<PAGE>
================================================================================
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 June 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,
August 9, 2000:
Class Outstanding Par Value Shares Outstanding
----------------- --------- ------------------
Common Stock................................ $.01...............14,043,434
================================================================================
-1-
<PAGE>
MEDALLION FINANCIAL CORP.
FORM 10-Q
June 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information
Item 1. Basis of Preparation ........................................................................ 3
Medallion Financial Corp. Consolidated Balance Sheets
at June 30, 2000 and December 31, 1999.............................................. 4
Medallion Financial Corp. Consolidated Statements of Operations
for the three and six months ended June 30, 2000 and 1999........................... 5
Medallion Financial Corp. Consolidated Statements of Cash
Flows for the six months ended June 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 ................................................................... 14
General................................................................................. 14
Consolidated Results of Operations (for the three months
ended June 30, 2000 and 1999)....................................................... 19
Consolidated Results of Operations (for the six months
ended June 30, 2000 and 1999)....................................................... 22
Asset/Liability Management.............................................................. 25
Liquidity and Capital Resources......................................................... 27
Investment Considerations............................................................... 29
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................. 31
SIGNATURES ............................................................................................. 32
</TABLE>
-2-
<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 June
30, 2000 and December 31, 1999 and the related statements of operations for the
three and six months ended June 30, 2000 and 1999 and cash flows for the six
months ended June 30, 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 and six months ended June 30, 2000 and 1999.
The consolidated balance sheet of the Company as of June 30, 2000, the
related statements of operations and for the three and six months ended June 30,
2000 and cash flows for the six months ended June 30, 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 and
six months ended June 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-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------------------
<S> <C> <C>
ASSETS (unaudited)
Investments:
Medallion loans $296,077,285 $303,093,283
Commercial installment loans 193,147,434 162,033,462
Equity investments 2,677,595 2,336,185
------------ ------------
Net investments 491,902,314 467,462,930
Investment in and loans to unconsolidated subsidiary 4,152,647 4,349,651
------------ ------------
Total investments 496,054,961 471,812,581
Cash 8,053,188 5,961,776
Accrued interest receivable 7,701,960 4,887,142
Receivable from sale of loans 4,700,660 10,563,503
Servicing fee receivable 6,601,442 4,878,783
Fixed assets, net 2,153,340 2,378,686
Goodwill, net 5,915,099 6,180,151
Other assets, net 3,568,756 2,949,906
------------ ------------
Total assets $534,749,406 $509,612,528
============ ============
LIABILITIES
Accounts payable and accrued expenses $ 8,243,703 $ 9,318,480
Dividends payable -- 5,609,773
Accrued interest payable 1,907,967 3,711,199
Notes payable to banks 177,650,000 190,450,000
Senior secured notes 45,000,000
45,000,000
Commercial paper 137,077,731 93,983,792
SBA debentures payable 10,500,000 10,500,000
------------ ------------
Total liabilities $380,379,401 $358,573,244
Negative goodwill, net -- 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 valu-- stock authorized
14,043,434 and 14,024,433 shares outstanding at June 30, 2000 and December
31, 1999, respectively) 140,434 140,245
Capital in excess of par value 142,201,682 142,015,875
Accumulated undistributed net investment income 12,027,889 8,532,648
------------ ------------
Total shareholders' equity 154,370,005 150,688,768
------------ ------------
Total liabilities and shareholders' equity $534,749,406 $509,612,528
============ ============
Number of common shares and common share equivalents 14,097,802 14,129,210
Net asset value per share $ 10.95 $ 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 Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Investment income:
Interest and dividend income on investments $ 13,177,487 $ 10,774,938 $ 26,901,057 $ 20,056,692
Interest income on short-term investments 55,236 59,929 125,173 158,049
------------- ------------- ------------- -------------
Total investment income 13,232,723 10,834,867 27,026,230 20,214,741
Interest expense:
Notes payable to banks 3,402,068 1,891,449 6,616,134 3,810,279
Commercial paper 2,223,077 1,845,311 4,504,236 3,406,658
SBA debentures 185,266 687,108 372,181 1,445,413
Notes payable LT 821,865 138,955 1,643,730 138,955
------------- ------------- ------------- -------------
Total interest expense 6,632,276 4,562,823 13,136,281 8,801,305
Net interest income 6,600,447 6,272,044 13,889,949 11,413,436
