shares
underwritten, the other Underwriters shall be obligated severally, in proportion
to their respective commitments hereunder, to purchase the Shares which such
defaulting Underwriter or Underwriters agreed but failed to purchase. If any
Underwriter or Underwriters shall so default and the aggregate number of Shares
with respect to which such default or defaults occur is more than 10% of the
total number of Shares underwritten and arrangements satisfactory to the
Representatives and the Company for the purchase of such Shares by other persons
are not made within 48 hours after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the Shares of a defaulting Underwriter
or Underwriters as provided in this Section 12, (i) the Company shall have the
right to postpone the Closing Dates for a period of not more than five full
business days in order that the Company may effect whatever changes may thereby
be made necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective numbers of Shares to be
purchased by the remaining Underwriters or substituted Underwriters shall be
taken as the basis of their underwriting obligation for all purposes of this
Agreement. Nothing herein contained shall relieve any defaulting Underwriter of
its liability to the Company or the other Underwriters for damages occasioned by
its default hereunder. Any termination of this Agreement pursuant to this
Section 12 shall be without liability on the part of any non-defaulting
Underwriter or the Company, except for expenses to be paid or reimbursed
pursuant to Section 5 and except for the provisions of Section 6.
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<PAGE>
13. Notices. All communications hereunder shall be in writing and, if
--------
sent to the Underwriters shall be mailed, delivered or telecopied and confirmed
to the Representatives c/o Furman Selz LLC at 230 Park Avenue, New York, New
York 10169 (telecopier no.: (212) 692-9608), Attention: Stuart B. Katz, except
that notices given to an Underwriter pursuant to Section 6 hereof shall be sent
to such Underwriter at the address furnished by the Representatives or, if sent
to the Company, shall be mailed, delivered or telecopied and confirmed at 205
East 42nd Street, Suite 2020, New York, New York 10017 (telecopier no.: (212)
983-0351), Attention: Alvin Murstein, with a copy to Palmer & Dodge LLP, One
Beacon Street, Boston, Massachusetts 02108 (telecopier no.: (617) 227-4420),
Attention: Stanley Keller, Esq.
14. Successors. This Agreement shall inure to the benefit of and be
----------
binding upon the several Underwriters, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable right, remedy
or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company contained in this Agreement
shall also be for the benefit of the person or persons, if any, who control any
Underwriter or Underwriters within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, and the indemnities of the several
Underwriters shall also be for the benefit of each director of the Company, each
of its officers who has signed the Registration Statement and the person or
persons, if any, who control the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.
15. Applicable Law. This Agreement shall be governed by and construed
--------------
in accordance with the laws of the State of New York.
16. Authority of the Representatives. In connection with this
--------------------------------
Agreement, the Representatives will act for and on behalf of the several
Underwriters, and hereby represent that they are authorized so to act, and any
action taken under this Agreement by the Representatives, will be binding on all
the Underwriters.
17. Partial Unenforceability. The invalidity or unenforceability of
------------------------
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
18. General. This Agreement constitutes the entire agreement of the
-------
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
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<PAGE>
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and the Representatives.
19. Counterparts. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
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<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
between us.
Very truly yours,
MEDALLION FINANCIAL CORP.
By:
-------------------------------
Name:
Title:
Accepted and delivered as of
the date first above written:
FURMAN SELZ LLC
BEAR, STEARNS & CO. INC.
EVEREN SECURITIES, INC.
J.C. BRADFORD & CO.
Acting on their own behalf
and as Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: Furman Selz LLC
By:
----------------------------
Name:
Title:
<PAGE>
SCHEDULE I
Number Number of
of Firm Option
Shares Shares
to be to be
Name Purchased Purchased
- ----- --------- -------------
Furman Selz LLC...........
Bear, Stearns & Co. Inc...
J.C. Bradford & Co........
EVEREN Securities, Inc....
________ ------------
Total..................... 3,500,000
=========
<PAGE>
SCHEDULE II
Party to Lock-up Agreement Period
Alvin Murstein *
---------
Andrew Murstein *
---------
Marie Russo 90 days
Daniel F. Baker 90 days
Michael Fanger 90 days
Michael J. Kowalsky 90 days
Michael Leible 90 days
Mario M. Cuomo 90 days
Stanley Kreitman 90 days
David L. Rudnick 90 days
Benjamin Ward 90 days
Alvin Murstein Second Family Trust *
---------
Andrew Murstein Family Trust *
---------
____________________________
* Shares owned by Alvin Murstein, Andrew Murstein, the Alvin Murstein
Second Family Trust and the Andrew Murstein Family Trust are subject
to previously executed Lock-up Agreements which expire on until May 2,
1998.
<PAGE>
EXHIBIT 99.H2
FURMAN SELZ LLC
230 Park Avenue
New York, New York 10169
MASTER AGREEMENT AMONG UNDERWRITERS
-----------------------------------
January 2, 1996
Gentlemen:
In connection with certain public offerings of securities after the date
hereof for which we are acting as representative or one of the representatives
of the members of the underwriting syndicate, you may be offered the opportunity
to join the underwriting syndicate. This will confirm our mutual agreement as
to the general terms and conditions applicable to your participation in any such
underwriting syndicate.
1. Applicability of this Agreement. The terms and conditions of this
Agreement shall be applicable to any negotiated offering of securities
("Securities"), pursuant to a registration statement filed under the Securities
Act of 1933, as amended (the "Securities Act"), or exempt from registration
thereunder, wherein we are responsible for managing or otherwise implementing
the sale of the Securities and organizing an underwriting syndicate (including
any such offering where we are acting with others as representatives of the
underwriters) and have expressly informed you that the terms and conditions of
this Agreement shall be applicable. This Agreement shall not apply to any
offering of securities effected wholly outside the United States of America.
Any such offering in which you have been invited to participate as an
underwriter and with respect to which we have informed you that the terms and
conditions of this Agreement apply is hereinafter called an "Offering."
We shall advise you by telecopy, telegram, telex, graphic scanning
communication or other written form of communication that you have been invited
to participate in an Offering (the "Invitation"). The Invitation will also
contain information regarding certain terms of the Securities which are the
subject of the Offering, and the amount of the Securities which you are invited
to underwrite. The Invitation will include instructions for advising us of your
acceptance (the "Acceptance") of the Invitation.
Prior to the time of the Offering, we shall also advise you, to the extent
applicable, of the amount of Securities to be underwritten by you, the
anticipated offering and closing dates, the initial offering price or prices,
the interest or dividend
<PAGE>
rate (or the method by which such rate is to be determined), the conversion
price and certain other terms relating to the Securities, whether the
underwriters will be granted an option to purchase additional Securities (the
"Additional Securities"), and, if so, the amount of Additional Securities which
you will be obligated to purchase, whether the seller of the Securities proposes
to authorize the Underwriters (as hereinafter defined) to solicit offers to
purchase Securities from the seller pursuant to delayed delivery contracts (such
contracts being hereinafter called "Delayed Delivery Contracts" and such an
Offering being hereinafter called a "Delayed Delivery Offering"), whether the
seller of the Securities proposes to offer Securities through one or more
underwriting syndicates (which may be composed of a single underwriter) other
than the underwriting syndicate composed of the Underwriters and the extent to
which the Underwriters may become obligated to purchase Securities from, or sell
Securities to, such other underwriting syndicate or syndicates pursuant to one
or more agreements between the Representatives (as hereinafter defined) and the
representatives or managers of such other syndicate or syndicates (or such
single underwriter) (any such agreement being hereinafter referred to as an
"Inter-Syndicate Agreement," and any Securities subject to purchase by the
Underwriters pursuant to an Inter-Syndicate Agreement being referred to herein
as "Other Securities"), and the gross spread and breakdown of management fee,
underwriting compensation and selling concession, and the dealer's reallowance,
except that, if the initial offering price of the Securities is to be determined
by a formula based upon the market price of certain securities (such procedure
being hereinafter called "Formula Pricing"), we shall so indicate in lieu of
specifying an initial offering price or prices (and other applicable terms of
the Securities) and shall specify only the maximum gross spread and maximum
management fee, instead of the initial fixed amounts and components thereof. The
foregoing information will be included in the Invitation or be conveyed to you
in one or more separate written communications (collectively, the "Final
Communication"). The Invitation and the Final Communication may also contain
additional provisions which supplement or amend the terms of this Agreement as
they apply to the Offering.
The terms and conditions of this Agreement, as amended or supplemented by
the Invitation and the Final Communication, shall become effective with respect
to your participation in an Offering if we have received your Acceptance and if
we do not receive a written communication revoking your Acceptance prior to the
date and time specified in the Invitation or the Final Communication (your
unrevoked Acceptance after expiration of such date and time being hereinafter
referred to as your "Final Acceptance").
