<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27812
MEDALLION FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE No. 04-3291176
(State of Incorporation) (IRS Employer Identification No.)
205 East 42nd Street, New York, New York 10017
(Address of principal executive offices) (Zip Code)
(212) 682-3300
(Registrant's telephone number, including area code)
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
--- ---
Number of shares of Common Stock outstanding at the latest practicable date,
April 30, 1997:
<TABLE>
<CAPTION>
Class Outstanding Par Value Shares Outstanding
----------------- --------- ------------------
<S> <C> <C>
Common Stock........................... $.01 8,250,000
</TABLE>
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<PAGE>
MEDALLION FINANCIAL CORP.
FORM 10-Q
March 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. Financial Information
Item 1. Basis of Preparation......................................... 3
Medallion Financial Corp. Consolidated Balance Sheets
as of December 31, 1996 and March 31, 1997............ 4
Medallion Financial Corp. Consolidated Statement of
Operations for the three months ended March 31, 1997.. 5
Medallion Financial Corp. Consolidated Statement of
Changes in Stockholders' Equity for the three
months ended March 31, 1997........................... 6
Medallion Financial Corp. Consolidated Statement of Cash
Flows for the three months ended March 31, 1997....... 7
Notes to Consolidated Financial Statements.............. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 12
General................................................. 12
Consolidated Results of Operations (for the three months
ended March 31, 1997)................................. 15
Asset/Liability Management.............................. 18
Liquidity and Capital Resources......................... 19
Investment Considerations............................... 21
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................. 24
Signatures ...................................................... 25
</TABLE>
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<PAGE>
BASIS OF PREPARATION
Medallion Financial Corp. (the "Company") was incorporated in Delaware in
1995 and commenced operations on May 29, 1996 in connection with the closing of
its initial public offering (the "Offering") and simultaneous acquisition (the
"Acquisitions") of Medallion Funding Corp. ("MFC"), Edwards Capital Company
("Edwards"), Transportation Capital Corp. ("TCC") and Medallion Taxi Media, Inc.
("Media"). Media and MFC were subsidiaries of Tri-Magna Corporation ("Tri-
Magna") which was merged into the Company. The Company's acquisition of these
businesses in connection with the Offering and the resulting two-tier structure
were effected pursuant to an order of the Securities and Exchange Commission
(the "Commission") (Release No. I.C. 21969, May 21, 1996) ("the "Acquisition
Order") and the approval of the U.S. Small Business Administration (the "SBA").
A detailed description of the Company, MFC, Edwards, TCC and Media may be found
in the Acquisition Order and the Company's Registration Statement (the
"Registration Statement") on Form N-2 (File No. 333-24877) filed in connection
with the Company's recent public offering which was declared effective on May
12, 1997.
The financial information included in this report is divided into two
sections. The first section, Item 1, includes the unaudited consolidated
balance sheet of the Company as of March 31, 1997 and the related statements of
operations, stockholders' equity and cash flows for the three months ending
March 31, 1997. Item 1 also sets forth the audited consolidated balance sheet
of the Company as of December 31, 1996. The second section, Item 2, consists of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and sets forth an analysis of the financial information included in
Item 1 for the three months ended March 31, 1997. All references to shares and
per share amounts in this report reflect a 12,500-for-one stock split effected
on May 29, 1996.
The consolidated balance sheet of the Company as of March 31, 1997, the
related statements of operations, stockholders' equity and cash flows for the
three months ended March 31, 1997 included in Item 1 have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying consolidated financial statements
include all adjustments (consisting of normal, recurring adjustments) necessary
to summarize fairly the Company's financial position and results of operations.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results of operations for the full year or any
other interim period. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Registration
Statement.
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<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1996 and MARCH 31, 1997
<TABLE>
<CAPTION>
December 31, March 31,
------------- -------------
1996 1997
------------- -------------
<S> <C> <C>
(Unaudited)
Assets
Investments (Note 2)
Medallion loans $134,614,899 $138,030,494
Commercial installment loans 41,925,289 46,281,372
------------ ------------
Gross investments 176,540,188 184,311,866
Unrealized depreciation of investments (46,300) (46,300)
------------ ------------
Net investments 176,493,888 184,265,566
Investment in unconsolidated
subsidiary (Note 3) 937,000 941,953
------------ ------------
Total investments 177,430,888 185,207,519
Cash 1,664,603 2,612,359
Accrued interest receivable 1,696,584 1,801,377
Fixed assets, net 89,815 96,999
Goodwill, net (Note 2) 6,250,636 6,145,576
Other assets 2,491,974 3,970,990
------------ ------------
Total assets $189,624,500 $199,834,820
============ ============
Liabilities
Accounts payable and accrued expenses $ 1,844,033 $ 2,092,708
Dividends payable 1,849,225 116,725
Accrued interest payable 1,086,247 1,261,656
Notes payable to banks and demand
notes (Note 4) 96,450,000 106,350,000
SBA debentures payable 29,390,000 29,390,000
------------ ------------
Total liabilities $130,619,505 $139,211,089
------------ ------------
Negative goodwill, net (Note 2) 2,517,716 2,337,116
------------ ------------
Commitments and contingencies -- --
Stockholders' equity (Note 1)
Preferred Stock (1,000,000 shares of
$0.01 par value stock
authorized - none outstanding) $ - $ -
Common stock (15,000,000 shares of
$0.01 par value stock authorized -
8,250,000 shares outstanding at
March 31, 1997 and December 31,
1996, respectively) 82,500 82,500
Capital in excess of par value 56,359,555 56,359,555
Accumulated undistributed income 45,224 1,844,560
------------ ------------
Total stockholders' equity 56,487,279 58,286,615
------------ ------------
Total liabilities and stockholders'
equity $189,624,500 $199,834,820
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
-----------------
<S> <C>
Investment income:
Interest income on investments $4,885,264
----------
Total investment income 4,885,264
----------
Interest expense:
Notes payable to banks 1,886,325
SBA debentures 542,327
----------
Total interest expense 2,428,652
----------
Net interest income 2,456,612
----------
Non-interest income:
Equity in earnings of unconsolidated
subsidiary 4,953
Accretion of negative goodwill 180,600
Other income 255,810
----------
Total non-interest income 441,363
----------
Expenses:
Administrative and advisory fees 56,757
Professional fees 168,299
Salaries and benefits 353,017
Other operating expenses 447,206
Amortization of goodwill 105,060
