<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 September 30, 2000
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, November 7, 2000:
Class Outstanding Par Value Shares Outstanding
----------------- --------- ------------------
Common Stock............................... $.01 14,567,475
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1
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MEDALLION FINANCIAL CORP.
FORM 10-Q
September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. Financial Information
<S> <C>
Item 1. Basis of Preparation................................................. 3
Medallion Financial Corp. Consolidated Balance Sheets
at September 30, 2000 and December 31, 1999...................... 4
Medallion Financial Corp. Consolidated Statements of Operations
for the three and nine months ended September 30, 2000 and 1999.. 5
Medallion Financial Corp. Consolidated Statements of Cash
Flows for the nine months ended September 30, 2000 and 1999...... 6
Notes to Consolidated Financial Statements......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 13
General............................................................ 13
Consolidated Results of Operations (for the three and nine months
ended September 30, 2000 and 1999)............................... 17
Asset/Liability Management......................................... 19
Liquidity and Capital Resources.................................... 21
Investment Considerations.......................................... 24
PART II. Other Information.................................................... 27
SIGNATURES .................................................................... 28
</TABLE>
2
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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 (Edwards), Transportation Capital Corp. (TCC) and Medallion Taxi Media,
Inc. (Media).
The report is divided into two sections. The first section, Item 1,
includes the unaudited consolidated financial statements of the Company
including related footnotes. The second section, Item 2, consists of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and nine months ended September 30, 2000 and 1999.
The consolidated balance sheet of the Company as of September 30, 2000, the
related statements of operations for the three and nine months ended September
30, 2000, and the statements of cash flows for the nine months ended September
30, 2000 included in Item 1 have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities Exchange Commission
("SEC"). 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 and nine months
ended September 30, 2000 are not necessarily indicative of the results of
operations for the full year or any other interim period nor may be indicative
of future period performance. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
3
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MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------------------------------------------
ASSETS (unaudited)
<S> <C> <C>
Investments:
Medallion loans $289,117,322 $303,093,283
Commercial installment loans 213,380,861 162,033,462
Equity investments 2,705,410 2,336,185
------------ ------------
Net investments 505,203,593 467,462,930
Investment in and loans to unconsolidated subsidiary 5,017,174 4,349,651
------------ ------------
Total investments 510,220,767 471,812,581
Cash 6,704,709 5,961,776
Accrued interest receivable 8,581,948 4,887,142
Receivable from sale of loans - 10,563,503
Servicing fee receivable 6,659,487 4,878,783
Fixed assets, net 2,078,406 2,378,686
Goodwill, net 5,782,571 6,180,151
Other assets, net 4,780,236 2,949,906
------------ ------------
Total assets $544,808,124 $509,612,528
============ ============
LIABILITIES
Accounts payable and accrued expenses $ 10,301,144 $ 9,318,480
Dividends payable 2,184,351 5,609,773
Accrued interest payable 2,238,496 3,711,199
Commercial paper 160,144,462 93,983,792
Notes payable to banks 164,450,000 190,450,000
Senior secured notes 45,000,000 45,000,000
SBA debentures payable 10,500,000 10,500,000
------------ ------------
Total liabilities 394,818,453 358,573,244
Negative goodwill, net - 350,516
SHAREHOLDERS' EQUITY
Preferred Stock (1,000,000 shares of $.01 par value stock - -
authorized - none outstanding)
Common stock (50,000,000 shares of $.01 par value stock
authorized - 14,049,026 and 14,024,433 shares outstanding
at September 30, 2000 and December 31, 1999,
respectively) 140,490 140,245
Capital in excess of par value 142,293,626 142,015,875
Accumulated undistributed net investment income 7,555,555 8,532,648
------------ ------------
Total shareholders' equity 149,989,671 150,688,768
------------ ------------
Total liabilities and shareholders' equity $544,808,124 $509,612,528
============ ============
Net asset value per share $10.68 $10.74
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income
Interest and dividend income on investments $13,566,764 $10,718,656 $40,467,821 $30,775,348
Interest income on short-term investments 164,654 58,645 289,827 216,694
--------------------------------------------------------------------
Total investment income 13,731,418 10,777,301 40,757,648 30,992,042
--------------------------------------------------------------------
Interest expense
Notes payable to banks 3,207,580 1,998,434 9,823,714 5,808,713
Commercial paper 2,851,866 1,870,986 7,356,102 5,277,644
Senior secured notes 821,865 551,865 2,465,595 690,820
SBA debentures 187,302 419,953 559,483 1,865,366
--------------------------------------------------------------------
Total interest expense 7,068,613 4,841,238 20,204,894 13,642,543
--------------------------------------------------------------------
Net interest income 6,662,805 5,936,063 20,552,754 17,349,499
--------------------------------------------------------------------
Non-interest income
Gain on sale of loans 373,209 787,508 1,877,505 2,231,032
Equity in earnings (losses) of
unconsolidated subsidiary 140,305 138,632 (32,179) 439,104
Accretion of negative goodwill - 180,600 350,516 541,800
Other income 997,129 476,501 2,704,697 1,569,557
--------------------------------------------------------------------
Total non-interest income 1,510,643 1,583,241 4,900,539 4,781,493
--------------------------------------------------------------------
Expenses
Salaries and benefits 2,543,998 2,357,126 7,336,300 6,621,513
Professional fees 581,494 525,088 1,314,803 1,369,191
Rent expense 252,848 183,816 757,667 577,001
Amortization of goodwill 163,352 101,426 405,287 413,437
Administrative and advisory fees 3,137 60,259 107,337 185,247
Prepayment penalty on SBA bond - 87,792 - 165,064
Other operating expenses 1,390,373 1,203,577 4,132,183 3,374,298
--------------------------------------------------------------------
Total expenses 4,935,202 4,519,084 14,053,577 12,705,751
--------------------------------------------------------------------
Net investment income 3,238,246 3,000,220 11,399,716 9,425,241
Net realized gains (losses) on investments (1,822,831) 8,859,119 (2,998,693) 9,494,953
Change in unrealized appreciation, net 1,194,157 (5,799,018) 2,553,541 (3,208,033)
Income tax benefit (provision) 158,080 (147,350) 218,759 (209,663)
--------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 2,767,652 $ 5,912,971 $11,173,323 $15,502,498
--------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations per share
Basic $ 0.20 $ 0.42 $ 0.80 $ 1.11
