<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27812
MEDALLION FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 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, May 10, 1999:
Class Outstanding Par Value Shares Outstanding
----------------- --------- ------------------
Common Stock.......................................$.01...........14,013,768
================================================================================
<PAGE>
MEDALLION FINANCIAL CORP.
FORM 10-Q
March 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. Financial Information
Item 1. Basis of Preparation ..............................................3
Medallion Financial Corp. Consolidated Balance Sheets
at March 31, 1999 and December 31, 1998......................4
Medallion Financial Corp. Consolidated Statement of Operations
for the three months ended March 31, 1999 and 1998...........5
Medallion Financial Corp. Consolidated Statement of Cash
Flows for the three months ended March 31, 1999 and 1998.....6
Notes to Consolidated Financial Statements.......................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................14
General.........................................................14
Consolidated Results of Operations (for the three months
ended March 31, 1999 and 1998)..............................17
Asset/Liability Management......................................20
Liquidity and Capital Resources.................................22
Investment Considerations.......................................23
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................25
SIGNATURES.................................................................26
</TABLE>
<PAGE>
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 "1996 Acquisitions") of Medallion Funding Corp. ("MFC"),
Edwards Capital Company, Transportation Capital Corp. ("TCC") and Medallion Taxi
Media, Inc. ("Taxi"). 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 reflects the
acquisition of Capital Dimensions, Inc. ("CDI") which was subsequently renamed
Medallion Capital, Inc. The acquisition was completed on June 16, 1998 and was
accounted for as a pooling of interests and, accordingly, the information
included in the accompanying financial statements and notes thereto present the
combined financial position and the results of operations of the Company and CDI
as if they had operated as a combined entity for all periods presented. The
financial information 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, 1999 and the related statements of operations and cash
flows for the three months ended March 31, 1999 and 1998. Item 1 also sets forth
the consolidated balance sheet of the Company as of December 31, 1998. 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,
1999 and 1998.
The consolidated balance sheet of the Company as of March 31, 1999, the
related statements of operations, and cash flows for the three months ended
March 31, 1999 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, 1999 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, 1998.
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1999 and DECEMBER 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Medallion loans $ 268,322,246 $ 266,061,808
Commercial installment loans, net 119,524,877 106,422,835
Equity investments, net 12,797,003 11,579,329
--------------- --------------
Net investments 400,644,126 384,063,972
Investment in and loans to unconsolidated subsidiary 4,977,225 5,033,661
--------------- --------------
Total investments 405,621,351 389,097,633
Cash 7,854,774 6,027,596
Accrued interest receivable 3,871,508 3,640,301
Receivable from sale of loans 4,881,407 9,569,989
Servicing fee receivable 2,571,773 2,290,303
Fixed assets, net 1,536,294 1,662,973
Goodwill, net 6,661,763 6,706,879
Other assets 2,487,257 3,229,568
--------------- --------------
Total assets $ 435,486,127 $ 422,225,242
=============== ==============
LIABILITIES
Accounts payable $ 3,202,596 $ 5,593,101
Dividends payable - 4,764,681
Accrued interest payable 1,532,631 2,308,229
Notes payable to banks and demand notes 106,300,000 115,600,000
Commercial paper 129,270,817 103,081,785
SBA debentures payable 41,590,000 41,590,000
--------------- --------------
Total liabilities $ 281,896,044 $ 272,937,796
Negative goodwill, net 892,316 1,072,916
Commitments and contingencies
SHAREHOLDER'S EQUITY
Preferred Stock (1,000,000 shares of $.01 par value
stock authorized-none outstanding) - -
Common stock (45,000,000 shares of $.01 par value
stock authorized - 14,013,768 shares outstanding) $ 140,138 $ 140,138
Capital in excess of par value 141,376,068 141,376,068
Accumulated undistributed income 11,181,561 6,698,324
--------------- --------------
Total shareholder's equity 152,697,767 148,214,530
--------------- --------------
Total liabilities and shareholder's equity $ 435,486,127 $ 422,225,242
============== ==============
Number of common shares and common stock equivalents 14,084,307 14,143,537
========== ==========
Net asset value per share $10.84 $10.48
======= ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- ----
(restated)
<S> <C> <C>
Investment income:
Interest income on investments $ 9,281,755 $ 8,648,159
Interest income on short-term investments 98,121 77,097
------------ -----------
Total investment income 9,379,876 8,725,256
Interest expense:
Notes payable to banks 1,918,830 2,653,219
Commercial paper 1,561,348
SBA debentures 758,305 778,936
------------ -----------
Total interest expense 4,238,483 3,432,155
Net interest income 5,141,393 5,293,101
Non-interest income:
Equity in earnings of
unconsolidated subsidiary 383,464 155,390
Accretion of negative goodwill 180,600 180,600
Gain on sale of loans 612,247 680,934
Other income 506,611 294,526
------------ -----------
Total non-interest income 1,682,922 1,311,450
Expenses:
Administrative and advisory fees 61,760 56,504
Professional fees 320,140 213,321