----------
Total expenses 1,130,339
----------
Net investment income 1,767,636
Change in net unrealized depreciation -
Net realized gain on investments 31,700
----------
Net increase in net assets resulting $1,799,336
from operations ==========
Net increase in net assets resulting
from operations per common share $0.22
==========
Weighted average shares and common
share equivalents outstanding 8,317,005
==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-5-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares of Capital Accumulated
Common Stock Common Stock in Excess Undistributed
Outstanding $0.01 Par of Par Value Income
------------ --------- ------------ ------
Value
-----
<S> <C> <C> <C> <C>
Balance at December 31,
1996 (Note 1) 8,250,000 $82,500 $56,359,555 $ 45,224
Distributable net
investment income - - - 1,799,336
------------ --------- ----------- ----------
Balance at March 31, 1997 8,250,000 $82,500 $56,359,555 $1,844,560
============ ========= =========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-6-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
---------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 1,799,336
Adjustments to reconcile net increase in net assets resulting from operations
to net cash provided by (used for) operating activities:
Depreciation and amortization 16,855
Increase in equity in earnings (losses) of unconsolidated subsidiary (4,953)
Amortization of goodwill 105,060
Decrease (increase) in accrued interest receivable (104,793)
Decrease (increase) in other assets (1,486,512)
Increase (decrease) in accounts payable and accrued expenses 248,675
Accretion of negative goodwill (180,600)
Increase (decrease) in accrued interest payable 175,409
---------------
Net cash provided by (used for) operating activities $ 568,477
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in investments $ (44,067,849)
Proceeds from sales and maturities of investments 36,296,171
Capital expenditures (16,543)
---------------
Net cash provided by (used for) investing activities $ (7,788,221)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to banks $ 9,900,000
Payment of declared dividends to current stockholders (1,732,500)
---------------
Net cash provided by (used for) financing activities $ 8,167,500
---------------
NET INCREASE (DECREASE) IN CASH $ 947,756
CASH beginning of period 1,664,603
---------------
CASH end of period $ 2,612,359
===============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 2,253,243
===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-7-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(unaudited)
(1) Formation of Medallion Financial Corp.
Medallion Financial Corp. (the "Company") is a closed-end management
investment company organized as a Delaware corporation in 1995. The Company has
elected to be regulated as a business development company under the Investment
Company Act of 1940, as amended (the "1940 Act"). On May 29, 1996, the Company
completed an initial public offering (the "Offering") of its common stock,
issued and sold 5,750,000 shares at $11.00 per share and split the existing 200
shares of common stock outstanding into 2,500,000 shares. All share and related
amounts in the accompanying financial statements have been restated to reflect
this stock split. Offering costs incurred by the Company in connection with the
sale of shares totaling $7,102,944 were recorded as a reduction of capital upon
completion of the Offering. These costs were recorded, net of $200,000 payable
between the Company and Tri-Magna Corporation and subsidiaries ("Tri-Magna") in
accordance with the merger agreement between the Company and Tri-Magna. In
parallel with the Offering, the Company merged with Tri-Magna; acquired
substantially all of the assets and assumed certain liabilities of Edwards
Capital Company, a limited partnership; and acquired all of the outstanding
voting stock of Transportation Capital Corp. ("TCC") (collectively, the
"Acquisitions"). The assets acquired and liabilities assumed from Edwards
Capital Company, were acquired and assumed by Edwards Capital Corporation
("Edwards"), a newly formed and wholly-owned subsidiary of the Company. As a
result of the merger with Tri-Magna in accordance with the Merger Agreement
dated December 21, 1995 between the Company and Tri-Magna, Medallion Funding
Corp. ("MFC") and Medallion Taxi Media, Inc. ("Media"), formerly subsidiaries of
Tri-Magna, became wholly-owned subsidiaries of the Company. In connection with
the Acquisitions, the Company has applied for and received the Acquisition Order
under the 1940 Act from the Securities and Exchange Commission. The Company
also received approval from the U.S. Small Business Administration ("SBA") for
these transactions.
Tri-Magna was a closed-end management investment company registered under
the 1940 Act and was the sole shareholder of MFC and Media. MFC is a closed-end
management investment company registered under the 1940 Act and is licensed as a
small business investment company ("SBIC") by the SBA. As an adjunct to MFC's
taxicab medallion finance business, Media operates a taxicab rooftop advertising
business.
Edwards is licensed as an SBIC by the SBA and is registered as a closed-end
management investment company under the 1940 Act.
TCC, a wholly-owned subsidiary of the Company, is licensed as an SBIC by
the SBA and is registered as a closed-end management investment company
registered under the 1940 Act. Effective January 1, 1997, the Company decided
to merge all of the assets and
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<PAGE>
liabilities of TCC into MFC subject to the approval of the SBA. The Company
expects to complete the merger by the end of the second quarter of 1997.
(2) Summary of Significant Accounting Policies
The Acquisitions were accounted for under the purchase method of
accounting. Under this accounting method, the Company has recorded as its cost
the fair value of the acquired assets and assumed liabilities. 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.
Deferred offering costs incurred by the Company in connection with the sale
of shares were recorded as a reduction of capital upon completion of the
Offering. These costs were recorded net of $200,000 payable by Tri-Magna in
accordance with the merger agreement between the Company and Tri-Magna.
Under the 1940 Act and the Small Business Investment Act of 1958 and
regulations thereunder (the "SBIA"), the Company's long-term loans are
considered investments and are recorded at their fair value. Since no ready
market exists for these loans, fair value is determined by the Board of
Directors in good faith. In determining fair value, the Company and the Board of
Directors take into consideration factors including the financial condition of
the borrower, the adequacy of the collateral, and the relationships between
market interest rates and portfolio interest rates and maturities. Loans are
valued at cost less unrealized depreciation. Any change in the fair value of the
Company's investments as determined by the Board of Directors is reflected in
net unrealized depreciation of investments. Total unrealized depreciation was
$1,568,717 on total investments of $176,493,888 and $184,265,566 at December 31,
1996 and March 31, 1997, respectively, of which $1,522,417 existed at the date
of the Company's acquisitions. The Board of Directors have determined that this
valuation approximates fair value.
