<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27812
MEDALLION FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3291176
(State of Incorporation) (IRS Employer Identification No.)
437 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 328-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
The approximate aggregate market value of common equity held by
non-affiliates of the Registrant as of March 28, 2000 was approximately $236.8
million based on the average bid and ask prices of the Registrant's Common Stock
on the Nasdaq National Market as of the close of business on March 28, 2000.
There were 14,029,798 shares of the Registrant's Common Stock outstanding as of
March 28, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2000
Annual Meeting of Shareholders to be held on June 15, 2000, which Definitive
Proxy Statement will be filed with the Securities and Exchange Commission not
later than 120 days after the Registrant's fiscal year-end of December 31, 1999,
are incorporated by reference into Part III of this Form 10-K.
================================================================================
<PAGE>
MEDALLION FINANCIAL CORP.
1999 FORM 10-K ANNUAL REPORT
Table of Contents
<TABLE>
<S> <C> <C>
Page
PART I
Item 1. Business of the Company................................................................. 3
Item 2. Properties.............................................................................. 16
Item 3. Legal Proceedings....................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders..................................... 16
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters................ 19
Item 6. Selected Financial Data................................................................. 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 41
Item 8. Financial Statements and Supplementary Data............................................. 41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures... 42
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 42
Item 11. Executive Compensation.................................................................. 42
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 42
Item 13. Certain Relationships and Related Transactions.......................................... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 42
Important Factors Relating to Forward-looking Statements............................................ 43
Signatures ........................................................................................ 44
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS OF THE COMPANY
General
Medallion Financial Corp. ("Medallion Financial") acquired on May 29,
1996 the specialty finance businesses conducted by Tri-Magna Corporation
("Tri-Magna"), Edwards Capital Company (collectively with its successor, Edwards
Capital Corp., "Edwards") and Transportation Capital Corp. ("TCC" and,
collectively with Tri- Magna and Edwards, the "Founding Companies") as well as
the taxicab rooftop advertising business conducted by Tri-Magna. Tri-Magna had
conducted its specialty finance and taxicab rooftop advertising businesses
through its wholly owned subsidiaries, Medallion Funding Corp. ("MFC") and
Medallion Taxi Media, Inc. ("Media"), respectively, and references herein to
Tri-Magna include such subsidiaries unless the context indicates otherwise. On
June 1, 1999, Edwards and TCC were merged into MFC. Prior to the closing of the
acquisitions of the Founding Companies (the "Acquisitions"), Medallion Financial
had no operations. On October 31, 1997, Medallion Financial's subsidiary,
Business Lenders LLC ("BLL"), acquired certain assets and assumed certain
liabilities of Business Lenders, Inc. ("Business Lenders"). BLL operates as a
specialty finance company and is a Small Business Administration ("SBA") Section
7(a) program lender focusing on long-term loans to active businesses secured by
real estate. On June 16, 1998, the Company completed the merger with Capital
Dimensions, Inc. ("CDI") a Specialized Small Business Investment Company
("SSBIC") lender, headquartered in Minneapolis, Minnesota. CDI was subsequently
renamed Medallion Capital, Inc. ("Medallion Capital"). The charter was amended
to convert Medallion Capital to a Small Business Investment Company ("SBIC").
The transaction was accounted for as a tax-free reorganization under Section 368
of the Internal Revenue Code of 1986, as amended, and was treated under the
pooling-of-interests method of accounting. Medallion Business Credit LLC ("MBC")
was formed on August 6, 1998 and is a wholly owned subsidiary of Medallion
Financial. MBC originates loans to small businesses for the principle purpose of
financing inventory and receivables. Medallion Financial is a business
development company under the Investment Company Act of 1940, as amended (the
"1940 Act").
--------------------
Unless the context indicates otherwise, all references herein to the
"Company" include Medallion Financial Corp. and its subsidiaries collectively
and references herein to "Medallion Financial" refer to Medallion Financial
Corp. alone.
--------------------
The Company operates a specialty finance business and its principal
focus is the origination and servicing of commercial secured loans. As an
adjunct to its finance business, the Company also operates a taxicab rooftop
advertising business. The Company has been engaged in taxicab medallion lending,
which finances the purchase of taxicab medallions and related assets ("Medallion
Loans") since 1979 and has developed a leading position in the industry. The
Company also originates and services commercial installment loans, financing
small businesses in targeted industries outside of the taxicab industry
("Commercial Installment Loans"). The Company intends to use the expertise it
has developed in its areas of concentration to further expand the range of
commercial loan products it offers as well as the industries and geographic
areas it services. Through its subsidiary BLL, the Company is licensed by the
U.S. Small Business Administration (the "SBA") to operate in the Section 7(a)
loan program and lends to active businesses secured by assets and or real estate
also referred to as Commercial Installment Loans.
At December 31, 1999, the Company had approximately 6,400 installed
taxicab rooftop advertising displays ("Displays"). The Company sells advertising
space to advertising agencies and directly to companies promoting products.
Currently, the Company provides such advertising in New York City and several
metropolitan areas across the U.S.
Medallion Financial is a closed-end, non-diversified management
investment company under the 1940 Act. The investment objectives of the Company
are to provide a high level of distributable income, consistent with
preservation of capital, as well as long-term growth of net asset value. The
Company is managed by its executive officers under the supervision of its Board
of Directors and has retained FMC Advisers, Inc. ("FMC") as an investment
adviser. The principals of FMC had served as directors and executive officers of
Tri-Magna and MFC since inception of these businesses until their acquisition by
the Company. The Company has elected to be treated as a business development
company under the 1940 Act. In addition, it has elected to be treated for tax
purposes as a regulated investment company ("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 may elect to reinvest distributions. Medallion Financial's
specialty finance subsidiaries, MFC and Medallion Capital are RICs and are
single member limited liability companies that are treated as branches of
Medallion Financial and therefore, for tax
3
<PAGE>
purposes, receive the benefits of RIC status, (collectively the "RIC
Subsidiaries"), and distribute at least 90% of their respective investment
company taxable income to Medallion Financial.
The following chart illustrates the organizational structure of the Company:
Medallion Financial Corp.
("Medallion Financial")
.RIC
.BDC
<TABLE>
<S> <C> <C> <C> <C>
Medallion Funding Business Medallion Taxi Medallion Medallion
Corp. Lenders LLC Media, Inc. Capital, Inc. Business Credit LLC
("MFC") ("BLL") ("Media") ("Medallion ("MBC")
RIC 7 (a) Lender Taxicab Capital")
SBIC advertising RIC
business SBIC
C Corporation
</TABLE>
- -----------------------------
BDC Business Development Company under the 1940 Act.
RIC Regulated Investment Company under the Code.
SBIC Small Business Investment Company licensed by the SBA.
7(a) Lender Participating lender under the SBA's Section 7(a) loan program.
Medallion Funding Corp. and Medallion Taxi Media Inc.
Prior to their acquisition by the Company, MFC and Media were wholly
owned subsidiaries of Tri-Magna which merged into the Company in connection with
the closing of Medallion Financial's acquisition of MFC and Media. Tri-Magna was
a closed-end, management investment company registered under the 1940 Act.
Management of the Company had operated Tri-Magna and its subsidiaries since they
were organized. MFC was incorporated in 1979 and is a closed-end, management
investment company registered under the 1940 Act. Before the termination of the
SBA's SSBIC program in September 1996, MFC was the largest SSBIC in the nation.
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").
Medallion Funding Corp.
Operating primarily in New York City, MFC is a well established taxi
medallion lender and has diversified its operations by developing a department
that originates Commercial Installment Loans. As an SSBIC, MFC was restricted to
financing small business concerns owned and managed by persons deemed to be
socially or economically disadvantaged ("Disadvantaged Borrowers"). As an SBIC,
MFC is permitted to lend to any small business meeting the size and eligibility
requirements established by the SBA, subject to certain restrictions contained
in the MFC Conversion Agreement. Accordingly, MFC now has a significantly larger
borrower base and performs its credit analyses based solely on economic
criteria. MFC is not subject to SBA restrictions on the amount of third-party
indebtedness it may incur.
On June 1, 1999, Edwards and TCC were merged with MFC with the SBA's
approval. The merger was treated similar to the pooling-of-interests method of
accounting which had no effect on the Company's consolidated financial
statements.
Edwards was 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's subsidiary, Edwards,
acquired substantially all of its assets and assumed substantially all of its
liabilities on May 29, 1996.
TCC was 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. Like MFC, TCC was licensed as an SSBIC before the modification of
the SSBIC program and is now licensed as an SBIC under the terms of an agreement
with the SBA entered into in February 1997 (the "TCC Conversion Agreement).
4
<PAGE>
Medallion Taxi Media, Inc.
Media, which was incorporated in 1994, provides taxicab rooftop
advertising and is pursuing a plan to become a national provider of such
advertising. Media currently provides such advertising in New York City, Boston,
New Orleans, Philadelphia, San Diego, Washington, Baltimore, Dallas and Atlanta
and intends to both expand within its existing markets and enter other major
metropolitan markets. In furtherance of its expansion efforts, Media acquired
450 additional installed Displays in New York City in connection with the
acquisition of the assets of See-Level Advertising, Inc. and See-Level
Management, Inc. on July 25, 1996. In addition, on March 6, 1997, Media entered
into an agreement with The Metropolitan Taxi Board of Trade, Inc. (the "MTBOT")
to provide advertising on over 1,700 New York City taxicabs owned by members of
the MTBOT commencing on September 22, 1997. On September 1, 1998, Media acquired
the assets of Taxi Ads, LLC adding 855 installed displays in New Orleans,
Philadelphia and San Diego. On February 2, 1999, Media purchased all of the
common stock of Transit Advertising Displays, Inc. which operated installed
displays in the Baltimore and Washington, D.C. areas. At December 31, 1999,
Media had approximately 6,400 displays installed nationwide.
Business Lenders LLC
On October 31, 1997, BLL purchased the assets and assumed certain
liabilities of Business Lenders. BLL is a Delaware limited liability company and
is licensed by the State of Connecticut Department of Banking as a business and
industrial development corporation and is also licensed by the SBA as a
participating lender in the SBA's Section 7(a) loan program. As a Section 7(a)
lender, the Company is eligible to make loans guaranteed by the SBA to small
businesses meeting certain size and other eligibility requirements of the SBA.
BLL makes secured loans to small businesses in principal amounts ranging from
$10,000 to $2,700,000 with terms of up to 25 years. These loans are made both on
a guaranteed basis under the SBA's Section 7(a) loan program (with guarantees
ranging from 68.2% to 80%) and on an unguaranteed basis independent of the
Section 7(a) program by participating with Medallion Financial.
In connection with the 1996 Acquisitions, the Company received the
Acquisition Orders under the 1940 Act from the Securities and Exchange
Commission. The Company obtained approval from the Connecticut State Department
of Banking and the SBA in the BLL Acquisition.
Medallion Business Credit LLC
MBC is a Delaware limited liability company and a wholly owned
subsidiary of the Company. MBC originates loans to small businesses for the
principle purpose of financing inventory and receivables through credit
facilities ranging from $250,000 to $3,500,000. MBC commenced business in
September 1998.
Medallion Capital, Inc.
On June 16, 1998, the Company completed the acquisition of Capital
Dimensions, Inc. ("CDI") an SSBIC lender, headquartered in Minneapolis,
Minnesota. CDI was subsequently renamed Medallion Capital, Inc. ("Medallion
Capital"). The charter was amended to convert Medallion Capital to an SBIC. The
Company issued 1,112,677 shares of its common stock for the outstanding shares
of CDI common stock by exchanging 0.59615 shares of its common stock for each
outstanding share of CDI common stock. The transaction was accounted for as a
tax-free reorganization under Section 368 of the Internal Revenue Code of 1986,
as amended, and was treated under the pooling-of-interests method of accounting.
Under this method, the consolidated financial statements have been restated to
retroactively combine Medallion Capital's financial statements as if the merger
had occurred at the beginning of the earliest period presented.
5
<PAGE>
GROSS INVESTMENT PORTFOLIO SUMMARY DATA
The following table classifies the Company's gross loans including net
origination costs and equity investments at cost and contractual weighted
average interest rates of the balance outstanding as of December 31, 1999 and
1998:
All Medallion Loans
<TABLE>
<CAPTION>
Contractual
Weighted
December 31, 1999 Number Average Balance
Type of Loans of Loans Interest Rate Outstanding
- -------------- -------- ------------- -----------
<S> <C> <C> <C>
New York City Medallion Loans........... 1,481 8.45% $252,853,688
Other Medallion Loans................... 970 11.17 50,239,595
--- ----- ----------
All Medallion Loans.................... 2,451 8.90% 303,093,283
Dry cleaners and laundromats............ 507 12.93% 25,984,507
7(a) Loans.............................. 626 11.04% 58,761,959
Other................................... 277 11.33% 85,457,982
--- ------ ----------
Total Loans............................. 3,861 11.71% $473,297,731
Equities................................ 11 - 3,110,751
--- ------ ---------
Total Investments at cost............... 3,872 9.91% $476,408,482
===== ====== ============
<CAPTION>
Contractual
Weighted
December 31, 1998 Number Average Balance
Type of Loans of Loans Interest Rate Outstanding
- -------------- -------- ------------- -----------
<S> <C> <C> <C>
New York City Medallion Loans........... 1,762 8.68% $234,989,904
Other Medallion Loans................... 751 11.71 31,071,904
--- ----- ----------
All Medallion Loans.................... 2,513 9.03 266,061,808
Dry cleaners and laundromats............ 654 13.25 34,327,668
7(a) Loans.............................. 356 10.65 21,398,308
Other................................... 218 10.66 52,544,710
--- ----- ----------
Total Loans............................. 3,741 12.13% 374,332,494
Equities................................ 12 - 6,797,761
-- - ---------
Total Investments at cost............... 3,753 9.93% $381,130,255
===== ===== ============
</TABLE>
MEDALLION LENDING
Industry Overview
The New York City Market. A New York City taxicab medallion represents
the only permitted license to operate a taxicab and accept street hails in New
York City. As reported by the Taxi and Limousine Commission ("TLC"), individual
(owner-driver) medallions sold for approximately $218,000 and corporate
medallions sold for approximately $266,000 at December 31, 1999. The number of
taxicab medallions is limited by law and until recently no new medallions had
been issued since 1937. However, in January 1996, the New York City Council
passed a law authorizing the city to sell up to 400 additional taxicab
medallions. The first 133 of such medallions were sold in May 1996, an
additional 133 were sold in October 1996, and the balance were sold in October
1997. The Company believes that the auctions have provided it with additional
opportunities because it has financed the purchase of a large number of the
medallions sold at auction. As a result of the limited supply of medallions, an
active market for medallions has developed. The Company estimates that the total
value of all New York City medallions exceeds $3.0 billion. The law limiting the
number of medallions also stipulates that the ownership for the 12,053
medallions outstanding at December 31, 1999 shall remain divided into 5,086
owner-driver or individual medallions and 6,967 fleet or corporate medallions.
Corporate medallions are more valuable because they can be aggregated by
businesses and leased to drivers and operated for more than one shift.
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 letter 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.
6
<PAGE>
The Boston and Cambridge Markets. The Company estimates that Boston
medallions currently sell for approximately $165,000. 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, including 40 additional medallions which are restricted to
"wheelchair accessible" taxicabs. In January, 1999, 75 additional medallions
were auctioned and put into service. An additional 57 medallions are to be
auctioned in June 2000. The Company estimates that the total value of all Boston
medallions and related assets is over $270 million. In addition, the Company
estimates Cambridge medallions currently sell for approximately $140,000. 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 over $34 million.
The Chicago Market. Based on the Company's experience, Chicago
medallions currently sell for approximately $67,500. Pursuant to a municipal
ordinance, the number of outstanding medallions, is currently capped at 5,850
which includes an additional 150 medallions that were auctioned and placed into
service in July, 1999. The Company estimates that the total value of all Chicago
medallions and related assets is over $380 million.
Market Position
The Company has originated and serviced Medallion Loans since 1979 and
has established a leading position in the industry. The Company's management has
a long history of owning, managing and financing taxicab fleets, taxicab
medallions and corporate car services. Medallion Loans collateralized by New
York City taxicab medallions and related assets comprised 83.2% of the value of
the Company's Medallion Loan portfolio at December 31, 1999. The balance
consisted of Medallion Loans collateralized by Boston, Chicago, Cambridge,
Newark, Baltimore and Hartford taxicab medallions. The Company believes that
there are significant growth opportunities in these and other metropolitan
markets nationwide.
Most New York City medallion transfers are handled through approximately
32 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.
Portfolio Characteristics
Medallion Loans generally require equal monthly payments covering
accrued interest and amortization of principal over a ten to fifteen year
schedule subject to a balloon payment of all outstanding principal after four or
five years. More recently, the Company has begun to originate loans with one to
four year interest rate maturities. Borrowers may prepay Medallion Loans upon
payment of a fee ranging from 30 to 90 days' interest. The Company generally
retains the Medallion Loans it originates. The Company believes that likelihood
of prepayment is 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, 1999, substantially all of the
Company's Medallion Loans were secured by first security interests in taxicab
medallions and related assets. The Company originates Medallion Loans at an
approximate average loan-to-value ratio of 75%. The Company has recourse against
the direct and indirect owners of the medallion through personal guarantees.
Although personal guarantees increase the commitment of borrowers to repay their
loans, there can be no assurance that the assets available under personal
guarantees would, if required, be sufficient to satisfy the obligations secured
by such guarantees.
The Company believes that its Medallion Loan portfolio is of high credit
quality because medallions have generally increased in value and are easy to
repossess and resell in an active market. In the event of defaults by borrowers,
the medallions collateralizing such loans have been seized and, when such loans
have not been brought current, readily sold in the active market for medallions
at prices at or in excess of the amounts due.
COMMERCIAL INSTALLMENT LOANS
Overview
MFC began Commercial Installment Loan operations in 1987 to diversify
its loan portfolio which, prior to that time, consisted almost entirely of
Medallion Loans. MFC chose to concentrate these operations on originating loans
secured by retail dry cleaning and coin operated laundromat equipment because of
certain characteristics similar to medallion lending that make
7
<PAGE>
these industries attractive candidates for profitable lending. These factors
include (i) a relatively high fixed rates of interest ranging from approximately
250 to 600 basis points over the prevailing prime rate of interest charged by
major commercial banks (the "Prime Rate") at the time of origination, (ii) low
historical repossession rates, (iii) vendor recourse, (iv) significant equity
investments by borrowers, (v) an active market for repossessed equipment, (vi) a
small average loan size of approximately $60,000 and (vii) collateral service
life that is frequently twice as long as the term of the loans. After achieving
success in the dry cleaning and laundromat sectors, the Company expanded its
customer base to other industries including: food service, real estate and radio
broadcast licenses. With the acquisition of Medallion Capital, the Company
expanded its geographic reach. Further, Medallion Capital often accepts warrants
as partial consideration in its lending transactions enabling the Company to
share in future growth of its borrowers.
BLL lends primarily to businesses secured by assets and or real estate
throughout the New England and the New York area under the SBA's Section 7(a)
loan program. BLL's loans are typically secured by assets or real estate, have
floating interest rates tied to a spread over the prime rate and are guaranteed
by the SBA, up to a maximum guarantee of $800,000. Additionally, a liquid market
exists for the sale of the guaranteed portion of these loans. The Company
regularly sells the guaranteed portion of its 7(a) loans in the secondary market
and recognizes a gain on these sales which is accounted for in accordance with
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." The
Company believes that the floating rate nature of these loans is beneficial for
its interest rate exposure management.
MBC is an asset based lender servicing small businesses that require
credit facilities ranging from $250,000 to $3,500,000. The Company believes that
this market is underserved and MBC had sucessfully established 35 credit lines
at December 31, 1999. Security on these facilities is principally the borrower's
accounts receivable but may also include inventory, machinery or equipment.
Currently, MBC's customer base is concentrated in the New York metropolitan area
and includes manufacturers, distributors and service organizations. MBC's earns
3% per annum over prime on its facilities.
The Company believes that other niche industries with similar
characteristics will provide additional loan portfolio growth opportunities.
Building on the success of MFC's Commercial Installment Loan operations, the
Company has continued to expand its lending activities in this area through BLL,
Medallion Capital, MBC and Medallion Financial itself.
Portfolio Characteristics
Commercial Installment 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 approximately
$3,500,000. These loans are generally retained by the Company and typically have
maturities ranging from one to ten years and require equal monthly payments
covering accrued interest and amortization of principal over a four to five year
term and generally can be prepaid with a fee ranging from 30 to 120 days'
interest. The term of, and interest rate charged on, the Company's outstanding
loans are subject to SBA Regulations. Under SBA Regulations, the maximum rate of
interest permitted on loans originated by the Company is 19.0%. Unlike Medallion
Loans, for which competition precludes the Company from charging the maximum
rate of interest permitted under SBA Regulations, the Company is able to charge
the maximum rate on certain Commercial Installment Loans and anticipates that
Medallion Financial will be able to continue to charge in excess of the maximum
rate since Medallion Financial is not subject to regulation by the SBA. The
Company believes that the increased yield on Commercial Installment Loans
compensates for their higher risk relative to Medallion Loans and further
illustrates the benefits of diversification.
The Company generally originates Commercial Installment Loans at an
approximate average loan to value ratio of 70-75%. Substantially all of the
Company's Commercial Installment Loans are collateralized by security interests
in the assets being financed by the borrower. In addition, the Company requires
the principals of borrowers to personally guarantee loans. Furthermore,
equipment vendors may provide full and partial recourse guarantees on loans.
MARKETING, ORIGINATION AND LOAN APPROVAL PROCESS
The Company and its subsidiaries employ 46 loan originators that
originate Medallion Loans and Commercial Installment Loans. The Company's loan
officers regularly receive referrals from medallion brokers and make use of an
extensive referral network in the retail dry cleaning and coin operated
laundromat industry. Equipment vendors are an 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
8
<PAGE>
inspection of the premises and TLC approval, if applicable. The Company also
requires each applicant to provide personal and corporate tax returns and
premises leases or property deeds. The Company's senior management establishes
loan origination criteria. Loans that conform to such criteria may be processed
by a loan officer with the proper credit authority and non-conforming loans must
be approved by the Chief Executive Officer or the Chief Credit Officer.
GROSS LOANS RECEIVABLE
The following table sets forth the Company's gross loans receivable,
including net origination costs and the percentage of total gross portfolio,
separated by entity:
<TABLE>
<CAPTION>
December 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Receivable
MBC................. $9,088 2% $29,540 6%
BLL................. $14,019 4% 21,398 6% 58,762 13%
Medallion
Financial.......... $14,640 8% 48,560 16% 63,394 17% 60,851 13%
MFC (a)............. $150,552 90% 161,900 83% 228,759 74% 258,965 69% 299,625 63%
Medallion Capital... 15,331 10% 18,236 9% 17,070 6% 21,487 6% 24,520 5%
------ -- ------ -- ------ -- ------ -- ------- --
Total................ $165,883 100% $194,776 100% $308,408 100% $374,332 100% $473,298 100%
======== ==== ======== ==== ======== ==== ======== === ======== ====
</TABLE>
(a) These amounts represent the combined balances for MFC, Edwards and
TCC as the entities were merged as of June 1, 1999.
INVESTMENT ACTIVITY
The following table sets forth a rollforward of the Company's investment
portfolio for the periods indicated (a):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Investments originated $ 244,485 $ 298,211
Loan repayments (193,003) (224,708)
Increase in unrealized appreciation (depreciation) 2,676 (11,910)
Realized gains, net 1,291 22,746
Amortization of origination costs (1,353) (971)
Acquisition of VGI, VGII and VOC 16,745 -
---------- ----------
Increase in Investments-net $ 70,841 $ 83,368
Investments-net (beginning of period) $ 313,254 $ 384,095
Investments-net (end of period) $ 384,095 $ 467,463
</TABLE>
- -------------------
(a) This schedule was revised from the 1998 filing to reflect changes in the
entire portfolio rather than just the loan portfolio. The 1998 numbers have
been revised to reflect the new presentation.
DELINQUENCY AND LOAN LOSS EXPERIENCE
The Company generally follows a practice of discontinuing the accrual of
interest income on Commercial Installment Loans which are in arrears as to
interest payments for a period in excess of 90 days. The Company delivers a
default notice and begins foreclosure and liquidation proceedings when
management determines that pursuit of these remedies is the most appropriate
course of action in the circumstances.
At December 31, 1999, the Company had an aggregate principal balance of
$34.8 million, or 7.3% of the portfolio, which were delinquent for 90 days or
more, compared to an aggregate principal balance of $14.5 million or 3.8% of the
portfolio, which were delinquent for 90 days or more at December 31, 1998. The
Company considers a loan to be delinquent if the borrower fails to make payments
for 90 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.
9
<PAGE>
The following table sets forth the Company's unrealized depreciation of
investments and the loan loss experience on a combined basis:
<TABLE>
<CAPTION>
Investments
Loans Equities Total
<S> <C> <C> <C>
Balance, December 31, 1997 $(2,643,660) $ 3,132,654 $ 488,994
Increase in unrealized:
Appreciation on investments 409,943 3,305,966 3,715,909
Depreciation on investments (540,000) (458,489) (998,489)
Unrealized depreciation of acquired subsidiary (200,000) - (200,000)
Realized:
Gains on investments - (1,167,363) (1,167,363)
Losses on investments 1,125,866 1,125,866
----------- ----------- -----------
-
Balance, December 31, 1998 $(1,847,851) $ 4,812,768 $ 2,964,917
Increase in unrealized:
Appreciation on investments - 12,818,814 12,818,814
Depreciation on investments (6,708,586) (208,853) (6,917,439)
Realized:
Gains on investments (18,197,295) (18,197,295)
Losses on investments 385,451 385,451
------------ ----------- -----------
-
Balance, December 31, 1999 $(8,170,986) $ (774,566) $(8,945,552)
</TABLE>
CUSTODIAL SERVICES
Fleet Bank N.A. acts as the custodian of all of the Company's portfolio
assets, except that BLL's portfolio assets are held by Colsen Services, Inc.
TAXICAB ROOFTOP ADVERTISING
Media provides taxicab rooftop advertising, which is a relatively
undeveloped segment of the out-of-home advertising industry. Out-of-home
advertising includes (i) traditional outdoor advertising, such as billboards and
posters, (ii) transit advertising, such as taxicabs, buses, bus shelters,
subway, commuter train and airport advertising and (iii) in-store point of sale
advertising. The Company entered this business in November 1994 with the
organization of Media and since that time the business has grown rapidly.
Generally, the Company enters into agreements with taxicab associations, fleets
or individuals to lease taxicab rooftop space for five-year terms. In July 1996,
the Company acquired See-Level Advertising, Inc., a taxicab rooftop advertising
firm with 450 Displays in New York City. Additionally, under an agreement with
MTBOT, the Company has added an additional 1,700 Displays to the number under
contract in New York City. On September 1, 1998, the company acquired the assets
of Taxi Ads, LLC which had 850 displays in service in New Orleans, Philadelphia
and San Diego. On February 2, 1999, Media purchased all of the common stock of
Transit Advertising Displays, Inc. which operated installed displays in the
Baltimore and Washington, D.C. areas. On September 30, 1999, Media entered into
an agreement with Yellow Cab Service Corp. to sell advertising space on a
commision basis on its 3,000 taxicab trunk signs located throughout the
Southeast.
The Company currently provides taxicab rooftop advertising in New York
City, Boston, Philadelphia, Los Angeles, New Orleans, San Diego, Washington
D.C., Baltimore, Dallas and Atlanta 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
additional major U.S. metropolitan markets. On December 31, 1999, the Company
had approximately 6,400 installed Displays.
The Company attaches each Display to the rooftop of a taxicab 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
10
<PAGE>
designed to be proportionally similar to "bulletins" or "billboards" to permit
advertisers to conveniently translate billboard copy to Display copy.
The Company markets the Displays to advertising agencies,and outdoor
advertising buying agencies.. Advertising contracts generally vary from 30 days
to one year and provide for monthly payments by the advertiser. The following is
a sample of the Media's advertising accounts in 1999: Armani Exchange, Versace;
Fleet Bank N.A.; Continental Airlines; M&M Mars, Kellogg's, Old Navy, Banana
Republic, Disney's The Lion King on Broadway; Hot Jobs.com, Alta Vista, Hard
Rock Cafe, California Pizza Kitchen, Fox Family Channel, Sony, Fossil and Kate
Spade.
Under the Master Settlement Agreement between tobacco manufacturers and
the attorneys general of various states (including those states in which the
Company conducts its outdoor advertising business), the tobacco manufacturers
agreed to eliminate general outdoor and transit advertising of tobacco products
by March 31, 1999. Since this agreement went into effect, the Company has
replaced a portion of the contracts for tobacco advertising that were cancelled
due to this regulation and does not believe that it will have a significant or
material impact on its financial position or results of operations.
SOURCES OF FUNDS
Overview
The Company funds its operations primarily through credit facilities
with bank syndicates and secured commercial paper and, to a lesser degree,
through fixed rate, senior secured notes and long-term subordinated debentures
issued to or guaranteed by the SBA. The determination of funding sources is
established by the Company's management, based upon an analysis of the
respective financial and other costs and burdens associated with funding
sources. In addition, SBA financing subjects its recipients to limits on the
amount of secured bank debt they may incur. Accordingly, the Company plans to
limit its use of SBA funding and will seek such funding only when advantageous.