2. Underwriting Arrangements. In connection with each Offering, the
issuer, any other seller (a "Selling Securityholder") and any guarantor of the
Securities shall enter
-2-
<PAGE>
into an underwriting agreement (the "Underwriting Agreement") (with such
additions, modifications and deletions as we shall, acting as sole
representative or as lead representative of one or more other representatives of
the Underwriters, in our sole discretion deem appropriate) which we shall as
soon as practicable send to you (or make available for your review in our
office) or which shall have been filed with, and publicly available from, the
Securities and Exchange Commission (the "Commission"), with us acting either as
sole representative or as lead representative of one or more other
representatives of the underwriters named in the Underwriting Agreement (the
"Underwriters"). We, in either such capacity, and one or more other
representatives of the Underwriters as are named in the Invitation or the Final
Communication, as the case may be, are herein referred to as the
"Representatives". By your Final Acceptance, you agree and authorize us to agree
on your behalf to purchase, in accordance with the terms of the Underwriting
Agreement or any Inter-Syndicate Agreements, as the case may be, (a) the amount
of the Securities (the "Firm Securities") set forth opposite your name in the
Underwriting Agreement (which amount may exceed the amount set forth in the
Invitation or Final Communication by not more than 20% as a result of an
increase in the aggregate amount of the Securities or a reallotment of the
Securities among the Underwriters), exclusive of any Additional Securities (the
maximum amount of which, after a corresponding increase, will also be set forth
opposite your name therein), plus such amount of Securities, if any, which you
may become obligated to purchase pursuant to Section 15 hereof (the "Initial
Commitment"), plus (b) such amount of Additional Securities, if any, which you
may become obligated to purchase by reason of the exercise of the option
provided in the Underwriting Agreement, plus (c) the amount of Other Securities,
if any, which you may, subject to the limitation provided in Section 4 hereof,
become obligated to purchase by reason of purchases for your account made
pursuant to such Inter-Syndicate Agreements, less (d) such amount, if any, of
Securities as are contracted to be sold pursuant to any Delayed Delivery
Contracts ("Contract Securities") allocated to you in accordance with the last
paragraph of Section 5 hereof. The Securities which, after any such increase or
reduction of your Initial Commitment, you are obligated to purchase pursuant to
the Underwriting Agreement and such Inter-Syndicate Agreements are referred to
herein as "your Securities.
In the event that the Securities consist in whole or in part of debt
obligations maturing serially, the serial Securities being purchased by each
Underwriter pursuant to the Underwriting Agreement will consist, subject to
adjustment as provided in the Underwriting Agreement, of serial Securities of
each maturity in a principal amount which bears the same proportion to the
aggregate principal amount of serial Securities of such maturity to be purchased
by all the Underwriters as the respective principal amount of serial Securities
set forth opposite such Underwriter's name in the Underwriting Agreement bears
to the
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aggregate principal amount of the serial Securities to be purchased by all the
Underwriters.
3. Registration Statement and Prospectus. With respect to each Offering
of Securities, we shall either (i) provide you with the file numbers of the
registration statement and any additional registration statement pursuant to
Rule 462(b) under the Securities Act which are filed with the Commission with
respect to the Securities or (ii) as soon as practicable send to you (or make
available for your review in our office) a copy of such registration statement
and any such additional registration statement (other than any documents
incorporated by reference in either of the foregoing). Your Final Acceptance
shall constitute your acknowledgment that you are familiar with such
registration statement, as amended to the date of the Offering, including any
documents incorporated therein by reference and the forms of Underwriting
Agreement and indenture or other document describing the terms of the Securities
filed as exhibits thereto, with any such additional registration statement, as
amended to the date of the Offering, including any documents incorporated
therein by reference, with any preliminary prospectus, prospectus supplement,
prospectus, term sheet or abbreviated term sheet relating to the Securities
theretofore filed with the Commission and with the information to be set forth
in an amendment to such registration statement, any such additional registration
statement or a prospectus, prospectus supplement, term sheet or abbreviated term
sheet proposed to be filed with the Commission. Further, your Final Acceptance
shall constitute your representation that the information to be set forth in
such amendments, prospectus supplement, prospectus, term sheet or abbreviated
term sheet is correct and is not misleading insofar as it relates to you and
your consent to being named as an Underwriter therein. By your Acceptance, you
agree that, if requested by the Representatives, you will furnish a copy of any
amended preliminary prospectus, prospectus supplement, prospectus, term sheet or
abbreviated term sheet to each person to whom you shall have furnished a
previous preliminary prospectus, prospectus supplement, prospectus, term sheet
or abbreviated term sheet. By your Final Acceptance, you confirm that you have
delivered and agree that you will deliver all preliminary and final
prospectuses, all supplements thereto, and all term sheets and abbreviated term
sheets required for compliance with the provisions of Rule 15c2-8 (or any
successor provision) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
4. Authority and Compensation of Representatives. You authorize the
Representatives on your behalf (a) to execute and deliver the Underwriting
Agreement with the issuer, any Selling Securityholder and any guarantor of the
Securities with such changes therein as in their judgment will not be materially
adverse to the Underwriters (except as to the purchase price (unless the initial
offering price is to be determined by Formula Pricing) and the amount of your
Securities (except for increases
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in such amount permitted under Section 2 hereof)), (b) to execute and deliver
any Inter-Syndicate Agreements with the representatives or managers of such
other syndicate or syndicates (or a single underwriter), in the form that shall
have been filed with, and be publicly available from, the Commission or any such
other regulatory authority as we shall specify in the Invitation or that we
shall send to you as soon as practicable (or make available for your review in
our office), with such changes therein as in their judgment will not be
materially adverse to the Underwriters, (c) to exercise all the authority and
discretion vested in the Underwriters and in them by the provisions of the
Underwriting Agreement and any Inter-Syndicate Agreements, (d) to take all such
action as they in their discretion may deem necessary or advisable in order to
carry out the provisions of the Underwriting Agreement, of any Inter-Syndicate
Agreement and of this Agreement, and the sale and distribution of the
Securities, including the right to determine the terms of the proposed Offering,
the concession to Selected Dealers (as hereinafter defined) and the reallowance,
if any, to other dealers, the right to exercise any option in the Underwriting
Agreement relating to the purchase of Additional Securities and the right to
make any judgment relating to the satisfaction of the conditions to the
obligations of the Underwriters under the Underwriting Agreement or any Inter-
Syndicate Agreement, and (e) to determine all matters relating to the public
advertisement of the Securities.
You also authorize the Representatives on your behalf (a) to determine
whether to purchase, and, if such determination is made, to purchase, any Other
Securities for the account of the Underwriters pursuant to the terms of any
Inter-Syndicate Agreement and (b) to determine whether to sell, and, if such
determination is made, to sell, Securities for the account of the Underwriters
pursuant to any Inter-Syndicate Agreement. Any Other Securities purchased or
any Securities sold pursuant to any Inter-Syndicate Agreement shall be purchased
or sold, as the case may be, at the offering price then in effect for the
Securities less all or any part of the concession to Selected Dealers, all as
determined by the Representatives. In the event of the exercise by the
Representatives of an option to purchase any Other Securities or to sell any
Securities pursuant to any Inter-Syndicate Agreement, the Representatives shall
promptly so notify each Underwriter and advise each Underwriter of the number of
Other Securities to be purchased or the number of Securities to be sold. The
Representatives shall not, without your consent, make net purchases of Other
Securities for your account in excess of 20% of your Initial Commitment, except
as may be provided in the Invitation or Final Communication. In connection with
any Offering involving one or more Inter-Syndicate Agreements, you agree to be
bound by, and all offers to sell and sales by you of Securities shall be subject
to, such limitations on offers to sell and sales of Securities as may be
contained in the Invitation or Final Communication or in the Underwriting
Agreement or any Inter-Syndicate Agreement as executed and you
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further agree that any sales made by you to dealers shall be made only to such
dealers as agree, in their offers to sell and sales, to be bound by the same
limitations.
As compensation for the Representatives' services, you agree to pay to them
with respect to each Offering, and authorize them to charge your account with, a
management commission not in excess of such management fee as they shall advise
you in the Invitation or the Final Communication. If there is more than one
Representative, such compensation will be divided among the Representatives in
such proportions as they shall determine.
5. Public Offering of Securities. The sale of the Securities to the
public is to be made, as herein provided, as soon after the registration
statement relating to the Securities and any additional registration statement
relating to the Securities which may be filed with the Commission pursuant to
Rule 462(b) become effective as in the Representatives' judgment is advisable.
The purchase price to be paid by the Underwriters for the Securities and the
initial public offering price are to be determined by agreement between the
Representatives and the issuer. The Securities shall be first offered to the
public at the initial public offering price as so determined. The
Representatives will advise you by telex, telecopy, telegraph or telephone when
the Securities shall be released for offering, when the registration statement
and any additional registration statement relating to the Securities shall
become effective, the price at which the Securities are initially to be offered
and the date that payment for the Securities shall be made to the seller or
sellers pursuant to the Underwriting Agreement. You agree not to sell any of
the Securities until the Representatives have released them for that purpose.
You authorize the Representatives, after the initial public offering, to change
the public offering price, the concession and the reallowance if, in their sole
discretion, such action becomes desirable by reason of changes in general market
conditions or otherwise. The public offering price at the time in effect is
herein called the "Offering Price." After notice from the Representatives that
the Securities are released for public sale, you will offer to the public in
conformity with the provisions hereof and with the terms of the Offering set
forth in the prospectus those Securities as the Representatives advise you are
not reserved.
In the case of a Delayed Delivery Offering, you authorize the
Representatives to make all arrangements for the solicitation of offers to
purchase Securities from the issuer pursuant to Delayed Delivery Contracts. To
the extent that the Representatives in their sole discretion shall determine,
Contract Securities which have been directed by institutional investors to
particular Underwriters or which were contracted for pursuant to arrangements
made by particular Underwriters through them shall be allocated to such
Underwriters and all other Contract Securities shall be allocated to the
accounts of the respective Underwriters as nearly as practicable in proportion
to
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their respective Initial Commitments; provided, however, that the amount of
Contract Securities so allocated to any Underwriter shall not exceed such
Underwriter's Initial Commitment, and any Contract Securities which would
otherwise have been allocated to such Underwriter (the "Excess Contract
Securities") shall be allocated among the other Underwriters in such manner as
the Representatives shall, in their sole discretion, determine to be equitable
and practicable. The Representatives may pay a commission to any Selected
Dealer for services rendered in respect of Contract Securities.
6. Offering to Dealers and Retail Sales. You authorize the
Representatives to reserve for offering and sale, and on your behalf to sell, to
retail purchasers (such sales being herein called "Retail Sales") and to dealers
selected by them (such dealers, among whom any Underwriter may be included,
being herein called "Selected Dealers") all or any part of your Securities as
they, in their sole discretion, shall determine. Such sales, if any, shall be
made (a) in the case of Retail Sales, at the Offering Price, and (b) in the case
of sales to Selected Dealers, at the Offering Price less such concession or
concessions as the Representatives, in their sole discretion, shall determine.