Net increase in net assets resulting from operations per share is computed
using the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents consist primarily of dilutive
outstanding stock options computed under the treasury stock method.
On March 3, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." This statement establishes standards for
the computation and presentation of earnings per share and applies to entities
with publicly held common stock or potential common stock. This statement,
which supersedes APB Opinion No. 15, is effective for financial statements for
both interim and annual periods ending after December 15, 1997. Early adoption
is not permitted. This statement when adopted, will require the restatement of
prior years' earnings per share. Management expects that the adoption of this
new statement will not have a material impact on the Company's previously
disclosed earnings per share.
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<PAGE>
(3) Investment in Unconsolidated Subsidiary
The Company's investment in Media is accounted for under the equity method
because as a non-investment company, Media cannot be consolidated with the
Company which is an investment company under the 1940 Act. Financial
information presented for Media includes the balance sheets as of December 31,
1996 and March 31, 1997 and unaudited statement of operations for the three
months ended March 31, 1997:
<TABLE>
<CAPTION>
Three
Months Ended
December 31, March 31, Statement March 31,
Balance Sheet 1996 1997 of operations 1997
------------- ------------ ------------ -------------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash $ 79,827 $ 27,193 Advertising revenue $ 451,056
Accounts receivable 307,303 385,931 Cost of services 178,587
----------
Equipment, net 976,442 907,743
Other 330,839 538,633 Gross margin 272,469
---------- ----------
Other operating expenses 267,516
----------
Total assets $1,694,411 $1,859,500
========== ==========
Income before taxes 4,953
Notes payable to parent $ 584,566 $ 746,582 Income tax provision -
----------
Accrued expenses 64,516 62,636
---------- ----------
Net Income $ 4,953
==========
Total liabilities 649,082 809,218
---------- ----------
Equity 1,001,000 1,001,000
Retained earnings 44,329 49,282
---------- ----------
Total equity 1,045,329 1,050,282
---------- ----------
Total liabilities and
shareholders equity $1,694,411 $1,859,500
========== ==========
</TABLE>
On March 6, 1997, Media entered into a five-year agreement with the
Metropolitan Taxi Board of Trade, Inc. ("MTBOT") to provide rooftop advertising
on approximately 1,800 New York City taxicabs affiliated with the MTBOT
commencing on September 22, 1997.
(4) Notes Payable to Banks
On January 28, 1997, MFC increased the amount available under its revolving
credit facility by $20,000,000. On February 10, 1997, the Company increased the
amount available under its revolving line of credit by $1,000,000.
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<PAGE>
(5) Pro Forma Results of Operations
The unaudited pro forma combined financial information for the three months
ended March 31, 1996 is presented as follows assuming the formation of the
Company and the Acquisitions described in Note 1 occurred on January 1, 1996:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
------------------
<S> <C>
Investment income $4,021,000
Net interest income 2,199,000
Net investment income 1,504,000
Net increase in net assets resulting from operations $1,524,000
==========
Net increase in net assets resulting from operations
per share $ 0.18
==========
Pro forma weighted average shares outstanding 8,250,000
==========
</TABLE>
(6) Subsequent Events
On April 7, 1997, the Company increased the amount available under its
revolving line of credit by $1,500,000.
On April 7, 1997, Edwards paid upon maturity an SBA debenture in the
principal amount of $1,500,000.
On April 28, 1997, MFC declared a dividend payable to the Company in the
amount of $130 per share payable on April 28, 1997 (aggregating $865,670),
Edwards declared a dividend payable to the Company in the amount of $3,500 per
share payable on April 28, 1997 (aggregating $350,000) and TCC declared a
dividend payable to the Company in the amount of $3,500 per share payable on
April 28, 1997 (aggregating $350,000). With the proceeds of these dividends, on
April 28, 1997 the Company declared a dividend in the amount of $0.22 per share
(aggregating $1,815,000) payable on May 21, 1997 to the stockholders of record
on May 8, 1997.
MFC entered into an interest rate cap agreement on April 17, 1997, limiting
the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit
facility to 6.0% until April 21, 1998. In addition, on May 9, 1997, MFC entered
into an interest rate cap agreement limiting the Company's maximum LIBOR
exposure on $10,000,000 of MFC's revolving credit facility to 6.5% until May 13,
1998 and 7.0% until November 13, 1999. On May 12, 1997, MFC entered into an
interest rate cap agreement limiting the Company's maximum LIBOR exposure on
$10,000,000 of MFC's revolving credit facility to 7.0% until May 13, 1999.
Total premiums of $145,000 paid under the agreements are being amortized over
the respective terms of the agreements.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this section should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing in this
Report on Form 10-Q. In addition, this Management's Discussion and Analysis
contains forward-looking statements. These forward-looking statements are
subject to the inherent uncertainties in predicting future results and
conditions. Certain factors that could cause actual results and conditions to
differ materially from those projected in these forward-looking statements are
set forth below in the Investment Considerations section.
General
The Company's principal activity is the origination and servicing of loans
secured by taxicab medallions ("Medallion Loans") and loans to small businesses
secured by equipment and other suitable collateral ("Commercial Installment
Loans"). The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on interest-
earning assets consisting primarily of Medallion Loans and Commercial
Installment Loans, and the interest paid on interest-bearing liabilities
consisting primarily of credit facilities with bank syndicates and subordinated
debentures issued to or guaranteed by the SBA. Net interest income is a
function of the net interest rate spread, which is the difference between the
average yield earned on interest-earning assets and the average interest rate
paid on interest-bearing liabilities, as well as the average balance of
interest-earning assets as compared to interest-bearing liabilities. Net
interest income is affected by economic, regulatory and competitive factors that
influence interest rates, loan demand and the availability of funding to finance
the Company's lending activities. The Company, like other financial
institutions, is subject to interest rate risk to the degree that its interest-
earning assets reprice on a different basis than its interest-bearing
liabilities.