At December 31, 1999 the Company's $339.9 million of outstanding debt was
comprised as follows: 56.1% of bank debt and 27.6% of secured commercial paper,
substantially all of which was at variable effective rates of interest averaging
below the Prime Rate, 13.2% of long-term senior secured notes fixed at an
interest rate of 7.2% and 3.1% of subordinated SBA debentures, with fixed rates
of interest with a weighted average rate of 7.08% on the outstanding balance at
December 31, 1999. An additional $35.5 million of debt was available at December
31, 1999 at variable effective rates of interest averaging below the Prime Rate
under the Company's $320.0 million in bank credit facilities.
The Company funds its fixed rate loans with variable rate bank debt and
fixed rate senior secured notes and SBA debentures. The mismatch between
maturities and interest-rate sensitivities of these balance sheet items results
in interest rate risk. The Company seeks to manage its exposure to increases in
market rates of interest to an acceptable level by (i) purchasing interest rate
caps to hedge a portion of its variable rate debt against increases in interest
rates, (ii) incurring fixed-rate debt and (iii) originating adjustable rate
loans. Nevertheless, the Company accepts varying degrees of interest rate risk
depending on market conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management."
Medallion Financial
Medallion Financial intends to rely on its bank credit facilities to
fund its operations. Medallion Financial has a credit facility with a bank
syndicate consisting of a $100.0 million revolving line of credit. Amounts
outstanding under the revolving line of credit bear interest at the agent bank's
prime rate or, at Medallion Financial's option, a rate based on LIBOR. At
December 31, 1999, the average interest rate was 7.44%, which was 106 basis
points below the Prime Rate and 144 basis points above the 90-day LIBOR as of
such date. The revolving line of credit is secured by all of Medallion
Financial's assets and matures on June 28, 2000. As of December 31, 1999, there
was an outstanding balance of $91.2 million under the revolving line of credit.
MFC
MFC intends to rely on its bank credit facilities rather than on SBA
financing to fund its operations. MFC has a credit facility with a bank
syndicate consisting of a $220 million revolving line of credit. Amounts
outstanding under the revolving line of credit bear interest at the agent bank's
prime rate or, at MFC's option, a rate based on LIBOR. At December 31, 1999, the
average interest rate was 7.2%, which was 130 basis points below the Prime Rate
and 120 basis points above the 90-day LIBOR as of such date. The revolving line
of credit is secured by all of MFC's assets and matures on June 30, 2001. As of
December 31, 1999, there was an outstanding balance of $99.3 million under the
revolving line of credit.
11
<PAGE>
On March 13, 1998, MFC established a commercial paper program as an
additional source of liquidity. In connection with such program, MFC obtained
two investment grade ratings for its short term borrowings. MFC began issuing
commercial paper on March 16, 1998 and at December 31, 1999 had $94.0 million
outstanding at an average interest rate of 6.60%. The commercial paper program
is secured pari passu with the revolving credit facility.
On June 1, 1999, MFC issued $22.5 million of senior secured notes (the
Notes) that mature on June 1, 2004. The Notes bear a fixed rate of interest of
7.2% and interest is paid quarterly in arrears. The Notes rank pari pasu with
the Revolvers and commercial paper through inter-creditor agreements. On
September 1, 1999, the note-holders purchased an additional $22.5 million under
the same terms and conditions. The proceeds of the Notes were used to pre-pay
MFC's outstanding SBA debentures.
Preferred Stock Repurchase Agreements
MFC and Medallion Capital have repurchased all of their previously
issued preferred stock from the SBA for an aggregate price of $8.0 million,
representing a discount of 65% from the original aggregate issuance price of
$22.6 million. The repurchase price discount of $14.6 million reflects the below
market 3% dividend rate and the fact that the preferred stock was not subject to
mandatory redemption at any time. The repurchase has resulted in the termination
of SBA limits on the amount of secured bank debt that MFC can incur and a
realized gain in retained earnings in the amount of the repurchase discount
which is being accreted to paid-in capital on a straight-line basis over 84
months, commencing March 31, 1993 for Medallion Capital and over 60 months,
commencing August 12, 1994 for MFC. In 1998, Medallion Capital repaid the
debenture associated with this liquidating interest and no longer carries a
balance. If MFC were to liquidate or lose its SBA license during the accretion
period, the SBA would receive the remaining unaccreted amount of the realized
gain attributable to the subsidiary liquidating or losing its license. MFC is
carrying a liquidating interest that includes amounts attributable to TCC,
however, the Company entered into an agreement with the SBA permitting the
merger of TCC into MFC without triggering repayment of TCC's liquidating
interest. At December 31, 1999, the aggregate remaining unaccreted amount of the
realized gain for MFC was $109,959.
THE COMPANY'S OPERATION AS A RIC
The Company has elected to be taxed as a RIC under Sections 851 through
855 under the Code. The Company intends, during this and subsequent taxable
years, to operate in a manner that permits it to satisfy the requirements or
taxation as a RIC under the applicable provisions of the Code, but no assurance
can be given that it will operate in a manner so as to qualify or remain
qualified. The sections of the Code relating to qualification and operation as a
RIC are highly technical and complex. The following sets forth the material
aspects of the Code sections that govern the federal income tax treatment of a
RIC and its stockholders. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations thereunder, and administrative
and judicial interpretations thereof.
In brief, if certain detailed conditions of the Code are met, business
development companies, such as Medallion Financial, that otherwise would be
treated for federal income tax purposes as corporations are generally not taxed
at the corporate level on their "investment company taxable income" that is
currently distributed to stockholders. This treatment substantially eliminates
the "double taxation" (i.e., taxation at both the corporate and stockholder
levels) that generally results from the use of corporate investment vehicles. A
RIC is, however, generally subject to federal income tax at regular corporate
rates on undistributed investment company taxable income.
Furthermore, in order to avoid a 4% nondeductible federal excise tax on
undistributed income and capital gains, the Company must distribute (or be
deemed to have distributed) by December 31st 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 31st of such
year) and any amounts that were not distributed in the previous calendar year
and on which no income tax has been paid.
If the Company fails to qualify as a RIC in any year, it will be subject
to federal income tax as if it were a domestic corporation, and its stockholders
will be taxed in the same manner as stockholders of ordinary corporations. In
this event, the Company could be subject to potentially significant tax
liabilities and the amount of cash available for distribution to its
stockholders could be reduced.
The Code defines the term "RIC" to include a domestic corporation that
has elected to be treated as a business development company under the 1940 Act
and meets certain requirements. These requirements include that (a) the company
derive at least 90% of its gross income for each taxable year from dividends,
interest, interest payments with respect to
12
<PAGE>
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 diversifies
its holdings so that, at the close of each quarter of its taxable year, (i) at
least 50% of the value of its total assets is represented by (A) cash, and cash
items (including receivables), U.S. Government securities and securities of
other RICs, and (B) other securities limited in respect of any one issuer to an
amount not greater in value than 5% of the value of the total assets of the
company and to not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of total assets is invested in
the securities (other than U.S. Government securities or securities of other
RICs) of any one issuer or two or of more issuers controlled by the company and
engaged in the same, similar or related trades or businesses. The foregoing
diversification requirements under the Code could restrict the Company's
expansion of its taxicab rooftop advertising business.
Furthermore, in order to qualify as a RIC under the Code, each taxable
year, a company also must distribute to its stockholders at least 90% of (a) its
investment company taxable income and (b) the excess of its tax-exempt interest
income over certain disallowed deductions.
Provided that the Company satisfies the above requirements, neither the
investment company taxable income it distributes to stockholders nor any net
capital gain that is distributed to stockholders should subject the Company to
federal income tax. Investment company taxable income and/or net capital gains
that are retained by the Company should be subject to federal income tax at
regular corporate income tax rates; provided, however, that to the extent that
the Company retains any net long-term capital gains, it may designate them as
"deemed distributions" and pay a tax thereon for the benefit of its
stockholders. The Company currently intends to continue to distribute to its
stockholders for each of its taxable years substantially all of its investment
company taxable income and may or may not distribute any capital gains.
If the Company acquires debt obligations that were originally issued at
a discount, or that bear interest rates that do not call for payments at fixed
rates (or certain "qualified variable rates") at regular intervals over the life
of the obligation, it will be required to include as interest income each year a
portion of the "original issue discount" that accrues over the life of the
obligation regardless of whether it receives the income, and it will be
obligated to make distributions accordingly. In this event, the Company may
borrow funds or sell assets to meet the distribution requirements. However,
under the 1940 Act, the Company will not be permitted to make distributions to
stockholders while senior securities are outstanding unless it meets certain
asset coverage requirements. If the Company is unable to make the required
distributions, it may be subject to the nondeductible 4% excise tax or it may
fail to qualify as a RIC. Furthermore, the SBA restricts the distributions that
may be made to an amount equal to undistributed net realized earnings less the
allowance for unrealized loan losses (which in the case of the Company is
included in unrealized depreciation).
As long as the Company qualifies as a RIC, distributions made to its
taxable domestic stockholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
them as ordinary income. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Company's actual net long-term capital gain for the taxable year)
without regard to the period for which the stockholder has held its stock.
Corporate stockholders, however, are subject to tax on capital gain dividends at
the same rate as ordinary income. To the extent that the Company makes
distributions in excess of current and accumulated earnings and profits, these
distributions are treated first as a tax-free return of capital to the
stockholder, reducing the tax basis of a stockholder's Common Stock by the
amount of such distribution (but not below zero), with distributions in excess
of the stockholder's tax basis taxable as capital gains (if the Common Stock is
held as a capital asset). In addition, any dividends declared by the Company in
October, November or December of any year and payable to a stockholder of record
on a specific date in any such month shall be treated as both paid by the
Company and received by the stockholder on December 31st of such year, provided
that the dividend is actually paid by the Company during January of the
following calendar year. Stockholders may not include in their individual income
tax returns any net operating losses or capital losses of the Company.
If the Company chooses to retain and pay tax on any net capital gain
rather than distribute such gain to its stockholders, the Company will designate
such deemed distribution in a written notice to stockholders prior to the
expiration of 60 days after the close of the taxable year. Each stockholder
would then be treated for federal income tax purposes as if the Company had
distributed to such stockholder on the last day of its taxable year the
stockholder's pro rata share of the net long-term capital gain retained by the
Company and the stockholder had paid its pro rata share of the taxes paid by the
Company and reinvested the remainder in the Company.
In general, any loss upon a sale or exchange of Common Stock by a
stockholder who has held such stock for six months or less (after applying
certain holding period rules) will be treated as long-term capital loss, to the
extent of distributions from the Company required to be treated by such
stockholder as long-term capital gains.
13
<PAGE>
THE COMPANY'S OPERATION AS A BDC
As a BDC, the Company is subject to regulation under the 1940 Act. The
1940 Act contains prohibitions and restrictions relating to transactions between
investment companies and their affiliates, principal underwriters and affiliates
of those affiliates or underwriters. In addition, the 1940 Act provides that the
Company may not change the nature of its business so as to cease to be, or to
withdraw its election as, a BDC unless so authorized by the vote of a "majority
of the Company's outstanding voting securities," as defined under the 1940 Act.
The Company is permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock (collectively, "senior
securities," as defined under the 1940 Act) senior to the shares of Common Stock
if the Company's asset coverage of such indebtedness and all senior securities
is at least 200% immediately after each such issuance. Subordinated SBA
debentures guaranteed by or issued to the SBA by the RIC Subsidiaries, are not
subject to this asset coverage test. In addition, while senior securities are
outstanding, provision must be made to prohibit the declaration of any dividend
or other distribution to stockholders (except stock dividends) or the repurchase
of such securities or shares unless the Company meets the applicable asset
coverage ratios at the time of the declaration of the dividend or distribution
or repurchase.
Under the 1940 Act, a BDC may not acquire any asset other than assets of
the type listed in Section 55(a) of the 1940 Act ("Qualifying Assets") unless,
at the time the acquisition is made, certain Qualifying Assets represent at
least 70% of the value of the company's total assets. The principal categories
of Qualifying Assets relevant to the business of the Company are the following:
(1) Securities purchased in transactions not involving a public offering
from the issuer of such securities, which issuer is an eligible
portfolio company. An "eligible portfolio company" is defined in the
1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company other than an SBIC wholly-owned by
the BDC; and
(c) satisfies one or more of the following requirements:
(i) the issuer does not have a class of securities with respect
to which a broker or dealer may extend margin credit; or
(ii) the issuer is controlled by a BDC and the BDC has an
affiliated person serving as a director of issuer;
(iii)the issuer has total assets of not more than $4 million and
capital and surplus (shareholders' equity less retained
earnings) of not less than $2 million, or such other amounts
as the Securities and Exchange Commission may establish by
rule or regulation; or
(iv) issuer meets such other requirements as the Commission may
establish from time to time by rule or regulation;
(2) Securities for which there is no public market and which are purchased
in transactions not involving a public offering from the issuer of
such securities where the issuer is an eligible portfolio company
which is controlled by the BDC;
(3) Securities received in exchange for or distributed on or with respect
to securities described in (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities;
and
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments in
the types of securities described in (1) or (2) above. In order to count
securities as Qualifying Assets for the purpose of the 70% test, the BDC must
either control the issuer of the securities or must make available to the issuer
of the securities significant managerial assistance; except that, where the
business development company purchases such securities in conjunction with one
or more other persons acting together, one of the other persons in the group may
make available the required managerial assistance. The Company believes that the
common stock of MFC, Edwards, TCC and Media are Qualifying Assets.
14
<PAGE>
REGULATION OF THE COMPANY BY THE SBA
MFC was formerly an SSBIC that was converted to a SBIC under conversion
agreements entered into with the SBA in February 1997. In June 1998, Medallion
Capital's charter was amended to convert from an SSBIC to an SBIC. The SBIA
authorizes the organization of SBICs as vehicles for providing equity capital,
long term financing and management assistance to small business concerns. A
small business concern, as defined in the SBIA and the SBA Regulations, is a
business that is independently owned and operated and which is not dominant in
its field of operation. In addition, at the end of each fiscal year, at least
20% of the total amount of loans made since April 25, 1994 by each SBIC and
SSBIC must be made to a subclass of small business concerns that (i) have a net
worth, together with any affiliates, of $6.0 million or less and average annual
net income after U.S. federal income taxes for the preceding two years of $2.0
million or less (average annual net income is computed without the benefit of
any carryover loss), or (ii) satisfy alternative criteria under SBA Regulations
that focus on the industry in which the business is engaged and the number of
persons employed by the business or its gross revenues. SBA Regulations also
prohibit an SBIC from providing funds to a small business concern for certain
purposes, such as relending and reinvestment.
Prior to the enactment of the Small Business Programs Improvement Act of
1996 (the "Improvement Act"), the SBIA authorized the organization of SSBICs as
vehicles for providing the same forms of assistance that SBICs provide, except
that SSBIC were limited to loans to small business concerns which were at least
50% owned and managed by persons whose participation in the free enterprise
system is hampered because of social or economic disadvantages. "Disadvantaged
Borrowers" include African Americans, Asian Sub-Continent Americans, Eskimos,
Hispanic Americans, Native Americans, Vietnam War era veterans and other groups
identified by the SBA. Such small business concerns were required to either (i)
have a tangible net worth, together with any affiliates, of $18.0 million or
less and an average annual net income after U.S. federal income taxes for the
preceding two years of $6.0 million or less (average annual net income is
computed without the benefit of any carryover loss), or (ii) satisfy alternative
criteria under the SBA Regulations that focus on the industry in which the
business is engaged and the number of persons employed by the business or its
gross revenues.
The Improvement Act, which became effective on September 30, 1996,
effectively terminated the SSBIC program by repealing the provisions of the SBIA
which authorized SSBICs. Following the enactment of the Improvement Act and
termination of the SSBIC program, the SBA established procedures for existing
SSBICs to convert to SBICs. In February 1997, MFC entered into an agreement with
the SBA whereby MFC was converted into an SBIC, subject to certain conditions
imposed by the SBA. Under the MFC Conversion Agreement with the SBA, MFC is
authorized to make loans to borrowers other than Disadvantaged Borrowers
provided that, at the time of such loan, MFC has in its portfolio outstanding
loans to Disadvantaged Borrowers with an aggregate cost basis equal to or
exceeding the value of the unamortized repurchase discount under the preferred
stock repurchase agreement between MFC and the SBA. At December 31, 1999 the
amount of such unamortized repurchase discount was $109,959 and MFC had
outstanding loans to Disadvantaged Borrowers well in excess of this amount.
Under current SBA Regulations and subject to local usury laws, the
maximum rate of interest that MFC may charge may not exceed the higher of (i)
19% and (ii) the sum of (a) the higher of (I) that company's weighted average
cost of qualified borrowings, as determined under SBA Regulations, or (II) the
current SBA debenture rate, plus (b) 11%, rounded off to the next lower eighth
of one percent. At December 31, 1999, the maximum rate of interest permitted on
loans originated by the RIC Subsidiaries is 19%. At December 31, 1999, the
Company's outstanding Medallion Loans had a weighted average rate of interest of
8.90% and outstanding Commercial Installment Loans had a weighted average rate
of interest of 11.70%. SBA Regulations also require that each loan originated by
an SBIC have a term of between 5 years and 20 years; however, loans to
Disadvantaged Borrowers may be for a minimum of four years.
The SBA restricts the ability of SBICs to repurchase their capital stock,
to retire their SBA debentures and to lend money to their officers, directors
and employees or invest in affiliates thereof. The SBA also prohibits, without
prior SBA approval, a "change of control" or transfers which would result in any
person (or group of persons acting in concert) owning 10% or more of any class
of capital stock of an SBIC. A "change of control" is any event which would
result in the transfer of the power, direct or indirect, to direct the
management and policies of an SBIC, whether through ownership, contractual
arrangements or otherwise.
Under SBA Regulations, without prior SBA approval, loans by licensees
with outstanding SBA leverage to any single small business concern may not
exceed 20% of an SBIC's Leveragable Capital. Under the terms of their respective
conversion agreements with the SBA, however, MFC is authorized to make loans to
Disadvantaged Borrowers in amounts not exceeding 30% of their respective
Leveragable Capital.
15
<PAGE>
SBICs must invest funds that are not being used to make loans in
investments permitted under SBA Regulations. These permitted investments include
direct obligations of, or obligations guaranteed as to principal and interest
by, the government of the United States with a term of 15 months or less and
deposits maturing in one year or less issued by an institution insured by the
FDIC. The percentage of an SBIC's assets so invested will depend on, among other
things, loan demand, timing of equity infusions and SBA funding and availability
of funds under credit facilities.
SBICs may purchase voting securities of small business concerns in
accordance with SBA Regulations. SBA Regulations prohibit SBICs from controlling
a small business concern except where necessary to protect an investment. SBA
Regulations presume control when SBICs purchase (i) 50% or more of the voting
securities of a small business concern if the small business concern has less
than 50 stockholders or (ii) more than 20% (and in certain situations up to 25%)
of the voting securities of a small business concern if the small business
concern has 50 or more stockholders.
COMPETITION
Banks, credit unions and finance companies, some of which are SBICs,
compete with the Company in originating Medallion Loans and Commercial
Installment Loans. Finance subsidiaries of equipment manufacturers also compete
with the Company in originating Commercial Installment Loans. Many of these
competitors have greater resources than the Company and certain competitors are
subject to less restrictive regulations than the Company. As a result, there can
be no assurance that the Company will be able to identify and complete the
financing transactions that will permit it to compete successfully. The
Company's taxicab rooftop advertising business competes with other taxicab
rooftop advertisers, as well as all segments of the out-of-home advertising
industry and other types of advertising media, including cable and network
television, radio, newspapers, magazines and direct mail marketing. Many of
these competitors have greater financial resources than the Company and offer
several forms of advertising as well as production facilities.
EMPLOYEES
As of December 31, 1999, the Company employed a total of 153 persons.
The Company believes that its relations with all of its employees are good, but
that its future success will depend, in part, on its ability to continue to
recruit, retain and motivate qualified personnel at all levels.
ITEM 2. PROPERTIES
The Company leases approximately 17,000 square feet of office space in
New York City for its corporate headquarters under a lease expiring in June
2006. The Company also leases office space for loan origination offices in
Boston, MA, Chicago, IL, Hartford, CT, Southbury, CT, Clifton, NJ, Providence,
RI, Rochester, NY, Phoenix, AZ, Wellesley, MA, Somers Point, NJ, Towson, MD, and
Minneapolis, MN. Media leases space for sales and maintenance in New York, NY,
New Orleans, LA, Washington, DC, Boston, MA and Los Angeles, CA. The Company
does not own any real property. The Company believes that its leased properties,
taken as a whole, are in good operating condition and are suitable for the
Company's current business operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries have been named as defendants in
various legal proceedings incident to the ordinary course of its business. The
Company intends to vigorously defend these outstanding claims. In the opinion of
the Company's management and 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 effect on the
Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 1999 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s) Held With the Company
<S> <C> <C>
Alvin Murstein(*) 65 Chairman, Chief Executive Officer and Director
Andrew M. Murstein(*) 35 President and Director
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Brian O'Leary(*) 53 Senior Vice President and Chief Credit Officer
Daniel F. Baker(*) 35 Treasurer and Chief Financial Officer
Marie Russo(*) 75 Senior Vice President and Secretary
Michael J. Kowalsky(*) 55 Executive Vice President
Conrad J. Isoldi(*) 56 Senior Vice President and Chief Accounting Officer
</TABLE>
An asterisk (*) indicates an "interested person" as such term is defined in
Section 2(a)(19) of the 1940 Act.
Each officer's term extends until the first meeting of the Board of
Directors following the next annual meeting of stockholders and until his or her
successor is elected and qualified.
Alvin Murstein has been Chairman of the Board of Directors of Medallion
Financial since its founding in 1995 and has been Chief Executive Officer of
Medallion Financial since February 1996. Mr. Murstein has also been Chairman of
the Board of Directors and Chief Executive Officer of MFC since its founding in
1979 and of Media since its founding in 1994. Mr. Murstein has been Chairman of
the Board of Directors and Chief Executive Officer of Edwards and TCC since June
1996. He served as Chairman of the Board of Directors and Chief Executive
Officer of Tri-Magna from its founding in 1989 until its acquisition by the
Company in May 1996. Mr. Murstein received a B.A. and an M.B.A. from New York
University and has been an executive in the taxicab industry for over 40 years.
Mr. Murstein served on the Board of Directors of the Strober Organization, Inc.,
a building supply company, from 1988 to 1997. Alvin Murstein is the father of
Andrew Murstein.
Andrew Murstein has been President of Medallion Financial since its
inception in 1995 and President of Media from its inception. Mr. Murstein has
served two terms as a Director of Medallion Financial, MFC, Edwards and TCC from
May 1996 until April 1997 and since October 10, 1997. He has served as a
director of Media since its inception. He served as Tri-Magna's Director of New
Business Development from 1994 until its acquisition by the Company in May 1996.
Mr. Murstein received a B.A. in economics, cum laude, from Tufts University and
an M.B.A. in finance from New York University. Mr. Murstein serves on the New
York City Private Industry Council. Andrew Murstein is the son of Alvin
Murstein, and is the third generation of his family to be active in the taxicab
industry.
Brian O'Leary joined Medallion in December, 1999 as Senior Vice President
and Chief Credit Officer. From April, 1996 to December, 1999, Mr. O'Leary was
Executive Vice President of Atlantic Bank of New York, serving initially as
Chief Credit Officer and Chief Administrative Officer and later as head of
middle market banking which included the banks Leasing and Premium Finance
subsidiaries. Mr. O'Leary was also a member of the management credit committee.
From May, 1990 to April, 1996 Mr. O'Leary was with Bank Leumi Trust Co. of New
York, first as a Deputy Division Head of the Lending Division and a Deputy Chief
Lending Officer and then as EVP and Division Executive of domestic banking. He
was also a member of the Senior Credit Committee. From July, 1977 to May, 1990,
he was with Marine Midland Bank, most recently as a Regional Executive Vice
President. He began his banking career in 1970 with Bankers Trust Co. in the
metropolitan banking division. Mr. O'Leary received a B.A. in economics from
Fordham University and an MBA in finance from Pace University.
Daniel F. Baker has been Treasurer and Chief Financial Officer of Medallion
Financial since February 1996. Mr. Baker has also been Treasurer and Chief
Financial Officer of MFC, Edwards, TCC and Media since June 1996. Mr. Baker also
served as Tri-Magna's Vice President of Finance from 1992 until its acquisition
by the Company in May 1996. From 1989 through 1991, he was Controller of Tri-
Magna and from 1988 through 1991 he was Controller of MFC. Prior to joining MFC,
Mr. Baker was employed by Arthur Andersen LLP. Mr. Baker received a B.S. in
accounting from Husson College.
Marie Russo has been Senior Vice President and Secretary of Medallion
Financial since February 1996. Ms. Russo has also been Senior Vice President and
Secretary of MFC, Edwards and TCC since June 1996. Ms. Russo served as Vice
President of Operations of Tri-Magna from 1989 until its acquisition by the
Company in May 1996. From 1989 to 1996, she was Vice President of MFC and from
1983 to 1986, she was Controller of MFC. Ms. Russo received a B.S. in accounting
from Hunter College.
Michael J. Kowalsky has been Executive Vice President of Medallion
Financial since May 1996. Mr. Kowalsky has been President of MFC and Edwards
since June 1996. He also served as Chief Operating Officer of Edwards from 1992
until June 1996. Prior to joining Edwards in 1990, Mr. Kowalsky was a Senior
Vice President at General Cigar Co. Inc., a cigar manufacturing company. Mr.
Kowalsky received a B.A. and M.A. in economics from the University of Kentucky
and an M.B.A. from the New York University Graduate School of Business.
Conrad J. Isoldi has been Senior Vice President and Chief Accounting
Officer of Medallion Financial since October 1999. Mr. Isoldi was employed by
Republic National Bank as Senior Vice President and Deputy Comptroller from
June, 1996 to October, 1999. From 1991 to 1996 Mr. Isoldi was Senior Vice
President and Director of Corporate Accounting for
17
<PAGE>
First Fidelity Bank (now First Union). Prior to this period he was Chief
Financial Officer for the Nationwide Consumer Bank of Manufacturers Hanover
Trust Company, (Chemical and then Chase) from 1974 to 1991. Mr. Isoldi received
a B.B.A. in Accounting from Baruch College.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on May 23, 1996 on the Nasdaq
National Market under the symbol "TAXI." As of March 22, 2000, there were
approximately 2,658 holders of record of the Company's Common Stock.
The following table sets forth for the periods indicated, the range of high and
low closing prices for the Company's Common Stock on the Nasdaq National Market:
HIGH LOW
1999
First Quarter $21-1/4 $14
Second Quarter $19-5/8 $15-1/8
Third Quarter $21-3/4 $18-1/8
Fourth Quarter $21-9/16 $17-1/4
HIGH LOW
1998
First Quarter $29-15/16 $18-7/8
Second Quarter $31 $25
Third Quarter $28-7/8 $12-1/16
Fourth Quarter $18-1/2 $12-9/16
On November 26, 1996, the Company paid its first quarterly cash dividend
of $0.20 per share of Common Stock. The Company has paid quarterly dividends
since that time, and currently anticipates that it will continue to pay
quarterly cash dividends on the Common Stock. There can be no assurance,
however, that the Company will have sufficient earnings to pay such dividends in
the future.
ITEM 6. SELECTED FINANCIAL DATA
On May 29, 1996, Medallion Financial acquired each of the Founding
Companies. Prior to this acquisition, each of the Founding Companies had been
operating independently of each other. On June 16, 1998 the Company completed a
merger with CDI, now known as Medallion Capital. This transaction was accounted
for as a tax-free reorganization under Section 368 of the Internal Revenue Code
of 1986, as amended, and was treated under the pooling-of-interests method of
accounting. Under this accounting treatment, the consolidated financial
statements of the Company have been restated retroactively to combine Medallion
Capital's financial statements with the Company's consolidated financial
statements as if the merger had occurred at the beginning of the earliest period
presented. Accordingly, the following Selected Financial Data is comprised of
two major sections.
The first section, Consolidated Selected Financial Data, presents
consolidated audited financial data of the Company for the years ending December
31, 1999, 1998, 1997 and 1996 and is derived from the actual financial position
and results of operation of the Company as set forth in the audited Consolidated
Financial Statements of the Company included as Item 8 in this Annual Report on
Form 10-K.
Also included are unaudited consolidated financial results for the year
ended December 31, 1995. The consolidated financial statements for Medallion
Financial Corp. for these years represent only the activity of Medallion
Capital, the predecessor of the registrant, as Medallion Financial Corp. had no
other activity. 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 periods presented.
19
<PAGE>
The second section of the following discussion presents the Historical Selected
Financial Data of each of the Founding Companies. The Historical Selected
Financial Data for the fiscal years ended December 31, 1995 and the period ended
May 29, 1996, have been derived from audited financial statements incorporated
by reference in this Annual Report on Form 10-K. The Historical Selected
Financial Data for Edwards and TCC have been reclassified to permit a
presentation that is consistent with the investment company status they acquired
upon completion of the Acquisitions. The Historical Selected Financial Data for
the fiscal year ended December 31, 1995 for each of the Founding Companies have
been derived from their respective audited financial statements not included in
this Annual Report on Form 10-K.
The Selected Financial Data provided herein should be read in conjunction with
the financial statements of Medallion Financial, Tri-Magna, Edwards and TCC,
including the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Annual Report on
Form 10-K.
