-----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, Kktmh3kWHfwHfodzVml/+iPJ/ovwYnMuQsC6qSZZBPEILSuchdbGwDdKo5WwTeOM slvs0Q3FyR8GQUu2wl7IsQ== 0000950130-98-002681.txt : 19980518 0000950130-98-002681.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950130-98-002681 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDALLION FINANCIAL CORP CENTRAL INDEX KEY: 0001000209 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 043291176 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27812 FILM NUMBER: 98624485 BUSINESS ADDRESS: STREET 1: 205 E 42ND ST STREET 2: STE 2020 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126823300 MAIL ADDRESS: STREET 1: 205 E 42ND ST STREET 2: STE 2020 CITY: NEW YORK STATE: NY ZIP: 10017 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, 1998 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.) 437 MADISON AVE, NEW YORK, NEW YORK 10022 (Address of principal executive offices) (Zip Code) (212) 328-2100 (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, 1998: Class Outstanding PAR VALUE SHARES OUTSTANDING ----------------- --------- ------------------ Common Stock........................ $.01 12,882,996 ================================================================================ MEDALLION FINANCIAL CORP. FORM 10-Q MARCH 31, 1998 INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Basis of Preparation............................................... 3 Medallion Financial Corp. Consolidated Balance Sheets at March 31, 1998 and December 31, 1997........................ 4 Medallion Financial Corp. Consolidated Statement of Operations for the three months ended March 31, 1998 and 1997.. 5 Medallion Financial Corp. Consolidated Statement of Cash Flows for the three months ended March 31, 1998 and 1997....... 6 Notes to Consolidated Financial Statements....................... 7 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, 1998 and 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- PART I FINANCIAL INFORMATION ITEM. 1 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 the simultaneous acquisitions (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"). 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, 1998 and the related statements of operations, stockholders' equity and cash flows for the three months ending March 31, 1998 and 1997. Item 1 also sets forth the audited consolidated balance sheet of the Company as of December 31, 1997. 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, 1998 and 1997 The consolidated balance sheet of the Company as of March 31, 1998, the related statements of operations, stockholders' equity and cash flows for the three months ended March 31, 1998 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, 1998 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 Company's Annual Report on Form 10K for the fiscal year ended December 31, 1997. -3- MEDALLION FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1998 and DECEMBER 31, 1997
March 31, December 31, 1998 1997 -------- -------- ASSETS (Unaudited) Investments : Medallion loans $ 241,521,796 $ 225,961,249 Commercial installment loans 66,092,738 62,763,197 ------------- ------------- Net investments 307,614,534 288,724,446 Investment in unconsolidated subsidiary 1,295,814 1,140,424 ------------- ------------- Total investments 308,910,348 289,864,870 ------------- ------------- Cash 4,874,704 2,529,613 Accrued interest receivable 3,256,261 2,934,840 Receivable from sale of loans 4,454,464 2,862,981 Fixed assets, net 743,859 356,206 Goodwill, net 5,965,897 6,082,515 Servicing fee receivable 1,840,709 1,671,415 Other assets 4,229,803 3,742,204 ------------- ------------- Total assets $ 334,276,045 $ 310,044,644 ============= ============= LIABILITIES Accounts payable 1,430,421 $ 4,410,508 Accrued expenses 1,728,694 2,439,714 Dividends payable - 3,594,402 Accrued interest payable 1,090,442 773,194 Notes payable to banks and demand notes 129,600,000 137,750,000 Commercial paper 35,645,422 - SBA debentures payable 27,890,000 27,890,000 ------------- ------------- Total liabilities 197,384,979 176,857,818 ------------- ------------- Negative goodwill, net 1,614,716 1,795,316 ------------- ------------- Commitments and contingencies (Note 6) SHAREHOLDERS' EQUITY (Note 1) Preferred Stock (1,000,000 shares of $.01 par - - value stock authorized-none outstanding) Common stock (15,000,000 shares of $.01 par value stock authorized-12,883,596 and 12,880,296 shares outstanding at March 31, 1998 and December 31, 1997, 128,836 128,803 respectively) Capital in excess of par value 130,426,341 130,378,936 Accumulated undistributed income 4,721,173 883,771 ------------- ------------- Total shareholders' equity 135,276,350 131,391,510 ------------- ------------- Total liabilities and shareholders' equity $ 334,276,045 $ 310,044,644 ============= ============= Diluted number of common shares 12,980,707 11,157,544 ========== ========== Net asset value per share $10.42 $11.78 ====== ======
See accompanying notes to unaudited consolidated financial statements. -4- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 and 1997 (Unaudited)
Three Months Three Months Ended Ended March 31, 1998 March 31, 1997 -------------- -------------- Investment income: Interest income on investments $8,020,714 $4,885,264 ---------- ----------- Total investment income 8,020,714 4,885,264 ---------- ----------- Interest expense: Notes payable to banks 2,653,219 1,886,325 SBA debentures 551,256 542,327 ---------- ----------- Total interest expense 3,204,475 2,428,652 ---------- ----------- Net interest income 4,816,239 2,456,612 ---------- ----------- Non-interest income: Equity in earnings of unconsolidated subsidiary 155,390 4,953 Accretion of negative goodwill 180,600 180,600 Gain on sale of loans 680,934 - Other income 294,526 255,810 ---------- ----------- Total non-interest income 1,311,450 441,363 ---------- ----------- Expenses: Administrative and advisory fees 56,504 56,757 Professional fees 155,700 168,299 Salaries and benefits 1,139,376 353,017 Other operating expenses 818,192 447,206 Amortization of goodwill 116,619 105,060 ---------- ----------- Total expenses 2,286,391 1,130,339 ---------- ----------- Net investment income 3,841,298 1,767,636 Change in net unrealized depreciation - - Net realized gain (loss) on investments (3,896) 31,700 ---------- ----------- Net increase in net assets resulting from operations $ 3,837,402 $ 1,799,336 ========== =========== Net increase in net assets resulting from operations per common share Basic $ 0.30 $ 0.22 ======= ======= Diluted $ 0.30 $ 0.22 ======= ======= Weighted average common shares outstanding: Basic Average Shares 12,881,676 8,250,000 ========== ========= Diluted Average Shares 12,980,707 8,298,223 ========== =========