On May 12, 1997, the Company's Registration Statement on Form N-2 was
declared effective and the Company executed an underwriting agreement with
certain underwriters providing for the public offering of 4,000,000 shares of
the Company's Common Stock at a price to the public of $17.25 per share. It is
expected that the offering will close on May 16, 1997. The net proceeds to the
Company from the offering, after deducting underwriting discounts and other
offering expenses payable by the Company (estimated to be approximately $4.5
million) are estimated to be approximately $64.5 million. The Company intends
to use the net proceeds to increase its loan portfolio, to fund possible
acquisitions of other finance companies, to repurchase loan participations that
the Company has previously sold to third parties and to provide working capital.
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<PAGE>
Trend in Loan Portfolio Yield. The Company's investment income is driven
by the principal amount of and yields on Medallion Loans and Commercial
Installment Loans. The following table illustrates the Company's weighted
average portfolio yield at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
--------------------------------------------------- --------------------------
Weighted Percentage Weighted Percentage
Average Principal of Total Average Principal of Total
Yield Amounts Portfolio Yield Amounts Portfolio
--------- ----------------- ----------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Medallion Loan Portfolio 9.92% $134,614,899 76.3% 9.75% $138,030,494 74.9%
Commercial Installment Loan Portfolio 13.51 41,925,289 23.7 13.54 46,281,372 25.1
------------ ----- ------------ -----
Total Portfolio 10.80 $176,540,188 100.0 10.70 $184,311,866 100.0
============ ===== ============ =====
</TABLE>
The weighted average yield e.o.p. of the Medallion Loan portfolio decreased
17 basis points from 9.92% at December 31, 1996 to 9.75% at March 31, 1997.
Medallion Loans constituted 76.3% of the total portfolio of $176.5 million at
December 31, 1996 and 74.9% of the total portfolio of $184.3 million at March
31, 1997. The yields on the Company's Medallion Loans had been in a long-term
decline. However, since December 31, 1994 the weighted average yield of the
Medallion Loan portfolio has stabilized primarily as a result of the
stabilization of market rates for Medallion Loans. During the three months
ended March 31, 1997, however, the weighted average yield of the Medallion Loan
portfolio has declined as the Company has elected to increase the percentage of
its Medallion Loan originations which are made to owners of large taxicab
fleets. Although these loans offer lower yields, they offer superior credit
quality as compared to Medallion Loans made to individuals or businesses that
own fewer taxicabs. In addition, such loans reprice more frequently than other
Medallions Loans in the Company's portfolio, thereby reducing the Company's
interest rate risk exposure. As a result of this decline in the Medallion Loan
portfolio yield, the weighted average yield e.o.p. of the entire portfolio
decreased ten basis points from 10.80% at December 31, 1996 to 10.70% at March
31, 1997.
The decrease in the average yield of the entire portfolio has been offset
in part by the Company's strategy of shifting the portfolio mix toward a higher
percentage of Commercial Installment Loans, which historically have had a yield
of approximately 350 basis points higher than the Company's Medallion Loans and
500 to 700 basis points higher than the prevailing prime rate of interest
charged by major commercial banks (the "Prime Rate"). The weighted average
yield e.o.p. of the Commercial Installment Loan portfolio increased three basis
points from 13.51% at December 31, 1996 to 13.54% at March 31, 1997. In
addition, the percentage of the entire portfolio composed of Commercial
Installment Loans increased from 23.7%, or $41.9 million, at December 31, 1996
to 25.1%, or $46.3 million at March 31, 1997. The Company intends to continue
to increase the percentage of Commercial Installment Loans in the total
portfolio.
Trend in Interest Expense. The Company's interest expense is driven by the
interest rate payable on the Company's LIBOR-based short-term credit facilities
with bank syndicates and, to a lesser degree, fixed-rate, long-term subordinated
debentures issued to or guaranteed by the SBA. In recent years, the Company has
reduced its reliance on SBA financing and increased the relative proportion of
bank debt to total liabilities. SBA financing can offer
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<PAGE>
very attractive rates, but such financing is restricted in its application and
its availability is uncertain. In addition, SBA financing subjects its
recipients to limits on the amount of secured bank debt they may incur.
Accordingly, the Company plans to continue to limit its use of SBA funding and
will seek such funding only when advantageous, such as when SBA financing rates
are particularly attractive, and to fund loans that qualify under the Small
Business Investment Act of 1958, as amended (the "SBIA") and SBA Regulations
through subsidiaries already subject to SBA restrictions. The Company believes
that its transition to financing its operations primarily with short-term LIBOR-
based bank debt has generally decreased its interest expense thus far, but has
also increased the Company's exposure to the risk of increases in market
interest rates which the Company attempts to mitigate with certain matching
strategies. The Company also expects that net interest income should increase
because bank debt is more available than SBA financing and will thus permit an
increase in the size of the loan portfolio. At December 31, 1996 and March 31,
1997, short-term LIBOR-based debt constituted 75.1% and 76.4% of total debt,
respectively. On March 26, 1997, the Federal Reserve System increased the
federal-funds interest rate by 25 basis points and, as a result, the prevailing
Prime Rate has generally increased by 25 basis points. If these increases lead
to a trend of higher interest rates, net interest rate spread could decline at
least until the Company is able to originate new loans at the higher prevailing
interest rates.
The Company's cost of funds is primarily driven by (i) the average maturity
of debt issued by the Company, (ii) the premium to LIBOR paid by the Company on
its LIBOR-based debt, and (iii) the ratio of LIBOR-based debt to SBA financing.
The Company incurs LIBOR-based debt for terms generally ranging from 30-180
days. The Company's subordinated debentures issued to or guaranteed by the SBA
typically have terms of ten years. The Company's cost of funds reflects
fluctuations in LIBOR to a greater degree than in the past because LIBOR-based
debt has come to represent a greater proportion of the Company's debt. The
Company measures its cost of funds as its aggregate interest expense for all of
its interest-bearing liabilities divided by the face amount of such liabilities.
The Company analyzes its cost of funds in relation to the average of the 90- and
180-day LIBOR (the "LIBOR Benchmark"). The Company's average cost of funds
e.o.p. increased from 7.11% or 153 basis points over the LIBOR Benchmark of
5.58% at December 31, 1996 to 7.14%, or 146 basis points over the LIBOR
Benchmark of 5.68% at March 31, 1997.