Except for such sales as are designated by a purchaser to be for the account of
a particular Underwriter or Selected Dealer, any sales to Selected Dealers made
for your account shall be as nearly as practicable in the ratio that the
Securities reserved for your account for offering to Selected Dealers bears to
the aggregate of all Securities of all Underwriters so reserved.
The Representatives agree to notify you promptly on the date of the public
offering as to the amount of Securities, if any, which you may retain for direct
sale by you. Prior to the termination of the provisions referred to in Section
16 hereof, the Representatives may reserve for offering and sale as hereinbefore
provided any Securities theretofore retained by you remaining unsold and you
may, with their consent, retain any Securities theretofore reserved by them
remaining unsold.
You agree that, from time to time prior to the termination of the
provisions referred to in Section 16 hereof, you shall furnish to the
Representatives such information as they may request in order to determine the
amount of Securities purchased by you under the Underwriting Agreement which
then remain unsold, and you shall upon their request sell to them for the
account of any Underwriter as many of such unsold Securities as they may
designate at the Offering Price, less all or any part of the concession to
Selected Dealers as they in their sole discretion, shall determine. The
provisions of Section 7 hereof shall not be applicable in respect of any such
sale.
You authorize the Representatives to determine the form and manner of any
communications or agreements with Selected Dealers. In the event that there
shall be any agreements with Selected Dealers, the Representatives are
authorized to act as manager
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thereunder and they agree, in such event, to be governed by the terms and
conditions of such agreements.
It is understood that any Selected Dealer to whom an offer may be made as
hereinbefore provided shall be actually engaged in the investment banking or
securities business and shall be either (i) a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") or (ii) a dealer
with its principal place of business located outside the United States, its
territories and its possessions and not registered as a broker or dealer under
the Exchange Act, who agrees not to make any sales within the United States, its
territories or its possessions or to persons who are nationals thereof or
residents therein. Each Selected Dealer shall agree to comply with the
provisions of Section 24 of Article III of the Rules of Fair Practice of the
NASD, and each foreign Selected Dealer who is not a member of the NASD also
shall agree to comply with the NASD's interpretation with respect to free-riding
and withholding, to comply, as though it were a member of the NASD, with the
provisions of Sections 8 and 36 of Article III of such Rules of Fair Practice,
and to comply with Section 25 of Article III thereof as that Section applies to
a non-member foreign dealer. The several Underwriters may allow, and the
Selected Dealers, if any, may re-allow, such concession or concessions as the
Representatives may determine from time to time on sales of Securities to any
qualified dealer, all subject to the Rules of Fair Practice of the NASD.
The Representatives, and any of the several Underwriters with their prior
consent, may make purchases or sales of Securities from or to any of the other
Underwriters, at the offering Price less all or any part of the gross spread,
and from or to any of the Selected Dealers at the Offering Price less all or any
part of the concession to Selected Dealers.
Upon the request of the Representatives, you will advise them of the
identity of any dealer to whom you allow such a discount and any Underwriter or
Selected Dealer from whom you receive such a discount.
7. Repurchase in the Open Market. Any Securities sold by you (otherwise
than through the Representatives) which shall be contracted for or purchased in
the open market by the Representatives on behalf of any Underwriter or
Underwriters shall be repurchased by you on demand at a price equal to the cost
of such purchase plus commissions and taxes on redelivery. Any Securities
delivered on such repurchase need not be the identical Securities originally
sold by you. In lieu of delivery of such Securities to you, the Representatives
may sell such Securities in any manner for your account and charge you with the
amount of any loss or expense or credit you with the amount of any profit, less
any expense, resulting from such sale, or charge your account with an amount not
in excess of the concession to Selected Dealers.
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8. Delivery and Payment. Upon the request of the Representatives, you
shall deliver to them, as and at such time and place as they direct in the
Invitation or Final Communication, a certified or official bank check in such
clearing house funds as indicated therein, as payment for the Securities to be
purchased by you under the Underwriting Agreement in an amount equal to the
Offering Price for such Securities plus any accrued interest, amortization of
original issue discount or accumulated dividends required to be paid to the
seller or sellers pursuant to the Underwriting Agreement less the concession to
Selected Dealers (or, in the case of Other Securities to be purchased by you
under any Inter-Syndicate Agreement, the price specified in such Inter-Syndicate
Agreement). Such payment shall be made in such form and at such time and place
as may be specified in such request, and you authorize the Representatives to
make payment for your Securities against delivery thereof for your account
hereunder. You authorize the Representatives to accept delivery of your
Securities in definitive form upon exchange of any Securities in temporary form
received by them on the Closing Date pursuant to the preceding sentence. If you
are a member of or clear through a member of The Depository Trust Company
("DTC"), the Representatives may, in their discretion, deliver your Securities
through the facilities of DTC.
The Representatives shall remit to you, as promptly as practicable, the
amounts received by them from Selected Dealers and retail purchasers as payment
in respect of Securities sold by them for your account pursuant to Section 6
hereof for which payment has been received. Securities purchased by you under
the Underwriting Agreement and not reserved or sold by the Representatives for
your account pursuant to Section 6 hereof shall be delivered to you as promptly
as practicable after receipt by them. Any Securities purchased by you and so
reserved which remain unsold at any time prior to the settlement of accounts
hereunder may, in the Representatives' discretion, and shall, upon your request,
be delivered to you, but, until termination of the Selected Dealer agreements
pursuant to their terms, such delivery shall be for carrying purposes only. In
case any Securities reserved for sale in Retail Sales or to Selected Dealers
shall not be purchased and paid for in due course as contemplated hereby, you
agree (a) to accept delivery when tendered by the Representatives of any
Securities so reserved for your account and not so purchased and paid for, and
(b) in case you shall have received payment from the Representatives in respect
of any such Securities, to reimburse them on demand for the full amount which
they shall have paid you in respect of such Securities.
In the case of a Delayed Delivery Offering, the commission payable by the
issuer in respect of any Contract Securities allocated to you pursuant to the
last paragraph of Section 5 hereof shall be credited (after deducting any
commissions paid by the Representatives to any Selected Dealer for services
rendered
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in respect of such Contract Securities) to your account and, in addition, you
shall be treated as a Selected Dealer in respect of your Excess Contract
Securities, if any.
In the event of your failure to tender payment for Securities as provided
in the Underwriting Agreement, the Representatives shall have the right under
the provisions thereof to arrange for other persons, who may include them and
any other Underwriter, to purchase such Securities which you had agreed to
purchase, but without relieving you from liability for your default.
9. Authority to Borrow. You authorize the Representatives to advance
their funds for your account (charging current interest rates) and to arrange
loans for your account or the account of the Underwriters for the purpose of
carrying out this Agreement and the Underwriting Agreement, and in connection
therewith to execute and deliver any notes or other instruments and to hold or
pledge as security therefor all or any part of your Securities and Securities
purchased hereunder for your account. Any lender is hereby authorized to accept
the Representatives' instructions in all matters relating to such loans. Any
part of your Securities and Securities so held by the Representatives may be
delivered to you for carrying purposes and, if so delivered, will be redelivered
to them, upon demand.
10. Allocation of Expenses and Liability. You authorize the
Representatives to charge your account with and you agree to pay (a) all
transfer taxes on sales made by the Representatives for your account, except as
herein otherwise provided, and (b) your proportionate share (based on your
Initial Commitment) of all expenses incurred by the Representatives in
connection with the purchase, carrying, sale and distribution of the Securities
(including, without limitation, any expenses to be borne by the Underwriters in
accordance with any Inter-Syndicate Agreements) and all other expenses arising
under the terms of the Underwriting Agreement, this Agreement or any Inter-
Syndicate Agreements. The Representatives' determination of all such expenses
and your allocation thereof shall be final and conclusive. The Representatives
may at any time make partial distributions of credit balances or call for
payment of debit balances. Funds for your account at any time in the
Representatives' hands may be held in their general funds without accountability
for interest. As soon as practicable after such time as this Agreement shall no
longer be applicable to an Offering, the net credit or debit balance in your
account, after proper charge and credit for all interim payments and receipts,
shall be paid to or paid by you, provided that the Representatives may establish
such reserves as they, in their sole discretion, shall deem advisable to cover
possible additional expenses chargeable to the several Underwriters.
Notwithstanding any settlement, you will remain liable for any taxes on
transfers for your account and for your proportionate share (based on your
Initial Commitment) of all expenses and
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liabilities that may be incurred for the accounts of the Underwriters.
11. Liability for Future Claims. Neither any statement by the
Representatives of any credit or debit balance in your account nor any
reservation from distribution to cover possible additional expenses relating to
the Securities shall constitute any representation by them as to the existence
or nonexistence of possible unforeseen expenses or liabilities of or charges
against the several Underwriters. Notwithstanding the distribution of any net
credit balance to you or after such time as this Agreement shall no longer be
applicable to an Offering or both, you shall be and remain liable for, and will
pay on demand, (a) your proportionate share (based on your Initial Commitment)
of all expenses and liabilities which may be incurred by or for the accounts of
the Underwriters, or any of them, based on the claim that the Underwriters (and
any underwriters, representatives or managers party to any Inter-Syndicate
Agreements) constitute an association, unincorporated business, partnership or
any separate entity, and (b) any transfer taxes paid after such settlement on
account of any sale or transfer for your account.