See accompanying notes to unaudited consolidated financial statements. -5- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 and 1997 (Unaudited)
Three Months Three Months Ended Ended March 31, 1998 March 31, 1997 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in net assets resulting from operations $ 3,837,402 $ 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 52,350 16,855 Increase in equity in earnings of unconsolidated subsidiary (155,390) (4,953) Amortization of goodwill 116,618 105,060 Decrease (increase) in accrued interest receivable (321,421) (104,793) Decrease (increase) in other assets (476,323) (1,486,512) Increase (decrease) in accounts payable and accrued expenses (3,691,107) 248,675 Decrease in receivable from sale of loans (1,591,483) - Increase in servicing fee receivable (223,294) - Accretion of negative goodwill (180,600) (180,600) Increase in accrued interest payable 317,248 175,409 ------------ ------------ Net cash provided by (used for) operating activities (2,316,000) 568,477 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Originations of investments (60,611,932) (44,067,849) Proceeds from sales and maturities of investments 41,721,844 36,296,171 Capital expenditures (397,279) (16,543) ------------ ------------ Net cash provided by (used for) investing activities (19,287,367) (7,788,221) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (Payments of) notes payable to banks (8,150,000) 9,900,000 Proceeds from issuance of commercial paper 35,645,422 - Proceeds from exercise of stock options 47,438 - Payment of declared dividends to current stockholders (3,594,402) (1,732,500) ------------ ------------ Net cash provided by (used for) financing activities 23,948,458 8,167,500 ------------ ------------ NET INCREASE (DECREASE) IN CASH 2,345,091 947,756 CASH beginning of period 2,529,613 1,664,603 ------------ ------------ CASH end of period $ 4,874,704 $ 2,612,359 ============ ============ SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 2,887,227 $ 2,253,243 ============ ============
See accompanying notes to unaudited consolidated financial statements. -6- MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (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 by Tri-Magna Corporation and subsidiaries (Tri-Magna) in accordance with the Merger Agreement. In parallel with the Offering, the Company merged with Tri- Magna; acquired substantially all of the assets and assumed certain liabilities of Edwards Capital Company, a limited partnership; and acquired all of the outstanding voting stock of Transportation Capital Corp. (TCC) (collectively, the 1996 Acquisitions) (see Note 3). The assets acquired and liabilities assumed from Edwards Capital Company were acquired and assumed by Edwards Capital Corporation (Edwards), a newly formed and wholly owned subsidiary of the Company. As a result of the merger with Tri-Magna in accordance with the Merger Agreement dated December 21, 1995 between the Company and Tri-Magna, Medallion Funding Corp. (MFC) and Medallion Taxi Media, Inc. (Media), formerly subsidiaries of Tri-Magna, became wholly-owned subsidiaries of the Company. MFC, Edwards and TCC are closed-end management investment companies registered under the 1940 Act and are each licensed as a small business investment company (SBIC) by the SBA. As an adjunct to the Company's taxicab medallion finance business, Media operates a taxicab rooftop advertising business. The Company decided to merge all of the assets and liabilities of Edwards and TCC into MFC subject to the approval of the SBA. As of March 31, 1998, the Company is awaiting such approval from the SBA. On October 31, 1997, the Company consummated the purchase of substantially all of the assets and liabilities of Business Lenders, Inc. through the Company's wholly owned subsidiary, BLI Acquisition Co., LLC. In connection with the transaction, BLI Acquisition Co., LLC was renamed Business Lenders, LLC. (Business Lenders). Business Lenders is licensed by the SBA under its section 7a program. In connection with the 1996 Acquisitions and the Business Lenders Acquisition, the Company received the Acquisition Orders under the 1940 Act from the Securities and Exchange Commission, as well as approval from the Small Business Administration (SBA). -7- (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 $2,233,717 on total investments of $307,614,534 and $288,724,446 at March 31, 1998 and December 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. On February 4, 1998, the Company announced the execution of a definitive agreement to acquire certain assets and assume certain liabilities of VGI, VGII and Venture Opportunities Corp., an SBIC lender headquartered in New York City, for an aggregate purchase price of approximately $19 million. The consummation of this transaction is subject to approval by the SBA. Moreover, on March 9, 1998, the Company announced the execution of a definitive agreement to acquire Capital Dimensions, Inc. (CDI), an SSBIC lender, headquartered in Minneapolis, MN. The stock for stock transaction is structured as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended, and is expected to be treated as