Taxicab Rooftop Advertising. In connection with its Medallion Loan finance
business, the Company also conducts a taxicab rooftop advertising business
through Media, which began operations in November 1994. Media's revenue is
affected by the number of taxicab rooftop advertising displays ("Displays") that
it owns and the occupancy rate and advertising rate of those Displays. At March
31, 1997, Media had approximately 2,000 installed Displays. In addition, on
March 6, 1997 Media entered into an agreement with the MTBOT to provide
advertising on over 1,800 New York City taxicabs affiliated with the MTBOT
commencing on September 22, 1997. The effect of that agreement will be to
increase the number of taxicabs Media has under contract for rooftop advertising
in New York City from approximately 1,700 currently to approximately 3,500.
With this agreement, Media is the leading taxicab rooftop advertiser in the
city. The Company expects that Media will continue to expand its operations.
Although Media is a wholly-owned subsidiary of the Company, its results of
operations are not consolidated with the Company because Securities and Exchange
-14-
<PAGE>
Commission regulations prohibit the consolidation of non-investment companies,
such as Media, with investment companies, such as the Company.
Factors Affecting Net Assets. Factors which affect the Company's net
assets include net realized gain/loss on investments and change in net
unrealized depreciation of investments. Net realized gain/loss on investments
is the difference between the proceeds derived upon foreclosure of a loan and
the cost basis of such loan. Change in net unrealized depreciation of
investments is the amount, if any, by which the Company's estimate of the fair
market value of its loan portfolio is below the cost basis of the loan
portfolio. Under the 1940 Act and the SBIA, the Company's loan portfolio must
be recorded at fair market value or "marked to market." Unlike certain lending
institutions, the Company is not permitted to establish reserves for loan
losses, but adjusts quarterly the valuation of its loan portfolio to reflect the
Company's estimate of the current realizable value of the loan portfolio. Since
no ready market exists for the Company's loans, fair market value is subject to
the good faith determination of the Company. In determining such value, the
Company takes into consideration factors such as the financial condition of its
borrowers, the adequacy of its collateral and the relationships between current
and projected market rates of interest and portfolio rates of interest and
maturities. Any change in the fair value of portfolio loans as determined by
the Company is reflected in net unrealized depreciation of investments and
affects net increase in net assets resulting from operations but has no impact
on net investment income or distributable income. Therefore, if recent
increases in prevailing interest rates lead to a trend of higher interest rates,
net increase in net assets resulting from operations could decline. Upon the
completion of the Acquisitions on May 29, 1996, the Company's loan portfolio was
recorded on the balance sheet at fair market value, which included $1.5 million
of net unrealized depreciation, as estimated by the Company in accordance with
the 1940 Act and the purchase method of accounting. From December 31, 1996
through March 31, 1997 there was no change in net unrealized depreciation of
investments. Application of the "marked to market" policy to the Company's loan
portfolio could result in greater volatility in the Company's earnings than was
the case for the businesses acquired in the Acquisitions since they did not in
all cases follow that policy.
Recent Commencement of Operations. The Company commenced operations in
connection with the simultaneous closing of its initial public offering and the
Acquisitions on May 29, 1996. Prior to that date, the Company had no results of
operations and each of Tri-Magna, Edwards and TCC had been operating
independently of each other. The following discussion under the caption
"Consolidated Results of Operations" sets forth an analysis of the Company's
actual results of operations and assets and liabilities for the three months
ended March 31, 1997. All period percentages involving income statement
accounts have been annualized for discussion purposes.
Consolidated Results of Operations
For the Three Months Ended March 31, 1997.
Performance Summary. For the three months ended March 31, 1997, investment
income has been positively impacted by the strong growth of the entire loan
portfolio which
-15-
<PAGE>
was primarily driven by an increase in the percentage of the portfolio composed
of higher yielding Commercial Installment Loans. Interest expense for the period
reflected an increase in the LIBOR benchmark e.o.p. of ten basis points and
growth in net borrowings. The positive trend in the spread between the average
yield on the entire portfolio and the average of costs of funds contributed to
the $1.8 million of net investment income earned during the period.
Investment Income. Investment income for the three months ended March 31,
1997 was $4.9 million. The Company's investment income reflects the positive
impact of portfolio growth during the period. Total portfolio growth was $7.8
million or 4.4% from $176.5 million at December 31, 1996 to $184.3 million at
March 31, 1997. The average portfolio outstanding during the three-month period
ended March 31, 1997 was $180.4 million which produced investment income of $4.9
million at a weighted average interest rate of 10.83%. Gross loan originations
net of participations during the three-month period ended March 31, 1997 was
$44.1 million offset by prepayments, terminations and refinancings by the
Company aggregating $36.3 million. Average yield e.o.p. of the entire portfolio
decreased ten basis points from 10.80% at December 31, 1996 to 10.70% at March
31, 1997. The decrease was caused by a decrease in the average yield on
Medallion Loans caused by the reduction of loan yields at Edwards. Edwards has
elected to increase the percentage of its Medallion Loan originations which are
made to owners of large taxicab fleets. Although these loans offer lower yields,
they offer superior credit quality as compared to Medallion Loans made to
individuals or businesses that own fewer taxicabs. In addition, such loans
reprice more frequently than other Medallion Loans in the Company's portfolio,
thereby reducing the Company's interest rate risk exposure. Moreover, most of
the loans that the Company originates to large fleet owners are syndicated to
other lenders and the Company earns a 50 basis point servicing fee on such
syndications. This decrease in yield was offset in part by a slight increase in
the average yield on Commercial Installment Loans and a shift in the portfolio
mix toward a higher percentage of Commercial Installment Loans which
historically have been originated at a yield of approximately 350 basis points
higher than Medallion Loans and 500 to 700 basis points higher than the
prevailing Prime Rate. The average yield e.o.p. of the Medallion Loan portfolio
decreased seventeen basis points from 9.92% at December 31, 1996 to 9.75% at
March 31, 1997 and the average yield of the Commercial Installment Loan
portfolio increased three basis points from 13.51% at December 31, 1996 to
13.54% at March 31, 1997. The percentage of the portfolio composed of Commercial
Installment Loans increased from 23.7% at December 31, 1996 to 25.1% at March
31, 1997.