12. Stabilization and Over-Allotment. You authorize the Representatives
on your behalf and for your account, prior to the time that this Agreement shall
cease to be applicable to an Offering, in their discretion, and without
obligating them to do so, to buy and sell Securities, or any other securities of
the issuer or any guarantor of the Securities named in the Invitation or the
Final Communication, in the open market or otherwise for either long or short
account, on such terms and at such prices as they may determine and, in
arranging for sales, to over-allot and cover such over-allotments, provided that
at no time shall your net commitment under authority of this Section, either for
long or short account, exceed an amount equivalent to 20% of the aggregate
initial offering price of your Securities to be purchased by you under the
Underwriting Agreement. The Representatives may cover any short position
incurred under the preceding sentence by purchase of Additional Securities
pursuant to the option which may be contained in the Underwriting Agreement or
otherwise. All purchases, sales and over-allotments under authority of this
Section 12 shall be for the accounts of each of the several Underwriters as
nearly as practicable in proportion to their respective Initial Commitments.
You agree to take up at cost on demand any Securities so purchased for your
account and to deliver on demand any Securities so sold or over-allotted for
your account. You also authorize the Representatives to deliver your
Securities, and any other Securities purchased by them for your account pursuant
to this Section 12, against sales made by the Representatives for your account
pursuant to any provision of this Agreement.
In the event that the Representatives effect any stabilizing purchases
pursuant to this Section 12, they will notify each Underwriter promptly of the
date and time when the first
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stabilizing purchase is effected and the date and time when stabilizing is
terminated. You agree that if you effect any stabilizing purchases, you will,
not later than three business days following the day on which any such
stabilizing purchase is effected, notify the Representatives of the price, date
and time at which such stabilizing purchase was effected and you will promptly
notify them of the date and time when such stabilizing was terminated. You
authorize the Representatives to file with the Commission all notices and
reports which may be required as a result of any transactions made pursuant to
this Section 12.
You agree to advise the Representatives, from time to time upon their
request during the term of this Agreement with respect to an Offering, of the
amount of Securities retained by you or purchased by you from other Underwriters
and Selected Dealers remaining unsold, and you will, upon their request, release
to them for the accounts of one or more of the several Underwriters, such amount
of Securities as they may designate at such price, not less than the net price
to Selected Dealers nor more than the public offering price, as they may
determine.
If, pursuant to the provisions of the first paragraph of this Section 12
and prior to such time as this Agreement shall cease to be applicable to an
Offering (or such earlier date as the Representatives may have determined on
notice to the Underwriters), the Representatives purchase or contract to
purchase any Securities which were retained by or released to you for direct
sale, which Securities were theretofore not effectively placed for investment by
you, you authorize them in their discretion either to charge your account with
an amount equal to the concession to Selected Dealers with respect thereto or to
require you to repurchase such Securities at a price equal to the total cost of
such purchase, including commissions, if any, and transfer tax on the
redelivery. Securities delivered on such repurchase need not be the identical
Securities originally purchased by and delivered to you.
Upon such time as this Agreement shall cease to be applicable to an
Offering, the Representatives are authorized in their discretion, in lieu of
delivering to the several Underwriters any Securities then held for their
respective accounts pursuant to this Section 12, to sell such Securities for the
accounts of each of the Underwriters at such price or prices as they may
determine and debit or credit your account for the loss or profit resulting from
such sale.
13. Open Market Transactions. You agree that you will not make bids or
offers, or make or induce purchases or sales for your own account or the
accounts of customers, in the open market or otherwise, either before or after
the purchase of the Securities and for either long or short account, of any
security of the same class or series, or any right to purchase any such security
except (i) as provided in this Agreement, the Underwriting Agreement and the
Selected Dealer agreements or
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otherwise approved by the Representatives, (ii) in brokerage transactions not
involving solicitation of the customer's order, and (iii) in connection with
option and option-related transactions that are consistent with the "no-action"
position set forth in Release 17609 of the Commission under the Exchange Act.
You further agree that you will not lend, either before or after the purchase of
the Securities, to any customer, Underwriter, Selected Dealer or to any other
securities broker or dealer any Securities. Prior to the completion (as defined
in Rule 10b-6 under the Exchange Act) of your participation in the Offering, you
will otherwise comply with Rule 10b-6.
14. Blue Sky. Prior to the initial offering by the Underwriters, the
Representatives will inform you as to the states and other jurisdictions under
the respective securities or blue sky laws of which it is believed that the
Securities have been qualified for sale or are exempt from such qualification,
but they do not assume any responsibility or obligation as to the accuracy of
such information or as to the right of any Underwriter or dealer to offer or
sell the Securities in any state or other jurisdiction. The Representatives
agree to file or cause to be filed, on behalf of the Underwriters, a Further
State Notice in respect of the Securities pursuant to Article 23-A of the
General Business Law of the State of New York, if necessary.
15. Default by Underwriters. Default by one or more Underwriters in
respect of their obligations under this Agreement, the Underwriting Agreement or
any Inter-Syndicate Agreement, shall not release you from any of your
obligations or in any way affect the liability of any defaulting Underwriter to
the other Underwriters for damages resulting from such default. In the event of
such default by one or more Underwriters, you agree (subject to any limitations
contained in the Underwriting Agreement, any Inter-Syndicate Agreement or any
Selected Dealer agreements) to assume your proportionate share, based upon the
proportion that the amount of the Securities set forth in the Underwriting
Agreement opposite your name bears to the aggregate amount of the Securities set
forth in the Underwriting Agreement opposite the names of all non-defaulting
Underwriters, of the obligations of such Underwriter without relieving such
Underwriter of its liability therefor.
In the event of default by one or more Underwriters in respect of their
obligations under this Agreement to take up and pay for any Securities purchased
by the Representatives for their respective accounts pursuant to Section 12
hereof, or to deliver any such Securities sold or over-allotted by the
Representatives for their respective accounts pursuant to any provision of this
Agreement, and to the extent that arrangements shall not have been made by the
Representatives for other persons to assume the obligations of such defaulting
Underwriter
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or Underwriters, each non-defaulting Underwriter shall assume its proportionate
share of the aforesaid obligations of each such defaulting Underwriter without
relieving any such defaulting Underwriter of its liability therefor.
16. Termination and Amendment. This Agreement may be terminated by either
party hereto upon five business days written notice to the other party;
provided, however, that with respect to any offering, if we receive any such
notice from you after your Final Acceptance, this Agreement shall remain in full
force and effect as to such Offering and shall terminate with respect to such
offering and all previous Offerings in accordance with the provisions of the
next paragraph of this Section 16.
Section 5, the second paragraph and the first sentence of the third
paragraph of Section 6, Section 7, the first sentence of Section 12 and Section
13 hereof will cease to be applicable to your participation in an Offering at
the close of business on the 30th calendar day after the Securities are first
released for public offering, unless extended or sooner terminated as
hereinafter provided. The Representatives may extend such provisions, or any of
them, for a period not to exceed 30 additional calendar days by notice to you to
such effect. The Representatives may terminate any of such provisions at any
time by notice to you, and they may terminate all such provisions with respect
to an offering at any time by notice to you to the effect that the offering
provisions with respect to an Offering of this Agreement will cease to be
applicable to such Offering.
This Agreement may be supplemented or amended by us by notice to you by
written communication and, except for supplements or amendments set forth in an
Invitation or Final Communication, any such supplement or amendment to this
Agreement shall be effective with respect to any Offering to which this
Agreement applies after the date of such supplement or amendment. Each
reference to "this Agreement" herein shall, as appropriate, be to this Agreement
as amended and supplemented.
17. General Position of the Representatives. In taking action under this
Agreement, any Underwriting Agreement or any Inter-Syndicate Agreements, the
Representatives shall act only as agent of the several Underwriters. The
Representatives' authority shall include the taking of such action as they may
deem advisable in respect of all matters pertaining to any and all offers and
sales of the Securities, including the right to make any modifications which
they consider necessary or desirable in the arrangements with Selected Dealers
or others. The Representatives shall be under no liability for or in respect of
the value of the Securities or the validity or the form thereof, the
registration statement, any additional registration statement which may be filed
with the Commission pursuant to Rule 462(b) of the Securities Act, the
prospectus, any term sheets, any abbreviated term sheets or agreements or other
instruments executed by the issuer or others; or for or in respect of the
delivery of the Securities; or for the performance by the issuer, any Selling
Securityholder, or others of any agreement on its or
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<PAGE>
their part; nor shall we as Representatives or otherwise be liable under any of
the provisions hereof or for any matters connected herewith, except for want of
good faith, and except for any liability arising under the Securities Act; and
only obligations expressly assumed by us as Representatives herein shall be
implied from this Agreement. In representing the Underwriters hereunder, we
shall act as the Representatives of each of them respectively. Nothing herein
contained shall constitute the several Underwriters partners with us or with
each other or with any underwriters, representatives or managers party to any
Inter-Syndicate Agreements, or render any Underwriter liable for the commitments
of any other Underwriter or any underwriters, representatives or managers party
to any Inter-Syndicate Agreements, except as otherwise provided in Section 15
hereof. If the Underwriters shall be deemed to constitute a partnership for
federal income tax purposes, it is the intent of each Underwriter to be excluded
from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal
Revenue Code of 1986, as amended. You shall elect to be so excluded and agree
not to take any position inconsistent with such election. You authorize us, in
our discretion, to execute and file on your behalf such evidence of election as
may be required by the Internal Revenue Service. The commitments and liabilities
of each of the several Underwriters are several in accordance with their
respective Initial Commitments and are not joint.
18. (a) Indemnity. You agree to indemnify and hold harmless us and each
other Underwriter, the officers, directors, partners, employees, agents and
counsel of us and each other Underwriter and each person, if any, who controls
us and any such other Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, and to reimburse our and
their expenses, to the extent and upon the terms that you agree to indemnify and
hold harmless the issuer and any Selling Securityholder and to reimburse their
expenses as set forth in the Underwriting Agreement.
