<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 31,2000
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, May 1, 2000:
Class Outstanding Par Value Shares Outstanding
----------------- --------- ------------------
Common Stock................................... $.01 14,029,798
================================================================================
MEDALLION FINANCIAL CORP.
-1-
<PAGE>
MEDALLION FINANCIAL CORP.
FORM 10-Q
March 31,2000
INDEX
Page
----
PART I. Financial Information
Item 1. Basis of Preparation............................................. 3
Medallion Financial Corp. Consolidated Balance Sheets
at March 31, 2000 and December 31, 1999...................... 4
Medallion Financial Corp. Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999........... 5
Medallion Financial Corp. Consolidated Statements of Cash
Flows for the three months ended March 31, 2000 and 1999..... 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 31,2000 and 1999)................................ 18
Asset/Liability Management..................................... 21
Liquidity and Capital Resources................................ 22
Investment Considerations...................................... 25
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 28
SIGNATURES................................................................. 29
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<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 (Edwards), Transportation Capital Corp. (TCC) and Medallion Taxi Media,
Inc. (Media). Media and MFC were subsidiaries of Tri-Magna Corporation (Tri-
Magna) which was merged into the Company. The Company's acquisition of these
businesses in connection with the Offering and the resulting two-tier structure
were effected pursuant to an order of the Securities and Exchange Commission
(the Commission) (Release No. I.C. 21969, May 21, 1996) (the Acquisition Order)
and the approval of the U.S. Small Business Administration (the SBA).
The financial information included in this report 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 sheets of the Company as of March
31, 2000 and December 31,1999 and the related statements of operations and cash
flows for the three months ended March 31, 2000 and 1999. 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, 2000 and
1999.
The consolidated balance sheet of the Company as of March 31, 2000, the
related statements of operations and cash flows for the three months ended March
31, 2000 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, 2000 are not necessarily
indicative of the results of operations for the full year or any other interim
period nor 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.
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<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------------------------------
ASSETS (unaudited)
<S> <C> <C>
Investments:
Medallion loans $316,791,775 $303,093,283
Commercial installment loans 173,748,551 162,033,462
Equity investments 2,474,210 2,336,185
------------ ------------
Net investments 493,014,536 467,462,930
Investment in and loans to unconsolidated subsidiary 3,333,144 4,349,651
------------ ------------
Total investments 496,347,680 471,812,581
Cash 8,441,172 5,961,776
Accrued interest receivable 7,140,271 4,887,142
Receivable from sale of loans 3,131,611 10,563,503
Servicing fee receivable 5,404,586 4,878,783
Fixed assets, net 2,240,042 2,378,686
Goodwill, net 6,046,142 6,180,151
Other assets, net 3,558,090 2,949,906
------------ ------------
Total assets $532,309,594 $509,612,528
============ ============
LIABILITIES
Accounts payable and accrued expenses $ 7,262,561 $ 9,318,480
Dividends payable - 5,609,773
Accrued interest payable 2,279,109 3,711,199
Notes payable to banks 175,500,000 190,450,000
Senior secured notes 45,000,000 45,000,000
Commercial paper 136,657,275 93,983,792
SBA debentures payable 10,500,000 10,500,000
------------ ------------
Total liabilities $377,198,945 $358,573,244
Negative goodwill, net 169,916 350,516
Commitments and contingencies
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 - 14,029,798 and 14,024,433 shares
outstanding at March 31, 2000 and December 31, 1999,
respectively) 140,298 140,245
Capital in excess of par value 142,051,822 142,015,875
Accumulated undistributed net investment income 12,748,613 8,532,648
------------ ------------
Total shareholders' equity 154,940,733 150,688,768
------------ ------------
Total liabilities and shareholders' equity $532,309,594 $509,612,528
============ ============
Number of common shares and common share equivalents 14,096,721 14,129,210
Net asset value per share $ 10.99 $ 10.67
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Investment income:
Interest income on investments $13,723,570 $ 9,281,755
Interest income on short-term investments 69,937 98,121
----------- -----------
Total investment income 13,793,507 9,379,876
Interest expense:
Notes payable to banks 3,214,066 1,918,830
Commercial paper 2,281,159 1,561,348
SBA debentures 186,915 758,305
Notes payable to bondholders 821,865 -
----------- -----------
Total interest expense 6,504,005 4,238,483
Net interest income 7,289,502 5,141,393
Non-interest income:
Equity in earnings (loss) of
unconsolidated subsidiary (319,349) 383,464
Accretion of negative goodwill 180,600 180,600
Gain on sale of loans 686,098 612,247
Other income 745,743 506,611
----------- -----------
Total non-interest income 1,293,092 1,682,922
Expenses:
Administrative and advisory fees 61,541 61,760
Professional fees 325,972 320,140
Salaries and benefits 2,414,624 1,810,032
Other operating expenses 1,585,230 1,343,254
Amortization of goodwill 136,578 164,551
----------- -----------
Total non-interest expenses 4,523,945 3,699,737
Net investment income before income taxes 4,058,649 3,124,578
Income tax benefit (provision) - (51,456)
----------- -----------
Net investment income after income taxes 4,058,649 3,073,122
Increase in net unrealized appreciation 270,027 605,293
Net realized gains (losses) on investments (112,711) 804,822
----------- -----------
Net increase in net assets resulting from operations $ 4,215,965 $ 4,483,237
=========== ===========
Net increase in net assets resulting from operations per common share:
Basic $ 0.30 $ 0.32
Diluted $ 0.30 $ 0.32
Weighted average common shares outstanding:
Basic Average Shares 14,026,817 14,013,768
Diluted Average Shares 14,093,741 14,084,307
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-5-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 4,215,965 $ 4,483,237
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Depreciation and amortization 218,484 108,773
Amortization of goodwill 136,578 164,551
Amortization of origination costs 255,874 156,656
Accretion of negative goodwill (180,600) (180,600)
Increase in unrealized depreciation (appreciation), net (270,027) (605,294)
Net realized gain (loss) on investments 112,711 (804,822)
Equity in losses (earnings) of unconsolidated subsidiary 319,349 (383,464)
Increase in accrued interest receivable (2,253,129) (231,207)
Decrease in receivable from sale of loans 7,431,892 4,688,582
Increase in servicing fee receivable (525,803) (281,470)
(Increase) decrease in other assets (573,950) 720,075
Decrease in accounts payable and accrued expenses (2,055,919) (2,390,505)
Decrease in accrued interest payable (1,432,090) (775,598)
-------------- --------------
Net cash provided by operating activities 5,399,335 4,668,914
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of investments (63,378,567) (51,125,835)
Proceeds from sales and maturities of investments 37,728,403 35,901,344
Investment in and loans to unconsolidated subsidiary, net 697,158 439,899
Capital expenditures (116,643) (181,495)
-------------- --------------
Net cash used for investing activities (25,069,649) (14,966,087)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to banks (14,950,000) (9,300,000)
Proceeds from issuance of commercial paper 42,673,483 26,189,032
Proceeds from exercise of stock options 36,000 -
Payment of declared dividends to current shareholders (5,609,773) (4,764,681)
-------------- --------------
Net cash provided by financing activities 22,149,710 12,124,351
-------------- --------------
NET INCREASE IN CASH 2,479,396 1,827,178
CASH, beginning of period 5,961,776 6,027,596
-------------- --------------
CASH, end of period $ 8,441,172 $ 7,854,774
============== ==============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 7,936,005 $ 5,014,081
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-6-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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). 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 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. In 1998, the Company
merged all of the assets and liabilities of Edwards and TCC into MFC, effective
on June 1, 1999.
MFC is a closed-end management investment company 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.
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. (the
Business Lenders Acquisition). 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.
-7-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2000
In connection with the 1996 Acquisitions, the Company received the
Acquisition Orders under the 1940 Act from the Securities and 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.
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, 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-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 December 22, 1999, the Company entered into an Agreement and Plan of
Merger with Freshstart Venture Capital Corp. (Freshstart), a specialty finance
company, located in Long Island City, New York. The shareholders of Freshstart
will receive common stock of the Company having a fair value between $4.025 to
$4.875 for each share of Freshstart common stock. The closing of the transaction
is subject to the approval of the shareholders of Freshstart, regulatory
approval and the satisfaction of customary conditions. Proforma information
related to the transaction with Freshstart has not been included as the
transaction is not expected to be material to the Company.
(2) Summary of Significant Accounting Policies
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 cost of business acquired
(negative goodwill) is being accreted on a straight-line basis over
approximately four years.