a pooling of interests for accounting purposes. Based on the closing price of the Company's stock on March 8, 1998, the transaction would be valued at approximately $30 million. The consummation of this agreement is subject certain regulatory approvals, including approval by the SBA. The Company expects both transactions to close during the second quarter of 1998. In 1997 the Company adopted SFAS No. 128, "Earnings Per Share". SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The Company has applied the provisions of SFAS No. 128 retroactively to all periods presented. In accordance with Staff Accounting Bulletin (SAB) No. 98, the Company has determined that there were no nominal issuances of -8- common stock or potential common stock in the period prior to the Company's initial public offering (IPO). The dilutive effect of potential common shares in 1997, consisting of outstanding stock options is determined using the treasury method in accordance with SFAS No. 128. Basic and fully diluted EPS for the three months ended March 31, 1998 and 1997 are as follows:
March 31, 1998 March 31, 1997 ................................................................................................................................ (Dollars in thousands, except Income Shares Per Share Income Shares Per Share shares and per share amounts) Amount Amount - -------------------------------------------------------------------------------------------------------------------------------- Net Income $ 3,837 $ 1,799 Basic EPS: Income available to common 3,837 12,881,676 $ .30 1,799 8,250,000 $ .22 stockholders Effect of dilutive options Stock options 99,031 48,223 Diluted EPS: Income available to common 3,837 12,980,707 $ .30 1,799 8,298,223 $ .22 stockholders
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is to become effective for fiscal years beginning after December 15, 1997. SFAS No. 130 established standards for reporting and display of comprehensive income and its components. Comprehensive income is the total of net income and all other non-owner changes in equity. Reclassification of financial statements of earlier periods presented for comparative purposes is required. The Company has adopted this statement and it does not have a significant impact on the Company's financial position or results of operations. (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 March 31, 1998 and December 31, 1997 and unaudited statement of operations for the three months ended March 31, 1998 and 1997: -9- March 31, December 31, 1998 1997 ------- ------- Cash $1,054,795 $ 594,377 Accounts receivable 966,390 700,392 Equipment, net 1,399,905 1,422,284 Other 465,017 533,541 ---------- ---------- Total assets $3,886,107 $3,250,594 ========== ========== Notes payable to parent $2,028,699 1,555,637 Accounts payable and accrued expenses 190,975 283,915 Federal income taxes payable 262,000 162,000 ---------- ---------- Total liabilities 2,481,674 2,001,552 Equity 1,001,000 1,001,000 Retained earnings 403,433 248,042 ---------- ---------- Total equity 1,404,433 1,249,042 ---------- ---------- Total liabilities and shareholders' equity $3,886,107 $3,250,594 ========== ========== Three Months Three Months Ended Ended March 31, March 31, Statement of Operations 1998 1997 - -------------------------- ----------------- ---------------- Advertising revenue $ 1,457,010 $ 451,056 Cost of service 535,843 178,587 ----------- ----------- Gross margin 921,167 272,469 Other operating expenses 665,777 267,516 ----------- ----------- Income before taxes 255,390 4,953 Income taxes 100,000 - ----------- ----------- Net income $ 155,390 $ 4,953 =========== =========== (4) Debt The table below summarizes the various debt agreements the Company had outstanding at March 31, 1998 and December 31, 1997: March 31, 1998 December 31, 1997 -------------- ----------------- Notes payable to banks: Total facilities $228,000,000 $228,000,000 Maturity of facilities 6/98-6/99 1/98-6/99 Total amounts outstanding $ 129,600,000 $ 137,750,000 ============== ================= SBA debentures payable $ 27,890,000 $ 27,890,000 ============= ============= -10- Maturity 6/98-9/04 6/98-9/04 Under the revolving credit agreement between MFC and its lenders, as amended, MFC is required to maintain minimum tangible net assets of $45,000,000 and certain financial ratios. The Company believes that MFC was in compliance with such requirements at March 31, 1998. (5) COMMERCIAL PAPER On March 13, 1998, MFC entered into a commercial paper agreement with Salomon Smith Barney to sell up to an aggregate principal amount of $195 million in secured commercial paper through private placements pursuant to Section 4(2) of the Securities Act of 1933. Amounts outstanding at any time under the program are limited by certain covenants, including a requirement that MFC retain an investment grade rating from at least two of the four rating agencies, and borrowing base calculations set forth in MFC's syndicated credit facilities, which act as a backup to the commercial paper program on a pari passu basis. The commercial paper program has no specified maturity and may be terminated by the Company at any time. As of March 31, 1998, MFC had $35,645,422 outstanding at a weighted average interest rate of 5..95% (6) SUBSEQUENT EVENTS On May 6, 1998, MFC declared a dividend payable to the Company in the amount of $250 per share payable on May 6, 1998 (aggregating $1,664,750), Edwards declared a dividend payable to the Company in the amount of $7,650 per share payable on May 6, 1998 (aggregating $765,000) and TCC declared a dividend payable to the Company in the amount of $1,590 per share payable on May 6, 1998 (aggregating $159,000). With the proceeds of these dividends, on May 6, 1998 the Company declared a dividend in the amount of $0.28 per share (aggregating $3,608,162) payable on May 27, 1997 to the stockholders of record on May 18, 1997. MFC entered into an interest rate cap agreement on April 7, 1998, limiting