Non-interest income:
Equity in earnings (losses) of
unconsolidated subsidiary 146,865 (82,992) (172,484) 300,472
Accretion of negative goodwill 169,916 180,600 350,516 361,200
Gain on sale of loans 818,198 831,278 1,504,296 1,443,524
Other income 961,825 586,444 1,707,568 1,093,056
------------- ------------- ------------- -------------
Total non-interest income 2,096,804 1,515,330 3,389,896 3,198,252
Expenses:
Administrative and advisory fees 42,659 63,228 104,200 124,988
Professional fees 407,337 523,963 733,309 844,103
Salaries and benefits 2,377,678 2,454,354 4,792,302 4,264,387
Rent expense 268,603 203,146 504,819 393,185
Other operating expenses 1,392,796 1,017,508 2,741,810 2,170,721
Amortization of goodwill 105,357 147,460 241,935 312,011
Prepayment penalty on SBA bond -- 77,272 -- 77,272
------------- ------------- ------------- -------------
Total expenses 4,594,430 4,486,931 9,118,375 8,186,667
Net investment income 4,102,821 3,300,443 8,161,470 6,425,021
Net realized gains (losses) on investments (1,063,151) (168,988) (1,175,862) 635,834
Change in unrealized appreciation, net 1,089,357 1,985,691 1,359,384 2,590,985
Income tax benefit (provision) 60,679 (10,857) 60,679 (62,313)
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations $ 4,189,706 $ 5,106,289 $ 8,405,671 $ 9,589,527
============= ============= ============= =============
Net increase in net assets resulting from
operations per common share
Basic $ 0.30 $ 0.36 $ 0.60 $ 0.68
Diluted $ 0.30 $ 0.36 $ 0.60 $ 0.68
Weighted average common shares outstanding:
Basic Average Shares 14,035,773 14,016,749 14,031,270 14,015,258
Diluted Average Shares 14,084,057 14,096,024 14,085,639 14,086,606
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-5-
<PAGE>
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operation 8,405,671 9,589,527
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Depreciation and amortization 412,232 264,950
Amortization of goodwill 241,935 312,011
Amortization of origination costs 563,404 368,219
Accretion of negative goodwill (350,516) (361,200)
Increase in unrealized appreciation (1,359,384) (2,590,985)
Net realized loss on investments 1,175,862 (635,834)
Decrease (Increase) in equity in earnings of unconsolidated subsidiary 172,484 (300,472)
Increase in accrued interest receivable (2,814,818) (532,543)
Decrease in receivable from sale of loans 5,862,843 4,000,820
Increase in servicing fee receivable (1,722,659) (203,956)
Decrease (Increase) in other assets (558,928) 328,161
Increase (Decrease) in accounts payable and accrued expenses (1,074,777) 1,024,742
Increase (Decrease) in accrued interest payable (1,803,232) 688,102
------------ ------------
Net cash provided by operating activities 7,150,117 11,951,542
============ ============
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of investments (118,805,217) (126,984,560)
Proceeds from sales and maturities of investments 93,985,949 82,477,763
Investment in and loans to unconsolidated subsidiary, net 24,520 1,389,605
Capital expenditures (223,689) (481,549)
----------- ------------
Net cash used for investing activities (25,018,437) (43,598,741)
=========== ============
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable to banks, net (12,800,000) (2,650,000)
Proceeds from private placement debt 22,500,000
Proceeds from issuance of commercial paper 43,093,939 34,102,560
Repayment of notes payable to the SBA (11,780,000)
Proceeds from exercise of stock options 185,996 35,999
Payment of declared dividends to current stockholders (10,520,203) (8,691,151)
------------ ------------
Net cash provided by financing activities 19,959,732 33,517,408
============ ============
NET INCREASE IN CASH 2,091,412 1,870,209
CASH beginning of period 5,961,776 6,426,985
CASH end of period 8,053,188 8,297,194
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest 14,939,513 5,250,925
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-6-
<PAGE>
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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). 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 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.
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
June 30, 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. As of June 30, 2000,
the Company has capitalized approximately $225,000 of professional fees related
to the transaction that will be expensed as a one-time charge when the
transaction is closed.
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 wholly owned subsidiary
of the Company. The shareholders of Ameritrans will receive common stock of the
company having a fair value between $9.64 to $9.89 for each share of Ameritrans
common stock. The merger is subject to the approval of the shareholders of
Ameritrans, the satisfaction of certain customary closing conditions, regulatory
approval and the completion of due diligence. As of June 30, 2000, the Company
capitalized approximately $133,000 of professional fees related to the
transaction that will be expensed as a one-time change upon closing the
transaction.
8
<PAGE>
(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 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 $7,355,110 and $8,950,995 on
total investments of $491,902,314 and $467,462,930 at June 30, 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 medallion 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.