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
-8-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2000
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
$8,601,341 and $8,945,552 on total investments of $493,014,537 and $467,462,930
at March 31, 2000 and December 31, 1999, 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.
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 lending terms, the Company offers loans at higher
loan to value ratios and will be entitled to earn additional interest income
based upon any increase in value of the collateral.
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 EPS for the three months ended March 31, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Three months ended March 31, 2000 March 31, 1999
Per Share Per Share
Income Shares Amount Income Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $4,216 $4,483
Basic EPS
- ---------
Income available to
common shareholders 4,216 14,026,817 $ 0.30 $4,483 14,013,768 $ 0.32
Effect of dilutive 66,923 70,539
stock options
Diluted EPS
- -----------
Income available to
common shareholders 4,216 14,093,740 $ 0.30 $4,483 14,084,307 $ 0.32
</TABLE>
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
-9-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2000
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.
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 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, 2000
and December 31, 1999 and statements of operations for the three months ended
March 31, 2000 and 1999:
Balance Sheet March 31, December 31,
2000 1999
----------- ------------
Cash $ 216,070 $ 189,480
Accounts receivable 2,337,229 3,582,642
Equipment, net 1,814,772 1,683,756
Goodwill 51,682 1,666,091
Other 3,797,010 2,147,534
----------- ------------
Total assets $ 8,216,763 $ 9,269,503
=========== ============
Notes payable to parent $ 903,644 $ 1,750,351
Accounts payable and accrued expenses 536,675 461,196
Other liabilities and income taxes payable 4,057,322 4,350,037
----------- ------------
Total liabilities 5,497,641 6,561,584
Equity 1,001,000 1,001,000
Retained earnings 1,718,122 1,706,919
----------- ------------
Total equity 2,719,122 2,707,919
----------- ------------
Total liabilities and equity $ 8,216,763 $ 9,269,503
=========== ============
-10-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2000
<TABLE>
<CAPTION>
Statements of Operations Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
---- ----
<S> <C> <C>
Advertising revenue $2,276,321 $2,758,040
Cost of services 1,163,103 989,077
---------- ----------
Gross margin 1,113,218 1,768,963
Other operating expenses 1,396,216 1,129,857
---------- ----------
Income before taxes (282,998) 639,106
Income tax benefit (provision) 113,199 (255,642)
---------- ----------
Net (loss) income $ (169,799) $ 383,464
========== ==========
</TABLE>
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. operating 1,300
installed displays in the Baltimore, MD and Washington, D.C. areas. The purchase
was accounted for under the purchase method of accounting. Included in the
purchase price were certain premiums paid totaling approximately $777,000, which
represented goodwill and is being amortized over 15 years.
During fiscal 2000, the Company purchased taxicab rooftop advertising from
its wholly-owned subsidiary Media. The Company paid an average market rate per
top totaling $149,550 for the three months ended March 31, 2000.
(4) Debt
The table below summarizes the various debt agreements outstanding at March
31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Notes payable to banks:
Total facilities $320,000,000 $295,000,000
Maturity of facilities 6/00 - 6/01 6/00-6/01
Total amounts outstanding $175,500,000 $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 6/04 6/04
</TABLE>
Under the revolving credit agreement between MFC and its lenders, as
amended, MFC is required to maintain minimum tangible net assets of $65,000,000
and certain financial
-11-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2000
ratios. The Company believes that MFC was in compliance with such requirements
at March 31, 2000.
On June 1, 1999, MFC issued $22.5 million of senior secured notes (the
Notes) that mature on June 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 revolvers 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 prepay
certain of the Company's outstanding SBA debentures.
On June 1, 1999, MFC extended its $195 million revolving credit facility
until June 30, 2001. On December 31, 1999, MFC increased the aggregate credit
commitment amount to $220 million with an effective date of February 10, 2000.
On June 29, 1999, Medallion Financial increased its revolving credit
facility to $100 million and extended the maturity until June 28, 2000.
(5) Commercial Paper
On March 13, 1998, MFC entered into a commercial paper agreement with
Salomon Smith Barney Inc. 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. On August 3, 1999, MFC entered into
a commercial paper dealer agreement with USBancorp to sell commercial paper
under the same program as Salomon Smith Barney. 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 MFC's Revolver, but may be
terminated by the Company at anytime. As of March 31, 2000, MFC had
approximately $136.7 million outstanding at a weighted average interest rate end
of period of 6.56%.