the Company's maximum LIBOR exposure on $20,000,000 of MFC's revolving credit facility to 6.5% until September 30, 1999 and 7.0% until March 30, 2001. The total premium of $64,000 paid under the agreement is being amortized over the term of the agreement. -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 and the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 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, secured commercial paper and subordinated debentures issued to or guaranteed by the SBA. Net interest income is a function of the net interest rate spread, which is the difference between the average yield earned on interest-earning assets and the average interest rate paid on interest-bearing liabilities, as well as the average balance of interest-earning assets as compared to interest-bearing liabilities. Net interest income is affected by economic, regulatory and competitive factors that influence interest rates, loan demand and the availability of funding to finance the Company's lending activities. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets reprice on a different basis than its interest-bearing liabilities. Trend in Loan Portfolio Yield. The Company's investment income is driven by the principal amount of and yields on Medallion Loans and Commercial Installment Loans. The following table illustrates the Company's weighted average portfolio yield at the dates indicated:
December 31, 1997 March 31, 1998 Weighted Percentage Weighted Percentage Average Principal of Total Average Principal Of Total Yield Amounts Portfolio Yield Amounts Portfolio ----- ------- --------- ----- ------- --------- Medallion Loan Portfolio 9.28% $225,961,249 78.3% 9.18% $241,521,796 78.5% Commercial Installment Loan Portfolio 12.60 62,763,197 21.7 12.63 66,092,738 21.5 ---------- ---- ---------- ---- Total Portfolio 10.02 $288,724,446 100.0% 9.93 $307,614,534 100.0% ============ ===== ============ =====
-12- The weighted average yield e.o.p./1/ of the Medallion Loan portfolio decreased 10 basis points from 9.28% at December 31, 1997 to 9.18% at March 31, 1998. Medallion Loans constituted 78.3% of the total portfolio of $288.7 million at December 31, 1997 and 78.5% of the total portfolio of $307.6 million at March 31, 1998. The decrease in the average yield on Medallion Loans was caused by a reduction in loan yields due to lower long-term interest rates and competition. To offset the resulting decline in investment income, the Company increased the origination of loans with shorter interest rate maturity dates, thereby reducing the Company's interest rate risk exposure. The Company believes that this time period varies to some extent as a function of changes in interest rates because borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment when the interest rate payable on the borrower's loan is high relative to prevailing interest rates and are less likely to prepay in a rising interest rate environment. As a result of this decline in the Medallion Loan portfolio yield, the weighted average yield e.o.p. of the entire portfolio decreased nine basis points from 10.02% at December 31, 1997 to 9.93% at March 31, 1998. The Company had been 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 250 to 600 basis points higher than the Prime Rate; however, the Company was able to grow the the Medallion Loan portfolio faster than anticipated. The weighted average yield e.o.p. of the Commercial Installment Loan portfolio increased three basis points from 12.60% at December 31, 1997 to 12.63% at March 31, 1998. While the percentage of the entire portfolio composed of Commercial Installment Loans decreased from 21.7%, or $62.7 million, at December 31, 1997 to 21.5%, or $66.1 million at March 31, 1998, the Company intends to try to increase both the percentage of Commercial Installment Loans in the total portfolio and the number of floating rate loan originations. Trend in Interest Expense. The Company's interest expense is driven by the interest rate payable on the Company's LIBOR-based short-term credit facilities with bank syndicates, secured commercial paper and, to a lesser degree, fixed- rate, long-term subordinated debentures issued to or guaranteed by the SBA. In recent years, the Company has reduced its reliance on SBA financing and increased the relative proportion of bank debt to total liabilities. SBA financing can offer very attractive rates, but such financing is restricted in its application and its availability is uncertain. In addition, SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. Accordingly, the Company plans to continue to limit its use of SBA funding and will seek such funding only when advantageous, such as when SBA financing rates are particularly attractive, and to fund loans that qualify under the 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 and commercial paper 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. - -------------------- /1/ e.o.p. or "end of period," indicates that a calculation is made at the date indicated rather than for the period then ended. -13- The Company also expects that net interest income should increase as the Company issues more commercial paper in lieu of bank debt and will thus permit an increase in the size of the loan portfolio. At the present time commercial paper is generally priced at approximately 50 basis points below the rate charged under the Company's revolving credit facilities. At December 31, 1997 and March 31, 1998, short-term LIBOR-based debt constituted 83.2% and 67.1% of total debt, respectively. At March 31, 1998, commercial paper constituted 18.5% of total debt. The Company began issuing commercial paper on March 16, 1998. The Company's cost of funds is primarily driven by (i) the average maturity of debt issued by the Company, (ii) the premium to LIBOR paid by the Company on its LIBOR-based debt and secured commercial paper, and (iii) the ratio of LIBOR- based debt to SBA financing. The Company incurs LIBOR-based debt for terms generally ranging from 1-180 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. decreased from 7.16% or 133 basis points over the LIBOR Benchmark of 5.83% at December 31, 1997 to 6.67%, or 96 basis points over the LIBOR Benchmark of 5.71% at March 31, 1998. 