(b) Claims Against Underwriters. You will pay, upon the
Representatives' request, as contribution, your proportionate share, based upon
the proportion that the amount of your Securities bears to the aggregate amount
of the Securities to the Offering as set forth in the Underwriting Agreement
(the "Proportionate Share"), of any loss, claim, damage or liability, joint or
several, paid or incurred by any Underwriter (including the Representatives,
individually or as representatives of the Underwriters) to any person other than
an Underwriter (including amounts paid by an Underwriter as contribution),
arising out of or based upon (i) an untrue statement or alleged untrue statement
of a material fact contained in a registration statement, any additional
registration statement which may be filed with the Commission pursuant to Rule
462(b) under the Securities Act or any amendment to either of the foregoing or
arising out of or based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
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<PAGE>
the statements therein not misleading, (ii) an untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus,
prospectus, prospectus supplement, term sheet, abbreviated term sheet,
preliminary offering circular, proof of an offering circular, offering circular,
amendment or supplement to any of the foregoing, or any other selling or
advertising material used with the consent of the Representatives by the
Underwriters in connection with the sale of the Securities, or arising out of or
based upon the omission or alleged omission to state therein a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading and (iii) any act or omission to act
or any alleged act or omission to act by the Representatives, individually or as
representatives of the Underwriters, or by the Underwriters, as a group but not
individually, in connection with any transaction contemplated by this Agreement
or undertaken in preparing for the purchase, sale and delivery of the
Securities; and each Underwriter will pay its Proportionate Share of any legal
or other expenses reasonably incurred by the Representatives, or with their
consent, in connection with investigating or defending any such loss, claim,
damage or liability, or any action in respect thereof. In determining the amount
of any Underwriter's obligation under this paragraph, appropriate adjustment may
be made by the Representatives to reflect any amounts received by any one or
more Underwriters, pursuant to the Underwriting Agreement or otherwise, in
respect of the claim upon which such obligation is based. In respect of any
claim there shall be credited against the amount of any Underwriter's obligation
under this paragraph any loss, damage, liability or expense that is paid or
incurred by such Underwriter as a result of such claim being asserted against
it, and, if such loss, damage, liability or expense is paid or incurred by such
Underwriter subsequent to any payment by it pursuant to this paragraph,
appropriate provision shall be made to effect such credit, by refund or
otherwise. If any claim to which the provisions of this paragraph would be
applicable is asserted, the Representatives may take such action in connection
therewith as they deem necessary or desirable, including retention of counsel
for the Underwriters and separate counsel for any particular Underwriter or
group of Underwriters, and the fees and disbursements of any counsel so retained
by the Representatives shall be included in the amounts of the Underwriters'
obligations under this paragraph. The Representatives may consent to being named
as the representatives of a defendant class of underwriters. Any Underwriter may
elect to retain at its own expense its own counsel and, on advice of such
counsel and with the Representatives' consent, may settle or consent to the
settlement of any such claim. The Representatives may settle or consent to the
settlement of any such claim, on advice of counsel retained by them, with the
approval of a majority in interest of the Underwriters. Whenever any Underwriter
receives notice of the assertion of any claim to which the provisions of this
paragraph would be applicable, such Underwriter shall give prompt notice thereof
to the
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<PAGE>
Representatives. Whenever the Representatives receive notice of the assertion
of any such claim, they shall give prompt notice thereof to each Underwriter.
The Representatives also shall furnish each Underwriter with periodic reports,
at such times as they deem appropriate, of the status of any such claim and the
action taken by them in connection therewith. In the event of the failure of
any Underwriter to fulfill its obligations under this paragraph, such
obligations may be charged against each nondefaulting Underwriters, without
relieving such defaulting Underwriter of its liability therefor. In determining
amounts payable pursuant to this paragraph, any loss, claim, damage, liability
or expense paid or incurred, and any amount received, by any person controlling
any Underwriter within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act shall be deemed to have been paid or incurred
or received by such Underwriter to the extent such amount has been paid or
incurred or received by reason of such control relationship. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
19. Capital Requirements. Your Acceptance will confirm that the
incurrence by you of your obligations under this Agreement and the Underwriting
Agreement will not place you in violation of the net capital requirements of
Rule 15c3-1 under the Exchange Act, of the NASD, if you are a member thereof, or
of any applicable rules relating to capital requirements of any securities
exchange to which you are subject.
20. Miscellaneous. Any notice hereunder from us to you or from you to us
shall be deemed to have been duly given if sent by registered mail, telecopy,
telegram or telex, to you at your address as set forth on the signature page of
this Agreement, or to us at 230 Park Avenue, New York, New York 10169,
Attention: Syndicate Department.
You understand that we are a member in good standing of the NASD. You
hereby confirm that you are actually engaged in the investment banking or
securities business and are either (i) a member in good standing of the NASD or
(ii) a dealer with its principal place of business located outside the United
States, its territories and its possessions and not registered as a broker or
dealer under the Exchange Act who agrees not to make any sales within the United
States, its territories or its possessions or to persons who are nationals
thereof or residents therein (except that you may participate in sales to
Selected Dealers and others under Section 6 of this Agreement). You hereby
agree to comply with the provisions of Section 24 of Article III of the Rules of
Fair Practice of the NASD, and, if you are a foreign dealer and not a member of
the NASD, you also hereby agree to comply with the NASD's interpretation with
respect to free-riding and withholding and to comply, as though you were a
member of the NASD, with the provisions of Section 8
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<PAGE>
and 36 of Article III of such Rules of Fair Practice, and to comply with Section
25 of Article III thereof as that Section applies to a non-member foreign
dealer. In connection with sales and offers to sell Securities made by you
outside the United States, its territories and possessions (i) you will either
furnish to each person to whom any such sale or offer is made a copy of the then
current preliminary prospectus, together with any then current term sheet or
abbreviated term sheet, or the prospectus, as the case may be, or inform such
person that such preliminary prospectus and any such term sheet or abbreviated
term sheet or prospectus will be available upon request, and (ii) you will
furnish to each person to whom any such sale or offer is made such prospectus,
advertisement or other offering document containing information relating to the
Securities or the issuer as may be required under the law of the jurisdiction in
which such sale or offer is made. Any prospectus, term sheet, abbreviated term
sheet, advertisement or other offering document furnished by you to any person
in accordance with the preceding sentence and any such additional offering
material as you may furnish to any person (x) shall comply in all respects with
the law of the jurisdiction to which it is so furnished, (y) shall be furnished
at your sole risk and expense and (z) shall not contain information relating to
the Securities or the issuer or any Selling Securityholder which is inconsistent
in any respect with the information contained in the then current preliminary
prospectus or the prospectus, as the case may be.
Your Acceptance will confirm that the information that you have given or
are deemed to have given in response to the Master Underwriters' Questionnaire,
attached hereto as Exhibit A (which information will be furnished to the issuer
for use in and otherwise in connection with the registration statement, any
additional registration statement which may be filed with the Commission
pursuant to Rule 462(b) under the Securities Act, the prospectus, any term sheet
or any abbreviated term sheet) is correct. Your acceptance will also confirm
that you authorize us (i) to furnish the information that you have given or are
deemed to have given in response to the Master Underwriters' Questionnaire to
appropriate regulatory authorities and (ii) to make appropriate representations
based on such information to such regulatory authorities. You will notify us
promptly of any development which makes untrue or incomplete any information
that you have given or are deemed to have given in response to the Master
Underwriters' Questionnaire before such time as the terms of this Agreement
(other than as set forth in Section 16 hereof) cease to be applicable to an
Offering.
You agree that, if you are advised by the Representatives that the issuer
was not, immediately prior to the filing of the registration statement, subject
to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act, you
will not, without their consent, sell any Securities to an account over which
you exercise discretionary authority.
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<PAGE>
Unless you have promptly notified us in writing otherwise, your name as it
should appear in any prospectus (or any supplement thereto) and your address are
set forth on the signature page hereof.
Please confirm by signing and returning to us the enclosed copy of this
Agreement that your Acceptance or Final Acceptance, as the case may be, with
respect to an Offering shall constitute (a) your acceptance of and agreement to
the terms and conditions of this Agreement (as supplemented and amended pursuant
to Section 16 hereof), together with and subject to any supplementary terms and
conditions contained in the Invitation, the Final Communication and any other
written communication from the Representatives in connection with such Offering,
all of which shall constitute a binding agreement between you and us as
Representatives of the Underwriters and among you and the Underwriters, (b)
confirmation that your representations and warranties set forth in this
Agreement are true and correct as of the times or for the periods specified
therein and that your agreements set forth in this Agreement have been and will
be performed by you to the extent and at the times required thereby and (c)
acknowledgment of your familiarity with the offering documents, as set forth in
Section 3 hereof, with respect to such Offering.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
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<PAGE>
Please confirm that the foregoing correctly states the understanding
between us by signing and return to us a counterpart hereof.
Very truly yours,
FURMAN SELZ LLC
By: _______________________
Confirmed as of the date
first above written:
_________________________
(NAME OF UNDERWRITER)
By:______________________
Title:
(If signer is not an officer
or partner, please attach
evidence of authorization.)
Address: ___________________________
___________________________
___________________________
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<PAGE>
Exhibit A
MASTER UNDERWRITERS' QUESTIONNAIRE
----------------------------------
The terms used and not otherwise defined herein shall have the meanings
assigned thereto in the Master Agreement Among Underwriters, dated October 1,
1992, between you and Furman Selz LLC. Reference will be made to this Master
Underwriters' Questionnaire in each Invitation or Final Communication described
in Section 1 of the Master Agreement Among Underwriters received by you from
Furman Selz LLC in connection with offerings of securities in which Furman Selz
LLC is acting as sole or lead representative of the several Underwriters. Your
Acceptance of any such Invitation should respond to this Master Underwriters'
Questionnaire.
Except as indicated in your Acceptance with respect to the Securities:
(1) neither you nor any of your directors, officers or partners have
(nor have you or they had within the last three years) a material
relationship (as "material" is defined in Regulation C under the Securities
Act) with the issuer, its parent (if any), any other Selling Securityholder
or any guarantor, nor are you an affiliate of (within the meaning of the
By-laws of the NASD), controlled by, controlling or under common control
with the issuer;
(2) neither you nor any of your directors, officers or partners,
separately or as a group, owns of record or beneficially more than 5% of
any class of voting securities of the issuer, its parent (if any), any
other Selling Securityholder or any guarantor.