(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.
-12-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2000
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>
Three months ended March 31, 2000 Taxicab
Lending Advertising Total
---------------------------------------------------------
<S> <C> <C> <C>
Net interest income $ 7,289,502 $ 7,289,502
Depreciation and amortization 218,484 218,484
Income tax benefit (provision) - -
Net increase (decrease) in net assets resulting
from operations* 4,535,314 (319,349) 4,215,965
Segment assets 528,976,450 3,333,144 532,309,594
Capital expenditures 116,643 296,234 **
<CAPTION>
Three months ended 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 **
</TABLE>
* Net income of the taxicab advertising segment excludes $149,550 which
represents intercompany taxi top sales from media to the Company.
** 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.
(7) Subsequent Events
On May 10, 2000, MFC declared a dividend payable to the Company in the
amount of $240 per share payable on May 11, 2000 (aggregating $1,598,160). With
the proceeds of these dividends, on May 10, 2000, the Company declared a
dividend in the amount of $0.35 per share (aggregating $4,910,429) payable on
June 1, 2000 to the shareholders of record on May 22, 2000.
On May 4, 2000, the Company executed an Agreement and Plan of Merger with
Ameritrans Capital Corporation, a specialty finance company, pursuant to which
Ameritrans will merge into and with a wholly-owned subsidiary of the Company.
The merger is subject to the satisfaction of certain customary closing
conditions and the completion of due diligence.
-13-
<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 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 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 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. The income from the
taxicab rooftop advertising business is reflected as earnings from
unconsolidated subsidiary.
In addition, through its subsidiary Medallion Capital, the Company invests
in 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
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<PAGE>
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 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 Loan Portfolio Yield - The Company's investment income is driven
by the principal amount of and yields on its portfolio. To identify trends in
the yields, 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 March 31, 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% 8.88% 316,791,775 64.3%
Commercial Installment Loan Portfolio 11.71% 162,033,462 34.7% 11.86% 173,748,551 35.2%
Equity Investments - 2,336,185 0.5% - 2,474,210 .5%
----- ------------ ----- ----- ----------- -----
Total Portfolio 9.91% $467,462,930 100.0% 9.96% 493,014,536 100.0%
===== ============ ===== ===== =========== =====
</TABLE>
Yield Summary:
The weighted average yields e.o.p./1/. of the Medallion Loan portfolio
decreased 2 basis points to 8.88% at March 31, 2000. The decrease in the average
yield on Medallion Loans was the result of continuing competition in the New
York medallion market partially offset by the Company's expansion into other
medallion markets which produce yields 100 to 300 basis points higher than New
York. At March 31, 2000, 19.8% 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 to originate higher yielding medallion loans
outside the New York market.
The weighted average yields e.o.p. of the Commercial Installment Loan
portfolio increased 15 basis points to 11.86% at March 31, 2000 from 11.71% at
December 31, 1999 due to the impact of increases in the prime rate. 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. The
weighted average yields e.o.p. of the entire portfolio increased 5 basis points
to 9.96% at March 31,2000 as compared to 9.91% at December 31, 1999 due to the
increase in yield of the commercial portfolio.
_______________
/1/ e.o.p. or "end of period," indicates that a calculation is made at the date
indicated rather than for the period then ended.
-15-
<PAGE>
Portfolio Summary:
Medallion Loans constituted 64.3% of the total portfolio of $493.0 million
at March 31, 2000 and 64.8% of the total portfolio of $467.5 million at December
31, 1999. The Medallion Loan portfolio increased by $13.7 million or 4.5%. The
increase is due to growth in the New York and Chicago markets. The Commercial
loan portfolio comprised 35.2%, of the total portfolio at March 31, 2000
compared to 34.7% at December 31, 1999. The Commercial Loan portfolio grew by
$11.7 million or 7.2% due to strong growth in the SBA 7(a) program and asset-
based lending portfolios.
Equity Investments represented 0.5% of the Company's entire portfolio at
both March 31, 2000 and December 31, 1999.