Salaries and benefits 1,810,032 1,224,755
Other operating expenses 1,343,254 978,419
Amortization of goodwill 164,551 116,619
------------ -----------
Total expenses 3,699,737 2,589,618
Net investment income 3,124,578 4,014,933
Net realized gain on investments 804,822 23,287
Change in net unrealized appreciation (depreciation) 605,293 172,402
Income tax benefit (provision) (51,456) (19,100)
------------ -----------
Net increase in net assets resulting
resulting from operations $4,483,237 $ 4,191,522
============ ===========
Net increase in net assets resulting from
operations per common share
BASIC $ 0.32 $ 0.30
DILUTED $ 0.32 $ 0.30
Weighted average common shares outstanding:
Basic Average Shares 14,013,768 13,910,296
Diluted Average Shares 14,084,307 14,108,831
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 4,483,237 $ 4,191,522
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by (used for) operating activities:
Depreciation and amortization 108,773 52,350
Increase in equity in earnings of unconsolidated subsidiary (383,464) (155,390)
Decrease (increase) in receivable from unconsolidated subsidiary 439,899 (373,062)
Increase in unrealized appreciation (605,293) -
Amortization of goodwill 164,551 116,619
Decrease (increase) in accrued interest receivable (231,207) (321,421)
Decrease (increase) in other assets 720,075 (32,382)
Increase (decrease) in accounts payable and accrued expenses (2,390,505) (3,691,107)
Decrease in receivable from sale of loans 4,688,582 (1,591,483)
Increase in servicing fee receivable (281,470) (223,294)
Accretion of negative goodwill (180,600) (180,600)
Decrease (increase) in accrued interest payable (775,598) 317,248
----------- -----------
Net cash provided by (used for) operating activities 5,756,980 (1,891,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of investments (51,125,835) (60,804,932)
Proceeds from sales and maturities of investments 35,253,177 41,889,844
Capital expenditures (181,495) (397,279)
----------- -----------
Net cash provided by (used for) investing activities (16,054,153) (19,312,367)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (Payments of) notes payable to banks (9,300,000) (8,150,000)
Repayment of notes payable to the SBA - (1,040,000)
Proceeds from issuance of commercial paper 26,189,032 35,645,422
Proceeds from exercise of stock options - 47,438
Payment of declared dividends to current stockholders (4,764,681) (3,594,402)
----------- -----------
Net cash provided by (used for) financing activities 12,124,351 22,908,458
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,827,178 1,705,091
CASH beginning of period 6,027,596 7,076,613
----------- -----------
CASH end of period $ 7,854,774 $ 8,781,704
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 5,014,081 $ 3,114,907
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(1) Organization of Medallion Financial Corp. And Its Subsidiaries
Medallion Financial Corp. (the Company) is a closed-end management
investment company organized as a Delaware corporation in 1995. The Company has
elected to be regulated as a business development company under the Investment
Company Act of 1940, as amended (the 1940 Act). On May 29, 1996, the Company
completed an initial public offering (the Offering) of its common stock, issued
and sold 5,750,000 shares at $11.00 per share and split the existing 200 shares
of common stock outstanding into 2,500,000 shares. All share and related amounts
in the accompanying financial statements have been restated to reflect this
stock split. Offering costs incurred by the Company in connection with the sale
of shares totaling $7,102,944 were recorded as a reduction of capital upon
completion of the Offering. These costs were recorded, net of $200,000 payable
by Tri-Magna Corporation and subsidiaries (Tri-Magna) in accordance with the
Merger Agreement. In parallel with the Offering, the Company merged with Tri-
Magna; acquired substantially all of the assets and assumed certain liabilities
of Edwards Capital Company, a limited partnership; and acquired all of the
outstanding voting stock of Transportation Capital Corp. (TCC) (collectively,
the 1996 Acquisitions). The assets acquired and liabilities assumed from Edwards
Capital Company were acquired and assumed by Edwards Capital Corporation
(Edwards), a newly formed and wholly owned subsidiary of the Company. As a
result of the merger with Tri-Magna in accordance with the Merger Agreement
dated December 21, 1995 between the Company and Tri-Magna, Medallion Funding
Corp. (MFC) and Medallion Taxi Media, Inc. (Media), formerly subsidiaries of
Tri-Magna, became wholly owned subsidiaries of the Company.
MFC, Edwards and TCC are closed-end management investment companies
registered under the 1940 Act and are each licensed as a small business
investment company (SBIC) by the Small Business Administration (SBA). As an
adjunct to the Company's taxicab medallion finance business, Media operates a
taxicab rooftop advertising business. 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 31,1999, 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 (BLL). BLL is licensed by the SBA under its section 7(a) program.
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1999
In connection with the 1996 Acquisitions, the Company received the
Acquisition Orders under the 1940 Act from the Securities Exchange Commission.
Approval from the Connecticut State Department of Banking and the SBA was
obtained for the Business Lenders Acquisition.
On May 27, 1998, the Company completed the acquisition of certain assets
and assumption of certain liabilities of Venture Group I, Inc. ("VGI"), Venture
Group II, Inc. (VGII) and Venture Opportunities Corp., (VOC), an SBIC lender
headquartered in New York, New York.
On June 16, 1998, the Company completed the merger with Capital
Dimensions, Inc. (CDI) an SSBIC lender, headquartered in Minneapolis, Minnesota.