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, 1998, Media had approximately 3,600 installed Displays The Company expects that Media will continue to expand its operations. Although Media is a wholly- owned subsidiary of the Company, its results of operations are not consolidated with the Company because Securities and Exchange Commission regulations prohibit the consolidation of non-investment companies, such as Media, with investment companies, such as the Company. Factors Affecting Net Assets. Factors which affect the Company's net assets include net realized gain/loss on investments and change in net unrealized depreciation of investments. Net realized gain/loss on investments is the difference between the proceeds derived upon foreclosure of a loan and the cost basis of such loan. Change in net unrealized depreciation of investments is the amount, if any, by which the Company's estimate of the fair market value of its loan portfolio is below the cost basis of the loan portfolio. Under the 1940 Act and the SBIA, the Company's loan portfolio must be recorded at fair market value or "marked to market." Unlike certain lending institutions, the Company is not permitted to establish reserves for loan losses, but adjusts quarterly the valuation of its loan portfolio to reflect the Company's estimate of the current realizable value of the loan portfolio. Since no ready market exists for the Company's loans, fair market value is subject to the good faith determination of the Company. In determining such value, the Company takes into consideration factors such as the financial condition of its -14- 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, 1997 through March 31, 1998 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. CONSOLIDATED RESULTS OF OPERATIONS For the Three Months Ended March 31, 1997 and 1998. Performance Summary. For the three months ended March 31, 1998, net investment income has been positively impacted by the growth of the Loan Portfolio's and a positive impact on spread. The gross spread for the period was higher due to a reduction in the Company's cost of funds resulting from a reduction in the spread over LIBOR on the Company's revolving credit facilities and the issuance of commercial paper offset by a slight increase in the LIBOR benchmark e.o.p. of 3 basis points. Investment Income. Investment income increased $3.1 million or 64.2% from $4.9 million for the three months ended March 31, 1997 to $8.0 million for the three months ended March 31, 1998. The Company's investment income reflects the positive impact of portfolio growth during the three months ended March 31, 1998. Total portfolio growth totalled $7.8 million or 4.4% from $176.5 million at December 31, 1996 to $184.3 million at March 31, 1997 as compared to $18.9 million or 6.5% from $288.7 million at December 31, 1997 to $307.6 million at March 31, 1998. The average portfolio outstanding was $180.4 million, for the three month period ended March 31, 1997, which produced investment income of $4.9 million at a weighted average interest rate of 10.83% compared to an average of $301.8 million for the three-month period ended March 31, 1998, which produced investment income of $8.0 million at a weighted average interest rate of 10.63%. Gross loan originations net of participations increased by $16.5 million or 37.4% from $44.1 million for the three-month period ended March 31, 1997 to $60.6 million for the three-month period ended March 31, 1998. The originations were offset by prepayments, terminations and refinancings by the Company aggregating $36.3 million for the three month period ended March 31, 1997 compared to $41.7 million for the three month period ended March 31, 1998. Average yield e.o.p. of the entire portfolio decreased 77 basis points from 10.70% at March 31, -15- 1997 to 9.93% at March 31, 1998. The decrease in the yield of the entire loan portfolio was caused by a decrease in the average yield on Medallion Loans, coupled with a decrease in the average yield on Commercial Installment Loans and a decrease in the percentage of the portfolio composed of higher yielding Commercial Installment Loans which historically have been originated at a yield of approximately 350 basis points higher than Medallion Loans and 250 to 600 basis points higher than the prevailing Prime Rate. The average yield e.o.p. of the Medallion Loan portfolio decreased 57 basis points from 9.75% at March 31, 1997 to 9.18% at March 31, 1998 and the average yield of the Commercial Installment Loan portfolio decreased 91 basis points from 13..54% at March 31, 1997 to 12.63% at March 31, 1998. The decline in the commercial portfolio yield is the result of the acquisition and growth of the Business Lenders portfolio of approximately $15.9 million of floating rate loans tied to prime at an average yield of 11.1%. This purchase shifts the average yield on commercial yields lower, however, interest rate exposure is mitigated by the floating rate nature of these loans. The decrease in the average yield on Medallion Loans was caused by a reduction in loan yields due to lower long-term interest rates and competition. To offset the resulting decline in investment income, the Company increased the origination of loans with shorter interest rate maturity dates, thereby reducing the Company's interest rate risk exposure. The decrease in average yield e.o.p. of the entire loan portfolio was offset in part by the strong growth in the Medallion loan portfolio during the period. The percentage of the portfolio composed of Commercial Installment Loans decreased from 25.1% at March 31, 1997 to 21.5% at March 31, 1998. Although the Company continues to pursue a shift in its portfolio