Interest Expense. The Company's interest expense was $2.4 million for the
three months ended March 31, 1997. The Company's average cost of funds e.o.p.
increased from 7.11% or 153 basis points over the LIBOR benchmark of 5.58% at
December 31, 1996 to 7.14% or 146 basis points over the LIBOR benchmark of 5.68%
at March 31, 1997. The increase in the average cost of funds e.o.p. was caused
by a ten basis point increase in the LIBOR benchmark, which was moderated by the
varying maturities of borrowings that the Company had at March 31, 1997. The
Company's net borrowings increased $9.9 million or 7.9% from $125.8 million at
December 31, 1996 to $135.7 million at March 31, 1997. Average borrowings
during the three months ended March 31, 1997 were $130.7 million which produced
an interest expense of $2.4 million at a weighted average interest rate of
7.43%. The weighted average interest rate of 7.43% includes commitment fees and
-16-
<PAGE>
amortization of premiums on existing interest rate cap agreements as a
reflection of total cost of funds borrowed. The increased borrowings were
incurred due to portfolio growth and such borrowings all related to LIBOR-
based indebtedness, which increased as a percentage of the Company's total
indebtedness from 75.1% at December 31, 1996 to 76.4% at March 31, 1997.
Net Interest Income. Net interest income was $2.5 million for the three
months ended March 31, 1997. Net interest income reflects the positive impact
of the portfolio growth during the period. The average spread between the
average yield on the portfolio and the average cost of funds during the three-
month period ended March 31, 1997 was 3.40%.
Equity in Earnings of Unconsolidated Subsidiary. For the three months
ended March 31, 1997, Media generated advertising revenue of $451,000 and
incurred Display rental costs of approximately $179,000, resulting in a gross
margin of approximately $272,000 or 60.3% of advertising revenue. The number of
Displays owned by Media were approximately 2,000 at March 31, 1997. For the
three months ended March 31, 1997, operating expenses were $267,000 and Media
generated net income of $5,000 which is recorded as equity in earnings or losses
of unconsolidated subsidiary on the Company's statement of operations. Display
occupancy increased from 64% at December 31, 1996 to 70% at March 31, 1997. The
Company expects display occupancy rates to increase to 90% by June 30, 1997.
Other Income. The Company derived $256,000 in other income, or 0.14% of
investments for the three months ended March 31, 1997. Other income was
primarily derived from late charges, prepayment fees and miscellaneous income.
Prepayment fees are heavily influenced by the level and volatility of interest
rates and competition.
Non-Interest Expenses. The Company had non-interest expenses of $1.0
million for the period. Approximately $353,000, or 34.4% of non-interest
expenses, was related to salaries and benefits, $168,000, or 16.4%, consisted of
professional fees, $57,000, or 5.6% consisted of investment advisory fees. The
operating expense ratio was 2.05% for the three-month period ended March 31,
1997, on an annualized basis, reflecting consolidation of the Company's
operations, efficiencies of scale and elimination of redundant services,
facilities and functions. The Company believes that operating expenses as a
percentage of average assets will decline as the loan portfolio increases due to
economies of scale.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill of $105,000 for the three months ended March 31, 1997
relates to $6.5 million of goodwill generated in the acquisitions of Edwards and
TCC. Goodwill is the amount by which the cost of acquired businesses exceeds
the fair value of the net assets acquired. Goodwill is being amortized on a
straight-line basis over 15 years. Negative goodwill is the excess of fair
market value of net assets of an acquired business over the cost basis of such
business. Negative goodwill of $2.9 million was generated in the acquisition of
Tri-Magna and is being amortized on a straight-line basis over four years.
Net Realized Gain/Loss on Investments The Company realized a net gain on
investments of $31,000 during the three months ended March 31, 1997. The gain
was the result of the sale of foreclosed real estate previously written down for
a gain of $28,000 and recoveries in the amount of $3,000 on certain loans
secured by radio dispatch and broadcast
-17-
<PAGE>
equipment and other assets used in connection with livery taxicab services
previously written off.
Net Investment Income. Net investment income earned during the three-month
period ended March 31, 1997 was $1.8 million reflecting the positive impact of
portfolio growth.
Net Increase in Net Assets Resulting from Operations. Net increase in net
assets resulting from operations was $1.8 million for the three months ended
March 31, 1997 and reflects portfolio growth. Return on assets and return on
equity for the three months ended March 31, 1997, on an annualized basis, were
3.7% and 12.5%, respectively.
Asset/Liability Management
Interest Rate Sensitivity. The Company, like other financial institutions,
is subject to interest rate risk to the extent its interest-earning assets
(consisting of Medallion Loans and Commercial Installment Loans) reprice on a
different basis over time in comparison to its interest-bearing liabilities
(consisting primarily of credit facilities with bank syndicates and subordinated
SBA debentures).
A relative measure of interest rate risk can be derived from the Company's
interest rate sensitivity gap. The interest rate sensitivity gap represents the
difference between interest-earning assets and interest-bearing liabilities
which mature and/or reprice within specified intervals of time. The gap is
considered to be positive when repriceable assets exceed repriceable liabilities
and negative when the inverse situation exists. A relative measure of interest
rate sensitivity is provided by the cumulative difference between interest
sensitive assets and interest sensitive liabilities for a given time interval
expressed as a percentage of total assets.
Having interest-bearing liabilities that mature or reprice more frequently
on average than assets may be beneficial in times of declining interest rates,
although such an asset/liability structure may result in declining net earnings
during periods of rising interest rates. Conversely, having interest-earning
assets that mature or reprice more frequently on average than liabilities may be
beneficial in times of rising interest rates, although this asset/liability
structure may result in declining net earnings during periods of falling
interest rates. The mismatch between maturities and interest rate sensitivities
of the Company's interest-earning assets and interest-bearing liabilities
results in interest rate risk. Abrupt increases in market rates of interest may
have an adverse impact on the Company's earnings. Accordingly, if recent
increases in prevailing interest rates caused by a 25 basis point increase in
the federal-funds rate lead to a trend of higher interest rates, net interest
rate spread could decline at least until the Company is able to originate new
loans at the higher prevailing interest rates.