20
<PAGE>
MEDALLION FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL DATA
AT AND FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, 1997, 1998 AND 1999
IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(unaudited)
Investment income $1,481 $12,292 $25,848 $35,157 $41,380
Interest expense 224 5,328 10,099 15,609 19,635
Net interest income 1,257 6,964 15,749 19,548 21,745
Equity in earnings (losses) of
Unconsolidated subsidiary (1) - (63) 203 1,200 (214)
Other income - 411 980 1,459 2,112
Gain on sale of loans - - 336 2,316 3,014
Accretion of negative goodwill - 421 722 722 722
Operating expenses 608 3,042 6,167 13,178 16,907
Amortization of goodwill - 259 368 506 530
Income tax (provision) benefit (639) (436) (929) 154 (46)
Dividends on minority interest (120) (116) - - -
Net investment income (110) 3,880 10,526 11,715 9,896
Realized gain (loss) on investments, net 3,800 558 78 1,291 22,746
Change in unrealized appreciation
(depreciation) of investments(2) (649) 758 1,929 2,676 (11,910)
Net increase in net assets
resulting from operations(3) $3,041 $5,196 12,533 $15,682 $20,732
Net increase in net assets
resulting from operations per
share (diluted)(3) $2.61 $0.87 $1.02 $1.11 $1.47
Dividends declared per share $ - $0.36 $0.92 $1.20 $1.31
BALANCE SHEET DATA
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(unaudited)
Investments
Medallion Loans $ - $134,615 $225,961 $266,062 $303,093
Commercial Installment Loans 15,331 60,115 79,803 106,423 162,034
Equity Investments 1,045 2,374 7,490 11,610 2,336
Investments, net of unrealized
depreciation of investments 16,376 197,104 313,254 384,095 467,463
Total assets 21,237 215,277 339,894 422,225 509,613
Notes payable - 96,450 137,750 115,600 190,450
Commercial paper - - - 103,082 93,984
Subordinated SBA debentures 2,408 38,806 39,770 41,590 10,500
Senior secured notes - - - - 45,000
Total liabilities 2,881 140,205 189,363 272,938 358,573
Negative goodwill - 258 1,795 1,072 351
Preferred Stock 3,330 - - - -
Total shareholders' equity 15,026 1,795 148,736 148,215 150,689
SELECTED FINANCIAL RATIOS AND OTHER DATA
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Return on assets(4) 15.28% 4.39% 4.51% 4.12% 4.45%
Return on equity(5) 20.24% 7.16% 8.43% 10.58% 13.76%
Average yield, e.o.p(6) 8.82% 10.98% 10.20% 9.93% 9.91%
Average cost of funds, e.o.p.(7) 3.79% 7.15% 7.15% 6.42% 7.09%
Spread, e.o.p.(8) 5.03% 3.83% 3.05% 3.51% 2.82%
Other income ratio (9) 0.00% 0.21% 0.31% 0.38% 0.45%
Operating expense ratio (10) 2.86% 1.41% 1.81% 3.12% 3.32%
Medallion Loans as a percentage of
Investments 0.00% 68.30% 72.13% 69.27% 64.84%
Commercial Installment Loans as a
percentage of investments 93.62% 30.52% 25.48% 27.71% 34.66%
Equity investments as a
percentage of investments 6.38% 1.20% 2.39% 3.02% 0.50%
Investments to assets 77.11% 91.56% 92.16% 90.97% 91.73%
Equity to assets 70.75% 33.70% 43.76% 35.10% 29.57%
Debt to equity 16.03% 186.42% 119.35% 175.60% 225.59%
SBA debt to total debt 100% 28.69% 22.40% 15.98% 3.09%
</TABLE>
21
<PAGE>
MEDIA (1)
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
May 30 to Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Advertising revenue $1,095,346 $3,070,119 $7,526,569 $9,878,117
Cost of services 499,135 1,204,892 2,413,089 4,261,673
---------- ---------- ---------- ----------
Gross margin 596,211 1,865,227 5,113,480 5,616,444
Other operating expenses 659,211 1,499,803 3,163,091 5,223,833
---------- ---------- ---------- ----------
Income (losses) before taxes (63,000) 365,424 1,950,389 392,611
Income taxes - (162,000) (750,000) (134,125)
---------- ---------- ---------- ----------
Net income (loss) $(63,000) $ 203,424 $1,200,389 $258,486
</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. The amount reflects the elimination of approximately $473,000 of
advertising revenue purchased by the Company from Media in 1999. Such
amount has not been eliminated in the Statement of Operations of Media.
(2) Change in unrealized depreciation of investments represents the (increase)
decrease for the period in the unrealized depreciation applied against the
Company's investments to state them at fair value.
(3) Net increase in net assets resulting from operations is the sum of net
investment income, net realized gains or losses on investments and the
change in unrealized gains or losses on investments.
(4) Return on assets represents net increase in net assets resulting from
operations, for the year indicated, divided by average total assets.
(5) Return on equity represents net increase in net assets resulting from
operations, for the year indicated, divided by total stockholders' equity.
(6) Average yield, e.o.p. represents the end of year weighted average interest
rate on investments at the date indicated.
(7) Average cost of funds, e.o.p. represents the end of year weighted average
interest rate on debt at the date indicated.
(8) Spread, e.o.p. represents average yield, e.o.p. less average cost of
funds, e.o.p.
(9) Other income ratio represents other income, for the year indicated,
divided by investments.
(10) Operating expense ratio represents operating expenses, for the year
indicated, divided by total assets.
22
s
<PAGE>
SELECTED FINANCIAL DATA (3)
TRI-MAGNA
(MFC, BUT NOT MEDIA, IS CONSOLIDATED WITH TRI-MAGNA)
<TABLE>
<CAPTION>
January 1
Year Ended To
December 31, May 29,
1995 1996
---- ----
<S> <C> <C>
(dollars in thousands)
STATEMENT OF OPERATIONS DATA
Investment income................................... $ 9,803 $4,423
Interest expense.................................... 6,034 2,517
----- -----
Net interest income................................. 3,769 1,906
Equity in earnings (losses) of
unconsolidated subsidiary(1)........................ 126 (53)
Other income........................................ 446 148
Total non-interest expense.......................... 2,615 1,816
Dividends paid on minority interest................. 208 --
---
Net investment income............................... 1,518 185
Realized gain (loss) on investments, net............ 61 --
Change in unrealized depreciation of
investments(2)...................................... (140) --
-----
Net increase in net assets resulting from
Operations.......................................... $ 1,439 $185
======= ====
SELECTED FINANCIAL RATIOS AND OTHER DATA(3)
Return on average assets(4)(5)...................... 1.50% 1.86%
Return on average equity(5)(6)...................... 12.97 16.93
Interest rate spread
Average yield(5)(7.................................. 10.61 11.00
Average cost of funds(5)(8)......................... 8.26 7.56
Spread(9)........................................... 2.35 3.44
Other income to average assets(5)................... 0.47 0.36
Non-interest expense to average
assets(5)(10)....................................... 2.73 2.98
Weighted average assets............................. 96,189 99,197
Weighted average investments(11).................... 92,433 96,479
Weighted average equity............................. 11,094 10,897
Weighted average debt............................... 73,063 79,912
December 31,(3) May 29,
1995 1996(3)
Medallion Loans as a percentage of investments...... 68.4% 67.9%
Commercial Installment Loans as a percentage of
Investments......................................... 31.6 32.1
Investments to assets............................... 96.3 97.0
Equity to assets.................................... 17.4 16.7
Debt to equity(12).................................. 464 482
SBA debt to total debt.............................. -- --
</TABLE>
23
<PAGE>
TRI-MAGNA
<TABLE>
<CAPTION>
December 31, May 29,
1995 1996
(dollars in thousands)
<S> <C> <C>
BALANCE SHEET DATA
Investments
Medallion Loans................................... $66,338 $64,934
Commercial Installment Loans...................... 30,619 31,598
Unrealized depreciation of investments............. (910) (910)
----- -----
Investments, net of unrealized depreciation of
Investments....................................... 96,047 95,622
Total assets....................................... 99,788 98,605
Notes payable...................................... 80,295 79,395
Subordinated SBA debentures........................ - -
Total liabilities.................................. 82,474 82,116
Minority interest.................................. - -
Total stockholders' equity......................... 17,314 16,489
</TABLE>
MEDIA(1)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1 TO
DECEMBER 31, MAY 29,
1995 1996
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Advertising revenue $1,542,013 $ 671,148
Cost of services 483,721 283,891
Gross margin 1,058,292 387,257
Other operating expenses 829,293 455,278
Income (losses) before taxes 228,999 (68,021)
Income taxes 103,043 (14,999)
Net income (loss) $ 125,956 $ (53,022)
</TABLE>
- --------------------------
(1) Equity in earnings (losses) of unconsolidated subsidiary represents the net
income (loss) for the period earned by Tri-Magna from its investment in
Media.
(2) Change in unrealized depreciation of investments represents the (increase)
decrease for the period in the unrealized depreciation applied against
Tri-Magna's investments to state them at fair value.
(3) Unaudited.
(4) Return on average assets is calculated as the net increase in net assets
resulting from operations (excluding Merger Related Costs) divided by the
weighted average assets for the period.
(5) Selected financial ratios are annualized for the period from January 1,
1996 to May 29, 1996.
(6) Return on average equity is calculated as the net increase in net assets
resulting from operations (excluding Merger Related Costs) divided by the
weighted average equity for the period.
(7) Average yield is calculated as gross investment income for the period
divided by the weighted average investments for the period.
(8) Average cost of funds is calculated as interest expense for the period
divided by the weighted average debt for the period.
(9) Spread is calculated as the difference between average yield and average
cost of funds.
(10) Non-interest expense to average assets is calculated as the total
non-interest expense (excluding Merger Related Costs) divided by the
weighted average assets for the period.
(11) Investments consists of the Tri-Magna's loan portfolio and excludes cash
and cash equivalents and Tri-Magna's investment in Media.
(12) Debt to equity is defined as total debt divided by total stockholders
equity and minority interest.
24
<PAGE>
EDWARDS
JANUARY 1
YEAR ENDED TO
DECEMBER 31, MAY 29,
1995 1996
---- ----
(dollars in thousands)
STATEMENT OF OPERATIONS DATA
Investment income............................. $ 4,317 $ 1,727
Interest expense.............................. 2,748 1,098
----- -----
Net interest income........................... 1,569 629
Other income.................................. 443 129
Total non-interest expense.................... 885 660
Income tax expense............................ 40 16
-- --
Net investment income......................... 1,087 82
Realized gain (loss) on investments, net...... - -
Net increase in net assets resulting from
operations before extraordinary items........ 1,087 82
------- ----
Net increase in net assets resulting
from operations.............................. $ 1,087 $ 82
======= ====
SELECTED FINANCIAL RATIOS AND OTHER DATA(1)
Return on average assets(2)(3)................ 2.42% 2.28%
Return on average partners' capital(3)(4)..... 12.29 11.38
Interest rate spread
Average yield(3)(5).......................... 9.92 9.40
Average cost of funds(3)(6).................. 7.96 7.54
Spread(7).................................... 1.96 1.86
Other income to average assets(3)............. 0.99 0.68
Non-interest expense to average assets(3)(8).. 1.98 1.63
Weighted average assets....................... $44,829 $45,543
Weighted average investments(9)............... 43,508 44,103
Weighted average partners' capital............ 8,846 9,112
Weighted average debt......................... 34,535 34,947
DECEMBER 31, (1) MAY 29,
1995 1996 (1)
---- --------
Medallion Loans as a percentage of investments 98.6% 98.7%
Commercial Installment Loans as a percentage
of investments 1.4 1.3
Investments to assets 97.1 96.7
Partners' capital to assets 20.2 19.8
Debt to partners' capital(10) 382 385
SBA debt to total debt 71.7 71.2
25
<PAGE>
EDWARDS
JANUARY 1
TO
DECEMBER 31, MAY 29,
1995 1996
(dollars in thousands)
BALANCE SHEET DATA
Investments
Medallion Loans................................. $43,177 $43,921
Commercial Installment Loans.................... 622 589
Unrealized depreciation of investments........... (20) (20)
---- ----
Investments, net of unrealized depreciation
of investments.................................. 43,779 44,490
Total assets..................................... 45,084 46,001
Notes payable and demand notes................... 9,850 10,100
Subordinated SBA debentures...................... 24,950 24,950
Total liabilities................................ 35,967 36,894
Total partners' capital.......................... 9,117 9,107
- ---------------
(1) Unaudited.
(2) Return on average assets is calculated as the net increase in net assets
resulting from operations before extraordinary items (excluding legal fees
related to sale of assets) divided by the weighted average assets for the
period.
(3) Selected financial ratios are annualized for the period from January 1,
1996 to May 29, 1996.
(4) Return on average partners' capital is calculated as the net increase in
net assets resulting from operations before extraordinary items (excluding
legal fees related to sale of assets) divided by the weighted average
partners' capital for the period.
(5) Average yield is calculated as gross investment income for the period
divided by the weighted average investments for the period.
(6) Average cost of funds is calculated as interest expense for the period
divided by the weighted average debt for the period.
(7) Spread is calculated as the difference between average yield and average
cost of funds.
(8) Non-interest expense to average assets is calculated as the total
non-interest expense (excluding legal fees related to sale of assets)
divided by the weighted average assets for the period.
(9) Investments consists of Edwards' loan portfolio and excludes cash and cash
equivalents.
(10) Debt to partners' capital is defined as total debt divided by total
partners' capital.
26
<PAGE>
TCC
<TABLE>
<CAPTION>
JANUARY 1
YEAR ENDED TO
DECEMBER 31 MAY 29,
1995 1996
<S> <C> <C>
(dollars in thousands)
STATEMENT OF OPERATIONS DATA
Investment income........................................... $ 1,836 $ 682
Interest expense............................................ 450 148
--- ---
Net interest income......................................... 1,386 534
Total non-interest expense.................................. 760 260
Income tax expense (benefit)(1)............................. 381 128
--- ---
Net investment income, adjusted for taxes(2)................ 245 146
Realized gain (loss) on investments......................... (50) 5
Change in unrealized depreciation of
investments(3)............................................. 335 30
--- --
Net increase (decrease) in net assets resulting
from operations............................................ $ 530 $181
===== ====
SELECTED FINANCIAL RATIOS AND
OTHER DATA(4)
Return on average assets(5)(6).............................. 2.91% 2.56%
Return on average common equity(6)(7)....................... 6.74 5.23
Interest rate spread
Average yield(6)(8)........................................ 13.58 12.95
Average cost of funds(6)(9)................................ 6.14 5.58
Spread(10)................................................. 7.44 7.37
Non-interest expense to average assets(6)................... 4.18 3.67
Weighted average assets..................................... $18,183 $16,983
Weighted average investments(11)............................ 10,389 9,745
Weighted average common equity.............................. 7,859 8,312
Weighted average debt....................................... 7,330 6,368
DECEMBER 31, MAY 29,
1995(4) 1996(4)
Medallion Loans as a percentage of investments.............. 81.5% 76.0%
Commercial Installment Loans as a percentage of investments. 18.5 24.0
Loans to assets............................................. 52.6 56.3
Equity to assets............................................ 60.2 63.7
Debt to equity(12).......................................... 64 53
SBA debt to total debt...................................... 100.0 100.0
</TABLE>
27
<PAGE>
TCC
DECEMBER 31, MAY 29,
1995 1996
(dollars in thousands)
BALANCE SHEET DATA
Investments
Medallion Loans...................................... $ 7,988 $ 7,543
Commercial Installment Loans......................... 1,808 2,381
Unrealized depreciation of investments................ (642) (612)
----- -----
Investments, net of unrealized depreciation of
Investments.......................................... 9,154 9,312
Cash and cash equivalents............................. 7,781 6,797
Total assets.......................................... 17,416 16,551
Notes payable and demand notes........................ -- --
SBA debentures........................................ 6,730 5,640
Total liabilities..................................... 6,937 6,008
Total stockholders' equity............................ 10,479 10,543
- -------------------------
(1) Income tax expense (benefit) includes income tax provision (benefit) on
investment income, realized losses on investments and change in unrealized
depreciation of investments. See note (2).
(2) Net investment income has been adjusted by combining TCC's income tax
provision (benefit) in order to present TCC's financial statements on a
comparable basis to the other Founding Companies.
(3) Change in unrealized depreciation of investments represents the (increase)
decrease for the period in the unrealized depreciation applied against
TCC's investments to state them at fair value.
(4) Unaudited.
(5) Return on average assets is calculated as the net increase (decrease) in
net assets resulting from operations divided by the weighted average
assets for the period.
(6) Selected financial ratios are annualized for the period from January 1,
1996 to May 29, 1996.
(7) Return on average common equity is calculated as the net increase in net
assets resulting from operations divided by the weighted average equity
for the period.
(8) Average yield is calculated as gross investment income excluding interest
income on cash and cash equivalents for the period divided by the weighted
average investments for the period.
(9) Average cost of funds is calculated as interest expense for the period
divided by the weighted average debt for the period.
(10) Spread is calculated as the difference between average yield and average
cost of funds.
(11) Investments consists of TCC's loan portfolio and excludes cash and cash
equivalents.
(12) Debt to equity is defined as total debt divided by total stockholders'
equity and minority interests.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing in this
Annual Report on Form 10-K. Amounts prior to June, 1998 have been restated to
include the historical amounts of Medallion Capital, Inc. (formerly Capital
Dimensions, Inc.).
General
The Company operates a specialty finance company whose principal
activity is the origination and servicing of commercial secured loans. The loans
are primarily secured by taxicab medallions ("Medallion Loans") and loans to
small businesses secured by equipment and other suitable collateral ("Commercial
Installment Loans"). As an adjunct to its finance business, the Company also
operates a taxicab rooftop advertising business. The earnings of the Company
depend primarily on its level of net interest income, which is the difference
between interest earned on interest-earning assets consisting primarily of
Medallion Loans and Commercial Installment Loans, and the interest paid on
interest-bearing liabilities consisting primarily of secured credit facilities
with bank syndicates, secured commercial paper, senior secured notes and
debentures issued to or guaranteed by the SBA. Net interest income is a function
of the net interest rate spread, which is the difference between the average
yield earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing liabilities. Net interest income is
affected by economic, regulatory and competitive factors that influence interest
rates, loan demand and the availability of funding to finance the Company's
lending activities. The Company, like other financial institutions, is subject
to interest rate risk to the degree that its interest-earning assets reprice on
a different basis than its interest-bearing liabilities. The income from the
taxicab rooftop advertising business is reflected as earnings from
unconsolidated subsidiary.
In addition, through its subsidiary Medallion Capital, the Company
invests in small businesses in selected industries. Medallion Capital's
investments are typically in the form of secured debt instruments with fixed
interest rates accompanied by warrants to purchase an equity interest for a
nominal exercise price (such warrants constituting "Equity Investments").
Interest income is earned on the debt investments. Realized gains (losses) on
investments are recognized when investments are sold and represent the
difference between the proceeds received from the disposition of portfolio
assets and the cost of such portfolio assets. In addition, changes in unrealized
appreciation (depreciation) of investments is recorded and represents the net
change in the estimated fair values of the portfolio assets at the end of the
period as compared with their estimated fair values at the beginning of the
period or the cost of such portfolio assets, if purchased during the period.
Generally, "realized gains (losses) on investments" and "changes in unrealized
appreciation (depreciation) of investments" are inversely related. When an
appreciated asset is sold to realize a gain, a decrease in the previously
recorded unrealized appreciation occurs. Conversely, when a loss previously
recorded as an unrealized loss is realized by the sale or other disposition of a
depreciated portfolio asset, the reclassification of the loss from "unrealized"
to "realized" causes an increase in net unrealized appreciation and an increase
in realized loss.
Trend in Loan Portfolio Yield - The Company's investment income is
driven by the principal amount of and yields on its portfolio. To identify
trends in the yields, the portfolio is grouped by Medallion Loans, Commercial
Installment Loans and Equity Investments. The following table illustrates the
Company's investments at fair value and the weighted average portfolio yields
calculated using the contractual interest rates of the loans at the dates
indicated:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
Contractual Contractual
Weighted Percentage Weighted Percentage
Average Principal of Total Average Principal of Total
Yield Amounts Portfolio Yield Amounts Portfolio
<S> <C> <C> <C> <C> <C> <C>
Medallion Loan Portfolio 9.03% $266,061,808 69.3% 8.90% $303,093,283 64.8%
Commercial Installment Loan
Portfolio 12.13% 106,422,835 27.7% 11.71% 162,033,462 34.7%
Equity Investments - 11,610,529 3.0% - 2,336,185 0.5%
----- ---------- ------- ----- --------- ------
Total Portfolio 9.93% $384,095,172 100.0% 9.91% $467,462,930 100.0%
</TABLE>
The weighted average yield e.o.p.(/1/) of the Medallion Loan portfolio
at December 31, 1999 was 8.90% a decrease of 13 basis points from 9.03% at
December 31, 1998. Medallion loans constituted 64.8% of the total portfolio of
$467.5 million at December 31, 1999 as compared to 69.3% of the total portfolio
of $384.1 million at December 31, 1998. The decrease in the average yield on
Medallion Loans was the result of increased competition in the New York
medallion
- -------------
(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.
- --------------------
29
<PAGE>
market partially offset by the Company's expansion into other medallion markets
which produce yields 100 to 300 basis points higher than New York. As of
December 31, 1999, medallion loans outside the New York market represented 16.5%
of the total medallion loan portfolio compared to 11.7% of the total medallion
loan portfolio at December 31, 1998. The Company plans to continue to focus its
marketing efforts towards origination of higher yielding medallion loans outside
of the New York market.
The weighted average yield e.o.p. of the Commercial Installment Loan
portfolio decreased 42 basis points to 11.71% at December 31, 1999 from 12.13%
at December 31, 1998. The yield decreased due to a shift in the mix within the
commercial portfolio from higher yielding fixed rate loans to floating rate
loans tied to the prime rate. At December 31, 1999, floating rate loans
represented approximately 51.5% of the commercial portfolio as compared to 27.7%
at December 31, 1998. Although this strategy produces a lower yield, the Company
believes that this strategy will help mitigate its interest rate risk in a
rising interest rate environment. The Company has continued to shift the total
portfolio mix toward a higher percentage of Commercial Installment Loans, which
historically have had a yield of approximately 200-300 basis points higher than
the Company's Medallion Loans and 250 to 600 basis points higher than the Prime
Rate. The percentage of the entire portfolio composed of Commercial Installment
Loans increased to 34.7% of the total portfolio of $467.5 million at December
31, 1999 from 27.7% of the total portfolio of $384.1 million at December
31, 1998.
The total portfolio yield decreased 2 basis points to 9.91% at
December 31, 1999 from 9.93% at December 31, 1998. This slight decline is the
result of the decrease in yields of the medallion and commercial portfolios. The
Company expects to try to continue increasing both the percentage of Commercial
Installment Loans in the total portfolio and the number of floating and
adjustable rate loan and non-New York medallion loan originations.
Equity Investments represented 0.5% and 3.0% of the Company's entire
portfolio at December 31, 1999 and 1998, respectively. The decrease in equity
investments was due to the sale of the Company's holdings of Radio One in 1999.
Trend in Interest Expense - The Company's interest expense is driven by
the interest rate payable on the Company's LIBOR-based short-term credit
facilities with bank syndicates, secured commercial paper, long-term notes
payable and, to a lesser degree, fixed-rate, long-term debentures issued to or
guaranteed by the SBA. In 1999, the Company has reduced its reliance on the SBA
by prepaying $31.1 million of debentures and issuing $45.0 million of senior
secured notes. The Company has retained $10.5 million of SBA financing, however
such financing is restricted in its application and its future availability is
uncertain. In addition, SBA financing subjects its recipients to limits on the
amount of secured bank debt they may incur. Accordingly, the Company plans to
limit its use of SBA funding. The Company believes that its entry into the
long-term private placement market increases its exposure to the investment
community and creates new financing opportunities. The Company has also been
making a transition to financing operations primarily with short-term
LIBOR-based secured bank debt and secured commercial paper which has generally
decreased its interest expense thus far. At the present time commercial paper is
priced at approximately 40-50 basis points below the rate charged under the
Company's revolving credit facilities. However, this has also increased the
Company's exposure to the risk of increases in market interest rates which the
Company attempts to mitigate with certain hedging strategies. At December 31,
1999 and December 31, 1998, short-term LIBOR-based debt including commercial
paper constituted 83.7% and 84.0% of total debt, respectively. The Company began
issuing commercial paper on March 16, 1998.
The Company's cost of funds is primarily driven by (i) the average
maturity of debt issued by the Company, (ii) the premium over LIBOR paid by the
Company on its LIBOR-based debt and secured commercial paper, and (iii) the
ratio of LIBOR-based debt to SBA financing and senior secured notes. The Company
incurs LIBOR-based debt for terms generally ranging from 1-180 days. The
Company's debentures issued to or guaranteed by the SBA typically have initial
terms of ten years and the Company's senior secured notes have a term of five
years. The Company's cost of funds reflect fluctuations in LIBOR to a greater
degree than in the past because LIBOR-based debt has come to represent a greater
proportion of the Company's debt. The Company measures its cost of funds as its
aggregate interest expense for all of its interest-bearing liabilities divided
by the face amount of such liabilities. The Company analyzes its cost of funds
in relation to the average of the 90- and 180-day LIBOR (the "LIBOR Benchmark").
The Company's average cost of funds e.o.p. at December 31, 1999 was 7.09% or 108
basis points over the LIBOR Benchmark of 6.01% compared to 6.42%, or 121 basis
points over the LIBOR Benchmark of 5.21% at December 31, 1998. Although the
Company achieved a 13 basis point improvement in the spread paid over the LIBOR
Benchmark, the average cost of funds e.o.p. was higher because of the 80 basis
point increase in the LIBOR Benchmark year over year.
Taxicab Rooftop Advertising. In addition to its 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 the
occupancy rate and advertising rate of those Displays. At December 31, 1999,
Media had approximately 6,400 installed Displays. The Company expects that Media
will continue to expand its operations by entering new markets on its own or
through acquisition of existing taxicab rooftop advertising companies. On
September 30, 1999, Media entered into an agreement with Yellow Cab Service
Corp. to sell advertising space on a commission basis on its 3,000 taxicab trunk
signs located throughout the Southeast. Although Media is a wholly-owned
30
<PAGE>
subsidiary of the Company, its results of operations are not consolidated with
the Company because the Securities and Exchange Commission regulations prohibit
the consolidation of non-investment companies with investment companies.
Under the Master Settlement Agreement between tobacco manufacturers and
the Attorneys General of various states (including those states in which the
Company conducts its taxitop advertising business), the tobacco manufacturers
agreed to eliminate general outdoor and transit advertising of tobacco products
by March 31, 1999. The loss of such advertising had an initial adverse effect
upon the taxicab rooftop advertising business of the Company. The Company
believes, however, that it has replaced some of the revenue which was lost due
to the elimination of tobacco taxicab rooftop advertising through contracts with
new advertisers from new industry sectors (i.e. internet companies) and
expansion into new markets. The Company believes that it will be able to
continue to replace the tobacco advertising contracts and in the long term this
agreement will not have a significant adverse impact on Media's financial
position or results of operations.
Factors Affecting Net Assets. Factors which affect the Company's net assets
include net realized gain/loss on investments and change in net unrealized
appreciation/depreciation of investments. Net realized gain/loss on investments
is the difference between the proceeds derived upon sale or foreclosure of a
loan and the cost basis of such loan or equity investment. Change in net
unrealized appreciation/depreciation of investments is the amount, if any, by
which the Company's estimate of the fair value of its investment
portfolio is above/below the previously established fair value or the cost basis
of the portfolio. Under the 1940 Act and the SBIA, the Company's loan portfolio
and other investments must be recorded at fair 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 value of the loan
portfolio. Since no ready market exists for the Company's loans, fair value is
subject to the good faith determination of the Company. In determining such
value, the Company and its Board of Directors takes into consideration factors
such as the financial condition of its borrowers, the adequacy of its collateral
and the relationships between current and projected market rates of interest and
portfolio rates of interest and maturities. Any change in the fair value of
portfolio loans or other investments as determined by the Company is reflected
in net unrealized depreciation or appreciation of investments and affects net
increase in net assets resulting from operations but has no impact on net
investment income or distributable income. Therefore, if recent decreases in
prevailing interest rates lead to a trend of lower interest rates, net increase
in net assets resulting from operations could increase. Upon the completion of
the Acquisitions on May 29, 1996, the Company's loan portfolio was recorded on
the balance sheet at fair value, which included $1.5 million of net unrealized
depreciation, as estimated by the Company in accordance with the 1940 Act and
the purchase method of accounting. In connection with the VGI, VGII and Venture
Opportunities portfolio acquisition, the Company recorded the investments on the
balance sheet at fair value, which included $200,000 of net unrealized
depreciation.
Commencement of Operations. Medallion Financial commenced operations in
connection with the simultaneous closing of its initial public offering and the
Acquisitions on May 29, 1996. Prior to that date, Medallion Financial had no
results of operations and each of Medallion Financial, Tri-Magna, Edwards and
TCC had been operating independently of each other. The acquisition of CDI, now
Medallion Capital, was accounted for as a pooling-of-interests and as such
requires that its operating results and its assets and liabilities be combined
with those of Medallion Financial since the inception of CDI. Therefore, the
predecessor company to the Acquisitions is a combination of Medallion Financial
with no activity and CDI. The results for the year ended December 31, 1996
reflect 12 months of operating results for CDI and only the seven months of
operating results from the period commencing May 30, 1996 and ending December
31, 1996 for Medallion Financial. The 1997 and 1998 financial statements have
been restated to include 12 months of operations for CDI. Further, the operating
results of BLL are included in the 1997 financial statements beginning October
31, 1997, the date the company was acquired. 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 (post pooling-
of-interests with CDI) for the years ending December 31, 1999, 1998 and 1997.
Consolidated Results of Operations
For the Years Ended December 31, 1999 and 1998.
Performance Summary. For the year ended December 31, 1999, net increase
in net assets resulting from operations has been positively impacted by the
growth of the loan portfolio and an increase in realized gains from the sale of
common and preferred stock warrants, offset by an increase in interest and
operating expenses.