mix towards higher yielding Commercial Installment Loans, this shift slowed by higher than expected growth in the Medallion Loan portfolio during the period. Interest Expense. The Company's interest expense increased $776,000 or 31.9% from $2.4 million for the three months ended March 31, 1997 to $3.2 million for the three months ended March 31, 1998. The Company's average cost of funds e.o.p. decreased 47 basis points from 7.14% or 140 basis points over the LIBOR benchmark of 5.68% at March 31, 1997 to 6.67% or 96 basis points over the LIBOR benchmark of 5.71% at March 31, 1998. The decrease in the average cost of funds e.o.p. was caused by a reduction in the premium to LIBOR paid by the Company offset by a 3 basis point increase in the LIBOR benchmark. Also contributing to the decrease in cost of funds e.o.p. was the Company's issuance of commercial paper, which at the present time is priced approximately 50 basis points less than the Company's revolving credit facilities. Average borrowings increased $48.7 million or 37.3% from $130.7 million for the three months ended March 31, 1997, which produced an interest expense of $2.4 million at a weighted average interest rate 7.43% to $179.4 million for the three months ended March 31, 1998 which produced an interest expense of $3.2 million at a weighted average interest rate of 7.15%. The weighted average interest rates include commitment fees and amortization of premiums on existing interest rate cap agreements as a reflection of total cost of funds borrowed. The percentage of the Company's short-term LIBOR based indebtedness increased as a percentage of total indebtedness from 76.4% at March 31, 1997 to 83.7% at March 31, 1998. Net Interest Income. Net interest income increased $2.3 million or 96.1% from $2.5 million for the three months ended March 31, 1997 to $4.8 million for the three months ended March 31, 1998. Net interest income reflects the positive impact of the portfolio growth during the three months ended March 31, 1998 and an increase in the spread between average yield and -16- average cost of funds. The average spread between the average yield on the portfolio and the average cost of funds increased 8 basis points or 2.3% from 3.40% for the three-month period ended March 31, 1997 to 3.48% for the three- month period ended March 31, 1998. Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue increased $1,006,000 or 223.1% from $451,000 for the three months ended March 31, 1997 to $1,457,000 for the three months ended March 31, 1998. Display rental costs increased $357,000 or 199.4% from $179,000 for the three months ended March 31, 1997 to $536,000 for the three months ended March 31, 1998. This resulted in a gross margin of approximately $272,000 or 60.3% of advertising revenue for the three months ended March 31, 1997 compared to $921,000 or 63.2% for the three months ended March 31, 1998. The significant increase in advertising revenue and display rental cost is directly related to the increase in Displays owned by Media. The number of Displays owned by Media increased 1,625 or 81.3% from 2,000 at March 31, 1997 to 3,625 at March 31, 1998. Operating costs increased $398,000 or 148.5% from $268,000 for the three months ended March 31, 1997 to $666,000 for the three months ended March 31, 1998. The increase in operating costs is a reflection of the expansion of the Media operations. Media generated an net income of $5,000 for the three-month period ended March 31, 1997 compared to net income of $155,000 for the three- month period ended March 31, 1998, which is recorded as equity in earnings or losses of unconsolidated subsidiary on the Company's statement of operations as a result of increases in the number of Displays owned and occupancy rates. Display occupancy increased from 70.0% for the three months ended March 31, 1997 to 100% for the three months ended March 31 1998. Other Income. The Company's other income increased $39,000 or 15.1% from $256,000 for the three months ended March 31, 1997 to $295,000 for the three months ended March 31, 1998. Other income was primarily derived from late charges, prepayment fees and miscellaneous income. Prepayment fees are heavily influenced by the level and volatility of interest rates and competition. Non-Interest Expenses. The Company's non-interest expenses increased $1.2 million or 102.3% from $1.1 million for the three months ended March 31, 1997 to $2.3 million for the three months ended March 31, 1998. Other operating expenses increased $371,000 or 45.3% from $447,000 for the three months ended March 31, 1997 to $818,000 for the three months ended March 31, 1998. Salaries and benefits increased $786,000 or 69.0% from $353,000 for the three months ended March 31, 1997 to $1,139,000 for the three months ended March 31, 1998. Professional fees decreased $12,000 or 7.5% from $168,000 for the three months ended March 31, 1997 to $156,000 for the three months ended March 31, 1998. Investment advisory fees were unchanged from $57,000 for the three months ended March 31, 1997 and 1998. The operating expense ratio increased to 2.61% for the three-month period ended March 31, 1998 from 2.05% for the three-month period ended March 31, 1997, on an annualized basis. The significant increase in other operating expenses and salary expense is principally the result of the acquisition of Business Lenders LLC, which added 28 full time employees and the related overhead to the Company's non-interest expense. Amortization of Goodwill and Accretion of Negative Goodwill. The amortization of -17- goodwill was $105,000 for the three months ended March 31, 1997 and $117,000 for the three months ended March 31, 1998, and relates to $6.5 million of goodwill generated in the acquisitions of Edwards and TCC. The acquisition of Business Lenders LLC resulted in the addition of $200,000 of goodwill. Goodwill is the amount by which the cost of acquired businesses exceeds the fair value of the net assets acquired. Goodwill is being