Diluted 0.20 0.42 0.79 1.10
--------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
Basic 14,045,379 14,019,155 14,036,060 14,016,566
Diluted 14,092,269 14,164,074 14,089,162 14,112,177
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
2000 1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations $ 11,173,323 $ 15,502,498
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by (used for) operating activities:
Depreciation and amortization 567,946 448,420
Amortization of goodwill 405,287 413,437
Amortization of origination costs 825,767 -
Accretion of negative goodwill (350,516) (541,800)
Decrease in receivable from unconsolidated subsidiary - 1,088,107
Increase (decrease) in unrealized appreciation (2,553,541) 3,208,033
Net realized loss (gain) on investments 2,998,693 (9,494,953)
Decrease (increase) in equity in earnings of unconsolidated subsidiary 32,179 (439,104)
Increase in accrued interest receivable (3,694,806) (446,486)
Decrease in receivable from sale of loans 10,563,503 2,117,521
Increase in servicing fee receivable (1,780,704) (981,447)
Increase in other assets (1,870,216) 139,568
Increase (decrease) in accounts payable and accrued expenses 982,665 8,457,745
Increase (decrease) in accrued interest payable (1,472,704) (370,209)
------------ -------------
Net cash provided by operating activities 15,826,876 19,101,330
CASH FLOWS FROM INVESTING ACTIVITIES
Originations of investments (155,344,309) (194,048,515)
Proceeds from sales and maturities of investments 116,332,727 131,750,261
Investment in and loans to unconsolidated subsidiary, net (667,523) -
Capital expenditures (267,666) (750,173)
------------ -------------
Net cash used for investing activities (39,946,771) (63,048,427)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable to banks 5,000,000 -
Payments of notes payable to banks (31,000,000) 5,150,000
Proceeds from private placement debt - 45,000,000
Proceeds from issuance of commercial paper 66,160,670 35,215,047
Repayment of notes payable to the SBA - (31,090,000)
Proceeds from exercise of stock options 277,996 50,062
Payment of declared dividends to current stockholders (15,575,838) (13,036,824)
------------ -------------
Net cash provided by financing activities 24,862,828 41,288,285
NET INCREASE (DECREASE) IN CASH 742,933 (2,658,812)
CASH beginning of period 5,961,776 6,027,596
------------ -------------
CASH end of period $ 6,704,709 $ 3,368,784
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SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 21,677,597 $ 14,012,752
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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"). The Company operates primarily
through its subsidiaries Medallion Funding Corp. ("MFC") and Medallion Taxi
Media, Inc. ("Media"). MFC, is a closed-end management investment company
registered under the 1940 Act and is licensed as a small business investment
company ("SBIC") by the Small Business Administration (SBA). As an adjunct to
the Company's taxicab medallion finance business, Media operates a taxicab
rooftop advertising business. The Company also operates a commercial loan
origination and sales operation through Business Lenders, LLC ("BLL"). BLL is
licensed by the SBA under its Section 7(a) program and headquartered in
Hartford, CT.
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.
On September 16, 1998, the Company completed the merger with Capital
Dimensions, Inc. (CDI), a Specialized Small Business Investment Company (SSBIC)
lender, headquartered in Minneapolis, Minnesota. CDI was subsequently renamed
Medallion Capital, Inc., (Medallion Capital), and the charter was amended to
convert Medallion Capital to an SBIC. The transaction was accounted for as a
tax-free reorganization under Section 368 of the Internal Revenue Code of 1986,
as amended, and was treated under the pooling-of-interests method of accounting.
In September 1998, the Company created Medallion Business Credit LLC (MBC)
as a wholly owned subsidiary. MBC originates loans to small businesses for the
purpose of financing inventory and receivables.
On May 4, 2000, the Company executed an Agreement and Plan of Merger with
Ameritrans Capital Corporation ("Ameritrans"), a specialty finance company,
pursuant to which Ameritrans will merge into and with a subsidiary of the
Company. The Ameritrans Agreement and Plan of Merger was subsequently amended,
and as amended, the shareholders of Ameritrans will receive that number of
shares of common stock of the Company determined by an exchange ratio based upon
the average closing price of the Company's common stock during the twenty days
ending on and including the third day before the closing of the transaction.
The merger is subject to the approval of the shareholders of Ameritrans, the
arrangement of financing satisfactory to the Company, the satisfaction of
certain customary closing conditions, regulatory approval, and the completion of
due diligence. As of September 30, 2000, the Company capitalized approximately
$146,000 of professional fees related to the transaction.
7
<PAGE>
On August 4, 2000, the Company executed a Purchase and Sale Agreement to
acquire for cash substantially all of the assets of Firestone Financial Corp.
and Firestone Financial Canada, Ltd., together a leading provider of secured
installment loan, lease, and inventory financing to borrowers in North America,
most of whom are engaged in one or more of the vending machine, amusement
machines, gaming equipment, and carnival equipment businesses (the "Firestone
Transaction"). Firestone's pretax earnings for the year ended December 31, 1999
were approximately $2.9 million. At September 30, 2000, Firestone had assets of
approximately $87 million. The Firestone Transaction is subject to the receipt
of certain approvals from the U.S. Department of Justice and Federal Trade
Commission, the arrangement of financing satisfactory to the Company, and other
customary closing conditions. Subject to the foregoing conditions, the
Firestone Transaction is expected to close within 90 days.
On October 2, 2000, the Company completed the merger with Freshstart
Venture Capital Corp. ("Freshstart"), a specialty finance company, located in
Long Island City, New York. The shareholders of Freshstart received 0.23865
shares of the Company's common stock for each share of Freshstart common stock.
Proforma information related to the transaction with Freshstart has not been
included as the transaction is not material to the Company. As of September 30,
2000, the Company capitalized approximately $325,000 of professional fees
related to the transaction.
(2) Summary of Significant Accounting Policies
Investment Valuation:
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 in good faith by the
Board of Directors. In determining the fair value, the Company and the Board of
Directors consider factors such as the financial condition of the borrower, the
adequacy of the collateral, individual credit risks, historical loss experience,
and the relationships between current and projected market rates and portfolio
rates of interest and maturities. 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 depreciation was
$6,115,533 and $8,950,995 on total investments of $505,203,593 and $467,462,930
at September 30, 2000 and December 31, 1999, respectively. The Board of
Directors has determined that this valuation approximates fair value.