Investment Income. Investment income increased $6.2 million or 17.7% in
1999 as compared to 1998. The Company's investment income reflects the positive
impact of portfolio growth during the year. Total portfolio growth was $83.4
million or 21.7% from $384.1 million at December 31, 1998 to $467.5 million at
December 31, 1999. The average portfolio outstanding in 1999 was $426.9 million
which generated $41.4 million of investment income at
31
<PAGE>
a weighted average of 9.70% as compared to $348.7 million average portfolio
outstanding in 1998 which generated $35.0 million of investment income at a
weighted average interest rate of 10.27%. The overall increase in investment
income of $6.2 million was primarily the result of higher outstanding loan
levels with a higher percentage of loans in commercial installment lending
portfolio which generated higher yields than Medallion loans. The lower yield on
the Medallion portfolio partially offset the increase in the investment income.
Total loan originations, net of participations, increased by $53.7
million or 22.0% to $298.2 million in 1999 compared to $244.5 million in 1998.
Not included in originations for 1998 are purchases of $16.7 million of loans
acquired as a result of the acquisition of VGI, VGII and Venture Opportunities
Corp. The originations were offset by prepayments, terminations and refinancings
by the Company aggregating $224.7 million in 1999 compared to $193.0 million in
1998.
The weighted average yield e.o.p. of the entire portfolio decreased 2
basis points to 9.91% at December 31, 1999 from 9.93% at December 31, 1998. The
decrease in the yield of the entire loan portfolio was caused by a decrease in
the yields of the Medallion and Commercial portfolios. The decrease in the
average yield on Medallion portfolio was caused by a reduction in loan yields
due to increased competition and refinancings by borrowers at lower rates. The
decrease in the commercial portfolio yield is due in part to the rise in the
quantity of floating rate loans tied to prime as a percentage of the Commercial
portfolio, because they are at lower yields than the older fixed rate loans
thus, shifting the average yield on Commercial Installment loans lower. In
addition, the current interest rate environment is such that the Company has
increased the origination of loans with shorter interest rate maturity dates,
which are issued at a lower interest rate further contributing to the decline in
the portfolio yield. However, the shorter maturity dates helps reduce the
Company's interest rate risk exposure.
Interest Expense. The Company's 1999 interest expense was $19.6 million,
an increase of $4.0 million or 25.8% from 1998. The Company's average cost of
funds e.o.p. increased 67 basis points to 7.09% or 108 basis points over the
LIBOR Benchmark of 6.01% at December 31, 1999 from 6.42% or 121 basis points
over the LIBOR Benchmark of 5.21% at December 31, 1998. The increase in the
average cost of funds e.o.p. was caused by an 80 basis point increase in the
LIBOR Benchmark. Also contributing to the increase in cost of funds e.o.p. was
an increase in the Company's issuance of LIBOR based bank debt, in place of
commercial paper which at the present time is generally priced approximately
40-50 basis points higher than the Company's commercial paper. Average total
borrowings increased $80.0 million or 36.5% to $298.9 million in 1999, producing
an interest expense of $19.6 million at a weighted average interest rate of
6.57% compared to $218.9 million in 1998 which produced an interest expense of
$15.6 million at a weighted average interest rate of 7.13%. The weighted average
interest rates include commitment fees and amortization of premiums on existing
interest rate cap agreements. The percentage of the Company's short-term LIBOR
based secured indebtedness including secured commercial paper decreased as a
percentage of total indebtedness to 83.7% at December 31, 1999 from 84.0% at
December 31, 1998, as the result of the issuance of $45 million of five year
senior secured notes which replaced $31.1 million of SBA debentures.
Net Interest Income. The increase in the net interest income was
primarily the result of the net increase in the principal outstanding in both
the Medallion and Commercial installment loan portfolios in 1999 over 1998 of
$37.0 million and $55.6 million respectively. Net interest income was positively
impacted by the 5 basis point or 1.5% increase in the average spread between the
average yield on the portfolio and the average cost of funds to 3.37% in 1999
from 3.32% in 1998.
Equity in Earnings of Unconsolidated Subsidiary. In 1999 Media generated
net income of $258,000 which includes approximately $473,000 of revenue from
taxi top advertising sales to the Company, compared to $1.2 million in 1998.
The decline is primarily the result of higher cost of goods sold and operating
expenses. Advertising revenue increased $2.4 million or 31.2% to $9.9 million in
1999 up from $7.5 million in 1998. Display rental costs increased $1.8 million
or 76.6% to $4.3 million in 1999 from $2.4 million in 1998. This resulted in a
gross margin in 1999 of approximately $5.6 million or 56.9% of advertising
revenue compared to $5.1 million or 67.9% in 1998. The increase in advertising
revenue and display rental cost is directly related to the increase in the
number of Displays owned by Media. The number of Displays owned by Media
increased 1,200 or 23% to approximately 6,400 at December 31, 1999. The
significant $2.4 million increase in revenue was partially offset by the
shortfall in revenue resulting from the elimination of higher priced tobacco
advertising with initially lower priced replacement contracts and a related
lower average display occupancy in 1999 of 81.4% down from 100% in 1998. Total
operating expense increased by $2.1 million in 1999 primarily due to increases
in the following expense
32
<PAGE>
categories: salary and benefits of $700,000, commission of $209,000, office
supplies of 63,000, travel and entertainment of $312,000. These increases
reflect the growth and expansion of the business.
Gain on sale of loans. The Company experienced a gain on the sale of the
guaranteed portion of SBA 7(a) loans in the amount of $3.0 million on loans sold
for the year ended December 31, 1999 compared to $2.3 million for the year ended
December 31, 1998. The increase in the gain is the result of the increase in the
sale of loans during the year of $53.8 million for 1999 compared to $23.0
million for 1998, offset by a reduction in the premiums received for the sales.
The Company accounts for gains on sale of loans in accordance with SFAS 125
(Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities). Based upon industry data and limited experience with this
portfolio, the Company has assumed a 15% prepayment speed in calculating the
gains on sale of loans and excess servicing assets. Management will continue to
review industry data as well as its experience with the portfolio and will
adjust discount rates and prepayment speeds, if deemed appropriate.
Other Income. The Company's other income increased $653,000 or 44.8% to
$2.1 million in 1999. Other income was primarily derived from servicing fee
income, late charges, prepayment fees and miscellaneous income. Approximately
$320,000 of the increase is due to growth in servicing fee income on the
guaranteed portion of SBA loans sold in the secondary market. Prepayment fees
are heavily influenced by the level and volatility of interest rates and
competition.
Non-Interest Expenses. The Company's non-interest expenses increased
$3.8 million or 27.4% to $17.4 million in 1999. Salary and benefits increased
$3.8 million or 68.0%, other operating expenses totaled $5.5 million for an
increase of $640,000 or 13.2% and professional fees increased $790,000 or 82.0%
to $1.8 million. The increase in salary and benefits of $3.8 million relates to:
the full year impact of 1998 staff changes, higher commissions, salary
adjustments, changes which lower the recording of deferred loan origination
costs, the full year impact of the Medallion Business Credit operation which was
partially in operation during 1998, higher accruals related to special bonus
payouts, and one time severance expense related to the Chief Operating Officer's
departure. Other operating expenses increase of $640,000 was primarily the
result of $250,000 expense related to the conversion of the Company's loan
system. The increase in professional fees related to expenses incurred in
reviewing potential acquisition candidates. The operating expense ratio
increased to 3.3% for 1999 from 3.2% for 1998. The operating expense ratio is
computed as non-interest expenses divided by total assets.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill was $530,000 in 1999 as compared to $506,000 in 1998,
and relates primarily to $6.6 million of goodwill generated in the acquisitions
of Edwards and TCC and $1.2 million related to the purchases of assets of VGI,
VGII and Venture Opportunities Corp. The acquisition of Business Lenders LLC
resulted in the addition of $66,000 of goodwill. Goodwill is the amount by
which the cost of acquired businesses exceeds the fair value of the net assets
acquired. Goodwill is being amortized on a straight-line basis over 15 years.
Negative goodwill is the excess of fair market value of net assets of an
acquired business over the cost basis of such business. Negative goodwill of
$2.9 million was generated in the acquisition of Tri-Magna and is being
amortized on a straight-line basis over four years. Accretion of negative
goodwill was $722,000 in 1999 and 1998.
Net Investment Income. Net investment income was $9.9 million in 1999, a
decrease of $1.7 million or 14.7% from $11.6 million in 1998. The decrease was
attributable to the $4.0 million increase in interest expense due to a higher
cost of funds in 1999, higher non-interest expenses of $3.8 million, offset
by an increase in investment income and non interest income of $6.2 million and
$653,000 respectively.
Change in Net Unrealized Depreciation/Appreciation. The change in net
unrealized depreciation in 1999 was $11.9 million as compared to a change in net
unrealized appreciation of $2.7 million in 1998. This change results from
approximately $5.4 million of net unrealized depreciation that was recognized
when Radio One stock owned by the Company was sold which offset the previously
recognized unrealized appreciation, and approximately $6.5 million of net
unrealized depreciation from additional loan loss reserves recorded.
Net Realized Gain on Investments. The Company had an increase in
realized net gain on investments of $21.4 million from $1.3 million in 1998 to
$22.7 million in 1999. The increase in realized gains was the result of the sale
of Radio One stock held by the Company.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations was $20.7 million in 1999 an increase of
$5.1 million or 32.5% over the $15.7 million earned in 1998. The increase was
attributable to the positive impact of portfolio growth, an increase in realized
gains offset by an increase in operating expenses and an
33
<PAGE>
increase in unrealized depreciation. Return on assets and return on equity for
the year ended December 31, 1999, were 4.45% and 13.76%, respectively, compared
to 4.1% and 10.6% for the year ended December 31, 1998.
Consolidated Results Of Operations
For the Years Ended December 31, 1998 and 1997.
Performance Summary. For the year ended December 31, 1998, net increase
in net assets resulting from operations has been positively impacted by the
growth of the Loan Portfolio and an increase in realized gains from the sale of
common and preferred stock warrants, offset by an increase in operating expenses
and the one time charge for merger related expenses.
Investment Income. Investment income increased $9.3 million or 36.0% in
1998 over 1997. The Company's investment income reflects the positive impact of
portfolio growth during the year. Total portfolio growth was $70.8 million or
22.6% from $313.3 million at December 31, 1997 to $384.1 million at December 31,
1998. The average portfolio outstanding in 1998 was $348.7 million which
generated $35.0 million of investment income at a weighted average of 10.27% as
compared to $255.2 million average portfolio outstanding in 1997 which generated
$25.8 million of investment income at a weighted average interest rate of
10.25%.
Loan originations net of participations increased by $27.4 million or
12.6% to $244.5 million in 1998 compared to $217.1 million in 1997. Not included
in originations for 1998 are purchases of $16.7 million of loans acquired as a
result of acquisition of VGI, VGII and Venture Opportunities Corp. The
originations were offset by prepayments, terminations and refinancings by the
Company aggregating $194.4 million in 1998 compared to $112.8 in 1997.
The weighted average yield e.o.p. of the entire portfolio decreased 27
basis points to 9.93% at December 31, 1998 from 10.20% at December 31, 1997. The
decrease in the yield of the entire loan portfolio was caused by a decrease in
the average yield on Medallion Loans, and Commercial Installment Loans as well
as a decrease in the percentage of the portfolio composed of higher yielding
Commercial Installment Loans which historically have been originated at a yield
of approximately 300 basis points higher than Medallion Loans and 250 to 600
basis points higher than the prevailing Prime Rate. The average yield e.o.p. of
the Medallion Loan portfolio decreased 24 basis points to 9.03% at December 31,
1998. The decrease in the average yield on Medallion Loans was caused by a
reduction in loan yields due to lower long-term interest rates and competition.
At December 31, 1998 the average yield of the Commercial Installment Loan
portfolio decreased 61 basis points to 12.13%. The decline in the commercial
portfolio yield is due in part to the drop in prime rate as the quantity of
floating rate loans tied to prime has increased as a percentage of the
Commercial portfolio. Thus, shifting the average yield on commercial loans
lower. In addition, the current interest rate environment is such that the
Company has increased the origination of loans with shorter interest rate
maturity dates, which are issued at a lower interest rate further contributing
to the decline in the portfolio yield. However, the shorter maturity dates
further reduces the Company's interest rate risk exposure. The decrease in
average yield e.o.p. of the entire loan portfolio was offset in part by the
growth in the Medallion loan portfolio during the period.
Interest Expense. The Company's 1998 interest expense was $15.6 million,
an increase of $5.5 million or 54.6% from 1997. The Company's average cost of
funds e.o.p. decreased 73 basis points to 6.42% or 121 basis points over the
LIBOR benchmark of 5.21% at December 31, 1998 from 7.15% or 132 basis points
over the LIBOR benchmark of 5.83% at December 31, 1997. The decrease in the
average cost of funds e.o.p. was caused by a reduction in the premium to LIBOR
paid by the Company combined with a 62 basis point decrease in the LIBOR
benchmark. Also contributing to the decrease in cost of funds e.o.p. was the
Company's issuance of commercial paper, which at the present time is generally
priced approximately 40-50 basis points less than the Company's revolving credit
facilities. Average total borrowings increased $81.1 million or 58.7% to $218.9
million in 1998 which produced an interest expense of $15.6 million at a
weighted average interest rate of 7.13% compared to $137.8 million 1997 which
produced an interest expense of $10.1 million at a weighted average interest
rate of 7.33%. The weighted average interest rates including commitment fees and
amortization of premiums on existing interest rate cap agreements as a
reflection of total cost of funds borrowed. The percentage of the Company's
short-term LIBOR based secured indebtedness including secured commercial paper
increased as a percentage of total indebtedness to 84.0% at December 31, 1998
from 77.6% at December 31, 1997.
Net Interest Income. Net interest income increased $3.8 million or 24.1%
to $19.5 million in 1998. Net interest income reflects the positive impact of
the portfolio growth during the year. The average spread between the average
yield on the portfolio and the average cost of funds increased 27 basis points
or 8.9% to 3.32% in 1998 from 3.05% in 1997.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $4.4 million or 141.9% to $7.5 million in 1998 up from $3.1 million in
1997. Display rental costs increased $1.2 million or 100.0% to $2.4 million from
34
<PAGE>
$1.2 million. This resulted in a gross margin in 1998 of approximately $5.1
million or 68.36% of advertising revenue compared to $1.9 million or 60.8% in
1997. The significant increase in advertising revenue and display rental cost is
directly related to the increase in the number of Displays owned by Media. The
number of Displays owned by Media increased 1,700 or 48.6% to approximately
5,200 at December 31, 1998. Operating costs increased $1.7 million or 113.0% in
1998. The increase in operating costs is a reflection of the expansion of the
Media operations. Income tax expense in 1998 amounted to $750,000. Media
generated net income of $1.2 million in 1998 compared to $203,000 in 1997. The
increase in net income is primarily the result of increases in the number of
Displays owned, improved margin and higher occupancy rates. Average display
occupancy was 100% during the year up from 84.6% during 1997. Net income is
recorded as equity in earnings or losses of unconsolidated subsidiary on the
Company's statement of operations.
Gain on sale of loans. The Company experienced a gain on the sale of the
guaranteed portion of SBA 7(a) loans in the amount of $2.3 million on loans sold
during the year. The Company accounts for gains on sale of loans in accordance
with SFAS 125 (Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities). Based upon industry data and limited experience
with this portfolio, the Company has assumed a 15% prepayment speed in
calculating the gains on sale of loans and excess servicing assets. Management
will continue to review industry data as well as its experience with the
portfolio and will adjust discount rates and prepayment speeds, if deemed
appropriate.
Other Income. The Company's other income increased $478,000 or 48.8% to
$1.5 million in 1998. Other income was primarily derived from late charges,
prepayment fees and miscellaneous income. Prepayment fees are heavily influenced
by the level and volatility of interest rates and competition.
Non-Interest Expenses. The Company's non-interest expenses increased
$7.1 million or 109.3% to $13.7 million in 1998. Included in non-interest
expenses for 1998 are $1.5 million of expenses related to the merger with
Medallion Capital. Exclusive of these expenses, non-interest expenses increased
$5.6 million or 86.5% to $12.2 million in 1998 as compared to $6.5 million in
1997. Other operating expenses were $4.8 million an increase of $2.2 million or
85.2% from 1997. Salaries and benefits increased $3.1 million or 123.7% to $5.6
million in 1998. Professional fees were $963,000 in 1998, an increase of
$136,000 or 16.4% from 1997. Administrative and advisory fees in 1998 were
$278,000 up from $226,000 in 1997. The operating expense ratio increased to 3.2%
for 1998 from 1.9% for 1997. The operating expense ratio is computed as
non-interest expenses divided by total assets. The significant increase in other
operating expenses and salary expense is principally the result of the
acquisition of certain assets and operations of Business Lenders LLC, which
added 50 full time employees and the related overhead of seven satellite offices
principally located in the eastern part of the country, to the Company's
non-interest expense. The additional staff and lending offices should continue
to provide additional loan growth for the Company.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill was $506,000 in 1998 up from $368,000 from 1997, and
relates to $6.6 million of goodwill generated in the acquisitions of Edwards and
TCC. The increase in amortization of goodwill is primarily related to the
purchases of assets of VGI, VGII and Venture Opportunities Corp. The goodwill
resulting from these acquisitions amounted to $1.2 million. The acquisition of
Business Lenders LLC resulted in the addition of $66,000 of goodwill. Goodwill
is the amount by which the cost of acquired businesses exceeds the fair value of
the net assets acquired. Goodwill is being amortized on a straight-line basis
over 15 years. Negative goodwill is the excess of fair market value of net
assets of an acquired business over the cost basis of such business. Negative
goodwill of $2.9 million was generated in the acquisition of Tri-Magna and is
being amortized on a straight-line basis over four years.
Net Investment Income. Net investment income was $11.6 million in 1998.
Exclusive of the merger related expenses of $1.5 million, net investment income
was $13.1 million an increase of $1.6 million or 13.9% from $11.5 million in
1997. The increase was attributable to the positive impact of portfolio growth
coupled with an increase in the spread between average yield on the portfolio
and the average cost of funds..
Change in Net Unrealized Depreciation/Appreciation. The change in net
unrealized appreciation in 1998 and 1997 was $2.7 million and $1.9 million,
respectively. The change was the result of the increase in the value of equity
investments that the Company owns.
Net Realized Gain/Loss on Investments. The Company had an increase in
realized net gain on investments of $1.2 million from $0.1 million in 1997 to
$1.3 million in 1998. The increase in realized gains was the result of the sale
of common and preferred stock warrants in connection with the repayment of
several loans.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations was $15.7 million in 1998 an increase of
$3.2 million or 25.6% over the $12.5 million earned in 1997. Exclusive of the
merger related expenses of $1.5 million, net investment income increased $1.6
million or 14% to $13.1 million in 1998. The increase was
35
<PAGE>
attributable to the positive impact of portfolio growth, an increase in realized
gains offset by an increase in operating expenses. Return on assets and return
on equity for the year ended December 31, 1998, were 4.1% and 10.6%,
respectively, compared to 4.5% and 8.4% for the year ended December 31, 1997.
Consolidated Results Of Operations
For the Years Ended December 31, 1997 and 1996.
Investment Income. Investment income in 1997 was $25.8 million and $12.3
in 1996. The Company's investment income reflects the positive impact of
portfolio growth during the period. Total portfolio growth was $116.2 million or
an increase of 58.9% to $313.3 at December 31, 1997 from $197.1 million at
December 31, 1996. The average portfolio outstanding during the year ended
December 31, 1997 was $255.2 million, which produced investment income of $25.8
million at a weighted average interest rate of 10.25%. Gross loan originations
net of participations during 1997 were $217.1 million offset by prepayments,
terminations and refinancings by the Company aggregating $112.8 million compared
to $77.2 million and $47.2 million in 1996. In addition, during 1997, the
Company repurchased approximately $22.5 million in Medallion Loans previously
participated out to other lenders.
Weighted average yield e.o.p. of the entire portfolio decreased 78 basis
points to 10.20% at December 31, 1997 from 10.98% at December 31, 1996. The
decrease in the yield of the entire loan portfolio was caused by a decrease in
the average yield on Medallion Loans coupled with a decrease in the average
yield on Commercial Installment Loans and a decrease in the percentage of the
portfolio composed of higher yielding Commercial Installment Loans. As of
December 31, 1997, Commercial Loans had historically been originated at a yield
of approximately 350 basis points higher than Medallion Loans and 500 to 700
basis points higher than the prevailing Prime Rate. The average yield e.o.p. of
the Medallion Loan portfolio decreased 65 basis points to 9.27% at December 31,
1997 from 9.92% at December 31, 1996. Further, the average yield of the
Commercial Installment Loan portfolio decreased 62 basis points to 12.74% at
December 31, 1997 from 13.36% at December 31, 1997. The decrease in the average
yield on Medallion Loans was caused by a reduction in loan yields due to lower
long-term interest rates and competition. To offset the resulting decline in
investment income, the Company increased its Medallion Loan portfolio by
continuing to buyback loan participations previously sold to third parties and
expanding lending. The Company also increased the origination of loans with
shorter interest rate maturity dates, thereby reducing the Company's interest
rate risk exposure. Although the Company's strategy was to try to shift its
portfolio mix towards higher yielding Commercial Installment Loans, this shift
was stalled by higher than expected growth in the Medallion Loan portfolio
during the year. The large decline in the commercial portfolio yield is the
result of the acquisition of the Business Lenders portfolio of approximately
$9.9 million of floating rate loans tied to prime at an average yield of 11.05%.
This purchase shifts the average yield on commercial loans lower, however,
interest rate exposure is mitigated by the floating rate nature of these loans.
The additional growth in the Medallion Loan portfolio was due in part to the
Company's use of a portion of the proceeds from its 1997 equity offering to
repurchase approximately $22.5 million in Medallion Loans which the Company had
previously participated out to other lenders.
Interest Expense. The Company's interest expense was $10.1 million in
1997 compared to $5.3 million in 1996. The Company's average cost of funds
e.o.p. was 7.15% or 132 basis points over the LIBOR benchmark of 5.83% at
December 31, 1997 compared to 7.15% or 157 basis points over the LIBOR benchmark
of 5.58% at December 31, 1996. The 25 basis point increase in the LIBOR
benchmark was offset by a reduction in the premium to LIBOR paid by the Company
keeping the average cost of funds e.o.p. flat at 7.15%,. The Company's net
borrowings at the end of the year, increased by $42.2 million or 31.2% to $177.5
million at December 31, 1997 from $135.3 million at December 31, 1996. The
increased borrowings were used to fund portfolio growth and the acquisition of
BLL. The percentage of the Company's short-term LIBOR based indebtedness
increased as a percentage of total indebtedness from 71.3% at December 31, 1996
to 77.6% at December 31, 1997. Average borrowings during 1997 were $137.8
million, which produced an interest expense of $10.1 million at a weighted
average interest rate of 7.33%. The weighted average interest rate of 7.33%
includes commitment fees and amortization of premiums on existing interest rate
cap agreements as a reflection of total cost of funds borrowed.
Net Interest Income. Net interest income was $15.8 million in 1997 and
$7.0 million in 1996. Net interest income reflects the positive impact of the
portfolio growth coupled with a slight increase in the average cost of funds
offset by a decrease in the spread between average yield and average cost of
funds. The average spread between the average yield on the portfolio and the
average cost of funds during 1997 was 3.05%.
Equity in Earnings of Unconsolidated Subsidiary. For the year ended
December 31, 1997, Media generated advertising revenue of $3.1 million up from
$1.1 million in the same period in 1996. Display rental costs of approximately
$1.2 million resulted in a gross margin of approximately $1.9 or 60.7% of
advertising revenue in 1997 compared to $600,000 or 54.4% of advertising revenue
in 1996. The number of Displays owned by Media were approximately 3,500 at
December 31, 1997. Operating expenses in 1997 and 1996 were $1.5 million and
$659,000, respectively. Media generated
36
<PAGE>
net income of $203,000 in 1997 compared to a $63,000 net loss in 1996. Net
income is recorded as equity in earnings or losses of unconsolidated subsidiary
on the Company's statement of operations. Display occupancy increased from 64.0%
at December 31, 1996 to 100.0% at December 31, 1997. The average for the year
was 84.6%.
Other Income. The Company derived $980,000 in other income in 1997 up
from $411,000 in 1996. Other income was primarily derived from late charges,
prepayment fees and miscellaneous income. Prepayment fees are heavily influenced
by the level and volatility of interest rates and competition.
Gain on Sale of Loans. The Company derived gains on the sale of loans of
$336,000 in 1997. There were none in 1996. The gains were the result of the sale
of approximately $5,415,000 of the guaranteed portions of the SBA Section 7a
loans originated by BLL since its acquisition on October 31, 1997. BLL retains
the servicing rights to these loans and receives a service fee of approximately
1.5% on the outstanding balance of each loan. This additional income is
reflected as an enhancement to the average yield. At December 31, 1997, BLL
serviced approximately $52.5 million for third parties.
Non-Interest Expenses. The Company had non-interest expenses of $6.5
million in 1997 and $3.3 million in 1996. Approximately $2.5 million of
non-interest expenses were related to salaries and benefits compared to $1.4
million in 1996. In 1997 and 1996, professional fees were $827,000 and $481,000
and other operating expenses were $2.6 million and $1.0 million, respectively.
The operating expense ratio was 1.92% for the year ended December 31, 1997.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill of in 1997 relates to $6.6 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 Investment Income. Net investment income earned during 1997 and 1996
was $11.5 million and $4.3 million, respectively. The increase reflects the
positive impact of portfolio growth offset by an increase in the average cost of
funds resulting in a decrease in the spread between average yield and average
cost of funds.
Change in Net Unrealized Depreciation/Appreciation. The change in net
unrealized appreciation in 1997 and 1996 was $1.9 million and $758,000,
respectively. The change was the result of the increase in the value of equity
investments that the Company owns.
Net Realized Gain/Loss on Investments. The Company realized a net gain
on investments of $78,000 during the year ended December 31, 1997. The gain was
the result of the sale of common and preferred stock warrants in connection with
the repayment of several loans and recoveries on certain loans secured by radio
dispatch and broadcast equipment and other assets used in connection with livery
taxicab services previously written off, offset by write- offs of $125,000
related to foreclosures on various equipment secured loans.
Net Increase in Net Assets Resulting from Operations. The 1997 net
increase in net assets resulting from operations was $12.5 million compared to
$5.2 million in 1996 and reflects portfolio growth offset by a decrease in the
spread between average yield and average cost of funds. Return on assets and
return on equity for the year ended December 31, 1997 were 4.5% and 8.4%,
respectively, compared to 4.4% and 7.2% for the year ended December 31, 1996.
RECENT DEVELOPMENTS
On December 22, 1999, the Company entered into an Agreement and Plan of
Merger with Freshstart Venture Capital Corp., a specialty finance company,
located in Long Island City, New York. The shareholders of Freshstart will
receive Medallion common stock having a fair value between $4.025 to
$4.875 for each share of Freshstart common stock. The closing of the transaction
is subject to the approval of the shareholders of Freshstart, regulatory
approval and the satisfaction of customary conditions.
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 SBA debentures).
37
<PAGE>
A relative measure of interest rate risk can be derived from the
Company's interest rate sensitivity gap. The interest rate sensitivity gap
represents the difference between interest-earning assets and interest-bearing
liabilities that mature and/or reprice within specified intervals of time. The
gap is considered to be positive when repriceable assets exceed repriceable
liabilities and negative when the inverse situation exists. A relative measure
of interest rate sensitivity is provided by the cumulative difference between
interest sensitive assets and interest sensitive liabilities for a given time
interval expressed as a percentage of total assets.
SCHEDULE OF PRINCIPAL PAYMENTS AS OF DECEMBER 31, 1999
The following schedule of principal payments sets forth at December 31,
1999 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 $476.7 million and
interest rate sensitive liabilities were $339.9 million at December 31, 1999.
The one year cumulative interest rate gap was negative $88.1 million, or 18.5%
of interest rate sensitive assets.
<TABLE>
<CAPTION>
MORE THAN 1 MORE THAN 2 MORE THAN 3 MORE THAN 5
LESS THAN AND LESS THAN AND LESS THAN AND LESS THAN AND LESS THAN
1 YEAR 2 YEARS 3 YEARS 5 YEARS 6 YEARS THEREAFTER TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Earning Assets
Medallion Loans
and Commercial
Fixed rate
Installment Loans $74,068 $62,430 $83,105 $125,933 $5,952 $3,002 $354,490
Variable rate
Installment Loans 116,247 116,247
Cash 5,962 5,962
-------- -------- ------- -------- -------- -------- --------
Total 196,277 62,430 83,105 125,933 5,952 3,002 476,699
Liabilities
Revolving line of
Credit 190,450 190,450
Commercial paper 93,984 93,984
SBA debentures 7,500 3,000 10,500
Senior Secured Notes 45,000 45,000
-------- -------- ------- -------- -------- -------- --------
Total 284,434 -- -- 45,000 7,500 3,000 339,934
-------- -------- ------- -------- -------- -------- --------
Interest rate gap $(88,157) $62,430 $83,105 $80,933 $(1,548) $ 2 $136,765
======== ======== ======= ======== ======== ======== ========
Cumulative interest
rate gap $(88,157) $(25,727) $57,378 $138,311 $136,763 $136,765
======== ======== ======= ======== ======== ========
</TABLE>
Having interest-bearing liabilities that mature or reprice more
frequently on average than assets may be beneficial in times of declining
interest rates, although such an asset/liability structure may result in
declining net earnings during periods of rising interest rates. Conversely,
having interest-earning assets that mature or reprice more frequently on average
than liabilities may be beneficial in times of rising interest rates, although
this asset/liability structure may result in declining net earnings during
periods of falling interest rates. The mismatch between maturities and interest
rate sensitivities of the Company's interest-earning assets and interest-bearing
liabilities results in interest rate risk. Abrupt increases in market rates of
interest may have an adverse impact on the Company's earnings.