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 and six months ended June 30, 2000 and 1999
are as follows:
9
<PAGE>
(Dollars in thousands, except per share amounts)
Three months ended June 30, 2000 June 30, 2000
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 4,190 $ 5,106
Basic EPS
---------
Income available to
common shareholders $ 4,190 14,035,773 $ 0.30 $ 5,106 14,016,749 $ 0.36
Effect of dilutive stock 48,284 79,275
options
Diluted EPS
-----------
Income available to
common shareholders $ 4,190 14,084,057 $ 0.30 $ 5,106 14,096,024 $ 0.36
(Dollars in thousands, except per share amounts)
Six months ended June 30, 2000 June 30, 1999
----------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------------------------------------------------
Net Income $ 8,406 $ 9,590
Basic EPS
---------
Income available to
common shareholders $ 8,406 14,031,270 $ 0.60 $ 9,590 14,015,258 $ 0.68
Effect of dilutive stock
options 54,369 71,348
Diluted EPS
-----------
Income available to
common shareholders $ 8,406 14,085,639 $ 0.60 $ 9,590 14,086,606 $ 0.68
</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 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
<PAGE>
balance sheets as of June 30, 2000 and December 31, 1999 and statements of
operations for the three and six months ended June 30, 2000 and 1999:
Balance Sheets June 30, December 31,
2000 1999
---- ----
Cash $ 556,898 $ 189,480
Accounts receivable 2,365,169 3,582,642
Equipment, net 1,970,168 1,683,756
Goodwill 1,629,981 1,666,091
Other 2,298,884 2,147,534
---------- ----------
Total assets $8,821,100 $9,269,503
========== ==========
Notes payable to parent $1,536,982 $1,750,351
Accounts payable and accrued expenses 360,569 461,196
Other liabilities and income taxes payable 4,018,262 4,350,037
---------- ----------
Total liabilities 5,915,813 6,561,584
Equity 1,001,000 1,001,000
Retained earnings 1,904,287 1,706,919
---------- ----------
Total equity 2,905,287 2,707,919
---------- ----------
Total liabilities and equity $8,821,100 $9,269,503
=========== ==========
<TABLE>
<CAPTION>
Statements of Operations Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advertising revenue $ 2,937,131 $ 2,057,110 $ 5,213,452 $ 4,815,150
Cost of service 1,260,119 1,046,708 2,423,222 2,035,785
-------------- -------------- --------------- ---------------
Gross margin 1,677,012 1,010,402 2,790,230 2,779,365
Other operating expenses 1,366,737 1,186,894 2,762,953 2,316,751
-------------- -------------- --------------- ---------------
Income (loss) before taxes 310,275 (176,492) 27,277 462,614
Income tax benefit (provision) (124,110) 93,500 (10,911) (162,142)
-------------- -------------- --------------- ---------------
Net income (loss) $ 186,165 $ (82,992) $ 16,366 $ 300,472
============== ============== =============== ===============
</TABLE>
On February 2, 1999, Me ia 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
-11-
<PAGE>
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 $39,300 and $188,850 for the three and six months ended June
30, 2000, respectively.
(4) Debt
The table below summarizes the various debt agreements outstanding at
June 30, 2000 and December 31, 1999:
June 30, 2000 December 31, 1999
------------- -----------------
Notes payable to banks:
Total facilities $ 320,000,000 $ 295,000,000
Maturity of facilities 9/00 - 6/01 6/00-6/01
Total amounts outstanding $ 177,650,000 $ 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
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 ratios. The Company believes that MFC was in compliance
with such requirements at June 30, 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 (the "Revolver") 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 (the "Revolver") to $100 million and extended the maturity until June
28, 2000. The credit facility maturity was further extended to September 24,
2000 which included a 15 basis point increase in the interest rate.
-12-
<PAGE>
(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. On June 30, 2000, Credit Suisse
First Boston was added as a commercial paper dealer under the same program.
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 June 30, 2000, MFC had approximately $137.1 million outstanding at a
weighted average interest rate of 7.07%.
(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.
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>
Six months ended June 30, 2000 Taxicab
Lending Advertising Total
----------------------------------------------------------
<S> <C> <C> <C>
Net interest income $ 13,889,949 $ 13,889,949
Depreciation and amortization 412,232 412,232
Income tax benefit 60,679 60,679
Net increase (decrease) in net assets resulting from
operations(1) 8,389,305 (172,484) 8,216,821
Segment assets 530,596,759 4,152,647 534,749,406
Capital expenditures 223,689 303,891 (2)
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999 Taxicab
Lending Advertising Total
----------------------------------------------------------
<S> <C> <C> <C>
Net interest income $ 11,413,436 $ 11,413,436
Depreciation and amortization 264,950 264,950
Income tax benefit (provision) (62,313) (62,313)
Net increase in net assets resulting from operations 9,289,055 300,472 9,589,527
Segment assets 461,363,089 3,944,528 465,307,617
Capital expenditures 481,549 189,008 (2)
</TABLE>
13
<PAGE>
(1) Net income of the taxicab advertising segment excludes $188,850 which
represents intercompany taxi top sales from media to the Company.
(2) 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 August 9, 2000, MFC declared a dividend payable to the Company in the
amount of $325 per share payable on August 10, 2000 (aggregating $2,164,175).
Additionally, on August 9, 2000, the Company declared a dividend in the amount
of $0.36 per share (aggregating $5,055,636) payable on September 5, 2000 to the
shareholders of record on August 25, 2000.