During fiscal 2000, the Company commenced origination of a new loan product
collateralized by taxi medallions. In consideration for modifications from the
Company's normal taxi medallion lending terms, the Company offers loans at
higher loan to value ratios and is entitled to earn additional interest income
based upon any increase in the value of the collateral. The Company assesses
the collateral value based upon recent sales activity of taxi medallions in the
related markets and other factors affecting the operating environment of the
taxi cab industry in such markets such as pricing and regulation. The Company
believes that
8
<PAGE>
the additional interest income recorded is fully realizable through operation of
the collateral or orderly sales in the market. Additional interest income
totaled approximately $1.2 million and $3.5 million for the three and nine
months ended September 30, 2000, and is included in investment income and
accrued interest receivable on the accompanying consolidated statements of
operations and the consolidated balance sheets, respectively. At September 30,
2000, the Company had originated $9.0 million of this new type of medallion
loan. No new loans of this type were originated in the 2000 third quarter.
Goodwill:
The cost of purchased businesses in excess of the fair value of net assets
acquired (goodwill) is being amortized on a straight-line basis over fifteen
years. The excess of fair value of net assets over the cost of business acquired
(negative goodwill) is being accreted on a straight-line basis over
approximately four years.
Earnings Per Share:
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share", which
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, consisting of outstanding stock
options, is determined using the treasury method in accordance with SFAS No.
128. Basic and diluted earnings per share for the three and nine months ended
September 30, 2000 and 1999 are presented on the accompanying consolidated
statements of operations on page 5.
Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes new standards regarding accounting and reporting requirements for
derivative instruments and hedging activities. In June 1999, the Board issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." The new standard
defers the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company is presently studying the effect of the new pronouncement
and, as required, will adopt SFAS No. 133 beginning January 1, 2001.
Reclassifications:
Certain reclassifications have been made to prior year balances to conform
with the current year presentation.
(3) Investment in Unconsolidated Subsidiary
The Company's investment in Media is accounted for under the equity method
because as an investment company, the Company is not allowed to consolidate non-
investment companies such as Media. Financial information presented for Media
includes the balance sheets as of September 30, 2000 and December 31, 1999 and
statements of operations for the three and nine months ended September 30, 2000
and 1999.
Balance Sheets September 30, December 31,
2000 1999
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9
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Cash $ 163,260 $ 189,480
Accounts receivable 2,549,682 3,582,642
Equipment, net 2,395,300 1,683,756
Goodwill 1,599,569 1,666,091
Other 3,088,453 2,147,534
---------- ----------
Total assets $9,796,264 $9,269,503
========== ==========
Notes payable to parent $2,261,204 $1,750,351
Accounts payable and accrued expenses 544,591 461,196
Other liabilities and income taxes payable 3,944,879 4,350,037
---------- ----------
Total liabilities 6,750,674 6,561,584
Equity 1,001,000 1,001,000
Retained earnings 2,044,590 1,706,919
---------- ----------
Total equity 3,045,590 2,707,919
---------- ----------
Total liabilities and equity $9,796,264 $9,269,503
========== ==========
<TABLE>
<CAPTION>
Statements of Operations Three months ended September 30, Nine months ended September 30,
----------------------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advertising revenue $3,003,542 $2,542,441 $8,216,994 $7,357,591
Cost of service 1,244,867 998,639 3,668,089 3,034,424
---------- ---------- ---------- ----------
Gross margin 1,758,674 1,543,802 4,548,905 4,323,167
Other operating expenses 1,524,832 1,312,748 4,287,786 3,629,499
---------- ---------- ---------- ----------
Income before taxes 233,842 231,054 261,119 693,668
Income tax provision (93,537) (92,422) (104,448) (254,564)
---------- ---------- ---------- ----------
Net income $ 140,305 $ 138,632 $ 156,671 $ 439,104
========== ========== ========== ==========
</TABLE>
During 2000, the Company purchased taxicab rooftop advertising at average
market rates from Media for a total of $-0- and $188,850 for the three and nine
months ended September 30, 2000, respectively.
On August 30, 2000, Media exchanged shares of the Company's common stock of
the Company for all the assets of Out There Media L.L.C., a privately-held
company headquartered in Cleveland, Ohio. Out There has the right to top more
than 250 taxis in Cleveland, Columbus, and Toledo, and has contracts with some
of the largest taxi fleets in each of their respective cities.
On February 2, 1999, Media purchased 100% of the common stock of Transit
Advertising Displays, Inc. (TAD) for approximately $849,000. TAD is a taxicab
rooftop advertising company headquartered in Washington, D.C. which operates
1,300 installed displays in the Baltimore, MD and Washington, D.C. areas. The
purchase was accounted for under the purchase method of accounting and,
accordingly the excess of the purchase price
10
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(4) Debt
The table below summarizes the various debt agreements outstanding at
September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
---------------------- ---------------------
<S> <C> <C>
Notes payable to banks:
Total facilities $330,000,000 $295,000,000
Maturity of facilities 6/01-9/01* 6/00-6/01
Total amounts outstanding $164,450,000 $190,450,000
SBA debentures payable $ 10,500,000 $ 10,500,000
Maturity date 3/06-6/07 3/06-6/07
Senior Secured Notes $ 45,000,000 $ 45,000,000
Maturity date 9/04 6/04
</TABLE>
* Note 1) The maturity of this line is subject to being declared in default by
the Bank Group on December 15, 2000 if in the opinion of a supermajority of
banks in the Bank Group, certain improvements in Company operations do not
occur. The Company has taken active steps to achieve these improvements,
including the hiring of new personnel and changes in both operating policies
and procedures, and believes that the Revolver will not be called.
Under the revolving credit agreement between MFC and its lenders (the "Bank
Group"), as amended, MFC is required to maintain minimum tangible net assets of
$65,000,000 and certain financial ratios. MFC believes that it was in compliance
with such requirements at September 30, 2000.
On September 22, 2000, Medallion Financial increased its revolving credit
facility (the "Medallion Revolver") to $110 million from $100 million, and
extended the maturity until September 21, 2001. If in the opinion of a
supermajority of the banks in the Bank Group, the Bank Group may declare a
default on the Medallion Revolver on December 15, 2000 if certain improvements
in the Company's internal control structure do not occur. The Company has taken
active steps to achieve these improvements, including the hiring of new
personnel and changes in both operating policies and procedures, and believes
that the Medallion Revolver will not be called.