The effect of changes in market rates of interest is mitigated by
regular turnover of the portfolio. From inception of its business in 1979
through 1996, the period between the origination and final payments of all
Medallion Loans originated by MFC, prior to the Acquisitions, is estimated by
the Company to have been 29 months on a weighted average basis. Accordingly, the
Company anticipates that approximately 40% of the portfolio will mature or be
prepaid each year. The Company believes that the average life of its loan
portfolio varies to some extent as a function of changes in interest rates
because borrowers are more likely to exercise prepayment rights in a decreasing
interest rate environment when the interest rate payable on the borrower's loan
is high relative to prevailing interest rates and are less likely to prepay in a
rising interest rate environment.
The Company seeks to manage the exposure of the balance of the portfolio
to increases in market interest rates by entering into interest rate cap
agreements to hedge a portion of its variable-rate debt against increases in
interest rates and by incurring fixed-rate debt consisting primarily of
subordinated SBA debentures. On April 17, 1997, MFC entered into an interest
rate cap agreement, limiting the Company's maximum LIBOR exposure on $10,000,000
of MFC's revolving credit facility to 6.0% until April 21, 1998. In addition, on
May 9, 1997, MFC entered into an interest rate cap agreement limiting
38
<PAGE>
the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit
facility to 6.5% until May 13, 1998 and 7.0% until November 13, 1999. On May 12,
1997, MFC entered into an interest rate cap agreement limiting the Company's
maximum LIBOR exposure on $10,000,000 of MFC's revolving credit facility to 7.0%
until May 13, 1999. Further, on April 7, 1998, MFC entered into an interest rate
cap agreement limiting the Company's maximum LIBOR exposure on $20,000,000 of
MFC's revolving credit facility to 6.5% until September 30, 1999 and 7.0% until
March 30, 2001. In addition, on July 6, 1999, MFC entered into two interest rate
cap agreements limiting the Company's maximum LIBOR exposure on a total of
$20,000,000 of MFC's revolving credit facility to 6.5% until July 6, 2001. At
December 31, 1999, these caps hedged 10.6% of the Company's LIBOR-based
indebtedness including commercial paper. In addition, the Company manages its
exposure to increases in market rates of interest by incurring fixed rate
indebtedness, such as five year senior secured notes and subordinated SBA
debentures. At December 31, 1999, the Company principal outstanding of $45.0
million of senior secured notes with fixed rate of interest of 7.20% and $10.5
million of SBA debentures with a weighted average rate of interest of 7.08%. At
December 31, 1999, the secured notes and the debentures constituted 13.2% and
3.1% respectively, 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, senior secured notes, fixed rate, long-term SBA debentures that are
issued to or guaranteed by the SBA, loan amortization and prepayments and a
secured commercial paper program with Salomon Smith Barney and USBancorp. 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, 1999 the Company's $339.9 million of
outstanding debt was comprised as follows: 56.1% bank debt, substantially all
of which was at variable effective rates of interest with an annual weighted
average interest rate of 6.76% or 174 below the Prime Rate, 27.6% secured
commercial paper with an annual weighted average interest rate of 5.96% or 254
below the Prime Rate, 13.2% long-term senior secured notes fixed at an interest
rate of 7.2%,and 3.1% subordinated SBA debentures, with fixed rates of interest
with an annual weighted average rate of 8.27%. The Company is eligible to seek
SBA funding but plans to continue to limit its use of SBA funding and will seek
such funding only when advantageous. 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 $35.6 million of debt
was available at December 31, 1999 at variable effective rates of interest
averaging below the Prime Rate under the Company's $320.0 million bank credit
facilities. The Company has observed a practice of minimizing credit facility
fees associated with the unused component of credit facilities by keeping the
unused component as small as possible and periodically increasing the amounts
available under such credit facilities only when necessary to fund portfolio
growth.
39
<PAGE>
The following table illustrates the Company's and each of the
subsidiaries' sources of available funds, amounts outstanding under credit
facilities and their respective end of period weighted average interest rates at
December 31, 1999:
<TABLE>
<CAPTION>
Medallion
Financial MFC BLLC MCC MBC Total
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Cash $ 411 $ 2,089 $480 $2,454 $528 $ 5,962
Revolving lines of credit 100,000 195,000(1) -- -- 295,000
Amounts available 8,800 1,766 -- -- -- 10,566(2)
Amounts outstanding 91,200 99,250 -- -- -- 190,450
Average interest rate 7.44% 7.20% -- -- -- 7.31%
Maturity 7/00 7/01 -- -- -- 7/00-7/01
Commercial paper
Amounts outstanding -- 93,984 -- -- -- 93,984
Average interest rate -- 6.60% -- -- -- 6.60%
Maturity -- 6/01 -- -- -- 6/01
SBA debentures -- -- -- 10,500 -- 10,500
Average interest rate -- -- -- 7.08% -- 7.08%
Maturity -- -- -- -- 3/06-6/07
3/06-6/07 --
Senior secured notes -- 45,000 -- -- -- 45,000
Average interest rate -- 7.20% -- -- -- 7.20%
Maturity -- 6/04 -- -- -- 6/04
Total cash and remaining amounts
available under credit 9,211 3,855 480 2,454 528 16,528
facilities
Total debt outstanding $ 91,200 $238,234 $ - $ 10,500 $ - $339,934
</TABLE>
(1) The Company increased its aggregate credit commitment to $220 million
effective February 10, 2000.
(2) Commercial paper outstanding is deducted from revolving credit lines
available as the revolving credit line acts as a liquidity facility for the
commercial paper.
Loan amortization and prepayments also provide a source of funding for
the Company. Prepayments on loans are influenced significantly by general
interest rates, Medallion Loan market rates, economic conditions and
competition. Medallion Loan prepayments have slowed since early 1994, initially
because of increases, and then stabilization, in the level of interest rates and
more recently because of an increase in the percentage of the Company's
Medallion Loans which are refinanced with the Company rather than through other
sources of financing.
The Company makes limited use of SBA funding and will seek such funding
only when advantageous and has consistently reduced its reliance on such
funding. On June 1, 1999, the Company issued $22.5 million of senior secured
notes (the Notes) that mature on June 1, 2004. The Notes bear a fixed rate of
interest of 7.2% and interest is paid quarterly in arrears. The Notes rank pari
pasu with the Revolvers and commercial paper through inter-creditor agreements.
On September 1, 1999, the note-holders purchased an additional $22.5 million
under the same terms and conditions. The proceeds of the Notes were used to
pre-pay $31.1 million of the Company's outstanding SBA debentures. At
December 31, 1999 only $10.5 million of debentures were still outstanding.
Media funds its operations through internal cash flow and inter-company
debt. Media is not a RIC and, therefore, is able to retain earnings to finance
growth.
The Company believes that 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
in the short-term.. The Company is exploring several options to increase its
available funds in order to the meet the Company's growth and expansion
strategy.
INVESTMENT CONSIDERATIONS
The following are certain of the factors that could affect the Company's
future results. They should be considered in connection with evaluating
forward-looking statements contained in this Management's Discussion and
Analysis and elsewhere in this Annual Report and otherwise made by or on behalf
of the Company since these factors, among others, could cause actual results and
conditions to differ materially from those projected in these forward-looking
statements.
Interest Rate Spread. The Company's net interest income is largely
dependent upon achieving a positive interest rate spread and other factors.
40
<PAGE>
Leverage. The Company's use of leverage poses certain risks for holders
of the Common Stock, including the possibility of higher volatility of both the
net asset value of the Company and the market price of the Common Stock and,
therefore, an increase in the speculative character of the Common Stock.
Availability of Funds. The Company has a continuing need for capital to
finance its lending activities. The Company funds its operations through credit
facilities with bank syndicates and, to a lesser degree, through senior secured
notes and subordinated SBA debentures. Reductions in the availability of funds
from banks and under SBA programs on terms favorable to the Company could have a
material adverse effect on the Company. Because the Company distributes to its
shareholders at least 90% of its investment company taxable income, such
earnings are not available to fund loan originations.
Industry and Geographic Concentration. A substantial portion of the
Company's revenue is derived from operations in New York City and these
operations are substantially focused in the area of financing New York City
taxicab medallions and related assets. There can be no assurance that an
economic downturn in New York City in general, or in the New York City taxicab
industry in particular, would not have an adverse impact on the Company.
Reliance on Management. The success of the Company will be largely
dependent upon the efforts of senior management. The death, incapacity or loss
of the services of any of such individuals could have an adverse effect on the
Company.
Taxicab Industry Regulation. Every city in which the Company originates
Medallion Loans, and most other major cities in the United States, limit the
supply of taxicab medallions. In many markets, regulation results in supply
restrictions which, in turn, support the value of medallions; consequently,
actions which loosen such restrictions and result in the issuance of additional
medallions into a market could decrease the value of medallions in that market
and, therefore, the collateral securing the Company's then outstanding Medallion
Loans, if any, in that market. The Company is unable to forecast with any degree
of certainty whether any potential increases in the supply of medallions will
occur. In New York City, and in other markets where the Company originates
Medallion Loans, taxicab fares are generally set by government agencies, whereas
expenses associated with operating taxicabs are largely unregulated. As a
consequence, in the short term, the ability of taxicab operators to recoup
increases in expenses is limited. Escalating expenses, therefore, can render
taxicab operation less profitable and make it more difficult for borrowers to
service loans from the Company and could potentially adversely affect the value
of the Company's collateral.
Government Regulation of Tobacco Advertising. Under the Master
Settlement Agreement between tobacco manufactures and the attorneys general of
various states (including these states in which the Company conducts its outdoor
advertising business), the tobacco manufacturers agreed to eliminate
general outdoor and transit advertising of tobacco products by March 31, 1999.
Taxicab rooftop advertising was covered under this agreement.
Year 2000. The Year 2000 problem concerns the inability of systems,
primarily computer software programs, to properly recognize and process date
sensitive information relating to the Year 2000 and beyond. The Company, in the
ordinary course of business, has for several years had several information
system improvement initiatives underway. These initiatives included the
installation of new loan servicing software and update of the general ledger
system and such initiatives are expected to be Year 2000 compliant. The Company
has completed these installations as of December 31, 1999. The Company received
Year 2000 compliance letters from each of its major software vendors and its
major office systems vendors.
The Company estimates that the total cost involved in the Year 2000
project was approximately $30,000. This excludes the costs related to new loan
servicing software and update of the general ledger system.
Management believes that the Company did not suffer any material effects
relating to the Year 2000 problem. Management further believes its third party
vendors were Year 2000 compliant and the Company has not been informed of any
material problems with its third party vendors relating to Year 2000 problem.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Rule 3-05 of Regulations S-K,
the quantitative and qualitative disclosures called for by this Item 7A and by
Rule 3-05 of Regulation S-K are inapplicable to the Company at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in the response found under Item 14(A)(1)
in this Annual Report on Form 10-K.
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption
"Executive Officers of the Registrant" in Part I hereof and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the caption "Election of Directors" in the Company's Proxy Statement relating to
its Annual Meeting of Stockholders scheduled for June 15, 2000 (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Stock Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Certain Transactions" in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedules as listed in
the Index to Financial Statements are filed as part of this Annual Report on
Form 10-K.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
The Exhibits filed as part of this Annual Report on Form 10-K are
listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit
Index is incorporated herein by reference.
42
<PAGE>
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Form 10-K and those that
may be made in the future by or on behalf of the Company, the Company notes that
there are various factors that could cause actual results to differ materially
from those set forth in any such forward-looking statements. The forward-looking
statements contained in this Form 10-K were prepared by management and are
qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond the control of the
Company. Accordingly, there can be no assurance that the forward-looking
statements contained in this Form 10-K will be realized or that actual results
will not be significantly higher or lower. The statements have not been audited
by, examined by, compiled by or subjected to agreed-upon procedures by
independent accountants, and no third-party has independently verified or
reviewed such statements. Readers of this Form 10-K should consider these facts
in evaluating the information contained herein. In addition, the business and
operations of the Company are subject to substantial risks which increase the
uncertainty inherent in the forward-looking statements contained in this Form
10-K. The inclusion of the forward-looking statements contained in this Form
10-K should not be regarded as a representation by the Company or any other
person that the forward-looking statements contained in this form 10-K will be
achieved. In light of the foregoing, readers of this Form 10-K are cautioned not
to place undue reliance on the forward-looking statements contained herein.
These risks and others that are detailed in this Form 10-K and other documents
that the Company files from time to time with the Securities and Exchange
Commission, including quarterly reports on Form 10-Q and any current reports on
Form 8-K must be considered by any investor or potential investor in the
Company.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEDALLION FINANCIAL CORP.
By: /s/ Daniel F. Baker
-------------------------------------
Daniel F. Baker
Treasurer and Chief Financial Officer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Alvin Murstein Chairman of the Board of Directors March 30, 2000
- ----------------------------------------- and Chief Executive Officer
Alvin Murstein
/s/ Daniel F. Baker Treasurer and Chief Financial Officer March 30, 2000
- -----------------------------------------
Daniel F. Baker
/s/ Andrew M. Murstein President and Director March 30, 2000
- -----------------------------------------
Andrew M. Murstein
/s/ Mario M. Cuomo Director March 30, 2000
- -----------------------------------------
Mario M.Cuomo
/s/ Stanley Kreitman Director March 30, 2000
- -----------------------------------------
Stanley Kreitman
/s/ David L. Rudnick Director March 30, 2000
- -----------------------------------------
David L. Rudnick
/s/ Benjamin Ward Director March 30, 2000
- -----------------------------------------
Benjamin Ward
/s/ Frederick S. Hammer Director March 30, 2000
- -----------------------------------------
Frederick S. Hammer
</TABLE>
44
<PAGE>
MEDALLION FINANCIAL CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
MEDALLION FINANCIAL CORP.
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.............................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............................... F-3
Consolidated Statements of Operations for the Years ended December 31, 1999, 1998 and 1997. F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years ended
December 31, 1999, and 1998 and 1997....................................................... F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997. F-6
Notes to Consolidated Financial Statements................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Medallion Financial Corp.:
We have audited the accompanying consolidated balance sheets of Medallion
Financial Corp. (a Delaware corporation) and its subsidiaries (the "Company") as
of December 31, 1999 and 1998, including the consolidated schedules of
investments as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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. 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 and investments in equity
securities valued at $467,462,930 (92% of total assets) and $384,095,172 (91% of
total assets) as of December 31, 1999 and 1998, 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, the
Board of Directors' estimate of values may differ significantly from the values
that would have been used had a ready market for the investments 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 Medallion Financial
Corp. and its subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
New York, New York
March 29, 2000
F-2
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Investments :
Medallion loans $ 303,093,283 $ 266,061,808
Commercial installment loans 162,033,462 106,422,835
Equity investments 2,336,185 11,610,529
------------- -------------
Net investments 467,462,930 384,095,172
Investment in and loans to unconsolidated subsidiary 4,349,651 5,033,661
------------- -------------
Total investments 471,812,581 389,128,833
Cash 5,961,776 6,027,596
Accrued interest receivable 4,887,142 3,640,301
Receivable from sale of loans 10,563,503 9,569,989
Servicing fee receivable 4,878,783 2,290,303
Fixed assets, net 2,378,686 1,939,859
Goodwill, net 6,180,151 6,710,248
Other assets, net 2,949,906 2,918,113
------------- -------------
Total assets $ 509,612,528 $ 422,225,242
============= =============
LIABILITIES
Accounts payable and accrued expenses $ 9,318,480 $ 5,593,101
Dividends payable 5,609,773 4,764,681
Accrued interest payable 3,711,199 2,308,229
Notes payable to banks 190,450,000 115,600,000
Senior secured notes 45,000,000 -
Commercial paper 93,983,792 103,081,785
SBA debentures payable 10,500,000 41,590,000
------------- -------------
Total liabilities $ 358,573,244 $ 272,937,796
Negative goodwill, net 350,516 1,072,916
Commitments and contingencies (Note 11)
SHAREHOLDERS' EQUITY
Preferred Stock (1,000,000 shares of $.01 par value
stock authorized - none outstanding) $ - $ -
Common stock (50,000,000 shares of $.01 par value
stock authorized, 14,024,433 and 14,013,768 shares
outstanding at December 31, 1999 and 1998, respectively) 140,245 140,138
Capital in excess of par value 142,015,875 141,376,068
Accumulated undistributed net investment income 8,532,648 6,698,324
------------- -------------
Total shareholders' equity 150,688,768 148,214,530
------------- ------------
Total liabilities and shareholders' equity $ 509,612,528 $ 422,225,242
============= =============
Number of common shares and common share equivalents 14,129,210 14,143,537
Net asset value per share $10.67 $10.48
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Investment income:
Interest income on investments.................... 41,079,652 $34,814,490 $25,646,513
Interest income on short-term investments 300,753 342,146 201,678
---------- ---------- ----------
Total investment income........................ 41,380,405 35,156,636 25,848,191
Interest expense:
Notes payable to bank............................. 8,734,914 8,905,679 7,041,286
Commercial paper.................................. 7,171,459 3,555,769 -
SBA debentures.................................... 2,216,084 3,147,576 3,057,571
Notes payable to bondholders...................... 1,512,684 -
---------- ---------- ----------
-
Total interest expense......................... 19,635,141 15,609,024 10,098,857
Net interest income............................... 21,745,264 19,547,612 15,749,334
Non-interest income:
Equity in (losses) earnings of unconsolidated
subsidiary.......... (214,314) 1,200,389 203,424
Accretion of negative goodwill............... 722,400 722,400 722,400
Gain on sale of loans............................. 3,014,478 2,316,245 336,300
Other income..................................... 2,111,812 1,458,802 980,309
---------- ---------- ----------
Total non-interest income........................ 5,634,376 5,697,836 2,242,433
Non-interest expenses:
Administration and advisory fees................ 245,332 277,808 226,086
Professional fees................................ 1,753,284 963,119 827,438
Salaries and benefits............................. 9,453,960 5,627,932 2,516,118
Other operating expenses......................... 5,454,104 4,814,948 2,599,199
Amortization of goodwill......................... 530,097 505,641 368,196
Merger related expenses........................... - 1,494,491 -
---------- ---------- ----------
Total non-interest expenses....................... 17,436,777 13,683,939 6,537,037
Net investment income before income taxes................ 9,942,863 11,561,509 11,454,730
Income tax benefit (provision)................ (46,358) 153,538 (928,910)
---------- ---------- ----------
Net investment income after income taxes........... 9,896,505 11,715,047 10,525,820
Increase in net unrealized (depreciation)/appreciation (11,910,469) 2,675,923 1,929,468
on investments
Net realized gain on investments 22,746,032 1,290,743 77,501
---------- ---------- ----------
Net increase in net assets resulting from operations $ 20,732,068 $15,681,713 $12,532,789
Net increase in net assets resulting from operations
per common share:
Basic............................................. $1.48 $1.12 $1.03
Diluted.......................................... $1.47 $1.11 $1.02
Weighted average common shares outstanding:
Basic Average Shares............................. 14,018,049 13,963,665 12,123,690
Diluted Average Shares........................... 14,122,826 14,093,434 12,271,783
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Shares of Accumulated
Common Capital Undistributed
Stock Common Stock in Excess Net Investment
Outstanding $.01 Par Value of Par Value Income
----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 (Restated)....... 9,212,544 $92,125 $67,680,608 $4,781,202
Issuance of common stock under
offering..................................... 4,600,000 46,000 74,293,425 -
Exercise of stock options.................... 96,372 964 519,204 -
Capitalization of undistributed income....... - - 1,188,101 (1,188,101)
Distributable net investment income.......... - - - 10,603,321
Dividends declared on common stock ($.92 per
share)..................................... - - - (11,210,807)
SOP 93-2 cumulative reclassification......... - - (615,688) 615,688
Change in unrealized appreciation, net....... - - - 1,929,468
---------- --------- ------------ ----------
Balance at December 31, 1997 (Restated)....... 13,908,916 139,089 143,065,650 5,530,771
Exercise of stock options.................... 104,852 1,049 568,498 -
Distributable net investment income.......... - - - 13,005,790
Dividends declared on common stock ($1.20 per - - - (16,772,240)
share).....................................
SOP 93-2 cumulative reclassification......... - - (2,258,080) 2,258,080
Change in unrealized appreciation, net....... - - - 2,675,923
---------- --------- ------------ ----------
Balance at December 31, 1998.................. 14,013,768 140,138 141,376,068 6,698,324
Exercise of stock options.................... 10,665 107 110,518
Distributable net investment income.......... - - - 32,642,537
Dividends declared on common stock ($1.31 per
share)..................................... - - - (18,368,455)
SOP 93-2 cumulative reclassification......... - - 529,289 (529,289)
Change in unrealized appreciation, net....... - - - (11,910,469)
---------- --------- ------------ ----------
Balance at December 31, 1999.................. 14,024,433 $ 140,245 $142,015,875 $8,532,648
========== ========= ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
(Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 20,732,068 $ 15,681,713 $ 12,532,789
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Depreciation and amortization................................... 641,656 360,545 80,072
Amortization of goodwill........................................ 530,097 505,641 368,196
Amortization of origination costs............................... 971,091 1,352,962 510,272
Accretion of negative goodwill.................................. (722,400) (722,400) (722,400)
Increase in unrealized depreciation (appreciation), net......... 11,910,469 (2,675,923) (1,929,468)
Net realized gain on investments................................ (22,746,032) (1,290,743) (77,501)
Equity in losses (earnings) of unconsolidated subsidiary........ 214,314 (1,200,389) (203,424)
Increase in accrued interest receivable......................... (1,246,841) (269,169) (1,349,220)
(Increase) decrease in receivable from sale of loans............ (993,514) (6,707,008) 1,493,189
Increase in servicing fee receivable............................ (2,588,480) (672,888) (81,400)
Decrease (increase) in other assets............................. (272,169) 66,645 (183,112)
Increase (decrease) in accounts payable and accrued expenses... 3,725,379 (1,959,089) 4,213,641
Increase (decrease) in accrued interest payable................. 1,402,970 1,319,953 (215,053)
----------- ------------ -----------
Net cash provided by operating activities........................ 11,558,608 3,789,850 14,436,581
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of investments..................................... (298,210,826) (244,484,885) (217,134,601)
Proceeds from sales and maturities of investments............... 224,707,540 193,003,495 112,311,497
Investment in and loans to unconsolidated subsidiary, net....... 559,696 (1,137,211) (971,071)
Payment for purchase of VGI, VGII and VOC....................... - (11,963,072) -
Payment for purchase of BLL, net................................ - - (1,022,984)
Capital expenditures............................................ (930,107) (1,776,565) (118,958)
----------- ------------ -----------
Net cash used for investing activities........................... (73,873,697) (66,358,238) (106,936,117)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) notes payable to banks............. 74,850,000 (22,150,000) 43,300,000
Repayment of term loan agreement................................ - - (2,000,000)
Proceeds from senior secured notes.............................. 45,000,000 - -
Proceeds from (repayment of) issuance of commercial paper....... (9,097,993) 103,081,785 -
Repayment of notes payable to SBA............................... (31,090,000) (4,380,000) (735,918)
Repayment of notes payable to other............................. - - (12,481,408)
Proceeds from public offering of common stock, net of expenses.. - - 74,339,425
Proceeds from exercise of stock options......................... 110,625 569,547 520,168
Payment of declared dividends to current shareholders........... (17,523,363) (15,601,961) (9,465,630)
----------- ------------ -----------
Net cash provided by financing activities....................... 62,249,269 61,519,371 93,476,637
NET (DECREASE) INCREASE IN CASH.................................. (65,820) (1,049,017) 977,101
CASH, beginning of year.......................................... 6,027,596 7,076,613 6,099,512
----------- ------------ -----------
CASH, end of year................................................ $5,961,776 $6,027,596 $7,076,613
=========== ============ ===========
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest........................... $18,232,171 $ 14,171,989 $10,313,910
=========== ============ ===========
Cash paid during the year for income taxes....................... $814,575 $ -- $ 317,914
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-6
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
In conjunction with the Acquisitions, liabilities were assumed as follows:
1999 1998 1997
---- ---- ----
VG Group BLL
----------- -----------
Fair value of goodwill and assets
acquired, other than cash $ - $18,455,155 $16,353,970
Cash acquired - - 256,538
Cash paid - 11,963,072 1,279,522
Cash paid, net - 11,963,072 1,022,984
Liabilities assumed $ - $ 6,492,083 $15,330,986
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES
Medallion Financial Corp. (the Company) is a closed-end management
investment company organized as a Delaware corporation in 1995. The Company has
elected to be regulated as a business development company under the Investment
Company Act of 1940, as amended (the 1940 Act). On May 29, 1996, the Company
completed an initial public offering (the Offering) of its common stock, issued
and sold 5,750,000 shares at $11.00 per share and split the existing 200 shares
of common stock outstanding into 2,500,000 shares. All share and related amounts
in the accompanying financial statements have been restated to reflect this
stock split. Offering costs incurred by the Company in connection with the sale
of shares totaling $7,102,944 were recorded as a reduction of capital upon
completion of the Offering. These costs were recorded, net of $200,000 payable
by Tri-Magna Corporation and subsidiaries (Tri-Magna) in accordance with the
Merger Agreement. In parallel with the Offering, the Company merged with Tri-
Magna; acquired substantially all of the assets and assumed certain liabilities
of Edwards Capital Company, a limited partnership; and acquired all of the
outstanding voting stock of Transportation Capital Corp. (TCC) (collectively,
the 1996 Acquisitions). The assets acquired and liabilities assumed from Edwards
Capital Company were acquired and assumed by Edwards Capital Corporation
(Edwards), a newly formed and wholly owned subsidiary of the Company. As a
result of the merger with Tri-Magna in accordance with the Merger Agreement
dated December 21, 1995 between the Company and Tri-Magna, Medallion Funding
Corp. (MFC) and Medallion Taxi Media, Inc. (Media), formerly subsidiaries of
Tri-Magna, became wholly owned subsidiaries of the Company.
MFC, Edwards and TCC are closed-end management investment companies
registered under the 1940 Act and are each licensed as a small business
investment company (SBIC) by the Small Business Administration (SBA). As an
adjunct to the Company's taxicab medallion finance business, Media operates a
taxicab rooftop advertising business. In 1998, the Company decided to merge all
of the assets and liabilities of Edwards and TCC into MFC, subject to the
approval of the SBA. The Company obtained approval from the SBA and the merger
became effective on June 1, 1999.
On October 31, 1997, the Company consummated the purchase of
substantially all of the assets and liabilities of Business Lenders, Inc.
through the Company's wholly owned subsidiary, BLI Acquisition Co., LLC. In
connection with the transaction, BLI Acquisition Co., LLC was renamed Business
Lenders, LLC (BLL). BLL is licensed by the SBA under its section 7(a) program.
In connection with the 1996 Acquisitions, the Company received the
Acquisition Orders under the 1940 Act from the Securities and Exchange
Commission. Approval from the Connecticut State Department of Banking and the
SBA was obtained for the BLL acquisition.
In September 1998, the Company created Medallion Business Credit LLC
(MBC), as a wholly owned subsidiary. MBC originates loans to small businesses
for the purpose of financing inventory and receivables.
On May 27, 1998, the Company completed the acquisition of certain assets
and assumption of certain liabilities of Venture Group I, Inc. (VGI), Venture
Group II, Inc. (VGII) and Venture Opportunities Corp., (VOC), an SBIC lender
headquartered in New York, New York.
On June 16, 1998, the Company completed the merger with Capital
Dimensions, Inc. (CDI) a Specialized Small Business Investment Company (SSBIC)
lender, headquartered in Minneapolis, Minnesota. CDI was subsequently renamed
Medallion Capital, Inc. (Medallion Capital). The charter was amended to convert
Medallion Capital to an SBIC. The transaction was accounted for as a tax-free
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended, and was treated under the pooling-of-interests method of accounting.
On December 22, 1999, the Company entered into an Agreement and Plan of
Merger with Freshstart Venture Capital Corp. (Freshstart), a specialty finance
company, located in Long Island City, New York. The shareholders of Freshstart
will receive common stock of the Company having a fair value between $4.025 to
$4.875 for each share of Freshstart common stock. The closing of the transaction
is subject to the approval of the shareholders of Freshstart, regulatory
approval and the satisfaction of customary conditions. Proforma information
related to the transaction with Freshstart has not been included as the
transaction is not expected to be material to the Company.
F-8
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
(2) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company primarily engages, directly and/or through its principal
subsidiaries, in the business of making loans to small businesses and, to a
lesser degree, in the business of taxicab rooftop advertising. The Company
originates and services loans that finance 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) as well as originates and sells loans guaranteed
by the SBA. While medallion and commercial installment loans are originated
substantially in the metropolitan New York, New Jersey and Connecticut areas,
the Company also finances medallion loans in the Boston, Cambridge, Baltimore,
Chicago and Newark areas.
Summary of Significant Accounting Policies
(a) Use of Estimates
The accounting and reporting policies of the Company conform with
generally accepted accounting principles and general practices in the investment
company industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reporting and disclosure of assets and
liabilities, including those that are of a contingent nature, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
(b) Principles of Consolidation and Use of the Equity Method
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, except for Media. All significant
intercompany transactions, balances and profits have been eliminated in
consolidation. The consolidated statements give retroactive effect to the merger
with Capital Dimensions Inc. (CDI), subsequently named Medallion Capital.