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 June 30, 2000, Firestone had assets of
approximately $90 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 in the fourth quarter of 2000 at an approximate
price of $15.5 million.
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
14
<PAGE>
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 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:
15
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 June 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% 9.07% 296,077,284 60.2%
Commercial Installment Loan Portfolio 11.71% 162,033,462 34.7% 12.34% 193,147,434 39.3%
Equity Investments - 2,336,185 0.5% - 2,677,596 10.5%
------ ------------ ----- ------ ----------- -----
Total Portfolio 9.91% $467,462,930 100.0% 10.38% 491,902,314 100.0%
====== ============ ===== ====== =========== =====
</TABLE>
Yield Summary:
The weighted average yields e.o.p.1. of the Medallion Loan portfolio
increased 17 basis points to 9.07% at June 30, 2000. The increase 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 200 to 300 basis points higher than New
York. At June 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 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 63 basis points to 12.34% at June 30, 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 47 basis points
to 10.38% at June 30, 2000 as compared to 9.91% at December 31, 1999 due to the
increase in yield of the commercial portfolio and the shift mix of the portfolio
to commercial loans.
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 will be entitled to earn additional interest
income (the "Additional Interest") based upon any increase in the value of the
collateral. Additional Interest totaled approximately $625,000 and $2.3 million
for the three and six months ended June 30, 2000, respectively, and is included
in investment income on the consolidated statements of operations and in accrued
interest receivable on the consolidated balance sheet as of June 30, 2000. As a
Regulated Investment Company, the Company is required to mark-to-market these
investments on a quarterly basis just as it does on all of its other
investments. The Company feel that it is adequately reserved on these
investments and relies upon such factual information as recent and historical
medallion prices.
Portfolio Summary:
Medallion Loans constituted 60.2% of the total portfolio of $491.9
million at June 30, 2000 and 64.8% of the total portfolio of $467.5 million at
December 31, 1999. The Medallion Loan portfolio decreased by $7.0 million or
2.3%. The decrease is due to growth in the Chicago market offset by a decrease
in the New York market which is due in part to participation agreements the
Company entered into with third parties on low yield New York medallion loans.
The Company retains a portion of these loans and earns a fee for servicing the
loans for the third parties. The Commercial loan portfolio comprised 39.3% of
the total portfolio at June 30, 2000 compared to 34.7% at December 31, 1999. The
Commercial Loan portfolio grew by $31.1 million or 19.2% due to strong growth in
the SBA 7(a) program and asset-based lending portfolios.
_____________________
/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.
16
<PAGE>
Equity Investments represented 0.5% of the Company's entire portfolio at
both June 30, 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. During 1999, 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% with proceeds from $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 June 30, 2000 and December
31, 1999, short-term LIBOR-based debt including commercial paper constituted
85.0% 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 reflects fluctuations in LIBOR to a greater degree than in the
past because LIBOR-based debt has come to represent a greater proportion of the
Company's debt. The Company measures its cost of funds as its aggregate interest
expense for all of its interest-bearing liabilities divided by the face amount
of such liabilities. The Company analyzes its cost of funds in relation to the
average of the 90- and 180-day LIBOR (the "LIBOR Benchmark"). The Company's
average cost of funds e.o.p. at June 30, 2000 was 7.44% or 77 basis points over
the LIBOR Benchmark of 6.67% 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 31 basis point improvement in the spread paid over the LIBOR
Benchmark partially offset by the 66 basis point increase in the LIBOR
Benchmark.
17
<PAGE>
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 June 30, 2000, Media had
approximately 7,800 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. 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.
On September 30, 1999, Media entered into an agreement with Yellow Cab
Service Corp., the taxi division of Coach USA, to sell advertising space on a
commission basis on its 3,000 taxicab trunk signs located throughout the
Southeast.
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.
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.
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
reflect the Company's estimate of the current value of the loan portfolio. Since
no ready
18
<PAGE>
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 June 30, 2000 and 1999.
Performance Summary. For the three months ended June 30, 2000, net
increase in net assets resulting from operations has been positively impacted by
the increase in the average spread between the average yield on the portfolio
and the average cost of funds, an increase in the yield of the portfolio, offset
by an increase in operating expenses and a decrease in realized gains from the
shares of stock held in an investment.
Investment Income. Investment income increased $2.4 million or 22.2% to
$13.2 million for the three months ended June 30, 2000 from $10.8 million for
the three months ended June 30, 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 medallion 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 balance of SBA 7 (a) loans not sold,
recovery of non-accrual interest from prior period delinquencies and income
related to the appreciation in collateral values from the new loan product. The
average portfolio outstanding was $489.9 million, for the second quarter of
2000, which produced interest income of $13.2 million at a weighted average
interest rate of 10.76% compared to an average of $400.6 million for the second
quarter of 1999, which produced investment income of $10.8 million at a weighted
average interest rate of 10.78%.