On September 1, 1999, MFC extended its $195 million revolving credit
facility (the "MFC Revolver") until September 30, 2001, at which time, MFC
increased the aggregate credit commitment amount to $220 million with an
effective date of February 10, 2000.
On June 1, 1999, MFC issued $22.5 million of Series A senior secured notes
that mature on June 1, 2004, and on September 1, 1999, MFC issued $22.5 million
of Series B senior secured notes (the "Notes") that mature on September 1, 2004.
The Notes bear a fixed rate of interest of 7.2% paid quarterly in arrears. The
Notes rank pari passu with the revolvers and commercial paper through inter-
creditor agreements. The proceeds of the Notes were used to prepay certain of
the Company's outstanding SBA debentures.
11
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(5) Commercial Paper
MFC has entered into commercial paper agreements with Salomon Smith Barney,
Inc., USBancorp, and Credit Suisse First Boston to sell up to an aggregate
principal amount of $220 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 Revolver. The commercial paper program has a
specified maturity date of June 30, 2001 which represents the maturity date of
the Revolver, but may be terminated by the Company at anytime. As of September
30, 2000, MFC had approximately $160.1 million outstanding at a weighted average
interest rate of 6.62%.
(6) Segment Reporting
The Company has two reportable business segments, lending and taxicab
rooftop advertising. The lending segment originates and services secured
commercial loans. The taxicab rooftop advertising segment sells advertising
space to advertising agencies and companies in several major markets across the
United States. The segment is reported as an unconsolidated subsidiary,
Medallion Taxi Media, Inc. The accounting policies of the operating segments are
the same as those described in the summary of significant accounting policies.
The lending segment is presented in the consolidated financial statements of the
Company. Financial information relating to the taxicab rooftop advertising
segment is presented in Note 3, and represents an immaterial part of total
Company revenues, expenses, income, and assets.
(7) Subsequent Events
On October 2, 2000, the Company completed the merger with Freshstart. See
Note 1 for additional details related to the Freshstart merger.
12
<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, 1999. In addition, this Management's Discussion and
Analysis contains forward-looking statements. These forward-looking statements
are subject to 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 operates a specialty finance business whose principal activity
is the origination and servicing of commercial secured loans. The loans are
primarily secured by taxicab medallions ("Medallion Loans") and loans to small
businesses secured by equipment and other suitable collateral ("Commercial
Installment Loans"). As an adjunct to its finance business, the Company also
operates a taxicab rooftop advertising business. The earnings of the Company
depend primarily on its level of net interest income, which is the difference
between interest earned on interest-earning assets consisting primarily of
Medallion Loans and Commercial Installment Loans, and the interest paid on
interest-bearing liabilities consisting primarily of secured credit facilities
with bank syndicates, secured commercial paper, senior secured notes and
debentures issued to or guaranteed by the SBA. Net interest income is a function
of the difference between the average yield earned on interest-earning assets
and the average interest rate paid on interest-bearing liabilities, and the
relative changes in average balances of interest-earning assets as compared to
interest-bearing liabilities, including changes in the asset/liability mix. Net
interest income is affected by economic, regulatory, and competitive factors
that influence interest rates, loan demand, and the availability of funding to
finance the Company's lending activities. The Company, like other financial
institutions, is subject to interest rate risk to the degree that its interest-
earning assets reprice on a different basis than its interest-bearing
liabilities. The income from the taxicab rooftop advertising business is
reflected as earnings from unconsolidated subsidiary.
The Company also invests in small businesses in selected industries through
its subsidiary Medallion Capital. 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 or written-off, and represent the difference between the proceeds received
from the disposition of portfolio assets if any 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 period end as compared with their estimated
fair values at the beginning of the period, or the cost of such portfolio assets
if purchased during
13
<PAGE>
the period. Generally, "realized gains (losses) on investments" and "changes in
unrealized appreciation (depreciation) of investments" are inversely related.
When an appreciated asset is sold to realize a gain, a decrease in the
previously recorded unrealized appreciation occurs. Conversely, when a loss
previously recorded as an unrealized loss is realized by the sale or other
disposition of a depreciated portfolio asset, the reclassification of the loss
from "unrealized" to "realized" causes an increase in net unrealized
appreciation and an increase in realized loss.
Trend in Interest Income. The Company's investment income is driven by the
principal amount of and yields on its portfolio. The portfolio is grouped by
medallion loans, commercial installment loans and equity investments. The
following table illustrates the Company's investments at fair value and the
weighted average portfolio yields calculated using the contractual interest
rates of the loans at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
-------------------------------------------------------------------------------------
Contractual Contractual
Weighted Percentage Weighted Percentage
Average Principal of Total Average Principal of Total
Yield Amounts Portfolio Yield Amounts Portfolio
----- ------- --------- ----- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Medallion loan portfolio 8.90% $303,093,283 64.8% 9.17% 289,117,322 57.2%
Commercial installment loan portfolio 11.71% 162,033,462 34.7% 12.40% 213,380,861 42.2%
Equity investments - 2,336,185 0.5% - 2,705,410 0.6%
----- ------------ ----- ----- ----------- -----
Total portfolio 9.91% $467,462,930 100.0% 10.56% 505,203,593 100.0%
===== ============ ===== ===== =========== =====
</TABLE>
Yield Summary:
The weighted average yield of the total portfolio at September 30, 2000 was
10.56%, an increase of 65 basis points from 9.91% at December 31, 1999. The
weighted average yield of the medallion loan portfolio at September 30, 2000 was
9.17%, an increase of 27 basis points from 8.90% at December 31, 1999,primarily
reflecting the Company's expansion into other medallion markets which produce
yields 200 to 300 basis points higher than New York, partially offset by the
effects of continuing competition in the New York medallion market. At
September 30, 2000, 24.8% of the medallion loan portfolio represented loans
outside New York, compared to 16.5% at December 31, 1999. The Company is
continuing to focus its efforts on originating higher-yielding medallion loans
outside the New York market.
The weighted average yield for the commercial installment loan portfolio at
September 30, 2000 was 12.40%, an increase of 69 basis points from 11.71% at
December 31, 1999, primarily reflecting the impact of increases in the prime
rate and in the number of loans tied to prime. The Company is continuing to
originate adjustable rate loans tied to the prime rate to help mitigate its
interest rate risk in a rising interest rate environment.