Subsequent to the merger, Medallion Capital changed its fiscal year end from
June 30 to December 31 to coincide with the Company's year end. As a result of
the merger being accounted for as a pooling-of-interests and the changing of
Medallion Capital's fiscal year end, Medallion Capital's financial statements
for 1997 were recast to a twelve-month period ending December 31. The
consolidated financial statements for 1997 were restated, including all per
share data, to retroactively combine Medallion Capital's financial statements as
if the merger had occurred at the beginning of the earliest period presented.
The Company's investment in Media is accounted for under the equity
method. All significant intercompany transactions, balances and profits have
been eliminated in the use of 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 5 for the presentation of financial
information for Media.
(c) Investment Valuation
The Company's loans, net of participations and any unearned discount,
are considered investments under the 1940 Act and are recorded at fair value.
Loans are valued at cost less unrealized depreciation. Since no ready market
exists for these loans, the fair value is determined in good faith by the Board
of Directors. In determining the fair value, the Company and Board of Directors
consider factors such as the financial condition of the borrower, the adequacy
of the collateral, individual credit risks, historical loss experience and the
relationships between current and projected market rates and portfolio rates of
interest and maturities.
Investments in equity securities and stock warrants are recorded at fair
value, represented as cost, plus or minus unrealized appreciation or
depreciation, respectively. The fair value of investments that have no ready
market, are determined by the Board of Directors based upon assets and revenues
of the underlying investee company as well as general market trends for
businesses in the same industry. Included in equity investments at December 31,
1999 are marketable and non-marketable securities of approximately $1,896,000
and $440,000, respectively. At December 31, 1998, the respective balances were
approximately $1,658,000 and $9,952,000. Approximately 8.6% and 86.0% of the
equity investments at December 31, 1999 and 1998 respectively, are warrants to
purchase shares that are attached to commercial loans held by Medallion Capital.
F-9
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
Because of the inherent uncertainty of valuations, the Board of
Directors' estimates of the values of the investments may differ significantly
from the values that would have been used had a ready market for the investments
existed and the differences could be material.
The Company's investments consist primarily of long-term loans to
persons defined by SBA regulations as socially or economically disadvantaged, or
to entities that are at least 50% owned by such persons. Approximately 65% and
69% of the Company's loan portfolio at December 31, 1999 and 1998, respectively,
has arisen in connection with the financing of taxicab medallions, taxicabs and
related assets, of which 83% and 88%, respectively, exist in the metropolitan
New York area. These loans are secured by the medallions, taxicabs and related
assets and are personally guaranteed by the borrowers, or in the case of
corporations, personally guaranteed by the owners. A portion of the Company's
portfolio represents loans to various commercial enterprises, including dry
cleaners, laundromats, restaurants, garages and gas stations. These loans are
secured by various equipment and/or real estate and are generally guaranteed by
the owners, and in certain cases, by the equipment dealers. These loans are made
primarily in the metropolitan New York City area. The remaining portion of the
Company's portfolio is from the origination of loans guaranteed by the SBA under
its section 7(a) program, less the sale of the guaranteed portion of those
loans. Funding for the section 7(a) program depends on annual appropriations by
the U.S. Congress.
(d) Investment Transactions and Income Recognition
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment to the yield of the related loans.
At December 31, 1999 and 1998, net origination costs totaled approximately
$2,561,000 and $1,990,000 respectively. Amortization expense for the years ended
December 31, 1999, 1998 and 1997 was approximately $971,000, $1,353,000 and
$510,000, respectively.
Interest income is recorded on the basis of interest accrued. Loans are
placed on nonaccrual status, with the reversal of all uncollected accrued
interest, when there is doubt as to the collectibility of interest or principal
or if loans are 90 days or more past due, unless management has determined that
they are both fully collateralized and in the process of collection. Interest
income on non-accrual loans is recognized when cash is received. At December 31,
1999 and 1998, total nonaccrual loans were approximately $12,961,000 and
$6,595,000, respectively. For the years ended December 31, 1999, 1998 and 1997
the amount of interest income on nonaccrual loans that would have been
recognized if the loans had been paying in accordance with their original terms
was approximately $1,791,000, $793,000 and $845,000, respectively.
(e) Loan Sales and Servicing Fee Receivable
The Company accounts for its sales of loans in accordance with Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125).
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. These standards are
based on consistent application of a financial-components approach that focuses
on control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. SFAS 125 also provides for
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings.
The principal portion of loans serviced for others by the Company at
December 31, 1999 and 1998 amounted to approximately $122,883,000 and $
88,826,000, respectively.
Receivable from loans sold and gain on loan sales are attributable to the
sale of commercial loans which have been at least partially guaranteed by the
SBA. The Company recognizes gains or losses from the sale of the SBA-guaranteed
portion of a loan at the date of the sales agreement when control of the future
economic benefits embodied in the loan is surrendered. The gains are calculated
in accordance with SFAS 125, which requires that the gain on the sale of a
portion of a loan be based on the relative fair values of the loan sold and the
loan retained. The gain on loan sales is due to the differential between the
carrying amount of the portion of loans sold and the sum of the cash received
and the servicing fee receivable, which is the difference between the servicing
fee received by the Company (generally 100 to 200 basis points) and the
Company's costs and a normal profit after considering the estimated effects of
prepayments and defaults.
F-10
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
In connection with calculating the gain on sale, the Company must make certain
assumptions which include (i) the amount of "adequate compensation" used to
determine the amount of the servicing asset that the Company will recognize at
the date of the sale; (ii) the estimated life of the underlying loan used in
projecting the time period over which the Company will receive the servicing
fee; and (iii) the discount rate used in the present value calculation of the
servicing asset. The Company considers 40 basis points to be its cost plus a
normal profit. The discount rate utilized in calculating the servicing fee is
the same as the note rate, which is generally the prime rate plus 2.75%.
The servicing fee receivable is amortized as a charge to loan servicing
fee income over the estimated lives of the underlying loans using the effective
interest rate method. The Company reviews the carrying amount of the servicing
fees receivable for possible impairment by stratifying the receivables based on
one or more of the predominant risk characteristics of the underlying financial
assets. If the estimated present value of the future servicing income is less
than the carrying amount, the Company recognizes an impairment loss and adjusts
future amortization accordingly. If the fair value exceeds the carrying value,
the Company may reduce future amortization. The servicing fee receivable is
carried at the lower of amortized cost or fair value. The carrying amount of the
servicing fee receivable at December 31, 1999 and 1998 was approximately
$4,879,000 and $2,290,000, respectively.
The estimated net servicing income is based in part upon management's
estimate of prepayment speeds, incluuding default rates. There can be no
assurance of the accuracy of these estimates. If the prepayment speeds occur at
a faster rate than anticipated, the amortization of the servicing assets will
be accelerated and the value of the receivable will decline; accordingly, total
income during the period of change and subsequent periods would be reduced. If
prepayments occur slower than anticipated, cash flows would exceed estimated
amounts and total income during the period of change and subsequent periods
would be enchanced. The constant prepayment rates utilized by the Company in
estimating the lives of the loans depend on the original term of the loan,
industry and the Company's historical data. During 1999 and 1998, the Company
used an estimated constant prepayment rate of 15%. The rate of prepayment of
loans may be affected by a variety of economic and other factors, including
prevailing interest rates and the availability of alternative financing to
borrowers.
An adjustment to the portion of the loan retained is recorded as
unearned discount or premium and is amortized as an adjustment to interest
income over the estimated life of the loan using the effective interest method.
When a loan prepays, the remaining loan discount is recognized as an increase to
interest income.
The Company also has the option to sell unguaranteed portions of loans
to third-party investors. The gain or loss on such sales would also be
calculated in accordance with SFAS No. 125. The discount related to unguaranteed
portions sold would be reversed and the Company would recognize a servicing fee
receivable or liability based on servicing fees retained by the Company. The
Company is required to retain at least 5% of the unguaranteed portion of SBA
guaranteed loans. The Company did not sell unguaranteed portions of loans to
third-party investors during the year ended December 31, 1998 or 1999.
(f) Unrealized Appreciation/(Depreciation)/ and Realized Gains/(Losses) on
Investments
The change in unrealized appreciation/(depreciation) of investments is
the amount by which the fair value estimated by the Company is greater/(less)
than the cost basis of the investment portfolio. Realized gains or losses on
investments are generated through sales of investments, foreclosure on specific
collateral, and write-offs of loans or assets acquired in satisfaction of loans,
net of recoveries. An analysis of the appreciation /(depreciation) and realized
gains/ (losses) on investments for the years ended December 31, 1998 and 1999 is
as follows:
<TABLE>
<CAPTION>
Investments
----------------------------------------------
Loans Equities Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1997 $(2,643,660) $ 3,132,654 $ 488,994
Increase in unrealized:
Appreciation on investments 409,943 3,305,966 3,715,909
Depreciation on investments (540,000) (458,489) (998,489)
Unrealized depreciation of acquired subsidiary (200,000) - (200,000)
Realized:
Gains on investments - (1,167,363) (1,167,363)
Losses on investments 1,125,866 - 1,125,866
----------- ----------- -----------
Balance, December 31, 1998 (1,847,851) 4,812,768 2,964,917
Increase in unrealized:
Appreciation on investments - 12,818,814 12,818,814
Depreciation on investments (6,708,586) (208,853) (6,917,439)
Realized:
Gains on investments - (18,197,295) (18,197,295)
Losses on investments 385,451 - 385,451
----------- ----------- -----------
Balance, December 31, 1999 $(8,170,986) $(774,566) $(8,945,552)
</TABLE>
F-11
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
For the years ended December 31, 1999, 1998 and 1997, gross unrealized
appreciation and depreciation and gross realized gains and losses were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Increase in net unrealized (depreciation)
appreciation on investments:
Unrealized appreciation $12,818,814 $ 3,715,909 $2,470,922
Unrealized depreciation (6,917,439) (998,489) (666,454)
Realized gain (18,197,295) (1,167,363) -
Realized loss 385,451 1,125,866 125,000
------------ ----------- ----------
Total (11,910,469) 2,675,923 1,929,468
Net realized gain on investments:
Realized gain $23,133,859 $ 2,416,609 $ 269,271
Realized loss (387,827) (1,125,866) (191,770)
------------ ----------- ----------
Total $22,746,032 $ 1,290,743 $ 77,501
</TABLE>
(g) 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 fifteen
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 four years.
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" (SFAS 121). 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 undiscounted future cash flows to result
from the use and eventual disposition of the asset is less than the carrying
amount of the asset. The adoption of this statement did not have a significant
impact on the Company's financial position or results of operations.
The Company reviews its goodwill and negative goodwill for events or
changes in circumstances that may indicate that the carrying amount of the
assets may not be recoverable, and if appropriate, reduces the carrying amount
through a charge to income in accordance with SFAS 121.
(h) Fixed Assets
Fixed assets are stated at cost less accumulated depreciation. Fixed
assets are depreciated using the straight-line method over their estimated
useful lives, which range from 5 to 10 years. For leasehold improvements, the
straight-line method is used over the lesser of the lease term or the estimated
economic useful life of the improvement. Depreciation expense for the years
ended December 31, 1999, 1998 and 1997 was approximately $401,000, $185,000 and
$34,000, respectively.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires
computer software costs associated with internal use software to be expensed as
incurred until certain capitalization criteria are met. Effective January 1,
1999, the Company capitalized eligible costs and amortizes these costs on a
straight-line basis over the expected useful life of the software costs of three
to five years. The restatement of previous years' financial statements was not
permitted. During 1999, approximately $700,000 of software costs was
capitalized. Amortization expense related to these costs was approximately
$33,000 for the year ended December 31, 1999.
(i) Deferred Financing Costs
Deferred financing costs, included in other assets, are amortized over
the lives of the related financing. Amortization expense for the years ended
December 31, 1999, 1998 and 1997 was approximately $176,000, $81,000, and
$25,000, respectively.
F-12
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
(j) Federal Income Taxes
The Company 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. It is the Company's policy to comply with the
provisions of the Code applicable to regulated investment companies. Medallion
Capital applied for status as a RIC on July 1, 1997. For periods prior to that
date Medallion Capital was a taxable entity and therefore the consolidated
financial statements of the Company show the effects of corporate tax related to
Medallion Capital. At December 31, 1999, Medallion Capital had no current or
deferred tax liability. At December 31, 1998, Medallion Capital had a current
tax liability of $350,000 and a deferred tax liability of $169,000. Both the
current and deferred amounts in 1998 related to unrealized gains on investments
at the date Medallion Capital became a RIC.
In 1999, the Company declared quarterly cash dividends totaling
$18,368,455 or $1.31 per share, to shareholders. During the year, the Company's
subsidiaries declared dividends payable to the Company totaling $6,726,050 from
Medallion Funding Corp. and $23,423,795 from Medallion Capital. Dividends paid
by subsidiaries were eliminated in consolidation.
Media, as a non-investment company, has elected to be taxed as a regular
corporation.
(k) Net Increase in Net Assets Resulting from Operations per Share
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share" (SFAS
128) which establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock. The Company has applied the provisions of SFAS 128 retroactively to all
periods presented. The dilutive effect of potential common shares, consisting of
outstanding stock options is determined using the treasury method in accordance
with SFAS 128. Basic and diluted EPS for the years ended December 31, 1999,
1998, and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Per Weighted Per Weighted
(Dollars in thousands, Average Share Average Share Average Per Share
except per share amount) Income Shares Amount Income Shares Amount Income Shares Amount
- ------------------------- --------- ----------- --------- --------- ----------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income $20,732 $15,682 $12,533
Basic EPS
- ---------
Income available to
Common stockholders $20,732 14,018,049 $1.48 $15,682 13,963,665 $1.12 $12,533 12,123,690 $1.03
Effect of dilutive
stock options 104,777 129,769 148,093
Diluted EPS
- -----------
Income available to
Common stockholders $20,732 14,122,826 $1.47 $15,682 14,093,434 $1.11 $12,533 12,271,783 $1.02
</TABLE>
(l) Stock-Based Compensation
In 1996, the Company adopted the provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," (SFAS 123) 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, "Accounting for Stock Issued to Employees" (APB 25). 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
F-13
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
had been adopted. The Company opted to account for its options under APB 25 and
apply the pro forma disclosure provisions of SFAS 123.
(m) Derivatives
The Company is party to certain interest rate cap agreements. These
contracts are entered into as part of the Company's management of interest rate
exposure and effectively limit the amount of interest rate risk that may be
taken on a portion of the Company's outstanding indebtedness. All interest rate
caps are designated as hedges of certain liabilities. Premiums paid on the
interest rate caps are amortized over the lives of the cap agreements and
amortization of these costs is recorded as an adjustment to interest expense.
Interest rate settlements, if any, are recorded as a reduction of interest
expense over the lives of the agreements.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes new standards regarding accounting and reporting requirements for
derivative instruments and hedging activities. In June 1999, the Board issued
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." The new standard
defers the effective date of SFAS 133 to fiscal years beginning after June 15,
2000. The Company is presently studying the effect of the new pronouncement and,
as required, will adopt SFAS 133 beginning January 1, 2001.
(n) Comprehensive Income
Comprehensive income, as defined, includes all changes in equity during a
period from non-owner sources. Examples of items to be included in comprehensive
income which are excluded from net income include cumulative translation
adjustments resulting from consolidation of foreign subsidiaries' financial
statements and unrealized gains and losses on available-for-sale securities. The
Company determined there was no difference between total comprehensive income
and net income for the years ended December 31, 1999 and 1998. Accordingly, no
change in presentation on the face of the Statement of Operations is required.
(o) Segment Information
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS
131). This statement establishes standards for reporting information about
segments in annual and interim financial statements. SFAS 131 utilizes a
management approach for segment reporting. The management approach is based on
the way the chief operating decision-maker organizes segments within a company
for making operating decisions and assessing performance. Reportable segments
are based on, among others, products and services, geography and legal and
management structure.
(p) Organization Costs
The Company adopted Statement of Position 98-5, "Reporting on the Costs
of Start-up Activities" (SOP 98-5) in 1999. SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. Costs previously deferred totaling approximately $42,000
were expensed in 1999 to comply with SOP 98-5.
(q) Reclassifications
Certain reclassifications have been made to prior year balances to
conform with the current year presentation.
F-14
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
(3) ACQUISITIONS
Tri-Magna, Edwards Capital Corp. and TCC
On May 30, 1996, the Company completed the acquisition of Tri-Magna,
Edwards and TCC. Funds used to finance these acquisitions were primarily
provided through the Company's Revolving Credit Agreements and the Company's
initial public offering.
Business Lenders, Inc.
On October 31, 1997, the Company completed its acquisition of certain
assets and the assumption of certain liabilities of BLL, a small business lender
headquartered in Hartford, Connecticut. The total purchase price was $16.6
million which included the assumption of $15.3 million in liabilities.
The purchase price was allocated to the assets based on their estimated
fair values and approximately $14 million was allocated to investments and
receivables. The excess of the purchase price over the fair value of the net
assets acquired (goodwill) was $66,000 and is being amortized on a straight-line
basis over 15 years. The purchase price is subject to a contingent earn-out
provision based on a multiple of net after-tax earnings up to $13 million. As of
December 31, 1999, due to cumulative net losses at BLL, no additional amounts
have been paid under this provision. The Company incurred approximately $310,000
of acquisition-related expenses associated with this transaction. These expenses
are capitalized and amortized over 5 years.
VG Group
On May 27, 1998, the Company completed the acquisition of certain assets
and assumption of certain liabilities of VGI, VGII and VOC, SBIC lenders
headquartered in New York, (hereinafter known as VG Group), for an aggregate
purchase price of $18.5 million which included the assumption of $6.5 million in
liabilities. The purchase price was allocated to certain assets based on their
estimated fair values and approximately $16.7 million was allocated to
investments. The excess of the purchase price over the fair value of the net
assets acquired (goodwill) was $1.2 million and is being amortized on a
straight-line basis over 15 years.
The acquisitions of Tri-Magna, Edwards, TCC, BLL and VG Group were
accounted for under the purchase method of accounting. Accordingly, the results
of operations for these acquisitions have been included in the consolidated
results of the Company from the date of acquisition. Under this accounting
method, the Company has recorded as its cost the fair value of the acquired
assets and liabilities assumed. The difference between the cost of acquired
companies and the sum of the fair values of tangible and identifiable intangible
assets less liabilities assumed was recorded as goodwill or negative goodwill.
The pro forma effect of the VG Group and BLL acquisitions on the
Company's results of operations for the years ended December 31, 1998 and 1997,
would not have been material. Therefore, no pro forma information for these
acquisitions has been presented.
(4) MERGER
On June 16, 1998, the Company completed the merger with CDI. CDI was
subsequently renamed Medallion Capital. The Company issued 0.59615 shares of its
common stock for each outstanding share of CDI. A total of 1,112,677 shares of
the Company's common stock was issued as a result of the merger, and each of
CDI's outstanding stock options were converted to purchase common shares of the
Company. The transaction was accounted for as a tax-free reorganization under
Section 368 of the Internal Revenue Code of 1986, as amended, and was treated
under the pooling-of-interests method of accounting for financial reporting
purposes. The following tables set forth the results of operations of CDI and
the Company for the six months ended June 30, 1998 and the twelve months ended
December 31, 1997 and are included in the accompanying consolidated statement of
operations.
F-15
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
(Dollars in thousands)
For the six months ended June 30, 1998 The Company CDI Combined
- -------------------------------------- ----------- --- --------
<S> <C> <C> <C>
Total Investment Income........................... $16,322 $1,288 $17,610
Net increase in net assets from operations........ $5,692 $1,467 $7,159
Changes in equity:
Exercise of stock options........................ $8 $91 $99
For the year ended December 31, 1997 The Company CDI Combined
- ------------------------------------ ----------- --- --------
Total Investment Income........................... $23,446 $2,402 $25,848
Net increase in net assets from operations........ $11,434 $1,099 $12,533
Changes in equity:
Issuance of common stock under offering.......... $74,339 - $74,339
Exercise of stock options ....................... $315 $205 $520
</TABLE>
(5) INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
The balance sheets at December 31, 1999 and 1998 for Media, are as follows:
December 31,
1999 1998
---- ----
Cash............................................... $ 189,480 $1,381,893
Accounts receivable................................ 3,582,642 2,614,842
Equipment, net..................................... 1,683,756 1,564,341
Goodwill........................................... 1,666,091 991,279
Other.............................................. 2,147,534 571,058
--------- -------
Total assets......................................$ 9,269,503 $7,123,413
=========== ==========
Notes payable to parent............................$ 1,750,351 $2,692,847
Accounts payable and accrued expenses.............. 461,196 1,824,158
Other liabilities and income taxes payable......... 4,350,037 156,977
--------- -------
Total liabilities................................. 6,561,584 4,673,982
Equity............................................. 1,001,000 1,001,000
Retained earnings.................................. 1,706,919 1,448,431
--------- ---------
Total equity...................................... 2,707,919 2,449,431
--------- ---------
Total liabilities and equity.......................$ 9,269,503 $7,123,413
=========== ==========
The statements of operations of Media for the years ended December 31, 1999,
1998 and 1997 are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
Advertising revenue $9,878,117 $7,526,569 $3,070,119
Cost of services 4,261,673 2,413,089 1,204,892
--------- --------- ---------
Gross margin 5,616,444 5,113,480 1,865,227
Other operating expenses 5,223,833 3,163,091 1,499,803
--------- --------- ---------
Income before taxes 392,611 1,950,389 365,424
Income taxes (134,125) (750,000) (162,000)
--------- -------- --------
Net income $ 258,486 $1,200,389 $ 203,424
========= ========== =========
F-16
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
During 1999, the Company purchased taxicab rooftop advertising from its wholly-
owned subsidiary, Media. The Company paid an average market rate per top
totaling $472,800 for the year ended December 31, 1999.
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 non-compete 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.
On September 1, 1998, the Company purchased for cash, substantially
all the operations and assets of New Orleans-based Taxi Ads, LLC (consisting of
855 taxicab rooftop advertising display units and certain contacts for
advertising and fleet rental) for an aggregate purchase price of $1,200,000.
This acquisition was accounted for under the purchase method of accounting.
Included in the purchase price was certain premiums paid totaling approximately
$1,002,000, which represented goodwill and is being amortized over 15 years.
On February 2, 1999, Media purchased 100% of the common stock of Transit
Advertising Displays, Inc. (TAD) for approximately $849,000. TAD is a taxicab
rooftop advertising company headquartered in Washington, D.C. operating 1,300
installed displays in the Baltimore, MD and Washington, D.C. areas. The purchase
was accounted for under the purchase method of accounting. Included in the
purchase price was certain premiums paid totaling approximately $770,000, which
represented goodwill and is being amortized over 15 years.
Under the Master Settlement Agreement between tobacco manufacturers and
the Attorneys General of various states (including those states in which the
Company conducts its outdoor advertising business), the tobacco manufacturers
agreed to eliminate general outdoor and transit advertising of tobacco products
by March 31, 1999. Taxicab rooftop advertising is covered by this agreement. The
Company does not believe the loss of advertising revenue from tobacco
manufacturers will have a significant adverse impact on its financial position
or results of operations.
(6) NOTES PAYABLE TO BANKS, COMMERCIAL PAPER AND SENIOR SECURED NOTES
December 31, December 31,
Description 1999 1998
---- ----
Revolving Credit Agreements.......... $190,450,000 $ 115,600,000
Commercial Paper..................... 93,983,793 103,081,785
Senior Secured Notes................. 45,000,000 -
------------ -------------
Total................................ $329,433,793 $ 218,681,785
============ =============
Borrowings under these agreements are secured by the assets of the Company.
(a) Revolving Credit Agreements
On March 27, 1992 (and as subsequently amended), MFC entered into a
committed revolving credit agreement (the Revolver) with a group of banks. MFC
extended the Revolver until June 30, 2001 at an aggregate credit commitment
amount of $195,000,000 pursuant to the Loan Agreement dated December 24, 1997.
Amounts available under the Revolver are reduced by amounts outstanding under
the commercial paper program as the Revolver acts as a liquidity facility for
the commercial paper program. As of December 31, 1999 and 1998, amounts
outstanding under the Revolver were $1.8 million and $23.7 million,
respectively. On December 31, 1999, MFC increased the aggregate credit
commitment amount to $220,000,000 with an effective date of February 10, 2000.
The Revolver may be extended annually thereafter upon the option of the
participating banks and acceptance by MFC. Should any participating bank not
extend its committed amount, the Revolver agreement provides that each bank
shall extend a term loan equal to its share of the principal amount outstanding
of the revolving credit note. Maturity of the term note shall be the earlier of
two years or any other date on which it becomes payable in accordance with the
Revolver agreement. Interest and principal payments are paid monthly. Interest
is calculated monthly at either the bank's prime rate or a rate based on the
adjusted London Interbank Offered Rate of interest (LIBOR) at the option of MFC.
Substantially all promissory notes evidencing MFC's investments are held by a
bank, as collateral agent under the agreement. At December 31, 1999, MFC is
required to pay an annual facility fee of 20 basis points on the unused portion
of the Revolver's aggregate commitment. Commitment fee expense for the years
ended December 31, 1999, 1998 and 1997 was approximately $388,000, $243,000 and
$288,000, respectively. Outstanding borrowings under the Revolver were
$99,250,000 and $68,250,000 at weighted average interest rates of 7.20% and
6.36% at December 31, 1999 and 1998, respectively. MFC is required under
F-17
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
the Revolver to maintain minimum tangible net assets of $65,000,000 and certain
financial ratios, as defined therein. The Revolver agreement contains other
restrictive covenants, including a limitation of $500,000 for capital
expenditures.
On July 31, 1998, (and as subsequently amended) the Company closed its
existing $25,000,000 revolving credit line and entered into a committed
revolving credit agreement (the Loan Agreement) with a group of banks. The
aggregate credit commitment amount is $100,000,000 and extends through June 28,
2000. The Loan Agreement 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 Loan 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
Loan 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 LIBOR rate 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. The Company is required to pay an annual facility fee
of 15 basis points on the amount of the aggregate commitment. Commitment fee
expense for the years ended December 31, 1999 and 1998 were approximately
$108,000 and $72,000, respectively. Outstanding borrowings under the Loan
Agreement were $91,200,000 and $47,350,000 at a weighted average interest rate
of 7.44% and 6.41% at December 31, 1999 and 1998, respectively. The Loan
Agreement contains other restrictive covenants, including a limitation of
$1,000,000 for capital expenditures per annum.
The weighted average interest rate for the Company's consolidated
outstanding revolver borrowings at December 31, 1999 and 1998 was 7.31% and
6.38%. During the years ended December 31, 1999 and 1998, the Company's weighted
average borrowings were $125,692,000 and $125,698,000 with a weighted average
interest rate of 6.55% and 7.08%, respectively.
(b) Commercial Paper
On March 13, 1998, MFC entered into a commercial paper agreement with
Salomon Smith Barney to sell up to an aggregate principal amount of $195 million
in secured commercial paper through private placements pursuant to Section 4(2)
of the Securities Act of 1933. On August 3, 1999, MFC entered into a commercial
paper dealer agreement with USBancorp to sell commercial paper under the same
program as Salomon Smith Barney. Amounts outstanding at any time under the
program are limited by certain covenants, including a requirement that MFC
retain an investment grade rating from at least two of the four nationally
recognized rating agencies, and borrowing base calculations as set forth in the
Revolver. The commercial paper program ranks on a pari passu basis with the
Revolver. The commercial paper program has a specified maturity date of June 30,
2001, which represents the maturity date of MFC's Revolver, but and may be
terminated by the Company at anytime. At December 31, 1999 and 1998,
respectively, MFC had approximately $93,984,000 and $103,082,000 outstanding at
a weighted average interest rate of 6.60% and 6.11%. For the year ended December
31, 1999 and during the period from March 13, 1998 through December 31, 1998,
MFC's weighted average borrowings related to commercial paper were $122,392,000
and $74,445,000 with a weighted average interest rate of 5.86% and 5.73%,
respectively. Commercial paper outstanding is deducted from the Revolver as the
Revolver acts as a liquidity facility for the commercial paper.
(c) Senior Secured Notes
On June 1, 1999, MFC issued $22.5 million of senior secured notes (the
Notes) that mature on June 1, 2004. The Notes bear a fixed rate of interest of
7.2% and interest is paid quarterly in arrears. The Notes rank pari pasu with
the revolvers and commercial paper through inter-creditor agreements. On
September 1, 1999, the note holders purchased an additional $22.5 million under
the same terms and conditions. The proceeds of the Notes were used to prepay
certain of the Company's outstanding SBA debentures (Note 7).
(d) Interest Rate Cap Agreements
On April 17, 1997, MFC entered into an interest rate cap agreement
limiting the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving
credit facility to 6.0% until April 21, 1998. In addition, on May 9, 1997, MFC
entered into an interest rate cap agreement limiting the Company's maximum LIBOR
exposure on an additional $10,000,000 of MFC's revolving credit facility to 6.5%
until May 13, 1998 and 7.0% until November 13, 1999. On May 12, 1997, MFC
entered into an interest rate cap agreement limiting the Company's maximum LIBOR
exposure on $10,000,000 of MFC's revolving credit facility to 7.0% until May 13,
1999.
F-18
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
On April 7, 1998, MFC entered into an interest rate cap agreement
limiting the Company's maximum LIBOR exposure on $20,000,000 of MFC's revolving
credit facility to 6.5% until September 30, 1999 and 7.0% until March 30, 2001.
On July 6, 1999, MFC entered into two interest rate cap agreements
limiting the Company's maximum LIBOR exposure on a total of $20,000,000 of MFC's
revolving credit facility to 6.5% until July 6, 2001. Total premiums of
approximately $95,000 paid under the agreement and being amortized over the
respective terms of the agreements.