CDI was subsequently renamed Medallion Capital, Inc. (Medallion Capital). The
charter was amended to convert Medallion Capital to an SBIC. The transaction was
accounted for as a tax-free reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended, and was treated under the pooling-of-interest
method of accounting.
In September 1998, the Company created Medallion Business Credit LLC
(MBC), as a wholly owned subsidiary. MBC originates loans to small businesses
for the purpose of financing inventory and receivables.
(2) Summary of Significant Accounting Policies
The 1996 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.
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 appreciation/depreciation of investments. Total net unrealized
appreciation was $3,570,210 and $2,964,917 on total investments of $400,644,126
and $384,063,972 at March 31, 1999 and December 31, 1998, respectively, of which
$1,522,417 existed at the date of the Company's 1996 Acquisitions. The Board of
Directors has determined that this valuation approximates fair value.
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1999
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 dilutive effect of potential common shares in 1997 and 1998,
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 and
nine months ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except shares and per share amounts)
Three Months ended March 31, 1999 March 31, 1998
(Restated)
- -------------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 4,483 $ 4,192
Basic EPS:
Income available to common
stockholders 4,483 14,013,768 $ .32 4,192 13,910,296 $ .30
Effect of dilutive options
Stock options 70,539 198,535
Diluted EPS:
Income available to common
stockholders 4,483 14,084,307 $ .32 4,192 14,108,831 $ .30
</TABLE>
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes new standards regarding accounting and reporting requirements
for derivative instruments and hedging activities. The new standard is effective
for fiscal years beginning after June 15, 1999. The Company is presently
studying the effect of the new pronouncement and, as required, expects to adopt
SFAS No. 133 beginning January 1, 2000.
(3) Acquisitions
On May 27, 1998, the Company completed the acquisition of certain assets
and assumption of certain liabilities of Venture Group I, Inc. (VGI), Venture
Group II, Inc. (VGII) and Venture Opportunities Corp. (VOC), SBIC lenders
headquartered in New York, (hereinafter known as VG Group), for an aggregate
purchase price of $18.5 million which included the assumption of $6.5 million in
liabilities. The purchase price was allocated to the assets based on their
estimated fair values and approximately $16.7 million were allocated to
investments. The excess of the purchase price over the fair value of the net
assets acquired (goodwill) was $1.2 million and is being amortized on a
straight-line basis over 15 years.
These acquisitions were accounted for under the purchase method of
accounting. Accordingly, the results of operations for these acquisitions have
been included in the consolidated results of the Company from the date of
acquisition. Under this accounting
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1999
method, the Company has recorded as its cost the fair value of the acquired
assets and liabilities assumed. The difference between the cost of acquired
companies and the sum of the fair values of tangible and identifiable intangible
assets less liabilities assumed was recorded as goodwill.
In conjunction with the acquisitions, assets and liabilities were assumed
as follows:
<TABLE>
<CAPTION>
VGI, VGII and Venture Opportunities Corp
--------------------------------------------------------------------
<S> <C>
Fair value of assets acquired $18,455,155
Cash paid 11,963,072
-----------
Liabilities assumed $ 6,492,083
===========
</TABLE>
(4) Merger
On June 16, 1998, the Company completed the merger with Capital
Dimensions, Inc. (CDI), a Specialized Small Business Investment Company
("SSBIC") lender, headquartered in Minneapolis, MN. CDI was subsequently renamed
Medallion Capital, Inc. (Medallion Capital). The Company issued 0.59615 shares
of its common stock for each outstanding share of CDI. A total of 1,112,677
shares of the Company's common stock was issued as a result of the merger, and
each of CDI's outstanding stock options were converted to purchase common shares
of the Company. The transaction was accounted for as a tax-free reorganization
under Section 368 of the Internal Revenue Code of 1986, as amended, and was
treated under the pooling-of-interests method of accounting. The following
tables set forth the results of operations of CDI and the Company for the three
months March 31, 1998 and are included in the accompanying consolidated
statement of operations.
<TABLE>
<CAPTION>
(Dollars in thousands)
For the three months ended March 31, 1998 The Company CDI Combined
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Total Investment Income $8,021 $704 $8,725
Net increase in net assets from operations $3,838 $354 $4,192
</TABLE>
(5) 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, 1999
(unaudited) and December 31, 1998 and unaudited statement of operations for the
three months ended March 31, 1999 and 1998:
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1999
<TABLE>
<CAPTION>
Balance Sheet March 31, December 31,
1999 1998
---- ----
Cash $895,749 $1,381,893
Accounts receivable 2,427,183 2,614,842
Equipment, net 1,618,286 1,564,341
Goodwill 1,699,079 991,279
Other 630,358 571,058
---------- ----------
Total assets $7,270,655 $7,123,413
========== ==========
Notes payable to parent $2,252,948 $2,692,847
Accounts payable and accr
expenses 2,245,140 1,824,158
Federal income taxes paya (79,388) 156,977
---------- ----------
Total liabilities 4,418,700 4,673,982
Equity 1,001,000 1,001,000
Retained earnings 1,850,955 1,448,431
---------- ----------
Total equity 2,851,955 2,449,431
Total liabilities
shareholders' equity 7,270,655 $7,123,413
============ ==========
<CAPTION>
Statement of Operations Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Advertising revenue $ 2,758,040 $ 1,457,010
Cost of service 989,077 535,843
---------- ----------
Gross margin 1,768,963 921,167
Other operating expenses 1,129,857 665,777
---------- ----------
Income before taxes 639,106 255,390
Income taxes 255,642 100,000
---------- ----------
Net income 383,464 $ 155,390
========== ==========
</TABLE>
On September 1, 1998, the Company purchased for cash substantially all
of the operations and assets of New Orleans-based Taxi Ads, LLC, for an
aggregate purchase price of $1,200,000. This acquisition was accounted for under
the purchase method of accounting. Included in the purchase price was certain
premiums paid totaling $1,001,766, which represented goodwill and is being
amortized over 15 years.