Portfolio Summary:
Medallion loans constituted 57.2% of the total portfolio of $505.2 million
at September 30, 2000 and 64.8% of the total portfolio of $467.5 million at
December 31, 1999. The Medallion Loan portfolio decreased by $14.0 million or
4.6%, reflecting, participation agreements the Company entered into with third
parties on low yield New York medallion loans, partially offset by growth in the
Chicago market. The Company retains a portion of participated loans and earns a
fee for servicing the loans for the participants. The commercial
14
<PAGE>
loan portfolio comprised 42.2% of the total portfolio at September 30, 2000
compared to 34.7% at December 31, 1999. The commercial loan portfolio grew by
$51.4 million or 31.7% due to strong growth in the SBA 7(a) program and asset-
based lending portfolios.
Equity Investments represented 0.5% and 0.6% of the Company's entire
portfolio at September 30, 2000 and December 31, 1999, 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 commercial paper and 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 SBIA and SBA
Regulations. Further, 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, 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 hedging strategies.
The Company also expects that net interest income should increase as the Company
issues more commercial paper in lieu of bank debt. 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 September 30,
2000 and December 31, 1999, short-term LIBOR-based debt including commercial
paper constituted 85.4% and 83.7% of total debt, respectively.
The Company's cost of funds is primarily driven by the rates paid on its
various debt instruments and their relative mix and changes in the levels of
average borrows outstanding. 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 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 at September 30, 2000 was 7.24% or 43 basis
points over the LIBOR Benchmark of 6.81%, up from 7.09% or 108 basis points over
the LIBOR Benchmark of 6.01% at December 31, 1999. The increase in the cost of
funds is due to the 80 basis point increase in the LIBOR Benchmark partially
offset by the 65 basis point improvement in the spread paid over the LIBOR
Benchmark.
Taxicab 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
15
<PAGE>
("Displays") that are currently showing advertising and the rate charged
customers for those Displays. At September 30, 2000, Media had approximately
8,400 installed Displays. The Company expects that Media will continue to expand
its operations by entering new markets on its own or through acquisition of
existing taxicab rooftop advertising companies.
On August 7, 2000 Media entered into an agreement with Yellow Cab Service
Corp., the taxi division of Coach USA, the leading taxi and bus charter company
in the U.S., to sell advertising on over 2,300 taxi tops throughout the United
States. Going forward, as Coach USA acquires taxi companies around the U.S.,
Media will have the right to top those taxis as well.
On July 5, 2000 Media entered into an agreement to purchase all the assets
of Out There Media L.L.C., a privately-held company headquartered in Cleveland,
Ohio. Out There has the right to top more than 250 taxis in Cleveland, Columbus
and Toledo and has contracts with some of the largest taxi fleets in each of
their respective cities. This transaction closed on August 30, 2000.
Factors which affect the Company's net assets include net realized
gain/loss on investments and change in net unrealized appreciation/depreciation
of investments. Net realized gain/loss on investments is the difference between
the proceeds derived upon sale or foreclosure of a loan and the cost basis of
such loan or equity investment. Change in net unrealized
appreciation/depreciation of investments is the amount, if any, by which the
Company's estimate of the fair value of its investment portfolio is above/below
the previously established fair value or the cost basis of the portfolio. Under
the 1940 Act and the SBIA, the Company's loan portfolio and other investments
must be recorded at fair value. Unlike certain lending institutions, the Company
is not permitted to establish reserves for loan losses, but adjusts quarterly
the valuation of its loan portfolio to reflect the Company's estimate of the
current value of the loan portfolio. Since no ready market exists for the
Company's loans, fair value is subject to the good faith determination of the
Company. In determining such value, the Company and its Board of Directors takes
into consideration factors such as the financial condition of its borrowers, the
adequacy of its collateral and the relationships between current and projected
market rates of interest and portfolio rates of interest and maturities. Any
change in the fair value of portfolio loans or other investments as determined
by the Company is reflected in net unrealized depreciation or appreciation of
investments and affects net increase in net assets resulting from operations but
has no impact on net investment income or distributable income.
16
<PAGE>
Consolidated Results of Operations
For the Three and Nine Months Ended September 30, 2000 and 1999.
Net investment income. Net investment income of $3.2 million ($0.23 per
diluted common share) and $11.4 million ($0.81 per share) in the 2000 quarter
and nine months increased $238,000 or 7.9% and $2.0 million or 20.9% from the
comparable 1999 periods, primarily reflecting increased net interest income,
partially offset by higher expenses and a lower level of gain on sales of loans.
Net increase in net assets resulting from operations. Net increase in net
assets resulting from operations was $2.8 million ($0.20 per share) and $11.2
million ($0.79 per share) in the 2000 third quarter and nine months, down $3.1
million or 53.2% and down $4.3 million or 27.9% from the comparable 1999
periods. The decreases were primarily attributable to an increase in the
average cost of funds resulting in higher interest expense that partially offset
increases in interest income from a larger, higher-yielding loan portfolio,
higher levels of operating expenses, and net realized/unrealized losses on
investments compared to net gains in the 1999 periods. Return on average assets
was 2.1% and 2.8% for the 2000 quarter and nine months, compared to 5.0% and 4.5
% for the 1999 periods, and return on average equity was 7.3% and 9.9% for the
third quarter and nine months, compared to 15.3% and 13.6% for 1999.
Investment income. Investment income of $13.7 million and $40.8 million
for the 2000 third quarter and nine months increased $3.0 million or 27.4% and
$9.8 million or 31.5% from the 1999 third quarter and nine month periods.
Investment income in 2000 contains a component which is derived from a new loan
product collateralized by taxi medallions. In consideration for modifications
from the Company's normal taxi medallion lending terms, the Company offers loans
at higher loan to value ratios and is entitled to earn additional interest
income based upon any increase in the value of the collateral. This additional
interest income was $1.2 million and $3.5 million for the 2000 third quarter and
nine months. The increase in investment income also reflects the positive
impact of portfolio growth, an increase in weighted average yields earned, a
higher balance of SBA 7 (a) loans not sold, and recovery of non-accrual interest
from prior period delinquencies. During the 2000 quarter, average portfolio
outstandings increased $57.3 million or 13.0% to $498.5 million at a weighted
average interest rate of 11.02%, compared to 10.07% for the 1999 period. For
the 2000 nine months, average portfolio outstandings increased $67.9 million or
16.2% to $486.3 million at a weighted average interest rate of 11.20%, compared
to 9.73% for the 1999 nine months.