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. As of March 31, 2000, the Company has
repaid the $31.9 million of SBA debentures which had a 7.38% rate of interest
that was to increase to 7.50% at MFC with $45 million of fixed 7.20% long term
notes. 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 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, 2000 and December
31, 1999, short-term LIBOR-based debt including commercial paper constituted
84.9% and 83.7% 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
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<PAGE>
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, 2000 was 6.91% or 66
basis points over the LIBOR Benchmark of 6.25% down from 7.09% or 108 basis
points over the LIBOR Benchmark of 6.01% at December 31, 1999. The decline in
the cost of funds is due to the 42 basis point improvement in the spread paid
over the LIBOR Benchmark partially offset by the 24 basis point increase in 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 ("Displays") that it owns, the occupancy
rate and advertising rate of those Displays. At March 31, 2000, Media had
approximately 7,150 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 September 30,
1999, Media entered into an agreement with Yellow Cab Service Corp. to sell
advertising space on a commission basis on its 3,000 taxicab trunk signs located
throughout the Southeast. Although Media is a wholly-owned subsidiary of the
Company, its results of operations are not consolidated with the Company because
the Securities and Exchange Commission regulations prohibit the consolidation of
non-investment companies with investment companies.
Under the Master Settlement Agreement between tobacco manufacturers and the
Attorneys General of various states (including those states in which the Company
conducts its taxitop advertising business), the tobacco manufacturers agreed to
eliminate general outdoor and transit advertising of tobacco products by March
31, 1999. The loss of such advertising had an initial adverse effect upon the
taxicab rooftop advertising business of the Company. The Company believes,
however, that it has replaced some of the revenue which was lost due to the
elimination of tobacco taxicab rooftop advertising through contracts with new
advertisers from new industry sectors (i.e. internet companies) and expansion
into new markets. The Company believes that it will be able to continue to
replace the tobacco advertising contracts and in the long term this agreement
will not have a significant adverse impact on Media's financial position or
results of operations.
Factors Affecting Net Assets. 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 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
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<PAGE>
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. Therefore, if recent decreases in
prevailing interest rates lead to a trend of lower interest rates, net increase
in net assets resulting from operations could increase. Upon the completion of
the Acquisitions on May 29, 1996, the Company's loan portfolio was recorded on
the balance sheet at fair value, which included $1.5 million of net unrealized
depreciation, as estimated by the Company in accordance with the 1940 Act and
the purchase method of accounting. In connection with the VGI, VGII and Venture
Opportunities portfolio acquisition, the Company recorded the investments on the
balance sheet at fair value, which included $200,000 of net unrealized
depreciation.
Consolidated Results of Operations
For the Three Months Ended March 31, 2000 and 1999.
Performance Summary. For the three months ended March 31, 2000, net
increase in net assets resulting from operations has been positively impacted by
the growth of the loan portfolio, offset by an increase in the average cost of
funds and a decrease in realized gains from the shares of stock held in an
investment.
Investment Income. Investment income increased $4.4 million or 47.1% to
$13.8 million for the three months ended March 31, 2000 from $9.4 million for
the three months ended March 31, 1999. Investment income 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 lending terms,
the Company offers loans at higher loan to value ratios and will be entitled to
earn additional interest income based upon any increase in the value of the
collateral. The increase in investment income reflects the positive impact of
portfolio growth, a higher than usual balance of SBA 7(a) loans not sold,
recovery of non-accrual interest from prior period delinquencies, income related
to the appreciation in collateral values from the new loan product. The average
portfolio outstanding was $477.8 million, for the first quarter of 2000, which
produced interest income of $13.7 million at a weighted average interest rate of
11.37% compared to an average of $380.2 million for the first quarter of 1999,
which produced investment income of $9.3 million at a weighted average interest
rate of 9.77%.
Loan originations net of participations increased by $12.2 million or 24.0%
to $63.4 million for the three month period ended March 31, 2000 compared to
$51.1 million for the three month period ended March 31, 1999. The originations
were offset by prepayments,
-18-
<PAGE>
terminations and refinancings by the Company aggregating $37.7 million in the
first quarter of 2000 compared to $35.3 million in the first quarter of 1999.