(3) if the Securities are to be issued under an indenture to be
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"):
(a) neither you nor any of your directors, officers or partners
is an affiliate (as "affiliate" is defined in Rule 0-2 under the Trust
Indenture Act) of the Trustee or its parent (if any) and neither the
Trustee nor its parent (if any) nor any of their directors or
executive officers is a "director, officer, partner, employee,
appointee or representative" of yours (as such terms are defined in
the Trust Indenture Act or in the relevant instructions to Form T-1
thereunder);
(b) neither you nor any of your directors, partners or executive
officers beneficially owned, as of the date specified in Item 7 on
Form T-1 or now own, separately or as a group more than 1% of the
<PAGE>
outstanding shares of any class of voting securities of the Trustee or
its parent (if any); and
(c) if you are a corporation, you do not have outstanding nor
have you assumed or guaranteed any securities issued otherwise than in
your present corporate name, and neither the Trustee nor its parent
(if any) is a holder of such securities;
(4) other than as is, or is to be, stated in the registration
statement, the Master Agreement Among Underwriters, the Underwriting
Agreement and the Furman Selz Selected Dealer Agreement relating to the
proposed offering, you do not know or have reason to believe that (a) there
are any discounts or commissions to be allowed or paid to underwriters or
any other items that would be deemed by the NASD to constitute underwriting
compensation for purposes of the NASD's Rules of Fair Practice, (b) there
are any discounts or commissions to be allowed or paid to dealers,
including any cash, securities, contracts or other consideration to be
received by any dealer in connection with the sale of the Securities, (c)
there is an intention to over-allot or (d) the price of any security may be
stabilized to facilitate the offering of the Securities.
(5) any proposed commitment you may make to purchase Securities will
not result in a violation of the financial responsibility requirements of
Section 15(c)(3) of the Exchange Act or the rules and regulations
thereunder, including Rule 15c3-1, or any provisions of the applicable
rules of the NASD or of any securities exchange to which you are subject or
of any restrictions imposed upon you by the NASD or any such exchange;
(6) neither you nor any related person (as defined by the NASD) has
(a) purchased any warrants, options or other securities of the issuer
within the preceding 12 months or (b) had any other dealings with the
issuer within the preceding 12 months as to which documents or other
information is required to be furnished to the NASD, and except as stated
in the registration statement relating to the Securities, as such may have
been or be amended, you have no knowledge of any private placement of the
issuer's Securities within the preceding 18 months; and
(7) you have not prepared nor had prepared for you any report or
memoranda for external use by you in connection with the proposed offering
of the Securities, and if the registration statement relating to the
Securities is on Form S-1, you have not prepared any engineering,
management or similar reports or memoranda relating to broad aspects of the
business, operations or products of the issuer within the past 12 months
(except for reports solely comprised of recommendations to buy, sell or
hold the securities of the
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<PAGE>
issuer which recommendations have not changed within the past six months).
(If any such report or memorandum has been prepared, furnish to Furman Selz
LLC (a) three copies thereof and (b) a statement as to the actual or
proposed use, identifying (i) each class of persons (institutional mailing
lists, retail clients, etc.) which has received or will receive such
material, (ii) the number of copies distributed to each such class and
(iii) the period of distribution.
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<PAGE>
AMENDMENT TO MASTER AGREEMENT AMONG UNDERWRITERS
Please be advised that effective as of March 4, 1997 the Furman Selz
Master Agreement Among Underwriters dated January 2, 1996 is hereby amended to
delete Section 13 in its entirety and to substitute the following in its place:
13. Open Market Transactions. You agree that you will not make bids or
offers, or make or induce purchases or sales for your own account or the
accounts of customers, in the open market or otherwise, either before or after
the purchase of the Securities and for either long or short account, of any
"covered security" (as defined below in this Section 13), except (i) as provided
in the applicable Final Communication, this Agreement, the Underwriting
Agreement and the Selected Dealer agreements or otherwise approved by the
Representatives, (ii) in brokerage transactions not involving solicitation of
the customer's order, (iii) in basket transactions permitted under Rule
101(b)(6) of Regulation M under the Securities Act and the Exchange Act, (iv) in
transactions consisting of the conversion, exchange or exercise of derivative
securities owned by you, and the sale of the securities obtained through such
conversion, exchange or exercise, (v) the delivery of securities owned by you
upon the exercise of any option written by you, and (vi) in passive market
making transactions permitted under Rule 103 of Regulation M. You further agree
that you will not lead any Securities, either before or after the purchase of
the Securities, to any customer, Underwriter, Selected Dealer or to any other
Securities broker or dealer. Prior to the completion (as defined in Regulation
M) of your participation in the Offering, you will otherwise comply with
Regulation M.
The term "covered security" means (a) the Securities and (b) any
security into which the Securities may be converted, exchanged, or exercised or
which, under the terms of the Securities, may in whole or significant part,
determine the value of the Securities.
<PAGE>
FURMAN SELZ LLC
230 Park Avenue
New York, New York 10169
Master Selected Dealer Agreement
January 2, 1996
Gentlemen:
In connection with certain public offerings of securities after the date
hereof for which we are acting as representative or one of the representatives
of the members of the underwriting syndicate, we may invite you to participate
as a selected dealer. This will confirm our mutual agreement as to the general
terms and conditions applicable to such participation.
1. Applicability of this Agreement. From time to time on or after the date
hereof we may be responsible (acting for our own account or for the account of
an underwriting or similar group or syndicate) for managing or otherwise
implementing the sale to selected dealers ("Selected Dealers") of securities
offered publicly pursuant to a registration statement filed under the Securities
Act of 1933, as amended (the "Securities Act"), or offered pursuant to an
exemption from registration thereunder. The terms and conditions of this
Agreement shall be applicable to any such offering in which we have invited you
to participate as a Selected Dealer and have expressly informed you that the
terms and conditions of this Agreement shall apply. This Agreement shall not
apply to any offering of securities effected wholly outside the United States of
America. Any offering to which the terms and conditions of this Agreement apply
is herein referred to as an "Offering", and the securities offered in an
Offering are herein referred to as the "Securities" with respect to such
Offering. In the case of any Offering in which we are acting for the account of
an underwriting or similar group or syndicate ("Underwriters"), the terms and
conditions of this Agreement shall be for the benefit of, and binding upon, such
Underwriters, including, in the case of any Offering in which we are acting with
others as representatives of Underwriters, such other representatives. Some or
all of the Underwriters in any Offering may be included among the Selected
Dealers.
The following provisions of this Agreement shall apply separately to each
Offering.
2. Conditions of Offering; Acceptance and Purchase. Any Offering will be
subject to delivery of the Securities and their acceptance by us and any other
Underwriters, will be subject to
<PAGE>
prior sale, to the approval of all legal matters by counsel and the satisfaction
of other conditions, and may be made on the basis of a reservation of Securities
or an allotment against subscription. We reserve the right to reject any
acceptance in whole or in part, to make allotments and to close the subscription
books at any time without notice. You agree to act as principal in purchasing
any Securities.
We shall invite you to participate in an Offering and in connection
therewith shall advise you of the particular method and supplementary terms and
conditions of the Offering (including the amount of Securities to be allotted to
you, the amount of Securities reserved for purchase by the Selected Dealers, the
period of such reservation and the information as to prices and offering date
referred to in Section 3(b) hereof). Such invitation and additional
information, to the extent applicable and then determined, shall be conveyed to
you in a telecopy, telex or other written form of communication (any
communication in any such form being herein referred to as a "written
communication"). Such written communication will include instructions for
advising us of your acceptance of such invitation. Any such additional
information, to the extent applicable but not determined at the time such
invitation is conveyed to you, will be conveyed to you in a subsequent written
communication. To the extent such supplementary terms and conditions are
inconsistent with any provision herein, such terms and conditions shall
supersede any such provision, and you, by your acceptance, shall be bound
thereby. If we have received your acceptance, a subsequent written
communication from us shall state that you may reject your allotment of
Securities by notifying us prior to the time and in the manner specified in such
written communication. Unless otherwise indicated in any such written
communication, acceptances and other communications by you with respect to an
Offering should be sent to Furman Selz LLC, 230 Park Avenue, New York, New York
10169, Attention: Syndicate Department.
Unless you are notified otherwise by us, Securities purchased by you shall
be paid for on such date as we shall determine on one day's prior notice to you,
by certified or official bank check or checks drawn on a New York Clearing House
bank and payable in next day funds, in an amount equal to the Offering Price (as
hereinafter defined) or, if we shall so advise you, at such Offering Price less
the Concession (as hereinafter defined), and payable to or upon the order of
Furman Selz LLC, 230 Park Avenue, New York, New York 10169, against delivery of
the Securities. If Securities are purchased and paid for at such Public
Offering Price, such Concession will be paid after the termination of the
provisions of Section 3(b) hereof with respect to such Securities.
Unless you are notified otherwise by us, payment for and delivery of
Securities purchased by you shall be made through the facilities of The
Depository Trust Company, if you are a member,
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<PAGE>
unless you have otherwise notified us within one day after the date the
Securities are first released for public offering or, if you are not a member,
settlement may be made through a correspondent who is a member pursuant to
instructions you may send to us on or before the third business day preceding
the closing for the sale of the Securities.