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1999
On February 2, 1999, Media purchased 100% of the common stock of
Transit Advertising Displays, Inc. ("TAD") for $848,500. TAD is a taxicab
rooftop advertising company headquartered in Washington, D.C. operating 1,300
installed rooftop advertising displays in the Baltimore, MD and Washington, D.C.
areas. The purchase was accounted for under the purchase method of accounting
and the results of operations are consolidated with those of Media. Included in
the purchase price was certain premiums paid totaling $712,701, which
represented goodwill and is being amortized over 15 years.
(6) Debt
The table below summarizes the various debt agreements the Company and
its subsidiaries had outstanding at March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Notes payable to banks:
Total facilities $252,500,000 $252,500,000
Maturity of facilities 6/99-7/99 6/99-7/99
Total amounts outstanding $ 106,300,000 $ 115,600,000
============== =============
SBA debentures payable $ 41,590,000 $ 41,590,000
============= =============
Maturity 9/00-6/07 9/00-6/07
</TABLE>
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, 1999.
(7) 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 nationally recognized
rating agencies, and borrowing base calculations as set forth in MFC's
syndicated credit facilities, which act as 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, 1999,
MFC had $129,271,000 outstanding at a weighted average interest rate of 5.30%
(8) Segment Reporting
The Company has two reportable business segments, lending and taxicab
rooftop advertising. The lending segment originates and services secured
commercial loans. The taxicab rooftop advertising segment sells advertising
space to advertising agencies and
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1999
companies in several major markets across the United States. The segment is
reported as an unconsolidated subsidiary, Medallion Taxi Media, Inc. The
accounting policies of the operating segments are the same as those described in
the summary of significant accounting policies.
For taxicab advertising, the increase in net assets resulting from
operations represents the Company's equity in net income from Media. Segment
assets for taxicab advertising represents the Company's investment in and loan
to Media.
<TABLE>
<CAPTION>
March 31, 1999 Taxicab
Lending Advertising Total
--------------------------------------------------------
<S> <C> <C> <C>
Net interest income $5,141,393 $5,141,393
Depreciation and amortization 108,773 108,773
Income tax benefit (provision) (51,456) (51,456)
Net increase in net assets resulting
from operations 4,099,773 383,464 4,483,237
Segment assets 430,508,902 4,977,225 435,486,127
Capital expenditures 181,495 67,117 **
<CAPTION>
March 31, 1998 Taxicab
Lending Advertising Total
--------------------------------------------------------
<S> <C> <C> <C>
Net interest income $5,293,101 $5,293,101
Depreciation and amortization 52,350 52,350
Income tax benefit (provision) (19,100) (19,100)
Net increase in net assets resulting
from operations 4,036,133 155,390 4,191,527
Segment assets 360,108,532 3,224,513 363,333,045
Capital expenditures 397,279 49,817 **
</TABLE>
** Capital expenditures for the Company are equal to expenditures for the
lending segment. Capital expenditures related to the taxicab advertising
segment are included in order to provide additional information.
(9) Subsequent Events
On May 6, 1999, MFC declared a dividend payable to the Company in the
amount of $275 per share payable on May 7, 1999 (aggregating $1,831,225),
Edwards declared a dividend payable to the Company in the amount of $2,300 per
share payable on May 7, 1999 (aggregating $230,000), TCC declared a dividend
payable to the Company in the amount of $1,700 per share payable on May 7, 1999
(aggregating $170,000) and , Medallion Capital declared a dividend payable to
the Company in the amount of $0.45 per share payable on May 7, 1999 (aggregating
$839,897). With the proceeds of these dividends, on May 7, 1999, the Company
declared a dividend in the amount of $0.28 per share (aggregating $3,923,855)
payable on May 25, 1999 to the shareholders of record on May 17, 1999.
On May 7, 1999, Media signed an agreement to purchase the taxicab
advertising contracts of Roadway Media. The purchase gives Media the right to
install up to 400 signs on tops of cabs in the Los Angeles area.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this section should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing in this
Report on Form 10-Q and the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998. 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. All amounts have been
restated to include the historical amounts of Medallion Capital, Inc. (formerly
Capital Dimensions, Inc.)
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 secured credit facilities with bank syndicates, secured
commercial paper and debentures issued to or guaranteed by the SBA. Net interest
income is a function of the net interest rate spread, which is the difference
between the average yield earned on interest-earning assets and the average
interest rate paid on interest-bearing liabilities, as well as the average
balance of interest-earning assets as compared to interest-bearing liabilities.