Loan originations, net of participations, were $36.5 million in the 2000
third quarter, down $30.6 million or 45.6%, compared to $67.1 million for the
1999 quarter. Originations were offset by prepayments, terminations, and
refinancings of $22.3 million in the 2000 quarter, down $26.2 million or 54.0%
compared to $48.5 million in the 1999 quarter. For the 2000 nine months, net
originations of $155.3 million decreased $38.7 million or 19.9% from 1999, and
were offset by prepayments, terminations, and refinancings of $116.3 million,
compared to $131.8 million for the 1999 nine months. Originations for the 1999
nine months
17
<PAGE>
did not include $16.9 million of loans acquired from VGI, VGII, and Venture
Opportunities Corp.
Interest expense. Interest expense of $7.1 million and $20.2 million in the
2000 third quarter and nine months, increased $2.2 million or 46.0% and $6.6
million or 48.1% from the comparable 1999 periods. The increases reflected a
higher average cost of funds of 7.24% in the quarter, up from 6.27% in the 1999
quarter which resulted from an 80 basis point increase in the LIBOR benchmark
combined with a 17 basis point increase in the premium paid over LIBOR. For the
2000 nine months, the increase in the average cost of funds resulted from a 133
basis point increase in the LIBOR benchmark combined with a 36 basis point
increase in the premium paid over LIBOR. Substantially all of Medallion's
borrowings are LIBOR-based. Average total borrowings were $375.2 million in the
quarter and $372.5 million in the nine months, up $66.7 million or 21.6% and
$85.1 million or 29.6%, respectively, from the 1999 periods. At September 30,
2000, borrowings were at an average rate of 7.53%. 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 secured indebtedness and
commercial paper as a percentage of total indebtedness was 85.4% and 82.4% at
September 30, 2000 and September 30, 1999, respectively.
Gain on sale of loans. The Company generated gains of $373,000 and $1.9
million during the 2000 third quarter and nine months from the sale of $12.3
million and $43.6 million, respectively, of the guaranteed portion of SBA 7(a)
loans, compared to gains of $788,000 and $2.2 million on sales of $14.6 million
and $37.1 million for the comparable 1999 periods, reflecting fewer sales and a
decrease in the average premium earned on sales to the secondary market.
Equity in earnings of unconsolidated subsidiary. Media net income was
$140,305 and $156,671 in the 2000 third quarter and nine months, compared to
$138,632 and $439,104 for the 1999 third quarter and nine months. Advertising
revenues of $3.0 million and $8.2 million in the 2000 third quarter and nine
months, increased $461,000 or 18.1% and $859,000 or 11.7% from the comparable
1999 periods. The increase in revenues reflected an increase in the average
sales price per top and higher top utilization rates. Display rental costs were
$1.2 million and $3.7 million for the 2000 periods, up $246,000 or 24.7% and
$634,000 or 20.9%, respectively, compared to 1999, reflecting the increased
number of tops. The number of displays owned by Media increased approximately
2,200 or 35.5% to approximately 8,400 at September 30, 2000, from approximately
6,200 a year-ago. Operating expenses of $1.5 million and $4.3 million in the
2000 quarter and nine months, increased $212,000 or 16.2% and $658,000 or 18.1%
from 1999, primarily reflecting the expansion of Media's operations into six new
markets.
Accretion of negative goodwill. Negative goodwill was $0 and $350,516 in the
2000 third quarter and nine months, down $180,600 and $191,284 compared to the
1999 periods. Negative goodwill related to the excess of the fair value of net
assets of Tri-Magna over the cost basis of such business at the acquisition
date, and was fully accreted as of June 30, 2000.
18
<PAGE>
Other income. The Company's other income of $997,000 and $2.7 million for
the 2000 quarter and nine months, increased $521,000 and $1.1 million from the
1999 periods. Other income is primarily derived from late charges, prepayment
fees, accretion of discount, servicing fee income on loans sold to the secondary
market, and miscellaneous income. The increase was primarily due to a higher
than usual volume of 7(a) loan prepayments during the period, as a result of the
increase in interest rates and the impact of the competitive environment.
Non-interest expenses. Non-interest expenses were $4.9 million and $14.1
million for the 2000 third quarter and nine months, up $416,000 or 9.2% and $1.3
million or 10.6 % from the 1999 third quarter and nine months. The increases
primarily reflect higher levels of salaries and benefits, up $187,000 in the
quarter and $715,000 in the nine months, from new hires, incentive compensation,
and salary rate increases. Additionally, professional fees increased by $56,000
in the quarter, and decreased $54,000 year-to-date. Other operating expenses
increased by $187,000 and $758,000 in the 2000 periods, primarily reflecting
costs associated with the conversion to a new loan processing system, the
opening of additional offices, and general expansion of business operations.
Net realized loss on investments. The Company had net realized losses of
$1.8 million and $3.0 million for the 2000 quarter and nine months, decreases of
$10.7 million and $12.5 million from net realized gains of $8.9 million and $9.5
million in the 1999 periods. The realized losses during the 2000 periods,
primarily reflected the charge-off of loan losses at Medallion Capital. The
realized gains in the 1999 periods primarily reflected the sale of Radio One
stock by Medallion Capital.
Change in net unrealized appreciation (depreciation). The change in net
unrealized appreciation increased was $1.2 million and $2.6 million for the 2000
quarter and nine months, up $7.0 million and $5.8 million from net unrealized
depreciation of $5.8 million and $3.2 million in the 1999 third quarter and nine
months. The unrealized appreciation during the third quarter resulted primarily
from an $850,000 increase related to the reversal of prior reserves for the
write-off of an equity investment held by the Company, $458,000 related to the
reversal of prior reserves established for loan charge-offs, partially offset by
$114,000 of depreciation from an increases in loan and equity investment
reserves. The change in net unrealized appreciation for the 2000 nine months
resulted primarily from $1,367,000 related to the reversal of prior reserves
established for loan charge-offs, a $1,216,000 increase related to the reversal
of prior reserves for the write-off of equity investments held by the Company,
partially offset by $29,000 of depreciation from an increases in loan and equity
reserves.
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, senior secured notes, and subordinated SBA debentures).