Loan originations net of participations increased by $38.3 million or
224.0% to $55.4 million for the three month period ended June 30, 2000 compared
to $17.1 million for the three month period ended June 30, 1999. The
originations were offset by prepayments, terminations
19
<PAGE>
and refinancings by the Company aggregating $56.3 million in the second quarter
of 2000 compared to $47.0 million in the second quarter of 1999.
The weighted average yield e.o.p. of the entire portfolio increased 43
basis points to 10.38% at June 30, 2000 from 9.95% at June 30, 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 weighted average yield e.o.p. of the medallion loan
portfolio increased 6 basis points to 9.07% at June 30, 2000 from 9.01% at June
30, 1999. The increase in the average yield on medallion loans was caused by the
origination of higher yielding loans for medallions outside New York which
average 200 to 300 basis points higher than New York medallion loans. The
weighted average yield of the commercial loan portfolio increased 60 basis
points to 12.34% at June 30, 2000 from 11.74% at June 30, 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 $2.1 million
or 45.7% to $6.6 million for the three months ended June 30, 2000 from $4.6
million for the three months ended June 30, 1999. The Company's average cost of
funds e.o.p. increased 123 basis points to 7.44% or 77 basis points over the
LIBOR benchmark of 6.67% at June 30, 2000 from 6.21% or 107 basis points over
the LIBOR benchmark of 5.14% at June 30, 1999. The increase in the average cost
of funds e.o.p. results from a 153 basis point increase in the LIBOR benchmark
which was partially offset by a 30 basis point reduction in the premium paid
over LIBOR. Average total borrowings increased $79.1 million or 27.3% from
$289.8 million for the three months ended June 30, 1999, which produced an
interest expense of $4.6 million at a weighted average interest rate of 6.30%,
to $368.9 million for the three months ended June 30, 2000, which produced an
interest expense of $6.6 million at a weighted average interest rate of 7.19%.
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
85.0% and 83.7% at June 30, 2000 and June 30, 1999, respectively.
Net Interest Income. Net interest income increased $328,000 or 5.2% to
$6.6 million for the three months ended June 30, 2000 from $6.3 million for the
three months ended June 30, 1999. The increase in net interest income is the
result of higher interest income from portfolio growth off-set by the 90 basis
point or 20.1% decrease in the average spread between the average yield on the
portfolio and the average cost of funds to 3.57% for the three-month period
ended June 30, 2000 from 4.48% for the three-month period ended June 30, 1999.
20
<PAGE>
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased approximately $880,000 or 41.9% to $2.9 million in the second quarter
of 2000 compared to $2.1 million in the second quarter of 1999. Display rental
costs increased $213,000 or 20.4% for the quarter. Gross margin was $1.7 million
or 57.1% of advertising revenue for the second quarter of 2000 compared to $1.0
million or 49.1% for the second quarter of 1999. The increase in gross margin is
due to an increase in average sales price per top and higher occupancy. 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 900 or 13.0% to approximately 7,800 at June 30, 2000 from
approximately 6,900 at June 30, 1999. Operating costs increased $180,000 or
15.0% to $1.4 million in the second quarter of 2000 from $1.2 million in the
second quarter of 1999. The increase in operating costs reflects the expansion
of Media's operations into six new markets. The resulting net income for the
second quarter of 2000 was $186,165 compared to net loss of $83,000 in the
second 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 $818,000 on loans sold
amounting to $17.8 million during the second quarter of 2000 compared to
$831,000 on loans sold amounting to $13.5 million during the second quarter of
1999. The net decline in income of $13,000 is due to a decrease in the average
premium earned on sales to the secondary market.
Other Income. The Company's other income increased $376,000 or 64.2% to
$962,000 for the three months ended June 30, 2000 from $586,000 for the three
months ended June 30, 1999. Other income is primarily derived from late charges,
prepayment fees, accretion of discount of premium on loans sold to the secondary
market and miscellaneous income. Prepayment fees are heavily influenced by the
level and volatility of interest rates and competition. The Company experienced
a higher than usual volume of 7(a) loan payments during the period.
Non-Interest Expenses. The Company's non-interest expenses increased
$108,000 or 2.4% to $4.6 million for the three months ended June 30, 2000 from
$4.5 million for the three months ended June 30, 1999. Salaries and benefits
were lower period over period and professional fees decreased by $117,000. Other
operating expenses increased by $375,000 to $1.4 million primarily reflecting
costs related to the conversion of the Company's loan processing system.
Net Investment Income. Net investment income increased $802,000 or 24.3% to
$4.1 million in the second quarter of 2000 from $3.3 million in the second
quarter of 1999. The increase is attributable to increases in net interest
income and higher earnings of the unconsolidated Media subsidiary partially
offset by higher operating expenses.
Net Realized Loss on Investments. The Company had a net realized loss of
$1.1 million for the three months ended June 30, 2000, an increase of $894,000
from net realized losses of $169,000 for the three months ended June 30, 1999.