Net interest income is affected by economic, regulatory and competitive factors
that influence interest rates, loan demand and the availability of funding to
finance the Company's lending activities. The Company, like other financial
institutions, is subject to interest rate risk to the degree that its
interest-earning assets reprice on a different basis than its interest-bearing
liabilities.
In addition, through its Medallion Capital subsidiary, the Company
invests in minority owned small businesses in selected industries. Medallion
Capital's investments are typically in the form of secured debt instruments with
fixed interest rates accompanied by warrants to purchase an equity interest for
a nominal exercise price (such warrants constituting "Equity Investments").
Interest income is earned on the debt investments. Realized gains (losses) on
investments are recognized when investments are sold and represent the
difference between the proceeds received from the disposition of portfolio
assets and the cost of such portfolio assets. In addition, changes in unrealized
appreciation (depreciation) of investments is recorded and represents the net
change in the estimated fair values of the portfolio assets at the end of the
period as compared with their estimated fair values at the beginning of the
period or the cost of such portfolio assets, if purchased during the period.
Generally, "realized gains (losses) on investments" and "changes in unrealized
appreciation (depreciation) of investments" are inversely related. When an
appreciated asset is sold to realize a gain, a
<PAGE>
decrease in unrealized appreciation occurs when the gain associated with the
asset (if previously recognized as an unrealized gain) is transferred from the
"unrealized" to the "realized" category. Conversely, when a loss previously
recognized as an unrealized loss is realized by the sale or other disposition of
a depreciated portfolio asset, the reclassification of the loss from
"unrealized" to "realized" causes an increase in net unrealized appreciation and
an increase in realized loss.
Trend in Loan Portfolio. The Company's investment income is driven by
the principal amount of and yields on Medallion Loans and Commercial Installment
Loans. The following table illustrates the Company's weighted average portfolio
yield at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
Weighted Percentage Weighted Percentage
Average Principal of Total Average Principal of Total
Yield Amounts Portfolio Yield Amounts Portfolio
----- ------- --------- ----- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Medallion Loan Portfolio 9.03% $266,061,808 69.0% 9.01% $268,322,246 67.0%
Commercial Installment Loan Portfolio 12.13% 106,422,835 28.0% 11.81% 119,524,877 29.8%
Equity Investments - 11,579,329 3.0% - 12,797,003 3.2%
------ ------------ ------ ------ ------------ ------
Total Portfolio 9.93% $384,063,972 100.0% 9.88% $400,644,126 100.0%
======= ============ ====== ====== ============ ======
</TABLE>
Yield Summary:
The weighted average yields e.o.p. of the Medallion Loan portfolio
decreased 2 basis points to 9.01% at March 31, 1999. 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. The weighted average yields e.o.p. of the
Commercial Installment Loan portfolio decreased 32 basis points to 11.81% at
March 31, 1999 from 12.13% at December 31, 1998 due to the drop in prime rate
and the increase in the number of loans tied to the prime rate. The weighted
average yields e.o.p. of the entire portfolio decreased 5 basis points to 9.88%
at March 31,1999 from 9.93% at December 31, 1998 due to the decline in the
Commercial portfolio offset by a shift in mix of the portfolio to the higher
yielding Commercial loans.
Portfolio Summary:
Medallion Loans constituted 67.0% of the total portfolio of $400.6
million at March 31, 1999 and 69.0% of the total portfolio of $384.1 million at
December 31, 1998. The Medallion Loan portfolio increased by $2.3 million or
0.8%. The increase is due to growth in markets outside New York such as Boston,
Newark and Baltimore. The Commercial Installment loan portfolio comprised 29.8%,
of the total portfolio at March 31, 1999 compared to 28.0% at December 31, 1998.
The Commercial Loan portfolio grew by $13.1 million or 12.3% due to strong
growth in the SBA 7(a) program and asset-based lending portfolios.
<PAGE>
Equity Investments represented 3.2% and 3.0% of the Company's
entire portfolio at March 31, 1999 and December 31, 1998, respectively.
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 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 has offered attractive rates however, 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 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 subject to SBA restrictions. The Company believes that its
transition to financing operations primarily with short-term LIBOR-based secured
bank debt and secured 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. 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 70 basis
points below the rate charged under the Company's revolving credit facilities.
At March 31, 1999 and December 31, 1998, short-term LIBOR-based debt including
commercial paper constituted 85.0% and 84.0% of total debt, respectively. At
March 31, 1999 and December 31, 1998, commercial paper constituted 46.6% and
39.6% of total debt, respectively.
The Company's cost of funds is primarily driven by (i) the average
maturity of debt issued by the Company, (ii) the premium over LIBOR paid by the
Company on its LIBOR-based debt and secured commercial paper, and (iii) the
ratio of LIBOR-based debt to SBA financing. The Company incurs LIBOR-based debt
for terms generally ranging from 1-180 days. The Company's debentures issued to
or guaranteed by the SBA typically have initial terms of ten years. The
Company's cost of funds reflect fluctuations in LIBOR to a greater degree than
in the past because LIBOR-based debt has come to represent a greater proportion
of the Company's debt. The Company measures its cost of funds as its aggregate
interest expense for all of its interest-bearing liabilities divided by the face
amount of such liabilities. The Company analyzes its cost of funds in relation
to the average of the 90- and 180-day LIBOR (the "LIBOR Benchmark"). The
Company's average cost of funds e.o.p. at March 31, 1999 was 5.88% or 75 basis
points over the LIBOR Benchmark of 5.13% down from 6.42% or 121 basis points
over the LIBOR Benchmark of 5.21% at December 31, 1998.