3. Offering Documents.
(a) Registration Statement and Prospectus. With respect to each Offering of
Securities, we shall provide you with such number of copies of any
prospectus subject to completion, the prospectus, any term sheet, any
abbreviated term sheet and any amendment or supplement to any of the
foregoing as you may reasonably request for the purposes contemplated by
the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the applicable rules and regulations of the Securities
and Exchange Commission (the "Commission") thereunder. You shall
familiarize yourself with the terms of the Securities and the other terms
of the Offering reflected in any such preliminary prospectus, prospectus,
term sheet, abbreviated term sheet, amendment or supplement. You agree
that in purchasing Securities in an Offering you will rely upon no
statements whatsoever, written or oral, other than the statements in the
prospectus and any term sheet or abbreviated term sheet delivered to you by
us. You understand that you will not be authorized by the issuer or any
seller other than the issuer, any guarantor or any insurer of Securities to
give any information or to make any representation not contained in a
preliminary prospectus, the prospectus or any term sheet or abbreviated
term sheet, as amended or supplemented, in connection with the Offering of
such Securities. You represent and warrant that you are familiar with
Securities Act Release No. 4968 and Rule 15c2-8 under the Exchange Act (or
any successor release or provision) and any applicable foreign laws (and
any applicable rules and regulations thereunder) and agree that you will
deliver all preliminary prospectuses, prospectuses, term sheets and
abbreviated term sheets required for compliance therewith. You agree to
make a record of your distribution of each preliminary prospectus,
prospectus, term sheet and abbreviated term sheet (including dates, numbers
of copies and persons to whom sent) and you shall, if requested by us,
furnish a copy of an amended or supplemented preliminary prospectus,
prospectus, term sheet or abbreviated term sheet to each person to whom you
have furnished a previous preliminary prospectus, prospectus, term sheet or
abbreviated term sheet and, if also requested by us, indicate to each such
person the changes reflected in such amended or supplemented preliminary
prospectus, prospectus, term sheet or abbreviated term sheet.
(b) Offer and Sale to the Public. With respect to any Offering of Securities,
we shall inform you by a written communication of the initial public
offering price, if any, the selling concession to Selected Dealers, the
reallowance (if any)
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<PAGE>
to other dealers and the time when you may commence selling Securities to
the public. After such public offering has commenced, we may change the
public offering price, the selling concession and the reallowance. The
public offering price, selling concession and reallowance (if any) at any
time in effect with respect to an Offering are hereinafter referred to,
respectively, as the "Offering Price," the "Concession" and the
"Reallowance." With respect to each Offering of Securities, until the
provisions of this Section 3(b) shall be terminated pursuant to Section 4
hereof, you agree to offer Securities to the public only at the Offering
Price, except that if a Reallowance is in effect, a reallowance from the
Offering Price not in excess of such Reallowance may be allowed. If such
Offering is subject to the By-Laws, rules and regulations of the National
Association of Securities Dealers, Inc. (the "NASD"), such Reallowance may
be allowed only as consideration for services rendered in distribution to
dealers which are actually engaged in the investment banking or securities
business, which execute the written agreement prescribed by Section 24(c)
of Article III of the Rules of Fair Practice of the NASD and which are
either members in good standing of the NASD or are foreign banks, dealers
or institutions not eligible for membership in the NASD who represent to
you that they will promptly reoffer such Securities at the Offering Price
and will abide by the conditions with respect to foreign banks, dealers and
institutions set forth in Section 3(d) hereof. Any dealer which is allowed
any Reallowance hereby agrees that such amount will be retained and not
reallowed in whole or in part. Upon our request, you will advise us of the
identity of any dealer to which you allowed a Reallowance and any
Underwriter or dealer from which you received a Reallowance.
(c) Over-allotment; Stabilization; Unsold Allotments. We may, with respect to
any Offering, be authorized (i) to over-allot in arranging for sales of
Securities to Selected Dealers and to institutions and other retail
purchasers and, if necessary, to purchase Securities or other securities of
the issuer at such prices as we may determine for the purpose of covering
such over-allotments and (ii) for the purpose of stabilizing the market in
the Securities, to make purchases and sales of Securities or of any other
securities of the issuer or any guarantor or insurer of the Securities as
we may advise you by written communication or otherwise, in the open market
or otherwise, for long or short account, on a when-issued basis or
otherwise, at such prices, in such amounts and in such manner as we may
determine. You agree that upon our request at any time and from time to
time prior to the termination of the provisions of Section 3(b) hereof with
respect to any Offering, you will report to us the amount of Securities
purchased by you pursuant to such Offering which then remain unsold by you
and will, upon our request at any such time, sell to us for our account or
the account of one or more Underwriters such amount of such unsold
Securities as we may designate at the Offering Price less an amount to be
determined by us not in excess of the Concession.
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If, prior to the later of (i) the termination of the provisions of Section
3(b) hereof with respect to any Offering or (ii) the covering by us of any
short position created by us in connection with such Offering for our
account or the account of one or more Underwriters, we purchase or contract
to purchase for our account or the account of one or more Underwriters in
the open market or otherwise any Securities purchased by you under this
Agreement as part of such Offering, you agree to pay us on demand an amount
equal to the Concession with respect to such Securities (unless you shall
have purchased such Securities pursuant to Section 2 hereof at the Offering
Price, in which case we shall not be obligated to pay such Concession to
you pursuant to Section 2) plus, in each case, transfer taxes, broker's
commissions or dealer's mark-ups, if any, and accrued interest,
amortization of original issue discount or accumulated dividends, if any,
paid in connection with such purchase or contract to purchase.
(d) NASD. The provisions of this Section 3(d) shall apply to any Offering
subject to the By-Laws, rules and regulations of the NASD.
You represent and warrant that you are a dealer actually engaged in the
investment banking or securities business and you are either a member in good
standing of the NASD or, if you are not such a member, you are a foreign bank,
dealer or institution not eligible for membership in the NASD which agrees to
make no sales within the United States of America, its territories or
possessions or to persons who are citizens thereof or residents therein (other
than through us) and to comply with all applicable rules of the NASD, including
the NASD's Interpretation with Respect to Free-Riding and Withholding, in making
sales outside the United States of America. You agree that, in connection with
any purchase or sale of any of the Securities wherein a selling concession,
discount or other allowance is received or granted, (i) you will comply with the
provisions of Section 24 of Article III of the NASD's Rules of Fair Practice and
(ii) if you are a non-NASD member broker or dealer in a foreign country, you
will also comply, (A) as though you were an NASD member, with the provisions of
Sections 8 and 36 thereof and (B) with Section 25 thereof as that Section
applies to a non-NASD member broker or dealer in a foreign country. You
represent that you are fully familiar with the above provisions of the Rules of
Fair Practice of the NASD.
You represent, by your participation in an Offering, that neither you nor
any of your directors, officers, partners or "persons associated with" you (as
defined in the By-Laws of the NASD) nor, to your knowledge, any "related person"
(as defined in the By-Laws of the NASD, which definition includes counsel,
financial consultants and advisors, finders, members of the selling or
distribution group, and any other persons associated with or related to any of
the foregoing) or any broker-dealer (i) within the last eighteen months has
purchased in private transactions, or intends before, at or within six months
after
-5-
<PAGE>
the commencement of the public offering of the Securities, to purchase in
private transactions, any securities (including warrants or options) of the
issuer, its parent (if any), any guarantor or insurer of the Securities or any
subsidiary of any of the foregoing or (ii) within the last twelve months had any
dealings with the issuer, any guarantor or insurer of the Securities, any seller
other than the foregoing or any subsidiary or controlling person of any of the
foregoing (other than in connection with the syndicate agreements relating to
such Offering) as to which documents or information are required to be filed
with the NASD pursuant to its Interpretation with Respect to Review of Corporate
Financing.
If we inform you that the NASD views the Offering as subject to Schedule E
to the By-Laws of the NASD, you agree that you shall, to the extent required,
offer the Securities in compliance with such Schedule and the NASD's
interpretation thereof.
If we inform you that the NASD views the Securities as interests in a
direct participation program, you agree that you shall, to the extent required,
offer the Securities in compliance with the NASD's interpretation of Appendix F
of its Rules of Fair Practice.
(e) Relationship among Underwriters and Selected Dealers. We shall have full
authority to take such action as we may deem advisable in respect of all
matters pertaining to an Offering. We may buy Securities from or sell
Securities to any Underwriter or Selected Dealer and, with our consent, the
Underwriters (if any) and the Selected Dealers may purchase Securities from
and sell Securities to each other at the Offering Price less all or any
part of the Concession. You are not authorized to act as agent for us or
any Underwriter or the issuer, any seller other than the issuer, or any
guarantor or insurer of any Securities in offering Securities to the public
or otherwise.
Neither we nor any Underwriter shall be under any obligation to you except
for obligations assumed hereby or in any written communication from us to you in
connection with an Offering. Furthermore, neither we nor any Underwriter shall
be under any liability for or in respect of the validity, value or delivery of,
or title to, any Securities or any securities issuable upon exercise, conversion
or exchange of any Securities; the form of, or the statements contained in, or
the validity of the registration statement, any preliminary prospectus, the
prospectus, any amendment or supplement to any of the foregoing or any materials
incorporated by reference in any of the foregoing or any letters or instruments
executed by or on behalf of the issuer, any seller other than the issuer, any
guarantor or insurer of the Securities or any other party; the form or validity
of any contract or agreement under which any Securities may be issued or which
governs the rights of holders of any Securities; the form or validity of any
agreement for the purchase of the Securities, any agreement among underwriters;
the
-6-
<PAGE>
performance by the issuer, any seller other than the issuer, any guarantor
or insurer of the Securities and any other parties of any agreement on its or
their parts; the qualification for sale in any jurisdiction of any Securities or
securities issuable upon exercise, conversion or exchange of any Securities or
the legality for investment of the Securities or such securities under the laws
of any jurisdiction; or any matter in connection with any of the foregoing;
provided, however, that nothing in this paragraph shall be deemed to relieve us
or any Underwriter from any liability imposed by the Securities Act.