The weighted average yield e.o.p. of the entire portfolio increased 8 basis
points to 9.96% at March 31, 2000 from 9.88% at March 31, 1999. The increase in
the yield of the entire loan portfolio was caused by an increase in the average
yield on commercial loans, coupled with an increase in the percentage of the
portfolio composed of higher yielding commercial loans which historically were
originated at a yield of approximately 200 to 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 13
basis points to 8.88% at March 31, 2000 from 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 the lowering of rates due to increased competition. The
average yield of the commercial loan portfolio increased 5 basis points to
11.86% at March 31, 2000 from 11.81% at March 31, 1999. The increase in the
commercial portfolio yield is due in part to the increase in the quantity of
floating rate loans tied to prime as a percentage of the commercial portfolio
and the prime rate increases. 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 which
limited the rise in the yield. However, the shorter maturity dates helps to
mitigate the Company's interest rate risk exposure.
Interest Expense. The Company's interest expense increased $2.3 million or
53.4% to $6.5 million for the three months ended March 31, 2000 from $4.2
million for the three months ended March 31, 1999. The Company's average cost of
funds e.o.p. increased 103 basis points to 6.91% or 66 basis points over the
LIBOR benchmark of 6.25% at March 31, 2000 from 5.88% or 75 basis points over
the LIBOR benchmark of 5.13% at March 31, 1999. The increase in the average cost
of funds e.o.p. results from a 112 basis point increase in the LIBOR benchmark
which was partially offset by a 9 basis point reduction in the premium paid over
LIBOR. Average total borrowings increased $80.9 million or 29.2% from $277.4
million for the three months ended March 31, 1999, which produced an interest
expense of $4.2 million at a weighted average interest rate of 6.11%, to $353.8
million for the three months ended March 31, 2000, which produced an interest
expense of $6.5 million at a weighted average interest rate of 7.26%. 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 as a percentage of total indebtedness was
84.9% and 85.0% at March 31, 2000 and March 31, 1999, respectively.
Net Interest Income. Net interest income increased $2.1 million or 29.5% to
$7.2 million for the three months ended March 31, 2000 from $5.1 million for the
three months ended March 31, 1999. The increase in net interest income is the
result of the 45 basis point or 12.3% increase in the average spread between the
average yield on the portfolio and the average cost of funds to 4.11% for the
three-month period ended March 31, 2000 from 3.66% for the three-month period
ended March 31, 1999.
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<PAGE>
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
decreased approximately $500,000 or 17.5% to $2.3 million in the first quarter
of 2000 compared to $2.8 million in the first quarter of 1999. Display rental
costs increased $174,000 or 17.6% for the quarter. Gross margin was $1.1 million
or 48.9% of advertising revenue for the first quarter of 2000 compared to $1.8
million or 64.1% for the first quarter of 1999. The decrease in gross margin is
partly due to normal industry seasonality post - Christmas and the loss of
tobacco advertising contracts, some of which have not been replaced, which
contributed to a 77.5% occupancy rate in the first quarter of 2000. Further, an
overall cost of sales increase results from an increase in the number of
Displays installed. The number of Displays owned by Media increased
approximately 450 or 6.7% to approximately 7150 at March 31, 2000 from
approximately 6,700 at March 31, 1999. Operating costs increased $266,000 or
23.6% to $1.4 million in the first quarter of 2000 from $1.1 million in the
first quarter of 1999. The increase in operating costs reflects the expansion of
Media's operations into six new markets. The resulting net loss for the first
quarter of 2000 was $170,000 compared to net income of $383,000 in the first
quarter of 1999. 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 7(a) loans in the amount of $686,000 on loans sold
amounting to $13.4 million during the first quarter of 2000 compared to $612,000
on loans sold amounting to $9.0 million during the first quarter of 1999. The
increase of $74,000 is due to an increase in the volume of loans sold offset by
a slight decline in the premiums received from the secondary market. 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 $239,000 or 47.2% to
$745,000 for the three months ended March 31, 2000 from $506,000 for the three
months ended March 31, 1999. Other income was primarily derived from late
charges, prepayment fees and miscellaneous income.
Non-Interest Expenses. The Company's non-interest expenses increased
$824,000 or 22.3% to $4.5 million for the three months ended March 31, 2000 from
$3.7 million for the three months ended March 31, 1999. The increase in salaries
and benefits of $605,000 or 33.4% in the first quarter of 2000 compared to the
first quarter of 1999 is the result of the effect of year-end raises and
salaries of personnel hired since March 31, 1999. Other operating expenses
increased $242,000 or 18.0% as compared to the first quarter of 1999 due to
expenditures related to opening of new offices and expanded operations.