The effect of changes in market rates of interest is mitigated by regular
turnover of the portfolio. From inception of its business in 1979 through 1996,
the period between the origination and final payments of all Medallion Loans
originated by MFC is estimated by the Company to have been 29 months on a
weighted average basis. Accordingly, the Company
-18-
<PAGE>
anticipates that approximately 40% of the portfolio will mature or be prepaid
each year. The Company believes that the average life of its loan portfolio
varies to some extent as a function of changes in interest rates because
borrowers are more likely to exercise prepayment rights in a decreasing interest
rate environment when the interest rate payable on the borrower's loan is high
relative to prevailing interest rates and are less likely to prepay in a rising
interest rate environment.
The Company seeks to manage the exposure of the balance of the portfolio to
increases in market interest rates by entering into interest rate cap agreements
to hedge a portion of its variable-rate debt against increases in interest rates
and by incurring fixed-rate debt consisting primarily of subordinated SBA
debentures. The Company has entered into interest rate cap agreements to limit
the Company's interest rate exposure. MFC entered into an interest rate cap
agreement on April 17, 1997, limiting the Company's maximum LIBOR exposure on
$10,000,000 of MFC's revolving credit facility to 6.0% until April 21, 1998. On
May 9, 1997, MFC entered into an interest rate cap agreement limiting the
Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit
facility to 6.5% until May 13, 1998 and 7.0% until November 13, 1999. On May
12, 1997, MFC entered into an interest rate cap agreement limiting the Company's
maximum LIBOR exposure on $10,000,000 of MFC's revolving credit facility to 7.0%
until May 13, 1999. Total premiums of $145,000 paid under the agreements are
being amortized over the respective terms of the agreements. In addition, the
Company manages its exposure to increases in market rates of interest by
incurring fixed rate indebtedness, such as subordinated SBA debentures. The
Company currently has outstanding subordinated SBA debentures in the principal
amount of $27.9 million with a weighted average rate of interest of 7.30%. At
March 31, 1997, these debentures constituted 21.6% of the Company's
indebtedness.
The Company will seek to manage interest rate risk by evaluating and
purchasing, if appropriate, additional derivatives, originating adjustable-rate
loans, incurring fixed-rate indebtedness and revising, if appropriate, its
overall level of asset and liability matching. Nevertheless, the Company
accepts varying degrees of interest rate risk depending on market conditions and
believes that the resulting asset/liability interest rate mismatch results in
opportunities for higher net interest income.
Liquidity and Capital Resources
The Company's sources of liquidity are credit facilities with bank syndicates,
fixed rate, long-term subordinated debentures that are issued to or guaranteed
by the SBA and loan amortization and prepayments. As a Regulated Investment
Company ("RIC") under the Internal Revenue Code of 1986, as amended, 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 March 31, 1997, 78.4% of the Company's $135.7 million of debt consisted of
bank debt, substantially all of which was at variable effective rates of
interest with a weighted average rate of 7.07% or 143 basis points below the
Prime Rate and 21.6% consisted of subordinated SBA debentures with fixed rates
of interest with a weighted average rate of 7.38%. The Company is eligible to
seek SBA funding but plans to continue to limit its use of SBA funding and will
seek such funding only
-19-
<PAGE>
when advantageous, such as when SBA financing rates are particularly attractive,
or to fund loans that qualify under SBA regulations through Edwards and TCC
which are already subject to SBA restrictions. In the event that the Company
seeks SBA funding, no assurance can be given that such funding will be obtained.
In addition to possible additional SBA funding, an additional $21.6 million of
debt was available at March 31, 1997 at variable effective rates of interest
averaging below the Prime Rate under the Company's $126.0 million bank credit
facilities. On April 7, 1997, the Company increased the amounts available under
its revolving credit facility by $1.5 million. The Company has observed a
practice of minimizing credit facility fees associated with the unused component
of credit facilities by keeping the unused component as small as possible and
periodically increasing the amounts available under such credit facilities only
when necessary to fund portfolio growth.
The following table illustrates the Company's and each of the subsidiaries'
sources of available funds and amounts outstanding under credit facilities at
March 31, 1997.
<TABLE>
<CAPTION>
The
Company MFC Edwards TCC Total
---------- ----------- ------------- ------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash................................. $ 337 $ 1,252 $ 58 $ 965 $ 2,612
Revolving lines of credit............ 6,000(1) 105,000 15,000 -- 126,000(1)
Amounts available.................. - 19,350 2,300 -- 21,650
Amounts outstanding................ 6,000 85,650 12,700 -- 104,350
Average interest rate............ 7.14% 7.08% 6.90% -- 7.07%
Maturity......................... 12/97 6/97 4/97-7/97 -- 4/97-12/97
Term loans........................... -- 2,000 -- 2,000
Interest rate.................... -- 7.50% -- -- 7.50%
Maturity......................... -- 7/97 -- -- 7/97
SBA debentures....................... -- -- 23,750(2) 5,640 29,390(2)
Average interest rate............ -- -- 7.95% 5.00% 7.38%
Maturity......................... -- -- 4/97-9/04 6/02 4/97-9/04
Total cash and remaining amounts
available under credit facilities.. 337 20,602 2,358 965 24,262(1)
Total debt outstanding............... $6,000 $ 87,650 $ 36,450(2) $5,640 $ 135,740(2)
- --------------------
</TABLE>
(1) On April 7, 1997, the Company increased the amounts available under its
revolving credit facility by $1.5 million.
(2) On April 1, 1997, $1.5 million of such debentures matured and were paid by
the Company.
Loan amortization and prepayments also provide a source of funding for the
Company. Prepayments on loans are influenced significantly by general interest
rates, Medallion Loan market rates, economic conditions and competition.
Medallion Loan prepayments have slowed since early 1994, initially because of
increases, and then stabilization, in the level of interest rates and more
recently because of an increase in the percentage of the Company's Medallion
Loans which are refinanced with the Company rather than through other sources of
financing.
The Company makes limited use of SBA funding and will seek such funding
only when advantageous. Since May 30, 1996, the Company has expanded its loan
portfolio,
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<PAGE>
reduced its level of SBA financing and increased its level of bank
funding. While bank funding often carries higher interest rates than SBA
funding, the Company believes that such higher rates will be offset by the
increased volume of funding and loan originations which should result in
increased net interest margin.
Media funds its operations through internal cash flow and intercompany
debt. Media is not a RIC and, therefore, is able to retain earnings to finance
growth.