The Company is exposed to credit loss in the event of nonperformance by
the counterparties on the interest rate cap agreements. The Company does not
anticipate nonperformance by any of these parties.
(7) SBA DEBENTURES PAYABLE
Outstanding debentures are as follows at December 31, 1999 and December
31, 1998:
Due Date 1999 1998 Interest Rate
-------- ---- ---- -------------
September 1, 2000 $ - $ 510,000 9.60%
December 1, 2000 - 640,000 8.70%
June 1, 2002 - 5,640,000 8.00%
September 1, 2002 - 3,500,000 7.15%
September 1, 2002 - 6,050,000 7.15%
September 1, 2002 - 1,950,000 7.15%
June 1, 2004 - 900,000 4.80%
June 1, 2004 - 4,600,000 7.80%
September 1, 2004 - 5,100,000 8.20%
March 1, 2005 - 1,700,000 4.84%
September 1, 2005 - 500,000 3.88%
March 1, 2006 2,000,000 2,000,000 7.08%
December 1, 2006 5,500,000 5,500,000 7.08%
June 1, 2007 3,000,000 3,000,000 7.07%
----------- ----------- -----
$10,500,000 $41,590,000
=========== ===========
On June 1, 1999 and September 1, 1999, the Company prepaid outstanding
debentures totaling $31,090,000. The Company also paid approximately $165,000 in
prepayment penalties as a one-time charge that was included in interest expense.
The SBA imposes certain restrictions on the Company which include, among others,
transfers of stock and payments of dividends by its licensees.
(8) STOCK OPTIONS
The Company has a stock option plan (1996 Stock Option Plan) available
to grant both incentive and nonqualified share options to employees. The 1996
Stock Option Plan, which was approved by the Board of Directors and shareholders
on May 22, 1996, provides for the issuance of a maximum of 750,000 shares of
common stock of the Company. On June 11, 1998, the Board of Directors and
shareholders approved certain amendments to the Company's 1996 Stock Option
Plan, including increasing the number of shares reserved for issuance from
750,000 to 1,500,000. At December 31, 1999, 225,922 shares of the Company's
common stock remained available for future grants. The 1996 Stock Option 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
common stock on the date the option is granted. The term and vesting periods of
the options are determined by the Compensation Committee, provided that the
maximum term of an option may not exceed a period of ten years.
A Non-Employee Director Stock Option Plan (the Director Plan) was also
approved by the Board of Directors and shareholders on May 22, 1996. On February
24, 1999, the Board of Directors amended and restated the Director Plan in order
to adjust the calculation of the number of shares of the Company's Common Stock
issuable under options ("Options") to be granted to a Non-employee Director upon
his or her re-election. Under the prior plan the number of options granted was
obtained by dividing $100,000 into the current market price for the Common
Stock. The Amended
F-19
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
Plan, subject to SEC approval, calls for the grant of options to acquire 9,000
shares of Common Stock upon election of a non-employee director. It provides for
an automatic grant of options to purchase 9,000 shares of the Company's Common
Stock to an Eligible Director upon election to the Board, with an adjustment for
directors who are elected to serve less than a full term. A total of 100,000
shares of the Company's Common Stock is issuable under the Amended Plan. At
December 31, 1999, 54,091 shares of the Company's common stock remained
available for future grants. The grants of stock options under the Director Plan
are automatic as provided in the Director Plan. The option price per share may
not be less than the current market value of the Company's common stock on the
date the option is granted. Options granted under the Director Plan are
exercisable annually, as defined in the Director Plan. The term of the options
may not exceed five years.
In connection with the merger discussed in Note 4, the Company assumed
the former Capital Dimensions Venture Fund, Inc. 1997 Stock Plan. All stock
options outstanding at the time of the merger were exchanged for equivalent
shares under the 1996 Stock Option Plan and the Director Plan, respectively,
using the appropriate conversion factor. Thus, the Capital Dimensions Venture
Fund, Inc. 1997 Stock Plan was terminated at the effective date of the merger.
The Company records stock compensation in accordance with APB Opinion
No. 25 . Had compensation cost for stock options been determined based on the
fair value at the date of grant, consistent with the provisions of SFAS 123, the
Company's net increase in net assets resulting from operations would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Net increase in net assets resulting from operations:
As reported........................................ $20,732,068 $15,681,713 $12,532,789
Pro forma.......................................... $20,348,773 14,873,660 12,052,314
Net increase in net assets resulting from operations
Per share diluted:
As reported........................................ $1.47 $ 1.11 $ 1.02
Pro forma.......................................... $1.44 $ 1.06 $ 0.98
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1999, 1998 and 1997 were $4.32, $7.26 and $6.21 per share,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. However, management believes
that such a model may or may not be applicable to a company regulated under the
1940 Act. The following weighted average assumptions were used for grants in
1999, 1998 and 1997:
Year ended December 31,
1999 1998 1997
---- ---- ----
Risk-free interest rate............................. 5.7% 5.4% 6.2%
Expected dividend yield............................. 7.1% 6.0% 4.4%
Expected life of option in years.................... 7.0 8.6 5.4
Expected volatility................................. 44% 49% 49%
The following table presents the activity for the stock option program
under the 1996 Stock Option Plan and the Director Plan for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Weighted
Number Exercise Price Average
of Options Per Share Exercise Price
---------- --------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1996........... 370,310 $0.28-$14.38 $7.98
Granted.................................... 231,945 $6.71-$26.00 $17.55
Cancelled.................................. (62,311) $3.08-$14.38 $10.66
Exercised.................................. (96,372) $0.28-$14.38 $4.53
-------- ------------ -----
Outstanding at December 31, 1997........... 443,572 $0.28-$26.00 $13.36
--------
Granted.................................... 379,603 $13.75-$29.25 $23.67
Cancelled.................................. (21,943) $20.63-$29.25 $27.75
Exercised.................................. (104,888) $0.28-$16.77 $5.46
-------- ------------ ------
Outstanding at December 31, 1998........... 696,344 $6.71-$29.25 $19.72
--------
Granted.................................... 397,884 $14.25-$20.06 $17.52
Cancelled.................................. (42,700) $14.25-$28.87 $21.84
Exercised.................................. (10,665) $6.71-$14.38 $10.37
---------
Outstanding at December 31, 1999...........1,040,863 $6.71-$29.25 $18.88
---------
</TABLE>
F-20
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
<TABLE>
<S> <C> <C> <C>
Options exercisable at:
December 31, 1997.......................... 127,498 $0.28-$14.38 $6.86
December 31, 1998.......................... 123,798 $6.71-$22.38 $14.13
December 31, 1999.......................... 254,751 $6.71-$29.25 $16.37
</TABLE>
The following table summarizes information regarding options
outstanding and options exercisable at December 31, 1999 under the 1996 Stock
Option Plan and the Director Plan:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Number
Outstanding Weighted average exercisable Weighted average
At remaining at remaining
Range of December 31, contractual life in Weighted average December 31, contractual life in Weighted average
Exercise Prices 1999 years exercise price 1999 years exercise price
- --------------- ---- ----- -------------- ---- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
$6.71-$14.38 211,311 6.45 $12.09 123,807 5.32 $11.43
$15.88-$17.38 370,835 6.81 $17.13 34,501 2.53 $16.91
$18.75-$22.38 228,360 8.05 $19.39 58,964 7.10 $19.69
$26.06-$29.25 230,357 8.32 $27.43 37,479 8.18 $26.94
------- ---- ------ ------- ---- ------
1,040,863 7.34 $18.88 254,751 5.78 $16.37
========= =======
</TABLE>
(9) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1997 Quarter Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands except per share amounts)
Investment Income $5,725 $5,901 $6,451 $7,770
Net Investment Income 2,158 2,689 3,224 3,383
Net Increase in Net Assets 2,789 2,804 3,563 3,376
Net Increase in Net Assets per common share
basic .29 .25 .26 .24
diluted .29 .24 .25 .24
</TABLE>
<TABLE>
<CAPTION>
1998 Quarter Ended March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands except per share amounts)
Investment Income $8,725 $8,884 $8,942 $8,606
Net Investment Income 4,055 1,856 3,523 2,128
Net Increase in Net Assets 4,192 2,967 4,200 4,323
</TABLE>
F-21
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
<TABLE>
<S> <C> <C> <C> <C>
Net Increase in Net Assets per common share
basic .30 .21 .30 .31
diluted .30 .21 .30 .31
1999 Quarter Ended March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands except per share amounts)
Investment Income $9,380 $10,835 $10,777* $10,388*
Net Investment Income 3,125 3,300 3,000* 518*
Net Increase in Net Assets 4,483 5,106 5,913 5,230
Net Increase in Net Assets per common share
basic .32 .36 .42 .37
diluted .32 .36 .42 .37
* Subsequent to year-end, the Company identified clerical errors
resulting from the Company's system conversion that began in the third quarter
of 1999. The effect of these items has been reflected in the results for the
fourth quarter ended December 31, 1999. Certain of these errors resulted in a
decrease to Investment Income and Net Investment Income of approximately $1.2
million in the third quarter and an increase of approximately $1.2 million in
the fourth quarter. The clerical errors, in total, did not have an overall
material impact on Net Increase in Net Assets for either quarter.
</TABLE>
(10) SEGMENT REPORTING
The Company has two reportable business segments, lending and taxicab
rooftop advertising. The lending segment originates and services secured
commercial loans. The taxicab rooftop advertising segment sells advertising
space to advertising agencies and companies in several major markets across the
United States. The segment is reported as an unconsolidated subsidiary,
Medallion Taxi Media, Inc. The accounting policies of the operating segments are
the same as those described in the summary of significant accounting policies.
For taxicab advertising, the increase in net assets resulting from
operations represents the Company's equity in net income from Media. Segment
assets for taxicab advertising represents the Company's investment in and loan
to Media.
<TABLE>
<CAPTION>
Taxicab
1999 Lending Advertising Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $21,745,264 - $21,745,264
Depreciation and amortization 641,656 - 641,656
Income tax benefit (provision) (46,358) - (46,358)
Net increase (decrease) in net assets
resulting from operations+ 20,946,382 $(214,314) 20,732,068
Segment assets 505,262,877 4,349,651 509,612,528
Capital expenditures 958,037 602,572 **
Taxicab
1998 Lending Advertising Total
- -----------------------------------------------------------------------------------------------------------
Net interest income $19,547,612 - $19,547,612
Depreciation and amortization 360,545 - 360,545
Income tax benefit (provision) 153,538 - 153,538
Net increase in net assets resulting from operations 14,481,324 $1,200,389 15,681,713
Segment assets 417,191,581 5,033,661 422,225,242
Capital expenditures 1,491,379 1,167,155 **
</TABLE>
F-22
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Taxicab
1997 Lending Advertising Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $ 15,749,334 $ 15,749,334
Depreciation and amortization 80,072 80,072
Income tax benefit (provision) (928,910) (928,910)
Net increase in net assets resulting from operations 12,329,365 $203,424 12,532,789
Segment assets 337,197,583 2,696,061 339,893,644
Capital expenditures 118,958 754,394 **
</TABLE>
+ Net income of the taxicab advertising segment excludes $472,800, which
represents intercompany taxi top sales from Media to the Company.
** Capital expenditures for the Company are equal to expenditures for the
lending segment. Capital expenditures related to the taxicab advertising
segment are included in order to provide additional information.
(11) COMMITMENTS AND CONTINGENCIES
(a) Sub-Advisory Agreement
In May 1996, the Company entered into a sub-advisory agreement (the Sub-
Advisory Agreement) with FMC Advisers, Inc. (FMC) in which FMC provides advisory
services to the Company. Under the Sub-Advisory Agreement, the Company pays FMC
a monthly fee for services rendered of $18,750. FMC will regularly consult with
management of the Company with respect to strategic decisions concerning
originations, credit quality assurance, development of financial products,
leverage, funding, geographic and product diversification, the repurchase of
participations, acquisitions, regulatory compliance and marketing. Unless
terminated earlier as described below, the Sub-Advisory Agreement was to remain
in effect for a period of two years until May 1998. On February 24, 1999, the
Board of Directors voted to extend the Sub-Advisory Agreement with FMC until May
2000 under the renewal provisions in the Sub- Advisory Agreement. The term will
continue from year to year thereafter, if approved annually by (i) a majority of
the Company's non-interested 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. The escrow arrangement provides for common stock of the Company
worth 200% of the advisory fees remaining, to be held in escrow and 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 years ended December 31, 1999,
1998 and 1997 were $225,000 annually.
(b) Employment Agreements
The Company has employment agreements with certain key officers for
either a three or five-year term. Annually, the contracts with a five-year term
will renew for a new five-year term unless prior to the end of the first year,
either the Company or the executive provides notice to the other party of its
intention not to extend the employment period beyond the current five-year term.
In the event of a change in control, as defined, during the employment period,
the agreements provide for severance compensation to the executive in an amount
equal to the balance of the salary, bonus and value of fringe benefits which the
executive would be entitled to receive for the remainder of the employment
period.
(c) Other Commitments
The Company had loan commitments outstanding at December 31, 1999 to
various prospective qualified small businesses totaling approximately $31.5
million. A commitment to extend credit is a binding agreement to make a loan to
a customer in the future if certain conditions are met and is subject to the
same risk, credit review and approval process as a loan. These commitments are
made in the ordinary course of the Company's business and in management's
opinion, are generally on the same terms as those to existing borrowers.
Commitments generally have fixed expiration dates. Of these commitments,
approximately 54% will be sold pursuant to SBA Guaranteed Sales. Since some
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
In addition, the Company had approximately $22.6 million of undisbursed funds
relating to revolving credit facilities. These amounts may be drawn upon at the
customer's request if they meet certain credit requirements.
F-23
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
Commitments for leased premises expire at various dates through June 30,
2006. At December 31, 1999, minimum rental commitments for non-cancelable leases
are as follows:
Dollars
-------
(in thousands)
--------------
2000 $822,154
2001 763,952
2002 729,118
2003 666,264
2004 and thereafter 1,665,672
---------
Total $4,647,160
===========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $823,000, $894,000 and $336,000, respectively.
(d) Litigation
The Company and its subsidiaries become defendants to various legal
proceedings arising from the normal course of business. In the opinion of
management, based on the advice of legal counsel, there is no proceeding
pending, or to the knowledge of management threatened, which in the event of an
adverse decision would result in a material adverse impact in the financial
condition or results of operations of the Company.
(12) RELATED PARTY TRANSACTIONS
Certain directors, officers and shareholders of Medallion Financial
Corp. are also directors of its wholly-owned subsidiaries, MFC, BLL, Medallion
Capital, MBC 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 for the first meeting of each quarter and $1,000 each for any subsequent
meetings. Directors who are members of the committees of the Board of Directors
or members of a subsidiary's Board of Directors receive $500 - $1,000 for each
meeting attended. Total director fees during the years ended December 31, 1999,
1998 and 1997 were approximately $148,000, $130,000 and $91,000, respectively.
At December 31, 1999, 1998 and 1997, total officer compensation was
approximately $1,846,000, $1,089,000 and $1,182,000, respectively.
Media engaged in transactions to sell rooftop advertising space to a
company represented by a relative of a Media officer. All transactions were made
under market conditions and pricing.
During 1999, 1998 and 1997, a member of the Board of Directors of the
Company was also a partner in the Company's primary law firm.
(13) SHAREHOLDERS' EQUITY
In 1995 and 1996, MFC, TCC and Medallion Capital repurchased and
retired all of their previously issued 3% preferred stock from the SBA at a
discount of 65% ($14.6 million) for an aggregate price of $8.0 million, 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 for MFC and
TCC and seven years for Medallion Capital, 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 or Medallion Capital's liquidation, the
unexpired portion ($109,959 at December 31, 1999) 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.
On May 29, 1996, the Company issued and sold 5,750,000 shares at $11.00
per share in an initial public offering and split the existing 200 shares of
common stock outstanding into 2,500,000 shares. All references to the amount and
number of
F-24
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
shares outstanding in the accompanying consolidated financial statements have
been restated to reflect the stock split. The proceeds from the initial public
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.
On May 16, 1997, the Company completed a secondary equity offering and
sold 4,600,000 shares at $17.25 per share. Offering costs incurred by the
Company in connection with the sale of shares totaling $5,010,575 were recorded
as a reduction of capital upon completion of the Secondary Equity Offering.
On June 11, 1998, the shareholders adopted the resolution, proposed by
the Board of Directors, to amend the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of the Company's
common stock from 15 million shares to 50 million shares.
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," $529,289 was
reclassified from accumulated undistributed net investment income to capital in
excess of par value at December 31, 1999 in the accompanying consolidated
balance sheets. Further, $2,258,080 and $615,688 were reclassified from capital
in excess of par value to accumulated undistributed net investment income at
December 31, 1998 and 1997, respectively, in the accompanying consolidated
balance sheets. These reclassifications had no impact on the Company's total
shareholders' equity and were designed to present the Company's capital accounts
on a tax basis.
(14) OTHER OPERATING EXPENSES AND OTHER INCOME
The major components of other operating expenses for the years ended
December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
---- ---- ----
Rent............................. $822,751 $893,927 $336,114
Office expenses.................. 252,811 1,810,630 810,819
Insurance........................ 245,870 713,204 490,968
Other............................ 4,132,672 1,397,187 961,298
--------- --------- ----------
$5,454,104 $4,814,948 $2,599,199
---------- ---------- ==========
The major components of other income for the years ended December 31, 1999, 1998
and 1997 were as follows:
1999 1998 1997
---- ---- ----
Late charges...................... $427,554 $333,393 $212,139
Prepayments....................... 440,202 382,777 390,511
Loan servicing fee income......... 559,998 240,470 34,000
Other............................. 684,058 502,162 343,659
---------- ---------- --------
$2,111,812 $1,458,802 $980,309
========== ========== ========
(15) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Investment Plan (the 401(k) Plan) which covers
all full-time 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 Code. Employee contributions are invested in various mutual
funds according to the directions of the employee. Beginning September 1, 1998,
the Company elected to match employee contributions to the 401(k) Plan in an
amount per employee up to one-third of such employee's contribution but in no
event greater than 2% of the portion of such employee's annual salary eligible
for 401(k) Plan benefits. For the years ended December 31, 1999 and 1998, the
Company committed and expensed approximately $67,000 and $8,000, respectively,
to the 401(k) Plan.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107) 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
F-25
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
value of each class of financial instrument. Fair value estimates that were
derived from broker quotes cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument.
(a) Investments-- The Company's investments are recorded at the estimated fair
value of such investments.
(b) Servicing fee receivable--The fair value of the mortgage servicing fee
receivable is estimated based upon expected future service fee income cash
flows discounted at a rate that approximates that currently offered for
instruments with similar prepayment and risk characteristics.
(c) Notes Payable to Banks, Commercial Paper and Senior Secured Notes -- Due to
the short-term nature of these instruments, the carrying amount
approximates fair value.
(d) Commitments to Extend Credit--The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also includes a consideration of the difference
between the current levels of interest rates and the committed rates. At
December 31, 1999 and 1998, the estimated fair value of these
off-balance-sheet instruments was not material.
(e) Interest Rate Cap Agreements--The fair value is estimated based on market
prices or dealer quotes. At December 31, 1999 and December 31, 1998, the
estimated fair value of these off-balance-sheet instruments was not
material.
(f) SBA Debentures Payable--The fair value of the debentures payable to the SBA
is estimated based on current market interest rates for similar debt.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
(Dollars in thousands) (Dollars in thousands)
Financial Assets:
Investments..................... $471,813 $471,813 $384,064 $384,064
Cash............................ $ 5,962 $ 5,962 $ 6,028 $ 6,028
Servicing fee receivable........ $ 4,879 $ 4,879 $ 2,290 $ 2,290
Financial Liabilities:
Notes payable to banks.......... $190,450 $190,450 $115,600 $115,600
Commercial Paper................ $ 93,984 $ 93,984 $103,082 $103,082
SBA debentures payable.......... $ 10,500 $ 10,500 $ 41,590 $ 41,590
Senior secured notes............. $ 45,000 $ 45,000 -- --
</TABLE>
F-26
<PAGE>
Medallion Financial Corp.
Consolidated Schedule of Investments
December 31, 1999
<TABLE>
<CAPTION>
Number Principal Balance Contractual
Of Loans Outstanding Rates
------- ----------------- -----------
<S> <C> <C>
1 5,050 5.00
9 1,519,559 6.88-6.94
1 402,929 7.25
54 9,001,891 7.50-7.63
114 33,550,228 7.75-7.94
236 60,242,530 8.00-8.20
187 37,263,429 8.25-8.49
338 48,741,859 8.50-8.63
211 30,680,546 8.75-8.97
183 17,617,055 9.00-9.13
52 4,577,751 9.25-9.30
114 9,495,260 9.50-9.60
37 5,398,603 9.75-9.90
136 18,179,232 10.00-10.12
31 5,310,674 10.25-10.38
153 17,726,090 10.50
95 11,680,551 10.75-10.98
211 25,194,950 11.00-11.06
462 30,724,174 11.25-11.37
72 10,580,323 11.50-11.73
63 9,527,922 11.75-11.92
291 24,833,415 12.00
11 1,460,308 12.25-12.40
30 2,346,086 12.50-12.70
9 1,819,457 12.75-12.90
208 24,730,260 13.00-13.20
28 1,169,729 13.25-13.26
28 2,233,379 13.50
18 2,600,092 13.75-13.90
99 3,188,296 14.00-14.20
7 597,066 14.25
58 2,072,177 14.50-14.70
12 396,466 14.75-14.95
209 5,732,436 15.00-15.20
1 653,087 15.25
14 402,240 15.50
6 686,161 15.80-15.90
20 647,504 16.00
2 24,400 16.25
9 317,398 16.50
4 107,571 16.90-16.95
8 3,231,554 17.00
1 23,460 17.27
2 83,960 17.50
2 84,379 17.90
19 3,791,418 18.00
5 84,238 19.00-19.01
- -----------------------------------------------------------------------------------
Total Loans: 3,861 470,737,143 9.91%
- -----------------------------------------------------------------------------------
Equities:
PMC 1,992,022
Freshstart 504,862
Cardinal Health 329,625
Kleener King Satellites 108,696
Micromedics 58,828
Arca 50,000
Other 66,718
- -----------------------------------------------------------------------------------
Total Equities: 11 3,110,751 N/A
- -----------------------------------------------------------------------------------
Total Investments 3,872 473,847,894
- -----------------------------------------------------------------------------------
Plus: Origination costs, net 2,560,588
- -----------------------------------------------------------------------------------
Investments, at cost 476,408,482
- -----------------------------------------------------------------------------------
Less: Unrealized depreciation
on investments 8,945,552
- -----------------------------------------------------------------------------------
Total investments, at Board
of Director's valuation 467,462,930
- -----------------------------------------------------------------------------------
The accompanying notes are an integral part of this consolidated schedule.
</TABLE>
F-27
<PAGE>
MEDALLION FINANCIAL CORP.
Consolidated Schedule of Investments
December 31, 1998
<TABLE>
<CAPTION>
Number Principal Balance Contractual
Of Loans Outstanding Rates
------- ----------------- -----------
<S> <C> <C>
1 $ 24,539 5.00%
22 5,462,468 6.88-6.98
4 2,543,621 7.25
1 246,000 7.42
1 50,509 7.50
6 541,350 7.61
54 8,256,876 7.75
154 36,423,002 8.00-8.24
238 48,918,174 8.25-8.30
396 52,368,669 8.38-8.63
217 28,735,052 8.75-8.90
187 18,957,460 9.00
112 13,553,872 9.13-9.25
100 9,958,684 9.50
67 8,517,864 9.75-9.88
220 18,805,030 10.00
89 6,726,361 10.25-10.38
368 16,793,867 10.50
37 6,599,869 10.75
155 7,092,409 11.00
6 1,746,289 11.25
1 124,551 11.33
5 448,189 11.50
12 2,694,002 11.75-11.90
179 15,600,280 12.00
3 810,157 12.25
16 1,082,837 12.50-12.70
11 944,678 12.75-12.95
298 22,716,982 13.00-13.20
112 3,905,554 13.25
38 2,881,308 13.50
21 977,171 13.75-13.98
175 7,828,432 14.00-14.20
7 337,751 14.25
71 4,552,508 14.30-14.70
269 8,906,924 14.75-15.20
1 6,936 15.25
25 1,521,269 15.50-16.50
18 693,304 16.00
5 194,270 16.25
6 149,549 16.50
4 147,632 16.90-16.95
5 2,758,677 17.00
1 27,108 17.27
1 66,977 17.50
2 91,806 17.90
13 404,988 18.00
1 3,281 18.50
5 121,822 19.00
1 21,783 19.01
- ------------ ------
Total Loans 3,741 $372,342,691 9.93%
----- ------------ ------
Equities:
Radio One $ 2,220,332
Cardinal 329,624
Citywide 3
F. Howell 961
Micromedics 58,828
Star 40,000
Other 4,148,013
-----------
Total Equities: 12 $ 6,797,761 N/A
--- ----------- ---
Total Investments 3,753 $379,140,452
===== ============
Plus: Origination costs, net 1,989,803
---------
Investments, at cost $381,130,255
------------
Plus: Unrealized appreciation on investments 4,812,768
Less: Unrealized depreciation on investments 1,847,851
---------
Investments, at Board of Directors' valuation $384,095,172
============
The accompanying notes are an integral part of this consolidated schedule.
</TABLE>
F-28
<PAGE>
Exhibit Index
Exhibit
Number Description
2.1 Agreement and Plan of Merger, dated as of March 6, 1998, by and among
Medallion Financial Corp., CD Merger Corp. and Capital Dimensions,
Inc. (Exhibits and Schedules thereto omitted). Filed as Exhibit 2.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998 and incorporated by reference herein.
3.1 Certificate of Amendment to Medallion Financial Corp. Restated
Certificate of Incorporation. Filed as Exhibit 3.1.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998 and incorporated by reference herein.
3.2 Medallion Financial Corp. Restated By-Laws. Filed as Exhibit b to the
Company's Registration Statement on Form N-2 (File No. 333-1670) and
incorporated by reference herein.
10.3 Agreement of Merger between Medallion Financial Corp. and Tri-Magna
Corporation, dated December 21, 1995, as amended on February 22, 1996.
Filed as Exhibit K3(i) to the Company's Registration Statement on Form
N-2 (file No. 333-1670) and incorporated by reference herein.
10.4 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 K1 to the Company's Registration Statement on Form N-2 (File
No. 333-1670) and incorporated by reference herein.
10.5 Asset Purchase Agreement between Medallion Financial Corp., and
Edwards Capital Company, dated February 21, 1996. Filed as Exhibit K2
to the Company's Registration Statement on Form N-2 (File No.
333-1670) and incorporated by reference herein.
10.6 Amendment Number 2 to Agreement of Merger between Medallion Financial
Corp. and Tri-Magna Corporation, dated April 26, 1996. Filed as
Exhibit K3(ii) to the Company's Registration Statement on Form N-2
(File No. 333-1670) and incorporated by reference herein.
10.7 Amendment Number 1 to Stock Purchase Agreement among Medallion
Financial Corp. Transportation Capital Corp., LNC Investments, Inc.,
Leucadia, Inc. and Leucadia National Corporation dated April 30, 1996.
Filed as Exhibit K(i) to the Company's Registration Statement on Form
N-2 (File No. 333-1670) and incorporated by reference herein.
10.8 Amendment Number 1 to Asset Purchase Agreement between Medallion
Financial Corp. and Edwards Capital Company dated April 30, 1996.
Filed as Exhibit K2(i) to the Company's Registration Statement on Form
N-2 (File No. 333-1670) and incorporated by reference herein.
10.9 First Amended and Restated Employment Agreement between Medallion
Financial Corp. and Alvin Murstein dated May 29, 1998. Filed as
Exhibit 10.19 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated by referenced
herein..
10.10 First Amended and Restated Employment Agreement between Medallion
Financial Corp. and Andrew Murstein dated May 29, 1998. Filed as
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated by referenced
herein.
10.11 Agreement between Medallion Taxi Media, Inc. and Glenn Grumman dated
July 25, 1996. Filed as Exhibit 10.2 to the Company's Report on Form
10-Q for the quarterly period ended September 30, 1996 and
incorporated herein by reference.
<PAGE>
10.22 Agreement between Medallion Taxi Media, Inc. and Metropolitan Taxicab
Board of Trade, Inc. dated March 6, 1997. Filed as Exhibit 10.37 to
the Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1996 and incorporated by reference herein.
10.27 Medallion Financial Corp. Dividend Reinvestment Plan. Filed as Exhibit
e to the Company's Registration Statement on Form N-2 (File No.
333-1670) and incorporated by reference herein.
10.28 Medallion Financial Corp. Amended and Restated 1996 Stock Option Plan.
Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending June 30, 1998 and incorporated by
reference herein.
10.29 Medallion Financial Corp. 1996 Non-Employee Directors Stock Option
Plan. Filed as Exhibit 10.44 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1996 and incorporated by
reference herein.
10.30 Letter Agreement dated April 18, 1997 between MFC and The Chase
Manhattan Bank relating to an interest rate cap transaction in the
amount of $10,000,000. Filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ending June 30,
1997 and incorporated by reference herein.
10.31 Letter Agreement dated May 9, 1997 between MFC and Fleet National Bank
("Fleet") relating to an interest rate cap transaction in the amount
of $10,000,000. Filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1997 and
incorporated by reference herein.
10.32 Letter Agreement dated May 12, 1997 between MFC and Fleet relating to
an interest rate cap transaction in the amount of $10,000,000. Filed
as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997 and incorporated by reference
herein.
10.33 Amended and Restated Employment Agreement dated August 29, 1998
between Medallion Financial Corp. and Allen S. Greene. Filed as
Exhibit 10.48 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated by referenced
herein.