Net Investment Income. Net investment income increased $1.0 million or
32.3% to $4.1 million in the first quarter of 2000 from $3.1 million in the
first quarter of 1999. The increase is attributable to increases in net
investment income offset by an increase in operating expenses and the decline in
earnings of the unconsolidated Media subsidiary.
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<PAGE>
Net Realized Gain on Investments. The Company had a net realized loss of
$113,000 for the three months ended March 31, 2000, a decrease of $918,000 from
net realized gains of $805,000 for the three months ended March 31, 1999. The
realized gains during the first quarter of 2000 reflected the charge-off of loan
losses compared to the realized gains earned on equity investments in the first
quarter of 1999.
Change in Net Unrealized Appreciation (Depreciation). The change in net
unrealized depreciation decreased $335,000 to $270,000 for the three months
ended March 31, 2000 from $605,000 for the three months ended March 31, 1999.
The unrealized depreciation during the first quarter of 2000 resulted from a
$7,000 of net unrealized depreciation from increase of loan loss reserves,
$139,000 unrealized appreciation from charge-offs of loan balances previously
reserved and $138,000 of unrealized appreciation on equity investments held by
the Company.
Net Increase in Net Assets Resulting from Operations. Net increase in net
assets resulting from operations decreased $300,000 or 6.0% to $4.2 million for
the three months ended March 31, 2000 from $4.5 million for the three months
ended March 31, 1999. The decrease was attributable to the positive impact of
portfolio growth, an increase in average spread between average yield and
average cost of funds and offset by an increase in operating expenses, a decline
in earnings from Media and lower realized gains on investments. Return on
average assets and return on average equity for the three months ended March 31,
2000, on an annualized basis, were 3.24% and 11.0%, respectively, compared to
4.2% and 11.9% for the three months ended March 31, 1999.
Asset/Liability Management
Interest Rate Sensitivity. The Company, like other financial institutions,
is subject to interest rate risk to the extent its interest-earning assets
(consisting of Medallion Loans and Commercial Installment Loans) reprice on a
different basis over time in comparison to its interest-bearing liabilities
(consisting primarily of credit facilities with bank syndicates, secured
commercial paper and subordinated SBA debentures).
A relative measure of interest rate risk can be derived from the Company's
interest rate sensitivity gap. The interest rate sensitivity gap represents the
difference between interest-earning assets and interest-bearing liabilities,
which mature and/or reprice within specified intervals of time. The gap is
considered to be positive when repriceable assets exceed repriceable liabilities
and negative when the inverse situation exists. A relative measure of interest
rate sensitivity is provided by the cumulative difference between interest
sensitive assets and interest sensitive liabilities for a given time interval
expressed as a percentage of total assets.
Having interest-bearing liabilities that mature or reprice more frequently
on average than assets may be beneficial in times of declining interest rates,
although such an asset/liability 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
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<PAGE>
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>
$20,000,000 6.5% 4/9/98 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 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 million of senior secured notes at a fixed
interest rate of 7.20% and SBA debentures in the principal amount of $10.5
million with a weighted average rate of interest of 7.12%. At March 31, 2000,
these notes and debentures constituted 12.2% and 2.9% 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.
