-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ENgTGMUGLYqxKN7xiI8d5svF3JLAV1zA98u1/rvXi78yH/dCS5+FtKO0i7q0RrBt 4AmLM3Jvm6ZC8E/AaIzGgA== 0000927016-97-001494.txt : 19970520 0000927016-97-001494.hdr.sgml : 19970520 ACCESSION NUMBER: 0000927016-97-001494 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDALLION FINANCIAL CORP CENTRAL INDEX KEY: 0001000209 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 043291176 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27812 FILM NUMBER: 97609341 BUSINESS ADDRESS: STREET 1: 205 E 42ND ST STREET 2: STE 2020 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126823300 10-Q 1 FORM 10-Q ================================================================================ 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:
Class Outstanding Par Value Shares Outstanding ----------------- --------- ------------------ Common Stock........................... $.01 8,250,000
================================================================================ MEDALLION FINANCIAL CORP. FORM 10-Q March 31, 1997 INDEX
Page ---- 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
-2- 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. -3- MEDALLION FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996 and MARCH 31, 1997
December 31, March 31, ------------- ------------- 1996 1997 ------------- ------------- (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 ============ ============
See accompanying notes to unaudited consolidated financial statements. -4- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (Unaudited)
Three Months Ended March 31, 1997 ----------------- 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 ==========
See accompanying notes to unaudited consolidated financial statements. -5- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1997 (Unaudited)
Shares of Capital Accumulated Common Stock Common Stock in Excess Undistributed Outstanding $0.01 Par of Par Value Income ------------ --------- ------------ ------ Value ----- 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 ============ ========= =========== ==========
See accompanying notes to unaudited consolidated financial statements. -6- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (Unaudited)
Three Months Ended March 31, 1997 --------------- 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 ===============
See accompanying notes to unaudited consolidated financial statements. -7- 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 -8- 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. -9- (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:
Three Months Ended December 31, March 31, Statement March 31, Balance Sheet 1996 1997 of operations 1997 ------------- ------------ ------------ -------------------- ------------- (unaudited) (unaudited) 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 ========== ==========
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. -10- (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:
Three Months Ended March 31, 1996 ------------------ 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 ==========
(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. -11- 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. -12- 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:
December 31, 1996 March 31, 1997 --------------------------------------------------- -------------------------- Weighted Percentage Weighted Percentage Average Principal of Total Average Principal of Total Yield Amounts Portfolio Yield Amounts Portfolio --------- ----------------- ----------- -------- -------------- ---------- 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 ============ ===== ============ =====
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 -13- 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- 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- 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- 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- 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- 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- 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.
The Company MFC Edwards TCC Total ---------- ----------- ------------- ------- --------------- (dollars in thousands) 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) - --------------------
(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, -20- 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 -21- 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, -22- 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- 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- 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- EX-27 2 FINANCIAL DATA SCHEDULE
6 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. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 185,253,819 185,207,519 1,801,377 3,970,990 8,854,934 199,834,820 0 0 139,211,089 139,211,089 82,500 56,359,555 8,250,000 2,500,000 1,844,560 0 0 0 46,300 58,286,615 0 4,885,264 441,363 1,130,339 1,767,636 31,700 0 1,799,336 0 1,732,500 0 0 0 0 0 1,799,336 0 0 0 0 56,250 2,428,652 3,558,991 0 0 0 0 0 0 0 0 0 0 0
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