Taxicab Rooftop Advertising. In addition to its finance business, the
Company also conducts a taxicab rooftop advertising business through Media,
which began operations in November 1994. Media's revenue is affected by the
number of taxicab rooftop advertising displays ("Displays") that it owns and the
occupancy rate and advertising rate of those Displays. At March 31, 1999, Media
had approximately 6,700 Displays. The Company
<PAGE>
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, with
investment companies.
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 sale or foreclosure of a loan
and the cost basis of such loan or equity investments. 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 and other investments 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 or other investments as determined by the Company is reflected
in net unrealized depreciation or appreciation of investments and affects net
increase in net assets resulting from operations but has no impact on net
investment income or distributable income.
Consolidated Results of Operations
For the Three Months Ended March 31, 1999 and 1998.
Performance Summary. For the three months ended March 31, 1999, net
increase in net assets resulting from operations has been positively impacted by
the growth of the loan portfolio, a decrease in the average cost of funds and an
increase in realized gains from the sale of stock warrants offset by an increase
in operating expenses.
Investment Income. Investment income increased $655,000 or 7.5% to $9.4
million for the three months ended March 31, 1999 from $8.7 million for the
three months ended March 31, 1998. The Company's investment income reflects the
positive impact of portfolio growth. The average portfolio outstanding was
$392.4 million, for the first quarter of 1999, which produced investment income
of $9.4 million at a weighted average interest rate of 9.77% compared to an
average of $322.4 million for the first quarter of 1998, which produced
investment income of $8.7 million at a weighted average interest rate of 10.78%.
Loan originations net of participations decreased by $12.5 million or
19.7% to $51.1 million in the first quarter of 1999 compared to $60.8 million in
the first quarter of 1998. The originations were offset by prepayments,
terminations and refinancings by the Company
<PAGE>
aggregating $35.3 million in the first quarter of 1999 compared to $42.6 million
in the first quarter of 1998.
The weighted average yield e.o.p. of the entire portfolio decreased 37
basis points to 9.88% at March 31, 1999 from 10.25% 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 offset by an increase in the percentage of
the portfolio composed of higher yielding Commercial Installment Loans which
historically were originated at a yield of approximately 300 basis points higher
than Medallion Loans and 250 to 600 basis points higher than the prevailing
Prime Rate. The average yield e.o.p. of the Medallion Loan portfolio decreased
17 basis points to 9.01% at March 31, 1999 from 9.18% 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. The average
yield of the Commercial Installment Loan portfolio decreased 89 basis points to
11.81% at March 31, 1999 from 12.70% at March 31, 1998. The decline in the
commercial portfolio yield is due in part to the drop in prime rate as the
quantity of floating rate loans tied to prime has increased as a percentage of
the Commercial portfolio. Thus, shifting the average yield on commercial loans
lower. In addition, the current interest rate environment is such that the
Company has increased the origination of loans with shorter interest rate
maturity dates, which are issued at a lower interest rate further contributing
to the decline in the portfolio yield. However, the shorter maturity dates
further reduces the Company's interest rate risk exposure. The decrease in
average yield e.o.p. of the entire loan portfolio was offset in part by the
growth in the Medallion loan portfolio during the period.
Interest Expense. The Company's interest expense increased $806,000 or
23.5% to $4.2 million for the three months ended March 31, 1999 from $3.4
million for the three months ended March 31, 1998. The Company's average cost of
funds e.o.p. decreased 79 basis points to 5.88% or 75 basis points over the
LIBOR benchmark of 5.13% at March 31, 1999 from 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 combined with a 58 basis point decrease in the LIBOR benchmark. Also
contributing to the decrease in average cost of funds e.o.p. was the Company's
issuance of commercial paper, which at the present time is priced approximately
70 basis points less than the Company's revolving credit facilities. Average
total borrowings increased $69.0 million or 33.1% to $277.4 million for the
three months ended March 31, 1998, which produced an interest expense of $4.2
million at a weighted average interest rate of 6.11% compared to $208.4 million
for the three months ended March 31, 1998 which produced an interest expense of
$3.4 million at a weighted average interest rate of 6.59%. 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 and
commercial paper increased as a percentage of total indebtedness to 85.0% at
March 31, 1999 from 81.1% at March 31, 1998.