amortized on a straight-line basis over 15 years. Negative goodwill is the excess of fair market value of net assets of an acquired business over the cost basis of such business. Negative goodwill of $2.9 million was generated in the acquisition of Tri-Magna and is being amortized on a straight-line basis over four years. Net Realized Gain/Loss on Investments. The Company had a decrease in realized net gain on investments of $36,000 from $32,000 for the three months ended March 31, 1997 to a net loss of $4,000 for the three months ended March 31, 1998. Net Investment Income. Net investment income earned increased $2.0 million or 117.3% from $1.8 million for the three-month period ended March 31, 1997 to $3.8 million for the three months ended March 31, 1998. The increase was attributable to the positive impact of portfolio growth coupled with an increase in the spread between average yield and average cost of funds. Net Increase in Net Assets Resulting from Operations. Net increase in net assets resulting from operations increased $2.0 million or 113.3% from $1.8 million for the three months ended March 31, 1997 to $3.8 for the three months ended March 31, 1998. The increase was attributable to the positive impact of portfolio growth coupled with an increase in the spread between average yield and average cost of funds. Return on assets and return on equity for the three months ended March 31, 1998, on an annualized basis, were 6.3% and 10.9%, respectively, compared to 4.8% and 11.5% for the three months ended March 31, 1997. 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, secured commercial paper 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 -18- 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 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. The Company anticipates that approximately 40% of the portfolio will mature or be prepaid each year. The Company believes that the average life of its loan portfolio varies to some extent as a function of changes in interest rates because borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment when the interest rate payable on the borrower's loan is high relative to prevailing interest rates and are less likely to prepay in a rising interest rate environment. The Company seeks to manage the exposure of the balance of the portfolio to increases in market interest rates by entering into interest rate cap agreements to hedge a portion of its variable-rate debt against increases in interest rates and by incurring fixed-rate debt consisting primarily of subordinated SBA debentures. MFC has entered into interest rate cap agreements to limit the Company's interest rate exposure on MFC's revolving credit facility as summarized below: Effective Maturity Amount Rate Date Date ------ ---- ---- ---- $10,000,000 6.0% 4/21/97 4/21/98 $10,000,000 7.0% 5/13/97 5/13/99 $10,000,000 6.5% 5/13/97 5/13/98 $20,000,000 7.0% 5/13/98 11/13/99 Total premiums of $195,500 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 7.91%. At March 31, 1998, these debentures constituted 14.4% of the Company's total 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 -19- The Company's sources of liquidity are credit facilities with bank syndicates, secured commercial paper, 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, 1998, 67.1% of the Company's $193.1 million of debt consisted of bank debt, substantially all of which was at variable effective rates of interest with a weighted average rate of 6.60% or 190 basis points below the Prime Rate, 18.5% or $35.6 million consisted of short-term commercial paper at a weighted average interest rate of 5.95% and 14.4% or $27.9 million consisted of subordinated SBA debentures with fixed rates of interest with a weighted average rate of 7.91%. The Company is eligible to seek SBA funding but plans to continue to limit its use of SBA funding and will seek such funding only when advantageous, 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 $62.8 million of debt was available at March 31, 1998 at variable effective rates of interest averaging below the Prime Rate under the Company's $228.0 million bank credit facilities. 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, 1998.
Medallion Financial MFC Edwards TCC BLLC Total --------- --- ------- --- ---- ----- (dollars in thousands) Cash and cash equivalents $ 492 $ 1,884 $ 617 $ 835 $1,047 $ 4,875 Revolving lines of credit 25,000 195,000 8,000 -- -- 228,000 Amounts available 600 60,555* 1,600 -- -- 62,755* Amounts outstanding 24,400 98,800 6.400 -- -- 129,600 Average interest rate 6.66% 6.56% 6.96% -- -- 6.60% Maturity 6/98 6/99 5/98 -- -- 5/98-6/99 Commercial paper Amounts outstanding -- 35,645 -- -- -- 35,645 Average interest rate -- 5.95% -- -- -- 5.95% Maturity -- 6/99 -- -- -- 6/99 SBA debentures -- -- 22,250 5,640 -- 27,890 Average interest rate -- -- 7.87% 8.00% -- 7.90% Maturity -- -- 6/98-9/04 6/02 -- 6/98-9/04 Total cash and remaining amounts available under credit facilities1,092 62,439 2,217 835 1,047 67,630 Total debt outstanding $24,400 $134,445 $28,650 $5,640 $ - $ 193,135