10.34 Asset Purchase Agreement dated as of August 20, 1997 among the
Company, BLI Acquisition Co., LLC, Business Lenders, Inc., Thomas
Kellogg, Gary Mullin, Penn Ritter and TriumphConnecticut, Limited
Partnership (including all exhibits thereto - schedules omitted).
Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997 and incorporated by
reference herein.
10.35 Amended and Restated Loan Agreement, dated as of December 24, 1997, by
and among Medallion Funding Corp., the lenders party thereto Fleet
Bank, National Association as Swing Line Lender, Administrative Agent
and Collateral Agent and The Bank of New York as Documentation Agent
with Fleet Bank, National Association as Arranger. Filed as Exhibit
10.50 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and incorporated by reference herein.
10.36 Revolving Credit Note dated December 24, 1997 in the amount of
$30,000,000 from Medallion Funding Corp. payable to Fleet Bank,
National Association. Filed as Exhibit 10.51 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and
incorporated by reference herein.
10.37 Revolving Credit Note dated December 24, 1997 in the amount of
$30,000,000 from Medallion Funding Corp. payable to The Bank of New
York. Filed as Exhibit 10.52 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and incorporated by
reference herein.
10.38 Revolving Credit Note dated December 24, 1997 in the amount of
$30,000,000 from Medallion Funding Corp. payable to BankBoston, N.A.
Filed as Exhibit 10.53 to the Company's Annual
<PAGE>
Report on Form 10-K for the fiscal year ended December 31, 1997 and
incorporated by reference herein.
10.39 Revolving Credit Note dated December 24, 1997 in the amount of
$20,000,000 from Medallion Funding Corp. payable to Harris Trust and
Savings Bank. Filed as Exhibit 10.54 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and incorporated
by reference herein.
10.40 Revolving Credit Note dated December 24, 1997 in the amount of
$20,000,000 from Medallion Funding Corp. payable to Bank Tokyo -
Mitsubishi Trust Company. Filed as Exhibit 10.55 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
and incorporated by reference herein.
10.41 Revolving Credit Note dated December 24, 1997 in the amount of
$15,000,000 from Medallion Funding Corp. payable to Israel Discount
Bank of New York. Filed as Exhibit 10.56 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and
incorporated by reference herein.
10.42 Revolving Credit Note dated December 24, 1997 in the amount of
$15,000,000 from Medallion Funding Corp. payable to European American
Bank. Filed as Exhibit 10.57 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and incorporated by
reference herein.
10.43 Revolving Credit Note dated December 24, 1997 in the amount of
$15,000,000 from Medallion Funding Corp. payable to Bank Leumi USA.
Filed as Exhibit 10.58 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and incorporated by reference
herein.
10.44 Revolving Credit Note dated December 24, 1997 in the amount of
$20,000,000 from Medallion Funding Corp. payable to The Chase
Manhattan Bank. Filed as Exhibit 10.59 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 and
incorporated by reference herein.
10.45 Revolving Credit Note dated December 24, 1997 in the amount of
$5,000,000 from Medallion Funding Corp. payable to Fleet Bank,
National Association. Filed as Exhibit 10.60 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and
incorporated by reference herein.
10.46 Amended and Restated Security Agreement, dated as of December 24,
1997, between Medallion Funding Corp., as Debtor and Fleet Bank, N.A.,
as Agent and Secured Party for the benefit of the Banks and Swing Line
Lender signatory tot he Amended and restated Loan Agreement, dated as
of December 24, 1997, among Medallion Funding Corp., the banks
signatory thereto, the Swing Line Lender, The Bank of New York as
Documentation Agent and Fleet Bank, N.A. as Arranger and Agent and the
Holders of Commercial Paper issued by Medallion Funding Corp. Filed as
Exhibit 10.61 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated by reference
herein.
10.47 First Amendment, dated as of February 5, 1998, to Amended and Restated
Loan Agreement, dated as of December 24, 1997, by and among Medallion
Funding Corp., the lenders party thereto, Fleet Bank, National
Association as Swing Line Lender, Administrative Agent and Collateral
Agent and The Bank of New York as Documentation Agent with Fleet Bank,
National Association as Arranger. Filed as Exhibit 10.62 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and incorporated by reference herein.
10.48 Amendment No. 1, dated as of March 12, 1998, to Amended and Restated
Security Agreement, dated as of December 24, 1997, between Medallion
Funding Corp., ad Debtor and Fleet Bank, N.A., as Agent and Secured
Party for the benefit of the Banks and Swing Line Lender signatory to
the Amended and Restated Loan Agreement, dated as of December 24,
1997, among Medallion Funding Corp., the banks signatory thereto, the
Swing Line Lender, The Bank of New York as documentation Agent and
Fleet Bank, N.A. as Arranger and Agent and the
<PAGE>
Holders of Commercial Paper issued by Medallion Funding Corp. Filed as
Exhibit 10.63 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated by reference
herein.
10.49 Indenture of Lease, dated October 31, 1997, by and between Sage Realty
Corporation, as Agent and Landlord, and Medallion Financial Corp., as
Tenant. Filed as Exhibit 10.64 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and incorporated by
reference herein.
10.50 Third Amendment, dated December 22, 1997, to Letter Agreement, dated
as of December 1, 1996. between Medallion Financial Corp. and Fleet
Bank, National Association. Filed as Exhibit 10.65 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
and incorporated by reference herein.
10.51 Endorsement No. 3, dated December 22, 1997, to Revolving Credit Note
dated December 1, 1996 in the amount of $6,000,000 from Medallion
Financial Corp., payable to Fleet Bank, N.A. Filed as Exhibit 10.66 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and incorporated by reference herein.
10.52 (CE) Commercial Paper Dealer Agreement [4 (2) Program] between
Medallion Funding Corp., as issuer, and Smith Barney Inc., as dealer,
dated as of March 13, 1998. Filed as Exhibit 10.1 to the Company's
Quarterly report on Form 10-Q for the fiscal quarter ended March 31,
1998 and incorporated by reference herein.
10.53 Agency Agreement, by and between Medallion Funding Corp. and Bank of
Montreal Trust Company, dated as of March 13, 1998. Filed as Exhibit
10.2 to the Company's quarterly Report on form 10-Q for the fiscal
quarter ended March 31, 1998 and incorporated by reference herein.
10.54 Loan Agreement, dated as of July 31, 1998, by and among Medallion
Financial Corp., the Lenders Party thereto, Fleet Bank, National
Association as Agent and Swing Line Lender and Fleet Bank, National
Association as Arranger (Exhibits included). Filed as Exhibit 10.2 to
the Company's Quarterly Report on form 10-Q for the fiscal quarter
ended September 30, 1998 and incorporated by reference herein.
10.55 Amended and Restated Loan Agreement by and among Medallion Financial
Corp., Medallion Business Credit, LLC, the Lenders Party Hereto, Fleet
Bank, National Association as Agent and Swing Line Lender and Fleet
Bank, National Association as Arranger, dated June 29, 1999. Filed as
Exhibit 10.1 on Form 10-Q for the fiscal quarter ended June 30, 1999
and incorporated by reference herein.
10.56 Medallion Funding Corp. $22,500,000 7.20% Senior Secured Notes, Series
A Due June 1, 2004 Note Purchase Agreement, dated as of June 1, 1999.
Filed as Exhibit 10.2 on Form 10-Q for the fiscal quarter ended June
30, 1999 and incorporated by reference herein.
10.57 Security Agreement between Medallion Funding Corp., as debtor, and
Fleet Bank, N.A., as Agent and secured party, for the benefit of the
Travelers Insurance Company, the First Citicorp Life Insurance
Company, Citicorp Life Insurance Company, United of Omaha Life
Insurance Company and Companion Life Insurance Company dated June 1,
1999. Filed as Exhibit 10.3 on Form 10-Q for the fiscal quarter ended
June 30, 1999 and incorporated by reference herein.
10.58 Security Agreement between Medallion Business Credit, LLC, as debtor
and Fleet Bank, N.A., as Agent and secured party, for the benefit of
The Banks and Swing Line Lender Signatory to the Amended and Restated
Loan Agreement, dated as of June 29, 1999, among Medallion Financial
Corp., Medallion Business Credit LLC, the Banks Signatory thereto, the
Swing Line Lender and Fleet Bank, N.A., as Arranger and Agent, dated
as of June 29, 1999. Filed as Exhibit 10.4 on Form 10-Q for the fiscal
quarter ended June 30, 1999 and incorporated by reference herein.
<PAGE>
10.59 Intercreditor Agreement, dated June 1, 1999, among Fleet Bank, N.A.,
as agent for and on behalf of the Banks, the Banks, the Senior
Noteholders, Fleet, acting as collateral agent to the Senior
Noteholders and Fleet as intercreditor collateral agent for the Senior
Creditors. Filed as Exhibit 10.5 on Form 10-Q for the fiscal quarter
ended June 30, 1999 and incorporated by reference herein.
10.60 $5,000,000 Swing Line Note, dated June 29, 1999. Filed as Exhibit 10.6
on Form 10-Q for the fiscal quarter ended June 30, 1999 and
incorporated by reference herein.
10.61 $20,000,000 Revolving Credit Note No. 1, dated June 29, 1999. Filed as
Exhibit 10.7 on Form 10-Q for the fiscal quarter ended June 30, 1999
and incorporated by reference herein.
10.62 $15,000,000 Revolving Credit Note No. 2, dated June 29, 1999. Filed as
Exhibit 10.8 on Form 10-Q for the fiscal quarter ended June 30, 1999
and incorporated by reference herein.
10.63 $10,000,000 Revolving Credit Note No. 3, dated June 29, 1999. Filed as
Exhibit 10.9 on Form 10-Q for the fiscal quarter ended June 30, 1999
and incorporated by reference herein.
10.64 $10,000,000 Revolving Credit Note No. 4, dated June 29, 1999. Filed as
Exhibit 10.10 on Form 10-Q for the fiscal quarter period ended June
30, 1999 and incorporated by reference herein.
10.65 $10,000,000 Revolving Credit Note No. 5, dated June 29, 1999. Filed as
Exhibit 10.11 on Form 10-Q for the fiscal quarter ended June 30, 1999
and incorporated by reference herein.
10.66 $5,000,000 Revolving Credit Note No. 6, dated June 29, 1999. Filed as
Exhibit 10.12 on Form 10-Q for the fiscal quarter ended June 30, 1999
and incorporated by reference herein.
10.67 $10,000,000 Revolving Credit Note No. 7, dated June 29, 1999. Filed as
Exhibit 10.13 on Form 10-Q for the fiscal quarter ended June 30, 1999
and incorporated by reference herein.
10.68 $10,000,000 Revolving Credit Note No. 8, dated June 29, 1999. Filed as
Exhibit 10.14 on Form 10-Q for the fiscal quarter ended June 30, 1999
and incorporated by reference herein.
10.69 $10,000,000 Revolving Credit Note No. 9, dated June 29, 1999. Filed as
Exhibit 10.15 on Form 10-Q for the fiscal quarter period ended June
30, 1999 and incorporated by reference herein.
10.70 Commercial Paper Dealing Agreement, dated as of July 30, 1999 between
Medallion Financial Corp., and U.S. Bancorp Investments, Inc. Filed as
Exhibit 10.1 on Form 10-Q for the fiscal quarter period ended
September 30, 1999 and incorporated by reference herein.
10.71 Separation Agreement and Mutual General Release of All Claims between
Allen S. Greene and Medallion Financial Corporation effective as of
December 31, 1999. Filed herewith.
21 List of Subsidiaries of Medallion Financial Corp. Filed herewith.
23.1 Consent of Arthur Andersen LLP relating to its report concerning
Medallion Financial Corp., dated March 29, 2000. Filed herewith.
23.2 Consent of Arthur Andersen LLP relating to its reports concerning
Edwards Capital Corp., Transportation Capital Corp. and Tri-Magna
Corporation, dated March 29, 2000. Filed herewith.
27 Medallion Financial Corp. Financial Data Schedule. Filed herewith.
<PAGE>
EXHIBIT 10.71
SEPARATION AGREEMENT AND
MUTUAL GENERAL RELEASE OF ALL CLAIMS
This Separation Agreement and Mutual General Release of all Claims
("this Agreement") is entered into on this 8th day of February, 2000 by and
between Allen S. Greene ("Executive") and Medallion Financial Corporation
("Medallion") and effective as of December 31, 1999 (the "Termination Date").
In Consideration of the promises set forth in this Agreement, Executive
and Medallion agree as follows:
1. Termination of Employment Agreement; Entire Agreement
-----------------------------------------------------
The Amended and Restated Employment Agreement between Executive and
Medallion, dated as of August 29,1998 (the "Employment Agreement"), is
hereby terminated and canceled in its entirety. Executive hereby releases
Medallion and Medallion hereby releases Executive from all of the terms and
provisions of the Employment Agreement. From the date hereof, this
Agreement shall constitute the entire agreement between Executive and
Medallion and contain all of the agreements, whether written, oral, express
or implied, between Executive and Medallion and supersedes any other
agreement, whether written, oral, express or implied, between Executive and
Medallion. Other than this Agreement, there are no other agreements of any
nature whatsoever between Executive and Medallion which survive this
Agreement. This Agreement cannot be modified or amended except in a writing
signed and agreed to by Executive and Medallion.
2. Term
----
The term of this Agreement shall commence on the Termination Date and end
on August 31, 2001 (the "Term").
3. Termination
-----------
As of the Termination Date, Executive hereby resigns any and all
appointments he holds with Medallion, and its subsidiaries and affiliates,
including without limitation those appointments he holds as an officer, and
agrees that his employment with Medallion is terminated as of the
Termination Date. Except as expressly set forth in this Agreement,
Executive and Medallion shall have no obligations to each other of any
nature whatsoever after the Termination Date. After the Termination Date,
Executive shall have no authority to act on behalf of Medallion except upon
the written request of Medallion.
<PAGE>
4. Payments and Benefits
---------------------
In consideration for the promises, covenants and releases provided by
Executive pursuant to this Agreement, Medallion agrees to provide the
following payments and benefits to Executive during the Term or to his
estate in the event of his death.
(a) During the Term, Medallion shall make bi-monthly payments to Executive
equal to $11,458.34 commencing with an initial payment on January 15,
2000 and ending with a payment on August 31, 2001. All of these
payments shall be subject to all required federal, state and local
withholding taxes.
(b) During the Term, Medallion shall continue to make the premium payments
with respect to medical, dental and life insurance coverage currently
in effect with Summit Bancorp. Such coverage shall be subject to
Executive's contributions equal to Executive's employee contributions
in effect under such medical, dental and life insurance programs
existing immediately prior to the Termination Date. Executive's
termination of employment with Medallion on the Termination Date shall
constitute a "qualifying event" for purposes of part 6 of Title 1 of
ERISA ("COBRA") on such date. Executive acknowledges on behalf of
himself and his dependents that any period with respect to which any
of them otherwise would be eligible to elect continued group health
plan coverage under COBRA shall be reduced by the period of
post-termination group health plan coverage provided under this
paragraph 4(b).
(c) Medallion shall make a one-time payment on February 16, 2000 to
executive equal to $68,500, representing Executive's bonus for 1999.
(d) All employee stock options with respect to shares of Medallion common
stock currently held by Executive (the "Options"), to the extent not
yet vested, shall become immediately vested and exercisable, and all
Options shall remain exercisable until the earlier of (i) the date
that is 90 days from the date that Executive or Veral & Co., L.L.C.
ceases to provide any consulting services to Medallion or (ii) the
expiration of such employee stock options.
(e) During the Term, Medallion shall pay for or reimburse Executive for
the lease of the 2000 Mercedes Benz S430 or any replacement car which
lease cost is the same or less, that Executive currently uses and
shall pay for or reimburse Executive for all maintenance, gas, garage,
insurance and any other operating expenses with respect to such
automobile.
-2-
<PAGE>
(f) The payments and benefits in clauses (a) through (e) of this paragraph
4 are contingent upon Executive not revoking the waiver of rights
pursuant to the penultimate sentence of Section 8, below. Medallion
agrees that there are no current offsets or counter claims of any kind
or nature that they can make to these payments.
5. Proprietary Information; Non-Competition; Non-Solicitation
----------------------------------------------------------
(a) Executive agrees that all information and know-how, whether or not in
writing, of a private, secret or confidential nature concerning the
business or financial affairs of Medallion and its subsidiaries
(collectively for the purpose of this paragraph 5 "Medallion") and not
within Executive's possession or knowledge prior to his employment
with Medallion (collectively, the "Proprietary Information"), is and
shall be the exclusive property of Medallion. By way of illustration,
but not limitation, Proprietary Information shall include inventions,
products, processes, methods, techniques, projects, developments,
plans, research data, financial data, personnel data, and lists of
borrowers, advertisers, fleet and taxi owners. Executive agrees not to
disclose any Proprietary Information to any person or entity other
than as specifically authorized in writing by Medallion or use the
same for any unauthorized purpose, either during or after the Term,
unless and until such Proprietary Information has become public
knowledge without fault of Executive or unless required by a court of
law.
(b) Executive agrees that all files, letters, memoranda, reports, records,
data, sketches, drawings or other written, photographic, or other
tangible material containing Proprietary Information, whether created
by Executive or others, which came into his custody or possession,
shall be and are the exclusive property of Medallion.
(c) Executive agrees that his obligation not to disclose or use
Proprietary Information and records of the types set forth herein also
extends to such types of Proprietary Information, records and tangible
property of borrowers, advertisers, fleet taxi owners or other third
parties who may or may have disclosed or entrusted the same to
Medallion or to Executive in the course of his employment
(d) Executive agrees that for a period of one-year after the Termination
date, Executive shall not directly or indirectly (i) recruit, solicit,
hire or otherwise induce or attempt to induce any employees of
Medallion
-3-
<PAGE>
to leave their employment or (ii) call upon, solicit, divert or take
away, or attempt to divert or take away, the business or patronage of
any borrower or customer, of Medallion that had a business
relationship with Medallion at the Termination Date.
6. Return of Property
------------------
All Medallion files, Proprietary Information, access keys, desk keys, ID
badges, credit cards, in Executive's possession must be returned no later
than February 8, 2000.
7. General Release and Waiver of Claims.
----------------------------------------
Executive and Medallion hereby unconditionally and forever release,
discharge and waive any and all claims of any nature whatsoever, whether
legal, equitable or otherwise, which Executive or Medallion may have
against the other arising at any time on or before the Termination Date.
This mutual release of all claims extends to any and all claims of any
nature whatsoever, whether known, unknown or capable or incapable of being
known as of the Termination Date or thereafter. This Agreement is a release
of all claims of any nature whatsoever by Executive and Medallion against
the other and includes, without limitation, any and all claims, demands,
causes of action, liabilities whether known or unknown including those
caused by, arising from or related to Executive's employment relationship
with Medallion including, but without limitation, any and all alleged
discrimination or acts of discrimination which occurred or may have
occurred on or before the Termination Date based upon race, color, sex,
creed, national origin, age, disability or any other violation of any Equal
Employment Opportunity Law, ordinance, rule, regulation or order,
including, but not limited to, Title VII of the Civil Rights Act of 1964,
as amended; the Civil Rights Act of 1991; The Age Discrimination in
Employment Act of 1967, as amended (as further described in Section 7
below); the Fair Labor Standards Act, as amended, the Americans with
Disabilities Act; and any similar state statues or regulations.
The parties agree and understand and knowingly agree to this release
because it is their respective intent in executing this Agreement to
forever discharge each other from any and all present, future, foreseen or
unforeseen causes of action except for the settlement obligation described
herein. Notwithstanding this mutual release and waiver of claims between
the parties, Medallion agrees to indemnify Executive to the fullest extent
allowable by law and its corporate governance documents for any actions or
inactions by Executive in the normal course of his prior employment with
Medallion.
-4-
<PAGE>
8. Release and Waiver of Claims Under the Age Discrimination in Employment
-----------------------------------------------------------------------
Act.
---
Executive acknowledges that Medallion encouraged him to consult with an
attorney of his choosing, and through this Agreement encourages him to
consult with his attorney with respect to possible claims under the Age
Discrimination in Employment Act of 1967, as amended ("ADEA") and that
Executive acknowledges that he understands that the ADEA is a federal
statute that prohibits discrimination, on the basis of age, in employment,
benefits, and benefit plans. Executive wishes to waive any and all claims
under the ADEA that he may have, as of the Termination Date, against
Medallion, its shareholders, employees, or successors and hereby waives
such claims. Executive further understands that by signing this Agreement
he is in fact waiving, releasing and forever giving up any claim under the
ADEA that may have existed on or prior to the Termination Date. Executive
acknowledges that Medallion has informed him that he has at his option,
twenty-one (21) days in which to sign the waiver of this claim under ADEA,
and he does hereby knowingly and voluntarily waive said twenty-one (21) day
period. Executive also understands that he has seven (7) days following the
date of the execution of this Agreement within which to revoke the release
contained in this paragraph by providing a written notice of his revocation
of the release and waiver contained in this paragraph to Medallion.
Executive further understands that this right to revoke the release
contained in this paragraph relates only to this paragraph and does not act
as a revocation of any other term of this Agreement.
9. Continued Applicability of Certain Plans.
--------------------------------------------
Notwithstanding anything contained herein to the contrary, this Agreement
shall not supersede any retirement plan maintained by Medallion for the
benefit of Executive. Except as previously provided in paragraph 4(d)
herein, this Agreement shall not supersede the Medallion 1996 Stock Option
Plan or the option agreements entered into pursuant thereto. All
consideration to which employee is entitled under the above-mentioned plans
shall be provided to Employee pursuant to the terms of the plan documents
and related stock option agreements.
10. Indemnification.
----------------
Notwithstanding anything contained herein to the contrary, including the
general release and waiver of claims by Executive, by signing this
Agreement Executive will not be deemed to have relinquished his right to
indemnification for acts occurring or liabilities arising on or prior to
the Termination Date, including any right for reimbursement of
-5-
<PAGE>
expenses, from Medallion under any charter provision, insurance arrangement
or under applicable law with respect to any claim asserted against
Executive in his capacity as an officer, director, or employee of Medallion
or its predecessor companies, which right shall be no greater nor less than
the indemnification right of other officers, directors and employees of
Medallion.
11. Severability Clause.
-------------------
In the event any provision or part of this Agreement is found to be invalid
or unenforceable, only that particular provision or part so found, and not
the entire agreement, will be inoperative. If any of the restrictions
contained herein are deemed to be unenforceable by reason of the extent,
duration or scope thereof, or otherwise, then the court or other tribunal
making the determination shall reduce the extent, duration, geographical
scope or other provisions hereof to the broadest provision deemed by the
court to be enforceable, and in its reduced form this Agreement will then
be enforceable in the manner contemplated hereby.
12. Non-Admission; Non-Disparagement.
--------------------------------
Nothing contained in this Agreement will be deemed or construed as an
admission of wrongdoing or liability on Executive's part or on the part of
Medallion. Except to the extent required by law, Executive and Medallion
agree not to make any disparaging comments about each other to any third
party.
13. Governing Law.
-------------
This Agreement shall be governed, construed, interpreted and enforced in
accordance with the substantive laws of the State of New York without
regard to principles of conflicts of laws. The parties hereto agree to the
jurisdiction of the courts of the State of New York located in the City of
New York.
14. Arbitration.
-----------
Any claims, controversies, demands, disputes or differences between or
among the parties hereto or any persons bound hereby arising out of, or by
virtue of, or in connection with, or otherwise relating to this Agreement
shall be submitted to and settled by arbitration conducted in New York, New
York before one or three arbitrators each of whom shall be knowledgeable in
employment law. Such arbitration shall otherwise be conducted in accordance
with the rules then obtaining to such disputes of the American Arbitration
Association. The parties hereto agree to share equally the responsibility
for all fees of the arbitrators, abide by any
-6-
<PAGE>
decision rendered as final and binding, and waive the right to appeal the
decision or otherwise submit the dispute to a court of law for a jury or
non-jury trial. The parties hereto specifically agree that neither party
may appeal or subject the award or decision of any such arbitrator(s) to
appeal or review in any court of law or in equity or by any other tribunal,
arbitration system or otherwise. Judgment upon any award granted by such
arbitrator(s) may be enforced in any court having jurisdiction thereof. If
the arbitration decision holds that one party is entirely at fault and the
other party is without fault, the party that is without fault shall be
entitled to reimbursement of fees and expenses from the losing party that
is at fault in an amount not to exceed $50,000.
15. Survivorship.
------------
The respective rights and obligations of the parties hereunder shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations. Specifically,
paragraphs 5 (relating to non-disclosure of Proprietary Information and
non-solicitation), 7 (relating to the general release and waiver of
claims), 8 (relating to the release and waiver of claims under ADEA), 10
(relating to indemnification), 12 (relating to non-disparagement) and 14
(relating to arbitration) shall survive the termination hereof.
THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT AND THAT THEY FULLY
KNOW, UNDERSTAND, AND APPRECIATE ITS CONTENTS, AND THAT THEY EXECUTE THE SAME
AND MAKE THIS AGREEMENT AND THE RELEASE AND AGREEMENTS PROVIDED FOR HEREIN
VOLUNTARILY AND OF THEIR OWN FREE WILL.
IN WITNESS WHEREOF, the parties have executed this AGREEMENT on the 8th
of February, 2000.
MEDALLION CORPORATION
By: /s/ Alvin Murstein /s/ Allen S. Greene
------------------- --------------------
Alvin Murstein Allen S. Greene
Chairman and Chief,
Executive Officer
-7-
<PAGE>
Exhibit 21
List of Subsidiaries of Medallion Financial Corp.
Name Jurisdiction of Incorporation or Formation
Medallion Funding Corp. New York
Medallion Taxi Media, Inc. Delaware
Business Lenders LLC Delaware
Medallion Capital, Inc. Delaware
Medallion Business Credit LLC Delaware
<PAGE>
Exhbit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 29, 2000, included in this Form 10-K into Medallion Financial
Corp.'s previously filed registration statements on Form S-8 (File Nos.
333-19057 and 333-27977).
/s/ Arthur Andersen LLP
New York, New York
March 29, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports dated March 26, 1997 on our audits of the financial
statements of Edwards Capital Company, Transportation Capital Corporation and
Tri-Magna Corporation, included in the Medallion Financial Corp. ("the Company")
Annual Report on Form 10-K for the year ended December 31, 1997, into the
Company's Annual Report Form 10-K for the year ended December 31, 1999.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<INVESTMENTS-AT-COST> 476,413,925 381,130,255
<INVESTMENTS-AT-VALUE> 467,462,930 384,095,172
<RECEIVABLES> 20,329,428 15,500,593
<ASSETS-OTHER> 2,949,906 2,918,113
<OTHER-ITEMS-ASSETS> 18,870,264 19,711,364
<TOTAL-ASSETS> 509,612,528 422,225,242
<PAYABLE-FOR-SECURITIES> 0 0
<SENIOR-LONG-TERM-DEBT> 10,500,000 41,590,000
<OTHER-ITEMS-LIABILITIES> 348,423,760 232,420,712
<TOTAL-LIABILITIES> 358,923,760 274,010,712
<SENIOR-EQUITY> 140,245 140,138
<PAID-IN-CAPITAL-COMMON> 142,015,875 141,376,068
<SHARES-COMMON-STOCK> 14,024,433 14,013,768
<SHARES-COMMON-PRIOR> 14,013,768 13,908,916
<ACCUMULATED-NII-CURRENT> 8,532,648 6,698,324
<OVERDISTRIBUTION-NII> 0 0
<ACCUMULATED-NET-GAINS> 0 0
<OVERDISTRIBUTION-GAINS> 0 0
<ACCUM-APPREC-OR-DEPREC> 0 0
<NET-ASSETS> 150,688,768 148,214,530
<DIVIDEND-INCOME> 0 0
<INTEREST-INCOME> 41,380,405 35,156,636
<OTHER-INCOME> 5,634,376 5,697,836
<EXPENSES-NET> 17,483,135 13,530,401
<NET-INVESTMENT-INCOME> 9,896,505 11,715,047
<REALIZED-GAINS-CURRENT> 22,746,032 1,290,743
<APPREC-INCREASE-CURRENT> (11,910,469) 2,675,923
<NET-CHANGE-FROM-OPS> 20,732,068 15,681,713
<EQUALIZATION> 0 0
<DISTRIBUTIONS-OF-INCOME> 18,368,455 16,772,240
<DISTRIBUTIONS-OF-GAINS> 0 0
<DISTRIBUTIONS-OTHER> 0 0
<NUMBER-OF-SHARES-SOLD> 0 0
<NUMBER-OF-SHARES-REDEEMED> 0 0
<SHARES-REINVESTED> 0 0
<NET-CHANGE-IN-ASSETS> 0 0
<ACCUMULATED-NII-PRIOR> 6,698,324 5,530,771
<ACCUMULATED-GAINS-PRIOR> 0 0
<OVERDISTRIB-NII-PRIOR> 0 0
<OVERDIST-NET-GAINS-PRIOR> 0 0
<GROSS-ADVISORY-FEES> 225,000 225,000
<INTEREST-EXPENSE> 19,635,141 15,609,024
<GROSS-EXPENSE> 37,118,276 29,139,425
<AVERAGE-NET-ASSETS> 0 0
<PER-SHARE-NAV-BEGIN> 10.67 10.48
<PER-SHARE-NII> 0 0
<PER-SHARE-GAIN-APPREC> 0 0
<PER-SHARE-DIVIDEND> 0 0
<PER-SHARE-DISTRIBUTIONS> 0 0
<RETURNS-OF-CAPITAL> 0 0
<PER-SHARE-NAV-END> 0 0
<EXPENSE-RATIO> 0 0
</TABLE>