The Company believes that anticipated borrowings from the SBA and under its
bank credit facilities, proceeds from its public offering which is expected to
close on May 16, 1997 and cash flow from operations (after distributions to
stockholders) will be adequate to fund the continuing operations of the
Company's loan portfolio and advertising business for the foreseeable future.
In addition, in order to provide the funds necessary for the Company's expansion
strategy, the Company expects to incur, from time to time, additional short- and
long-term bank debt and (to the extent permitted and advantageous) to use SBA
financing, and to issue, in public or private transactions, its equity and debt
securities. The Company is currently exploring such external financing
possibilities and MFC is exploring establishing a commercial paper program. The
issuance of commercial paper will be contingent upon MFC obtaining an investment
grade rating, among other conditions, and no assurance can be given that MFC
will be able to establish such a program. The availability and terms of any
additional financing will depend upon market, regulatory and other conditions
and there can be no assurance that such additional financing will be available
on terms acceptable to the Company.
Investment Considerations
The following are certain of the factors which could affect the Company's
future results. They should be considered in connection with evaluating
forward-looking statements contained in this Management's Discussion and
Analysis and elsewhere in this Report and otherwise made by or on behalf of the
Company since these factors, among others, could cause actual results and
conditions to differ materially from those projected in these forward-looking
statements.
Interest Rate Spread. The Company's net interest income is largely
dependent upon achieving a positive interest rate spread and other factors.
Leverage. The Company's use of leverage poses certain risks for holders of
the Common Stock, including the possibility of higher volatility of both the net
asset value of the Company and the market price of the Common Stock and,
therefore, an increase in the speculative character of the Common Stock.
Availability of Funds. The Company has a continuing need for capital to
finance its lending activities. The Company funds its operations through credit
facilities with bank syndicates and, to a lesser degree, through subordinated
SBA debentures. Reductions in the availability of funds from banks and under
SBA programs on terms favorable to the Company could have a material adverse
effect on the Company. Because the Company
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<PAGE>
distributes to its shareholders at least 90% of its investment company taxable
income, such earnings are not available to fund loan originations.
Industry and Geographic Concentration. A substantial portion of the
Company's revenue is derived from operations in New York City and these
operations are substantially focused in the area of financing New York City
taxicab medallions and related assets. There can be no assurance that an
economic downturn in New York City in general, or in the New York City taxicab
industry in particular, would not have an adverse impact on the Company.
Reliance on Management. The success of the Company will be largely
dependent upon the efforts of senior management. The death, incapacity or loss
of the services of any of such individuals could have an adverse effect on the
Company.
Taxicab Industry Regulation. Every city in which the Company originates
Medallion Loans, and most other major cities in the United States, limit the
supply of taxicab medallions. In many markets, regulation results in supply
restrictions which, in turn, support the value of medallions; consequently,
actions which loosen such restrictions and result in the issuance of additional
medallions into a market could decrease the value of medallions in that market
and, therefore, the collateral securing the Company's then outstanding Medallion
Loans, if any, in that market. The Company is unable to forecast with any
degree of certainty whether any potential increases in the supply of medallions
will occur. In New York City, and in other markets where the Company originates
Medallion Loans, taxicab fares are generally set by government agencies, whereas
expenses associated with operating taxicabs are largely unregulated. As a
consequence, in the short term, the ability of taxicab operators to recoup
increases in expenses is limited. Escalating expenses, therefore, can render
taxicab operation less profitable and make it more difficult for borrowers to
service loans from the Company and could potentially adversely affect the value
of the Company's collateral.
Government Regulation of Tobacco Advertising. Currently, 60% of the
Company's taxicab rooftop advertising revenue is derived from tobacco products
advertising. In August 1996, President Clinton signed an executive order
adopting rules proposed by the U.S. Food and Drug Administration (the "FDA")
restricting the sale and advertising of cigarette and smokeless tobacco
products. Certain of these regulations which include provisions prohibiting the
placement of tobacco product advertising within 1,000 feet of playgrounds and
schools only apply to stationery advertising such as placards and billboards
and, accordingly, do not restrict taxicab rooftop advertising. Certain other of
these regulations, however, which limit tobacco products advertising to a format
consisting of black text on a white background and require the inclusion of a
statement which identifies the product as "a nicotine-delivery device for
persons over 18" apply to taxicab rooftop advertising. Certain advertisers may
be unwilling to advertise in this format; accordingly, these restrictions, which
become effective on August 28, 1997, could have an adverse effect upon the
taxicab rooftop advertising business of the Company. On April 25, 1997,
however, a federal district court in Greensboro, North Carolina ruled that the
FDA does not have the authority to restrict such advertising. The FDA has
indicated that it will appeal the decision. If the FDA is successful in its
appeal, the Company believes that these restrictions could have a material
adverse effect upon the taxicab rooftop advertising business of the Company. In
addition,
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<PAGE>
even if the FDA's appeal is not successful, discussions currently taking place
among the tobacco industry, certain state attorneys general and certain members
of Congress could result in a settlement that includes a ban on all outdoor
advertising of tobacco products.
-23-
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed.
-24-
<PAGE>
MEDALLION FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements 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.
Date: May 15, 1997 By: /s/ Daniel F. Baker
------------------------------------
Daniel F. Baker
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 185,253,819
<INVESTMENTS-AT-VALUE> 185,207,519
<RECEIVABLES> 1,801,377
<ASSETS-OTHER> 3,970,990
<OTHER-ITEMS-ASSETS> 8,854,934
<TOTAL-ASSETS> 199,834,820
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 139,211,089
<TOTAL-LIABILITIES> 139,211,089
<SENIOR-EQUITY> 82,500
<PAID-IN-CAPITAL-COMMON> 56,359,555
<SHARES-COMMON-STOCK> 8,250,000
<SHARES-COMMON-PRIOR> 2,500,000
<ACCUMULATED-NII-CURRENT> 1,844,560
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46,300
<NET-ASSETS> 58,286,615
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,885,264
<OTHER-INCOME> 441,363
<EXPENSES-NET> 1,130,339
<NET-INVESTMENT-INCOME> 1,767,636
<REALIZED-GAINS-CURRENT> 31,700
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,799,336
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,732,500
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,799,336
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</TABLE>