The realized losses during the second
21
<PAGE>
quarter of 2000 reflected the charge-off of loan losses compared to the realized
gains earned on equity investments in 1999.
Change in Net Unrealized Appreciation (Depreciation). The change in net
unrealized appreciation decreased $896,000 to $1.1 million for the three months
ended June 30, 2000 from $2.0 million for the three months ended June 30, 1999.
The unrealized appreciation during the second quarter of 2000 results from a
$120,000 of net unrealized appreciation from decrease of loan loss reserves,
$770,000 unrealized appreciation from charge-offs of loan balances previously
reserved and $200,000 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 $917,000 or 18.0% to $4.2 million for
the three months ended June 30, 2000 from $5.1 million for the three months
ended June 30, 1999. The decrease was attributable to an increase in the average
cost of funds, higher interest expense, and lower realized gains on investments,
partially offset by an increase in the portfolio average yield, an increase in
earnings from Media and higher non-interest income. Return on average assets and
return on average equity for the three months ended June 30, 2000, on an
annualized basis, were 3.14% and 10.84%, respectively, compared to 4.5% and
13.9% for the three months ended June 30, 1999.
Consolidated Results of Operations
For the Six Months Ended June 30, 2000 and 1999.
Performance Summary. For the six months ended June 30, 2000, net increase
in net assets resulting from operations has been positively impacted by the
growth of the loan portfolio, a increase in the spread of average yield over
average cost of funds and offset by an increase in operating expenses.
Investment Income. Investment income increased $6.8 million or 33.7% from
$20.2 million for the six months ended June 30, 1999 to $27.0 million for the
six months ended June 30, 2000. 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 medallion 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 Company's investment income reflects the positive impact
of portfolio growth and an increase in weighted average yield during the six
months ended June 30, 2000. Total portfolio growth was $24.4 million or 5.2%
from $467.5 million at December 31, 1999 to $491.9 million at June 30, 2000. The
average portfolio outstanding was $477.2 million for the six month period ended
June 30, 2000, which produced interest income of $26.9 million at a weighted
average interest rate of 11.3% compared to an average of $392.9 million for the
six-month period ended June 30, 1999, which produced investment income of $20.1
million at a weighted average interest rate of 10.2%.
22
<PAGE>
Loan originations net of participations decreased by $8.2 million or
6.5% from $127.0 million for the six-month period ended June 30, 1999 to $118.8
million for the six-month period ended June 30, 2000. Not included in
originations for the six months ended June 30, 1999 are purchases of $16.9
million of loans acquired from VGI, VGII and Venture Opportunities Corp. The
originations were offset by prepayments, terminations and refinancings by the
Company aggregating $82.5 million for the six month period ended June 30, 1999
compared to $94.0 million for the six month period ended June 30, 2000.
Weighted average yield e.o.p. of the entire portfolio increased 43
basis points from 9.95% at June 30, 1999 to 10.38% at June 30, 2000. The
increase in the yield of the entire loan portfolio was caused by an increase in
the average yield on Commercial Installment Loans bolstered by an increase in
the percentage of the portfolio composed of higher yielding Commercial
Installment Loans which historically have been originated at a yield of
approximately 300 basis points higher than Medallion Loans and 250 to 400 basis
points higher than the prevailing Prime Rate The weighted average yield e.o.p.
of the medallion loan portfolio increased 6 basis points to 9.07% at June 30,
2000 from 9.01% at June 30, 1999. The increase in the average yield on medallion
loans was caused by the origination of higher yield medallion loans for
medallions outside New York which have average yields 200 to 300 basis points
higher than New York medallion loans. The average yield of the Commercial
Installment Loan portfolio increased 60 basis points from 11.74% at June 30,
1999 to 12.34% at June 30, 2000. The increase in the commercial portfolio yield
is the result of the increase in the prime rate and the increase in the number
of loans tied to prime. This shifts the average yield on commercial yields
higher and helped mitigate the interest expense rate exposure on the Company's
variable rate debt. The percentage of the portfolio composed of Commercial
Installment Loans increased from 32.0% at June 30, 1999 to 39.3% at June 30,
2000. The Company continues to pursue a shift in its portfolio mix towards
higher yielding Commercial Installment Loans.
Interest Expense. The Company's interest expense increased $4.3 million
or 48.3% from $8.8 million for the six months ended June 30, 1999 to $13.1
million for the six months ended June 30, 2000. The Company's average cost of
funds e.o.p. increased 123 basis points from 6.21% or 107 basis points over the
LIBOR benchmark of 5.14% at June 30, 1999 to 7.44% or 77 basis points over the
LIBOR benchmark of 6.67% at June 30, 2000. The increase in the average cost of
funds e.o.p. was caused by a 153 basis point increase in the LIBOR benchmark
partially offset by the 30 basis point reduction in the premium over LIBOR paid
by the Company. Average total borrowings increased $91.8 million or 34.1% from
$269.6 million for the six months ended June 30, 1999, which produced an
interest expense of $8.8 million at a weighted average interest rate of 6.53% to
$361.4 million for the six months ended June 30, 2000 which produced an interest
expense of $13.1 million at a weighted average interest rate of 7.27%. 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 which includes secured commercial paper increased as a
percentage of total indebtedness from 82.7% at June 30, 1999 to 85.0% at June
30, 2000.