Nothing herein contained or in any written communication from us shall
constitute the Selected Dealers an association or partners with us or any
Underwriter or with one another or, in the case of an Offering involving the
public distribution of the Securities through two or more underwriting
syndicates, with any underwriter or manager participating in any such syndicate.
If the Selected Dealers, among themselves or with the Underwriters and/or such
other underwriters or managers, should be deemed to constitute a partnership for
federal income tax purposes, then you elect to be excluded from the application
of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as
amended, and agree not to take any position inconsistent with that election.
You authorize us, in our discretion, to execute and file on your behalf such
evidence of that election as may be required by the Internal Revenue Service.
In connection with an Offering you shall be liable for your proportionate amount
of any tax, claim, demand or liability that may be asserted against you alone or
against one or more Selected Dealers participating in such Offering, or against
us or the Underwriters and/or such other underwriters or managers, if any, based
upon the claim that the Selected Dealers, or any of them, constitute an
association, an unincorporated business or other entity, including, in each
case, your proportionate share of any expense incurred in defending against any
such tax, claim, demand or liability.
(f) Legal Qualifications. It is understood that neither we nor any Underwriter
assumes any responsibility with respect to the right of any Selected Dealer
to offer or to sell Securities in any jurisdiction, notwithstanding any
"Blue Sky" memorandum or survey or any other information that we or any
other Underwriter may furnish as to the jurisdictions under the securities
laws of which it is believed the Securities may be sold. You authorize us
to file with the Department of State of the State of New York a Further
State Notice with respect to the Securities, if necessary.
If you propose to offer Securities outside the United States of America,
its territories or its possessions, you will take, at your own expense and risk,
such action, if any, as may be necessary to comply with the laws of each foreign
jurisdiction in which you propose to offer Securities.
-7-
<PAGE>
(g) Compliance with Law. You agree that in selling Securities pursuant to any
Offering (which agreement shall also be for the benefit of the issuer, any
seller other than the issuer and any guarantor or insurer of such
Securities) you will comply with the applicable provisions of the
Securities Act and the Exchange Act, the applicable rules and regulations
of the Commission thereunder, the applicable rules and regulations of the
NASD, the applicable rules and regulations of any securities exchange or
other self-regulatory organization having jurisdiction over the offering
and the applicable federal, state or foreign laws, rules and regulations
specified in Section 3 hereof.
You represent and agree that in connection with each Offering to which this
Agreement applies, you will comply with the provisions of Rule l0b-6 (or any
successor provision) under the Exchange Act, as amended or interpreted from time
to time by the Commission. You represent that you are fully familiar with the
provisions of said Rule.
4. Termination. This Agreement may be terminated by either party hereto upon
five business days' written notice to the other party; provided, however, that
with respect to any Offering, if we receive any such notice from you after you
have agreed to participate as a Selected Dealer in any Offering, this Agreement
shall remain in full force and effect as to such Offering and shall terminate
with respect to such Offering in accordance with the provisions of the following
paragraph.
Unless this Agreement or any provision hereof is earlier terminated by us,
and except as we may advise you in a written communication, the terms and
conditions of this Agreement will cease to be applicable to your participation
in an Offering at the close of business of the thirtieth day after the date the
Securities are first released for public offering, but in our discretion may be
extended by us by written communication for a further period or periods not
exceeding an aggregate of thirty days; provided, however, that the provisions of
this Agreement that contemplate obligations surviving the termination of its
effectiveness shall survive such termination with respect to any Offering.
5. Amendments. This Agreement may be amended or supplemented by us by written
notice to you and without need for further action on your part and, except for
amendments or supplements set forth in a written communication to you relating
solely to a particular Offering, any such amendment or supplement to this
Agreement shall be effective with respect to any Offering effected after this
Agreement is so amended or supplemented. Each reference herein to "this
Agreement" shall, as appropriate, be to this Master Selected Dealer Agreement as
so amended or supplemented.
-8-
<PAGE>
6. Successors and Assigns. This Agreement shall be binding on, and inure to
the benefit of, the parties hereto and the other persons specified in Sections 1
and 3 hereof, and the respective successors and assigns of each of them.
7. Applicable Law. This Agreement and the terms and conditions set forth
herein with respect to any Offering, together with such supplementary terms and
conditions with respect to such Offering as may be contained in any written
communication to you in connection therewith, shall be governed by and construed
in accordance with the laws of the State of New York.
8. Notices. Any notice from us to you shall be deemed to have been duly given
if conveyed to you by written communication or telephone at the address set
forth at the end of this Agreement, or at such other address as you shall have
advised us in writing. Any notice from you to us shall be deemed to have been
duly given if conveyed to us by written communication or telephone at 230 Park
Avenue, New York, New York 10169, Attention: Syndicate Department.
Please confirm, by signing and returning this Agreement to us, your
acceptance of and agreement to the terms and conditions of this Agreement (as
amended and supplemented from time to time pursuant to Section 5 hereof),
together with and subject to any supplementary or alternative terms and
conditions contained in any written communication from us in connection with any
offering, all of which shall constitute a binding agreement between you and us,
individually or as representative of any Underwriters. Your subscription to, or
your acceptance of any reservation of any Securities pursuant to an Offering
shall constitute (i) confirmation that your representations and warranties set
forth in this Agreement are true and correct as of the times or for the persons
specified herein, (ii) confirmation that your agreements set forth in this
Agreement have been and will be fully performed by you to the extent and at the
times
-9-
<PAGE>
required hereby and (iii) acknowledgment that you have requested and received
from us sufficient copies of each preliminary prospectus and the prospectus with
respect to such Offering in order to comply with your undertakings in Section
3(a) hereof.
Very truly yours,
FURMAN SELZ LLC
By: ___________________________
CONFIRMED as of the date
first above written:
_____________________________________________
By: _________________________________________
(If signer is not an officer or partner,
please attach evidence of authorization.)
Title: ______________________________________
Address: ____________________________________
____________________________________
____________________________________
____________________________________
-10-
<PAGE>
AMENDMENT TO MASTER SELECTED DEALER AGREEMENT
Please be advised that effective as of March 4, 1997 the Furman Selz
Master Selected Dealer Agreement dated January 2, 1996 is hereby amended to
delete the references in Section 3(g) to "Rule 10b-6" and "said Rule," and to
substitute "Regulation M" in their place.
<PAGE>
Exhibit 99.L
[LETTERHEAD OF PALMER & DODGE LLP APPEARS HERE]
Telephone: (617) 573-0100 Facsimile: (617) 227-4420
April 9, 1997
Medallion Financial Corp.
205 East 42nd Street
New York, NY 10017
Dear Sirs:
We are rendering this opinion in connection with the Registration Statement
on Form N-2 (the "Registration Statement") filed by Medallion Financial Corp.
(the "Company") with the Securities and Exchange Commission under the Securities
Act of 1933, as amended. The Registration Statement relates to up to 4,025,000
of shares of the Company's Common stock, $0.01 par value (the "Shares"). We
understand that the Shares are to be offered and sold in the manner described in
the Registration Statement.
We have acted as your counsel in connection with the preparation of the
Registration Statement. We are familiar with the proceedings of the Board of
Directors in connection with the authorization, issuance and sale of the Shares
(the "Resolutions"). We have examined such other documents as we consider
necessary to render this opinion.
Based upon the foregoing, we are of the opinion that the Shares have been
duly authorized and, when issued and delivered by the Company against payment
therefor at the price to be determined pursuant to the Resolutions, will be
validly issued, fully paid and non-assessable.
The foregoing opinion is limited to the General Corporation Law of the
State of Delaware, and we are expressing no opinion as to the effect of the laws
of any other jurisdiction. We have relied as to certain matters on information
obtained from public officials, officers of the Company and other sources
believed by us to be responsible.
We hereby consent to the filing of this opinion as a part of the
Registration Statement and to the reference to our firm under the caption
"Validity of the Shares" in the Prospectus filed as part thereof. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ Palmer & Dodge LLP
<PAGE>
EXHIBIT 99.N.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
registration statement on Form N-2 of our report dated February 19, 1997, on our
audit of the consolidated financial statements of Medallion Financial Corp., and
to all references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 8, 1997
<PAGE>
EXHIBIT 99.N.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
registration statement on Form N-2 of our report dated March 26, 1997, on our
audit of the financial statements of Edwards Capital Company, and to all
references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 8, 1997
<PAGE>
EXHIBIT 99.N.3
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
registration statement on Form N-2 of our report dated March 26, 1997,on our
audit of the financial statements of Transportation Capital Corp., and to all
references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 8, 1997
<PAGE>
EXHIBIT 99.N.4
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
registration statement on Form N-2 of our report dated March 26, 1997, on our
audit of the consolidated financial statements of Tri-Magna Corporation and
Subsidiaries, and to all references to our Firm included in this registration
statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 8, 1997
<PAGE>
EXHIBIT 99.N5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Medallion Financial Corp. on Form N-2 of our report dated October 24, 1995, on
our audit of the Statement of Operations of Transportation Capital Corp. (a New
York corporation), and the related statements of shareholders' equity and cash
flows for the year ended December 31, 1994, which report is included in the
Annual Report on Form 10K.
COOPERS & LYBRAND L.L.P.
New York, New York
April 8, 1997
<PAGE>
EXHIBIT 99.N.6
FRIEDMAN ALPREN & GREEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
registration statement on Form N-2 of our report dated January 28, 1995, on our
audit of the statement of income and the related statements of changes in
partners' capital and cash flows, of Edwards Capital Company for the year ended
December 31, 1994, and to all references to our Firm included in this
registration statement.
FRIEDMAN ALPREN & GREEN LLP
New York, New York
April 8, 1997
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> MAY-30-1996
<PERIOD-END> DEC-31-1996
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<DISTRIBUTIONS-OF-INCOME> 0
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<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5750000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 56485279
<ACCUMULATED-NII-PRIOR> 0
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<INTEREST-EXPENSE> 5008493
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<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
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</TABLE>