19
<PAGE>
A relative measure of interest rate risk can be derived from the Company's
interest rate sensitivity gap. The interest rate sensitivity gap represents the
difference in maturity dates or repricing intervals between interest-earning
assets and interest-bearing liabilities. The gap is positive when repriceable
assets exceed repriceable liabilities in a given measurement period, and
negative when the inverse situation exists. A relative measure of interest rate
sensitivity is provided by the cumulative difference between interest sensitive
assets and interest sensitive liabilities for a given time interval expressed as
a percentage of total assets.
Having interest-bearing liabilities that mature or reprice more frequently
on average than assets may be beneficial in times of declining interest rates,
although such an asset/liability structure may result in declining net interest
income 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 interest income 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 LIBOR interest rate exposure on MFC's revolving credit facility as
summarized below:
<TABLE>
<CAPTION>
LIBOR Effective Maturity
Amount Rate Date Date
------ ---- ---- ----
<S> <C> <C> <C>
$20,000,000 7.0% 4/7/98 3/30/01
$10,000,000 6.5% 7/6/99 7/6/01
$10,000,000 6.5% 7/6/99 7/6/01
</TABLE>
Total premiums paid under the cap 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 senior secured notes and SBA debentures. The Company
currently has outstanding $45.0 million of senior secured notes at a fixed
interest rate of 7.20% and SBA debentures in the principal amount of $10.5
20
<PAGE>
million with a weighted average rate of interest of 7.08%. At September 30,
2000, these notes and debentures constituted 11.8% and 2.8% of the Company's
total indebtedness respectively.
The Company will seek to manage interest rate risk by evaluating and
purchasing, if appropriate, additional derivatives, originating adjustable-rate
loans, incurring fixed-rate indebtedness and revising, if appropriate, its
overall level of asset and liability matching. Nevertheless, the Company
accepts varying degrees of interest rate risk depending on market conditions and
believes that the resulting asset/liability interest rate mismatch results in
opportunities for higher net interest income.
Liquidity and Capital Resources
The Company's sources of liquidity are credit facilities with bank
syndicates, senior secured notes, fixed rate, long-term SBA debentures that are
issued to or guaranteed by the SBA, loan amortization, prepayments, and a
secured commercial paper program. As a RIC, the Company distributes at least 90%
of its investment company taxable income; consequently, the Company primarily
relies upon external sources of funds to finance growth. At September 30, 2000,
the Company's $380.1 million of outstanding debt was comprised as follows: 43.3%
bank debt, substantially all of which was at variable effective rates of
interest with an weighted average interest rate of 7.86% or 164 basis points
below the Prime Rate, 42.1% secured commercial paper with an annual weighted
average interest rate of 6.62% or 298 basis points below the Prime Rate, 11.8%
long-term senior secured notes fixed at an interest rate of 7.20% and 2.8%
subordinated SBA debentures, with fixed rates of interest with an annual
weighted average rate of 7.08%. The Company is eligible to seek SBA funding but
plans to continue to limit its use of SBA funding and will seek such funding
only when advantageous. In the event that the Company seeks SBA funding, no
assurance can be given that such funding will be obtained. In addition to
possible additional SBA funding, an additional $5.3 million of debt was
available at September 30, 2000 at variable effective rates of interest
averaging below the Prime Rate under the Company's $330.0 million bank credit
facilities. The Company has observed a practice of minimizing credit facility
fees associated with the unused component of credit facilities by keeping the
unused component as small as possible and periodically increasing the amounts
available under such credit facilities only when necessary to fund portfolio
growth.
The Company's bank and commercial paper facilities are subject to periodic
reviews by the Bank Group funding the borrowings and is also subject to certain
covenants and restrictions. In August 2000, the Company informed the Bank Group
of certain weaknesses in its internal control structure identified during its
1999 financial statement audit, which resulted in a modification in the
Company's traditional financing arrangements whereby the Bank Group may elect to
declare a default on $110 million of borrowings on December 15, 2000, if in the
opinion of a supermajority of the banks in the Bank Group, operations have not
been improved. The Company is in continuing discussions with the Bank Group to
revise and eliminate certain of these conditions upon demonstrating improvements
in internal controls and levels of operation. The Company has taken active steps
to achieve these improvements, including the hiring of new personnel and changes
in both operating policies and procedures, and although there are no assurances,
believes that the Revolver will not be called.
21
<PAGE>
Additionally, the Company's lead member in the Bank Group has approximately
doubled its exposure to the Company and MFC to $95 million as a result of a
merger between members of the Bank Group, and has asked the Company to find an
additional participant, to reduce their exposure to previous levels. The Company
is actively seeking new members for the Bank Group. As a result of both of these
occurrences, the Company is currently unable to expand its borrowing lines until
new banks join the Bank Group or a debt offering is completed, which has limited
the Company's ability to fund its originally planned level of loan originations.
The Company believes that its bank credit facilities and cash flow from
operations (after distributions to stockholders) will be adequate to fund the
continuing operations of the Company's loan portfolio and advertising business.
Nevertheless, the Company continues to explore several options which may
increase available funds for the Company's growth and expansion strategy. The
Company has engaged investment banking firms to investigate the viability of a
number of financing options which include a private placement of securities, the
sale or spin-off of certain assets or divisions, and the development of a
securitization conduit program. Any of these financing options would provide
additional sources of funds for both external expansion and continuation of
internal growth. If none of these financing options occur, management believes
liquidity would still be adequate to fund the continuing operations of the
Company's loan portfolio and advertising business. Deferred costs related to
these financing options was approximately $700,000 as of September 30, 2000 and
were included in other assets on the Company's consolidated balance sheets.
The following table illustrates the Company's and each of the subsidiaries'
sources of available funds, and amounts outstanding under credit facilities and
their respective end of period weighted average interest rate at September 30,
2000:
<TABLE>
<CAPTION>
Medallion
($'s in thousands) Financial MFC BLL MCC MBC Total
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash $ 1,317 $ 2,124 $ 582 $ 548 $2,133 $ 6,704
Revolving lines of credit 110,000 220,000(1) -- -- 330,000
Amounts available 4,500 905 -- -- 5,405
Amounts outstanding 105,500 58,950 -- -- 164,450
Average interest rate 7.98% 7.64% -- -- 7.86%
Maturity 9/01** 6/01 -- -- 6/01-9/01
Commercial paper
Amounts outstanding -- 160,145 -- -- 160,145
Average interest rate -- 6.62% -- -- 6.62%
Maturity -- 6/01 -- -- 6/01
SBA debentures -- -- -- 10,500 10,500
Average interest rate -- -- -- 7.08% 7.08%
Maturity -- -- -- 3/06-6/07 3/06-6/07
Senior secured notes -- 45,000 -- -- 45,000
Average interest rate -- 7.20% -- -- 7.20%
Maturity -- 6/04-9/04 -- -- 6/04-9/04
Total cash and remaining
amounts available
under credit facilities 5,817 3,029 582 548 2,133 12,109
-------------------------------------------------------------------------
Total debt outstanding $105,500 $ 264,095 $ - $ 10,500 $ - $ 380,095
--------------------------------------------------------------------------------------------------------------
</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.