23
<PAGE>
Net Interest Income. Net interest income increased $2.5 million or
21.9% from $11.4 million for the six months ended June 30, 1999 to $13.9 million
for the six months ended June 30, 2000. Net interest income reflects the
positive impact of the portfolio growth during the six months ended June 30,
2000 coupled with an increase in the spread between average yield and average
cost of funds. The average spread between the average yield on the portfolio and
the average cost of funds increased 36 basis points or 9.9% from 4.03% for the
six-month period ended June 30, 1999 to 3.67% for the six-month period ended
June 30, 2000.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $400,000 or 8.3% from $4.8 million for the six months ended
June 30, 1999 to $5.2 million for the six months ended June 30, 2000. Display
rental costs increased $400,000 or 20.0% from $2.0 million for the six months
ended June 30, 1999 to $2.4 million for the six months ended June 30, 2000. This
resulted in a gross margin of approximately $2.8 million or 57.7% of advertising
revenue for the six months ended June 30, 1999 compared to $2.8 million or 53.5%
for the six months ended June 30, 2000. The increase in advertising revenue and
display rental cost is directly related to the increase in the number of
Displays owned by Media and an increase in occupancy. The number of Displays
owned by Media increased 13.0% from 6,900 at June 30, 1999 to 7,800 at June 30,
2000. Operating costs increased $450,000 or 19.6% from $2.3 million for the six
months ended June 30, 1999 to $2.8 million for the six months ended June 30,
2000. The increase in operating costs is a reflection of the expansion of
Media's operations. Income tax expense amounted to $11,000 for the six months
ended June 30, 2000. Media generated net income of $342,000 for the six month
period ended June 30, 1999 compared to net income of $16,000 for the six month
period ended June 30, 2000. The decrease in net income is primarily the result
of a decrease in gross margin and an increase in operating expenses. Net income
is recorded as equity in earnings or losses of the 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 $1.5 million on $31.3
million loans sold during the six months ended June 30, 2000 as compared to a
gain of $1.4 million on $22.5 million of loans sold during the six months ended
June 30, 1999. Since June 30, 1999 the Company has experienced a decline in the
average premium earned on loan sales to the secondary market.
Other Income. The Company's other income increased $614,000 or 55.8%
from $1.1 million for the six months ended June 30, 1999 to $1.7 million for the
six months ended June 30, 2000.
Non-Interest Expenses. The Company's non-interest expenses increased
$932,000 or 11.4% from $8.2 million for the six months ended June 30, 1999 to
$9.1 million for the six months ended June 30, 2000. Other operating expenses
increased $571,000 or 26.3% from $2.2 million for the six months ended June 30,
1999 to $2.7 million for the six months ended June 30, 2000 due to cost
associated with the installation of a new loan accounting program the opening of
additional offices and general expansion of business operations. Salaries and
benefits increased $528,000 or 12.4% from $4.3 million for the six months ended
June 30, 1999 to $4.8 million for the six months ended June 30, 2000 as a result
of the effect of year-
24
<PAGE>
end raises, salaries of personnel hired since June 30, 1999, and bonuses paid
and accrued for in the period.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill was $312,000 for the six months ended June 30, 1999 and
$242,000 for the six months ended June 30, 2000, and relates to of goodwill
generated in the acquisitions of Edwards, TCC, VGI, VGII and Venture
Opportunities Corp and Business Lenders LLC. Goodwill is the amount by which the
cost of acquired businesses exceeds the fair value of the net assets acquired.
Goodwill is being amortized on a straight-line basis over 15 years. Negative
goodwill is the excess of fair market value of net assets of an acquired
business over the cost basis of such business. As of June 30, 2000, all of the
negative goodwill generated in the acquisition of Tri-Magna has been amortized
on a straight-line basis over the past four years.
Net Investment Income. Net investment income increased $1.8 or 28.1%
from $6.4 million for the six-month period ended June 30, 1999 to $8.2 million
for the six months ended June 30, 2000. The increase is attributable to an
increase in the spread of average yield over the cost of funds offset with an
increase in operating expenses.
Net Realized Gain/Loss on Investments. The Company had net realized
loss on investments of $1.2 million for the six months ended June 30, 2000
compared to the net realized gains of $636,000 for the six months ended June 30,
1999. The increase in realized losses was primarily the result of the
charge-off of previously reserved for loans.