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<PAGE>
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 and prepayments and a
secured commercial paper program with Salomon Smith Barney and USBancorp. 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 March 31, 2000, the Company's $367.7 million of
outstanding debt was comprised as follows: 47.7% bank debt, substantially all of
which was at variable effective rates of interest with an weighted average
interest rate of 7.89% or 174 below the Prime Rate, 37.2% secured commercial
paper with an annual weighted average interest rate of 6.53% or 254 below the
Prime Rate, 12.2% long-term senior secured notes fixed at an interest rate of
7.2% and 2.9% subordinated SBA debentures, with fixed rates of interest with an
annual weighted average rate of 7.12%. 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 $6.6 million of debt was
available at March 31, 2000 at variable effective rates of interest averaging
below the Prime Rate under the Company's $320.0 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 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 March 31, 2000:
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<TABLE>
<CAPTION>
Medallion
Financial MFC BLLC MCC MBC Total
----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash $ 2,213 $ 2,468 $ 194 $ 2,233 $ 1,333 $ 8,441
Revolving lines of credit 100,000 220,000(1) -- -- 320,000
Amounts available 500 6,133 -- -- 6,633
Amounts outstanding 99,500 76,000 -- -- 175,500
Average interest rate 7.09% 7.10% -- -- 7.09%
Maturity 7/00 7/01 -- -- 7/00-7/01
Commercial paper
Amounts outstanding -- 136,657 -- -- 136,657
Average interest rate -- 6.56% -- -- 6.56%
Maturity -- 6/01 -- -- 6/01
SBA debentures
Amounts outstanding -- -- -- 10,500 10,500
Average interest rate -- -- -- 7.08% 7.08%
Maturity -- -- -- 3/06-6/07 3/06-6/07
Senior secured notes
Amounts outstanding -- 45,000 -- -- 45,000
Average interest rate -- 7.20% -- -- 7.20%
Maturity -- 6/04 -- -- 6/04
Total cash and remaining amounts
available under credit facilities 2,713 8,601 194 2,233 1,333 15,074
Total debt outstanding $ 99,500 $257,657 $ - $ 10,500 $ - $ 367,657
</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.
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 and has consistently reduced its reliance on such
funding. On June 1, 1999, the Company issued $22.5 million of senior secured
notes (the Notes) that mature on June 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 March 31, 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.
-24-
<PAGE>
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
in the short-term. The Company is exploring several options to increase its
available funds in order to meet the Company's growth and expansion strategy.
Investment Considerations
The following are certain of the factors which could affect the Company's
future results. They should be considered in connection with evaluating
forward-looking statements contained in this Management's Discussion and
Analysis and elsewhere in this Report and otherwise made by or on behalf of the
Company since these factors, among others, could cause actual results and
conditions to differ materially from those projected in these forward-looking
statements.
Interest Rate Spread. The Company's net interest income is largely
dependent upon achieving a positive interest rate spread and other factors.
Leverage. The Company's use of leverage poses certain risks for holders of
the Common Stock, including the possibility of higher volatility of both the net
asset value of the Company and the market price of the Common Stock and,
therefore, an increase in the speculative character of the Common Stock.
Availability of Funds. The Company has a continuing need for capital to
finance its lending activities. The Company funds its operations through credit
facilities with bank syndicates and, to a lesser degree, through subordinated
SBA debentures. Reductions in the availability of funds from banks and under
SBA programs on terms favorable to the Company could have a material adverse
effect on the Company. Because the Company distributes to its shareholders at
least 90% of its investment company taxable income, such earnings are not
available to fund loan originations.
Industry and Geographic Concentration. A substantial portion of the
Company's revenue is derived from operations in New York City and these
operations are substantially focused in the area of financing New York City
taxicab medallions and related assets. There can be no assurance that an
economic downturn in New York City in general, or in the New York City taxicab
industry in particular, would not have an adverse impact on the Company.
-25-
<PAGE>
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 Freshstart and Medallion
On December 22, 1999, the Company entered into an Agreement and Plan of
Merger with Freshstart Venture Capital Corp., a specialty finance company,
located in Long Island City, New York. The closing of the transaction is subject
to the approval of the shareholders of Freshstart, regulatory approval and the
satisfaction of customary conditions. The realization of certain benefits
anticipated as a result of the merger will depend in part on the integration of
Freshstart's investment portfolio and specialty finance business with the
Company and the successful inclusion of Freshstart'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 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.
Year 2000. The Year 2000 problem 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 included 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 completed these installations as of December 31, 1999. The Company received
Year 2000 compliance letters from each of its major software vendors and its
major office systems vendors.
The Company estimates that the total cost involved in the Year 2000 project
was approximately $30,000. This excludes the costs related to new loan servicing
software and update of the general ledger system.
Management believes that the Company did not suffer any material effects
relating to the Year 2000. Management further believes its third party vendors
were Year 2000
-26-
<PAGE>
compliant and the Company not been informed of any material problems with its
third party vendors relating to Year 2000 problem.
-27-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Medallion Financial Corp. Financial Data Schedule. Filed herewith.
-28-
<PAGE>
MEDALLION FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDALLION FINANCIAL CORP.
Date: May 15, 2000 By: /s/ Daniel F. Baker
------------------------------------------
Daniel F. Baker
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial and accounting officer
-29-
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