22
<PAGE>
** Note 2) The maturity of this line is subject to being declared in default
by the Bank Group on December 15, 2000 if in the opinion of a supermajority
of banks in the Bank Group, certain improvements in Company operations do not
occur. The Company has taken active steps to achieve these improvements,
including the hiring of new personnel and changes in both operating policies
and procedures, and believes that the Revolver will not be called.
Loan amortization, prepayments, and sales 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. Loan sales are a major focus of BLL, which is primarily
set up to originate and sell loans. Increases in loan balances in any given
period generally reflect timing differences in selling and closing transactions.
The Company makes limited use of SBA funding and will seek such funding
only when advantageous and has consistently reduced its reliance on such
funding. On September 1, 1999, the Company issued $22.5 million of senior
secured notes (the "Notes") that mature on September 1, 2004. The Notes bear a
fixed rate of interest of 7.2% and interest is paid quarterly in arrears. The
Notes rank pari pasu with the revolving credit facilities and commercial paper
through inter-creditor agreements. On September 1, 1999, the note-holders
purchased an additional $22.5 million under the same terms and conditions. The
proceeds of the Notes were used to pre-pay $31.1 million of the Company's
outstanding SBA debentures. At September 30, 2000 only $10.5 million of
debentures were still outstanding.
Media funds its operations through internal cash flow and inter-company
debt. Media is not a RIC and, therefore, is able to retain earnings to finance
growth.
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 dependent upon
the general level of interest rates in the economy and the relative asset and
liability blend between fixed and floating rate instruments. In general, the
Company's assets reprice at slower intervals than the related liabilities over
short period of time. Over the longer time horizons the lag in asset repricing
catches up.
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.
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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.
The Company's bank and commercial paper facilities are subject to periodic
reviews by the Bank Group funding the borrowings and is also subject to certain
covenants and restrictions. In August 2000, the Company informed the Bank
Group of certain weaknesses in its internal control structure identified during
its 1999 financial statement audit, which resulted in a modification in the
Company's traditional financing arrangements whereby the Bank Group may elect to
declare a default on $110 million of borrowings on December 15, 2000, if in the
opinion of a supermajority of the banks in the Bank Group, operations have not
been improved. The Company is in continuing discussions with the Bank Group to
revise and eliminate certain of these conditions upon demonstrating improvements
in internal controls and levels of operation. The Company has taken active steps
to achieve these improvements, including the hiring of new personnel and changes
in both operating policies and procedures, and although there are no assurances,
believes that the Revolver will not be called.
Additionally, the Company's lead member in the Bank Group has approximately
doubled its exposure to the Company and MFC to $95 million as a result of a
merger between members of the Bank Group, and has asked the Company to find an
additional participant, to reduce their exposure to previous levels by December
31, 2000. The Company is actively seeking new members for the Bank Group. As a
result of both of these occurrences, the Company is currently unable to expand
it's borrowing lines until new banks join the Bank Group or a debt offering is
completed, which has limited the Company's ability to fund its originally
planned level of loan originations.
The Company believes that its bank credit facilities and cash flow from
operations (after distributions to stockholders) will be adequate to fund the
continuing operations of the Company's loan portfolio and advertising business.
Nevertheless, the Company continues to explore several options which may
increase available funds for the Company's growth and expansion strategy. The
Company has engaged investment banking firms to investigate the viability of a
number of financing options which include a private placement of securities, an
offering of securities to the public, the sale or spin-off of certain assets or
divisions, and the development of a securitization conduit program. Any of
these financing options would provide additional sources of funds for both
external expansion and continuation of internal growth. If none of these
financing options occur, management believes liquidity would still be adequate
to fund the continuing operations of the Company's loan portfolio and
advertising business.
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
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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.
Risk relating to integration of recent acquisitions. On October 2, 2000,
the Company acquired Freshstart Venture Capital Corp., a specialty finance
company, located in Long Island City, New York. On August 4, 2000, the Company
executed a purchase and sale agreement to acquire for cash substantially all of
the assets of Firestone Financial Corp. and Firestone Financial Canada, Ltd. and
on May 4, 2000 the Company entered into an Agreement and Plan of Merger with
Ameritrans Capital Corporation a specialty finance company, located in New York,
New York. The Firestone Transaction is subject to the receipt of certain
approvals from the U.S. Department of Justice and Federal Trade Commission, the
arrangement of financing satisfactory to the Company, and other customary
closing conditions. The Ameritrans merger is subject to the approval of the
shareholders of Ameritrans, the arrangement of financing satisfactory to the
Company, the satisfaction of certain customary closing conditions, regulatory
approval and the completion of due diligence. The realization of certain
benefits anticipated as a result of these mergers will depend in part on the
integration of Freshstart's or Ameritrans' investment portfolio and specialty
finance business with the Company's and the successful inclusion of
Freshstart's, Ameritrans,' or Firestone's investment portfolio in the Company's
financing operations. The dedication of management resources to such integration
may detract attention from the day-to-day business of the Company and there can
be no assurance that there will not be substantial costs associated with the
transition process or that there will not be other material adverse effects as a
result of these integration efforts. There can be no assurance that
Freshstart's, Ameritrans' or Firestone's businesses 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims in the
ordinary course of business. The Company is not currently aware of any legal
proceedings or claims that the Company believes will have, individually or in
the aggregate, a material adverse effect on the Company's financial position or
results of operations.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Medallion Financial Corp. Financial Data Schedule. Filed herewith.
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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: November 14, 2000 By: /s/ Larry D. Hall
------------------------------------------
Larry D. Hall
Corporate Controller
Signing on behalf of the registrant and as
principal financial and accounting officer
27