Change in Net Unrealized Depreciation/Appreciation. The change in net
unrealized appreciation decreased $1.2 million from a net appreciation of $2.6
million for the six months ended June 30, 1999 to a net appreciation $1.4
million for the six months ended June 30, 2000. The net appreciation for six
months of 2000 results from $113,000 appreciation from decrease in loan loss
reserve, $909,000 appreciation from charge-off of loans previously reserved for
and $338,000 appreciation on equity in investments held by the Company.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations decreased $1.2 million or 12.5% from $9.6
million for the six months ended June 30, 1999 to $8.4 million for the six
months ended June 30, 2000. The decrease was attributable to the positive impact
of portfolio growth coupled with an increase in the spread between average yield
and average cost of funds offset by increased operating expenses and net
realized losses. Return on assets and return on equity for the six months ended
June 30, 2000, on an annualized basis, were 3.2% and 11.0%, respectively,
compared to 4.3% and 12.7% for the six months ended June 30, 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
25
<PAGE>
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 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:
LIBO Effective Maturity
Amount Rate Date Date
------ ---- ---- ----
$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
26
<PAGE>
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 $45.0 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 7.09%. At June 30, 2000,
these notes and debentures constituted 12.2% 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 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 June 30, 2000, the Company's $370.2 million of
outstanding debt was comprised as follows: 48.0% bank debt, substantially all of
which was at variable effective rates of interest with an weighted average
interest rate of 7.36% or 214 basis points below the Prime Rate, 37.0% secured
commercial paper with an annual weighted average interest rate of 7.14% or 236
basis points below the Prime Rate, 12.2% 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 7.09%. 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 June 30, 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
June 30, 2000:
27
<PAGE>
<TABLE>
<CAPTION>
Medallion
Financial MFC BLLC MCC MBC Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash $ 151 $ 3,329 $ 717 $ 3,021 $ 835 $ 8,053
Revolving lines of credit 100,000 220,000(1) -- -- 320,000
Amounts available - 5,273 -- -- 5,273
Amounts outstanding 100,000 77,650 -- -- 177,650
Average interest rate 7.93% 7.64% -- -- 7.80%
Maturity 9/00 7/01 -- -- 9/00-7/01
Commercial paper
Amounts outstanding -- 137,078 -- -- 137,078
Average interest rate -- 7.07% -- -- 7.07%
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 -- -- 6/04
Total cash and remaining
amounts
available under credit facilities 151 8,602 717 3,021 835 13,326
Total debt outstanding $100,000 $259,728 $ - $ 10,500 $ - $ 370,228
</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 June 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.
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
28
<PAGE>
exploring several options to increase its available funds in order to achieve
the Company's growth and expansion strategy. The Company has engaged two
investment banking firms to underwrite a three year renewable $150 million
securitization conduit program. This facility represents an increase in the
company's overall liquidity. The transaction is expected to close by the end
of the third quarter.
Investment Considerations
The following are certain of the factors which could affect the
Company's future results. They should be considered in connection with
evaluating forward-looking statements contained in this Management's Discussion
and Analysis and elsewhere in this Report and otherwise made by or on behalf of
the Company since these factors, among others, could cause actual results and
conditions to differ materially from those projected in these forward-looking
statements.
Interest Rate Spread. The Company's net interest income is largely
dependent upon achieving a positive interest rate spread and other factors.
Leverage. The Company's use of leverage poses certain risks for holders
of the Common Stock, including the possibility of higher volatility of both the
net asset value of the Company and the market price of the Common Stock and,
therefore, an increase in the speculative character of the Common Stock.
Availability of Funds. The Company has a continuing need for capital to
finance its lending activities. The Company funds its operations through credit
facilities with bank syndicates and, to a lesser degree, through subordinated
SBA debentures. Reductions in the availability of funds from banks and under SBA
programs on terms favorable to the Company could have a material adverse effect
on the Company. Because the Company distributes to its shareholders at least 90%
of its investment company taxable income, such earnings are not available to
fund loan originations.
Industry and Geographic Concentration. A substantial portion of the
Company's revenue is derived from operations in New York City and these
operations are substantially focused in the area of financing New York City
taxicab medallions and related assets. There can be no assurance that an
economic downturn in New York City in general, or in the New York City taxicab
industry in particular, would not have an adverse impact on the Company.
Reliance on Management. The success of the Company will be largely
dependent upon 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
29
<PAGE>
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 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 and on May 4, 2000 the Company entered into an Agreement and Plan of
Merger wit Ameritrans Capital Corporation a specialty finance company, located
in New York, 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. The closing of these
transactions are subject to the approval of the shareholders of Freshstart and
Ameritrans, 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, Ameritrans' investment
portfolio and specialty finance business with the Company 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.
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 compliant and the Company not been informed of any
material problems with its third party vendors relating to Year 2000 problem.
30
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Medallion Financial Corp. Financial Data Schedule. Filed herewith.
31
<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: August 14, 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
32