* Note 1) Commercial paper outstanding is deducted from revolving credit lines available as the line of credit acts as a liquidity facility for the commercial paper. Loan amortization and prepayments also provide a source of funding for the Company. Prepayments on loans are influenced significantly by general interest rates, medallion loan market rates, economic conditions and competition. Medallion loan prepayments have slowed since early -20- 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, 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 inter-company debt. Media is not a RIC and, therefore, is able to retain earnings to finance growth. 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 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 -21- 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, approximately 47% of Media's taxicab rooftop advertising revenue is derived from tobacco products advertising. Various federal, state and local government agencies, including the U.S. Food and Drug Administration (the "FDA") have from, time to time, proposed regulations restricting the sale and advertising of cigarette and smokeless tobacco products. Additionally, various tobacco companies have voluntarily proposed eliminating outdoor tobacco advertising in exchange for immunity from class action suits. Accordingly, such regulations or voluntary restrictions could have an adverse effect upon the taxicab rooftop advertising business of the Company. The Company believes, however, that it could replace some of the revenue which may be lost due to the loss of tobacco taxicab rooftop advertising. Year 2000. The Company is addressing the Year 2000 problem, which concerns the inability of systems, primarily computer software programs, to properly recognize and process date sensitive information relating to the year 2000 and beyond. The Company, in the ordinary course of business, has for several years had several information system improvement initiatives underway. These initiatives include the installation of new accounting software. Management believes that such initiatives will adequately address the Year 2000 problem, although there can be no assurance in this regard. Costs related to new information systems will be capitalized and amortized over their useful lives. Management does not believe that the other costs associated with addressing the Year 2000 problem will be material. The Company will continue to address the Year 2000 issue in connection with its future acquisitions. The ability of third parties with which the Company transacts business to adequately address their Year 2000 issues is outside of the Company's control. Failure of such third parties or the Company to adequately address their respective Year 2000 issues could have a material adverse effect on the Company's financial condition or results of operations. -22- PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 3.1 Medallion Financial Corp. Restated Certificate of Incorporation. Filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and incorporated by reference herein. 3.2 Medallion Financial Corp. Restated By-Laws. Filed as Exhibit b to the Company's Registration Statement on Form K-2 (File No. 333-1670) and incorporated by reference herein. 4.1 Debenture due April 1, 1997 in the amount of $1,500,000 issued by Edwards Capital Company and payable to Chemical Bank as Trustee under the Trust Agreement dated January 15, 1987 among the Trustee, the U.S. Small Business Administration and SBIC Funding Corporation (the "Trust Agreement"). Filed as Exhibit f.2 to the Company's Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein. 4.2 Debenture due June 1, 1998 in the amount of $3,000,000 issued by Edwards Capital Company and payable to Chemical Bank under the Trust Agreement. Filed as Exhibit f.3 to the Company's Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein. 4.3 Debenture due September 1, 2002 in the amount of $3,500,000 issued by Edwards Capital Company and payable to Chemical Bank as Trustee under the Amended and Restated Trust Agreement dated March 1, 1990 among the Trustee, the U.S. Small Business Administration and SBIC Funding Corporation (the "Amended Trust Agreement"). Filed as Exhibit f.4 to the Company's Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein. 4.4 Debenture due September 1, 2002 in the amount of $6,050,000 issued by Edwards Capital Company and payable to Chemical Bank under the Amended Trust Agreement. Filed as Exhibit f.5 to the Company's Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein. 4.5 Debenture due June 1, 2004 in the amount of $4,600,000 issued by Edwards Capital Company and payable to Chemical Bank under the Amended Trust Agreement. Filed as Exhibit f.6 to the Company's Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein. -23- 4.6 Debenture due September 1, 2004 in the amount of $5,100,000 issued by Edwards Capital Company and payable to Chemical Bank under the Amended Trust Agreement. Filed as Exhibit f.7 to the Company's Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein. 4.7 Letter Agreement, dated September 8, 1992, between the U.S. Small Business Administration and Edwards Capital Company regarding limit on incurrence of senior indebtedness, as amended on January 17, 1996. Filed as Exhibit f.8 to the Company's Registration Statement on Form N-2 (File No. 333- 1670) and incorporated by reference herein. Letter dated September 19, 1996 from the U.S. Small Business Administration to Edwards Capital Corp. amending such Letter Agreement was filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 and is incorporated by reference herein. 4.8 Debenture due June 1, 2002 in the amount of $5,640,000 issued by Transportation Capital Corp: and payable to Chemical Bank under the Amended Trust Agreement. Filed as Exhibit f.10 to the Company's Registration Statement on Form N-2 (File No. 333-1670) and incorporated by reference herein. 10.1(P) Commercial Paper Dealer Agreement [4(2) Program] between Medallion Funding Corp. as issuer, and Smith Barney Inc., as dealer, dated as of March 13, 1998. Filed herewith. 27 Medallion Financial Corp. Financial Data Schedule. Filed Herewith. (b) Reports on Form 8-K. There were no reports on Form 8-K were filed during the fiscal quarter ended March 31, 1998. -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, 1998 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 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 308,910,348 308,910,348 7,710,725 4,874,704 12,780,268 334,276,045 0 165,245,422 33,754,273 198,999,695 128,836 130,426,341 12,883,596 12,880,296 4,721,173 0 0 0 0 135,276,350 0 8,020,714 1,311,450 5,490,866 3,841,298 (3896) 0 3,837,402 0 0 0 0 3,300 0 0 3,884,840 0 0 0 0 56,504 3,204,475 2,286,391 133,333,930 11.78 .30 0 0 0 0 10.42 2.69 179,388,000 14.98
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