Net Interest Income. Net interest income decreased $0.2 million or 2.9%
to $5.1 million for the three months
<PAGE>
ended March 31, 1999 from $5.3 million for the three months ended March 31,
1998. The decrease in net interest income is the result of the faster decline in
the average yield as compared to the decline in the cost of funds. The average
spread between the average yield on the portfolio and the average cost of funds
decreased 54 basis points or 12.9% to 3.65% for the three-month period ended
March 31, 1999 from 4.19% for the three-month period ended March 31, 1998.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $1.3 million or 89.3% to $2.8 million in the first quarter 1999
compared to $1.5 million in the first quarter of 1998. Display rental costs
increased $453,000 or 84.5% for the quarter. Gross margin was $1.8 million or
64.1% of advertising revenue for the first quarter of 1999 compared to $921,000
or 63.2% for the first quarter of 1998. The significant increase in advertising
revenue and display rental cost is directly related to the increase in the
number of Displays owned by Media. The number of Displays owned by Media
increased approximately 3,100 or 84.8% to approximately 6,700 at March 31, 1999
from approximately 3,600 at March 31, 1998. Operating costs increased $466,000
or 70.0% to $1.1 million in the first quarter of 1999 from $666,000 in the first
quarter of 1998. The increase in operating costs is a reflection of the
expansion of the Media operations. Media generated net income of $383,000 in the
first quarter of 1999 compared to net income of $155,000 in the first quarter of
1998. The increase in net income is the result of increases in the number of
Displays owned, improved margin and continued strong occupancy rates. Net income
is recorded as equity in earnings or losses of unconsolidated subsidiary on the
Company's statement of operations.
Gain on sale of loans. The Company experienced a gain on the sale of
the guaranteed portion of SBA 7a loans in the amount of $612,000 during the
first quarter of 1999 compared to $681,000 during the first quarter of 1998. The
decrease of $69,000 is due to a decline in the premiums received on these sales
during the first quarter of 1999. The Company accounts for gains on sale of
loans in accordance with SFAS No. 125 (Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities) and EITF 88-11.
Other Income. The Company's other income increased $212,000 or 72.0% to
$506,000 for the three months ended March 31, 1999 from $295,000 for the three
months ended March 31, 1998. Other income was primarily derived from late
charges, prepayment fees and miscellaneous income. The increase is in other
income is primarily due to an increase in prepayment penalties collected in
connection with several refinancings completed during the quarter. 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
$1.1 million or 42.9% to $3.7 million for the three months ended March 31, 1999
from $2.6 million for the three months ended March 31, 1998. Other operating
expenses increased $365,000 or 37.3% as compared to the first quarter 1998. The
increase in salaries and benefits of $585,000 or 47.8% in the first quarter of
1999 compared to first quarter of 1998 is the result of the effect of year-end
raises, salaries of personnel hired since March 31, 1998, and the lowered
capitalization rate of salaries as loan origination costs.
<PAGE>
Net Investment Income. Net investment income decreased $890,000 or
22.2% in the first quarter of 1999 as compared to first quarter of 1998. The
decrease is attributable to the faster decline in the average yield as compared
to the decline in the cost of funds together with an increase in operating
expenses.
Net Realized Gain on Investments. The Company had an increase in
realized net gain on investments of $782,000 to $805,000 for the three months
ended March 31, 1999 from $23,000 for the three months ended March 31, 1998. The
increase in realized gains was primarily the result of the sale of common and
preferred stock warrants in connection with the repayment of one loan during the
first quarter of 1999.
Change in Net Unrealized Appreciation (Depreciation). The change in net
unrealized appreciation increased $433,000 to $605,000 for the three months
ended March 31, 1999 from $172,000 for the three months ended March 31, 1998.
The unrealized appreciation during the first quarter of 1999 resulted from an
increase of $1.7 million of unrealized gain recognized on the increase in value
of stock warrants of one investment offset by a $500,000 increase in the
depreciation of loan values and a transfer of $500,000 previously unrealized
gains to realized gain.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations increased $292,000 or 7.0% to $4.5 million
for the three months ended March 31, 1999 from $4.2 for the three months ended
March 31, 1998. The increase was attributable to the positive impact of
portfolio growth, higher realized and unrealized gains on investments offset by
an increase in interest and operating expenses. Return on average assets and
return on average equity for the three months ended March 31, 1999, on an
annualized basis, were 4.2% and 11.9%, respectively, compared to 4.8% and 11.1%
for the three months ended March 31, 1998.
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
<PAGE>
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 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 LIBO interest rate exposure on MFC's revolving credit
facility as summarized below:
<TABLE>
<CAPTION>
LIBO Effective Maturity
Amount Rate Date Date
------ ---- ---- ----
<S> <C> <C> <C>
$10,000,000 7.0% 5/12/97 5/13/99
$10,000,000 7.0% 5/13/98 11/13/99
$20,000,000 6.5% 4/7/98 9/30/99
$20,000,000 7.0% 9/30/99 3/30/01
</TABLE>
Total premiums 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 SBA debentures. The Company currently has outstanding SBA
debentures in the principal amount of $41.6 million with a weighted average rate
of interest of 7.32%. At March 31, 1999, these debentures constituted 15.0% 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
<PAGE>
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, secured commercial paper, fixed rate, long-term 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, 1999, 38.4% of the Company's $277.2
million of debt consisted of bank debt, substantially all of which was at
variable effective rates of interest with a weighted average rate of 6.03% or
172 basis points below the Prime Rate, 46.6% or $129.3 million consisted of
short-term commercial paper at a weighted average interest rate of 5.30% and
15.01% or $41.6 million consisted of SBA debentures with fixed rates of interest
with a weighted average rate of 7.32%. 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 MFC and Medallion Capital which are already subject to certain 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 $25.3 million of debt was available at March 31, 1999
at variable effective rates of interest averaging below the Prime Rate under the
Company's $252.5 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, 1999:
<TABLE>
<CAPTION>
Medallion
Financial MFC Edwards TCC BLLC CDI Total
--------- --- ------- --- ---- --- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 762 $ - $ 359 $ 664 $ 163 $6,005 $ 7,855
Revolving lines of credit 57,500 195,000 -- -- -- -- 252,500
Amounts available - 17,479 -- -- -- -- 17,479*
Amounts outstanding 58,050 48,250 -- -- -- -- 106,300
Average interest rate 6.08% 5.98% -- -- -- -- 6.03%
Maturity 7/99 6/99 -- -- -- -- 6/99-7/99
Commercial paper
Amounts outstanding -- 129,271 -- -- -- -- 129,271
Average interest rate -- 5.30% -- -- -- -- 5.30%
Maturity -- 6/99 -- -- -- -- 6/99
SBA debentures -- 6,200 19,250 5,640 -- 10,500 41,590
Average interest rate -- 6.27% 7.58% 8.00% -- 7.08% 7.32%
Maturity -- 9/00-9/05 9/02-9/04 6/02 -- 3/06-6/07 9/00-9/07
Total cash and remaining amounts
available under credit facilities 762 17,479 359 664 163 6,005 25,432
Total debt outstanding $58,050 $183,721 $19,250 $5,640 $ - $10,500 $277,161
</TABLE>
* 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.
<PAGE>
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, reduced its level of SBA financing and increased its level of bank
funding.
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.
Risk Relating to Integration of CDI and Medallion. The realization of
certain benefits anticipated as a result of the acquisition of Medallion Capital
(formerly CDI) will depend in part on the integration of Medallion Capital's
investment portfolio and specialty finance business with the Company and the
successful inclusion of Medallion Capital's investment portfolio in the
Company's financing operations. There can be no assurance that Medallion
Capital's business can be operated profitably or integrated successfully into
the Company's operations. Such effects could have a material adverse effect on
the financial results of the Company.
<PAGE>
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. In 1998, approximately
58.7% of Media's taxicab rooftop advertising revenue was 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. Under the Master Settlement Agreement between
tobacco manufactures and the attorneys general of various states (including the
states in which the Company conducts its outdoor advertising business), the
tobacco manufacturers have agreed to eliminate general outdoor and transit
advertising of tobacco products by March 31, 1999. Accordingly, such
restrictions may have an adverse effect upon the taxicab rooftop advertising
business of the Company. The Company believes, however, that it can replace some
of the revenue which is expected to be lost due to the loss of tobacco taxicab
rooftop advertising.
Year 2000. The Company is currently 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 loan servicing software and
update of the general ledger system and such initiatives are expected to be Year
2000 compliant. The Company has implemented a five phase plan to remediate its
information technology ("IT") and non-IT systems: (1) compiling an inventory
<PAGE>
of the company's computer hardware and software ("IT systems") and equipment
("non-IT systems"); (2) identifying and verifying the Year 2000 readiness of
third parties; (3) assessing whether the systems can be remediated or must be
replaced; (4) remediating or replacing IT and non-IT systems; (5) testing the
remediated or replaced IT and non-IT systems. An inventory of IT and non-IT
systems was completed by December 31, 1998. The Company has received Year 2000
compliance letters from each of its major software vendors and its major office
systems vendors and is awaiting responses from additional parties. Phase three
is substantially complete as of March 31, 1999. Planning for phases four and
five began in the first quarter of 1999 and testing of critical systems are
scheduled to be completed by the end of the second quarter. Software system
tests will be conducted using fictitious transactions and each individual
workstation and network server will be tested for Year 2000 compliance.
The Company estimates that the total cost involved in the Year 2000
project is approximately $30,000. This excludes the costs related to new loan
servicing software and an update of the general ledger system. These costs will
be expenses as incurred, except for capitalizable hardware. The project is
staffed with both external contractors and internal personnel. Approximately
$9,000 has been spent to date.
Management believes that the Year 2000 project is on schedule and such
measures will adequately address the Year 2000 issues, although there can be no
assurance in this regard. Further, both the cost estimates and completion
timeframes are subject to change based on new circumstances that may arise. The
Company will continue to address the Year 2000 issue in connection with its
future acquisitions. The Company has not yet completed its evaluation as to
whether its third party vendors will be able to resolve their year 2000 issues
in a satisfactory and timely manner, or the magnitude of the adverse impact it
would have on the Company's operations, if they fail to do so. Management has
sent Year 2000 compliance surveys to its third party vendors, however, 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. At this point in time, management is unable
to quantify the potential loss due to failure of systems to comply with the Year
2000. The Company is in the process of developing a contingency plan to address
the potential for business disruption due to systems failure or the failure of
third parties to modify their systems timely that may have a material or adverse
effect on the Company's operations. The Year 2000 disclosure set forth above is
a "year 2000 statement" as defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent the disclosure
related to year 2000 processing of the Company or to products or services
offered by the Company, is also a "year 2000 readiness disclosure" as defined in
the Year 2000 Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Medallion Financial Corp. Financial Data Schedule. Filed herewith.
<PAGE>
MEDALLION FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDALLION FINANCIAL CORP.
Date: May 17, 1999 By: /s/ Daniel F. Baker
------------------------------------------
Daniel F. Baker
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial and accounting officer
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