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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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.)
205 East 42nd Street, New York, New York 10017
(Address of principal executive offices) (Zip Code)
(212) 682-3300
(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,
October 31, 1996:
Class Outstanding Par Value Shares Outstanding
----------------- ----------- ------------------
Common Stock............................ $.01 8,250,000
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MEDALLION FINANCIAL CORP.
FORM 10-Q
September 30, 1996
INDEX
Page
----
PART I. Financial Information
Item 1. Basis of Preparation of Financial Information.................. 3
Medallion Financial Corp. Consolidated Balance Sheets
as of September 30, 1996 and December 31, 1995.......... 4
Medallion Financial Corp. Consolidated Statement of
Operations for the three months ended September 30, 1996
and the period commencing with the Company's inception
on May 29, 1996 and ending September 30, 1996........... 5
Medallion Financial Corp. Consolidated Statement of
Shareholders' Equity for the period commencing with
the Company's inception on May 29, 1996 and ending
September 30, 1996...................................... 6
Medallion Financial Corp. Consolidated Statement of Cash
Flows for the period commencing with the Company's
inception on May 29, 1996 and ending September 30, 1996. 7
Notes to Consolidated Financial Statements................. 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 13
General.................................................... 13
Results of Operations (for the three months ended
September 30, 1996)..................................... 15
Results of Operations (for the period commencing with
the Company's inception on May 29, 1996 and ending
on September 30, 1996).................................. 17
Asset/Liability Management................................. 18
Liquidity and Capital Resources............................ 19
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................... 22
Signatures ....................................................... 23
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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 simultaneous acquisition
(the "Acquisitions") of Medallion Funding Corp. ("MFC"), Edwards Capital Company
("Edwards"), Transportation Capital Corp. ("TCC") and Medallion Taxi Media, Inc.
("Media"). Media and MFC were subsidiaries of Tri-Magna Corporation ("Tri-
Magna") which was merged into the Company. The Company's acquisition of these
businesses in connection with the Offering and the resulting two-tier structure
were effected pursuant to an order of the Securities and Exchange Commission
(the "Commission") (Release No. I.C. 21969, May 21, 1996) (the "Acquisition
Order") and the approval of the U.S. Small Business Administration (the "SBA").
A detailed description of the Company, MFC, Edwards, TCC and Media may be found
in the Acquisition Order and the Company's Registration Statement (the
"Registration Statement") on Form N-2 (File No. 333-1670) filed in connection
with the Offering and declared effective on May 22, 1996.
The financial information included in this report is divided into two
sections. The first section, Item 1, includes the unaudited consolidated
balance sheet of the Company as of September 30, 1996 and the related statements
of operations, shareholders' equity and cash flows for the period commencing
with the Company's inception on May 29, 1996 and ending September 30, 1996.
Item 1 also sets forth the unaudited consolidated statement of operations for
the three months ended September 30, 1996 and the audited consolidated balance
sheet of the Company as of December 31, 1995. 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 September 30, 1996 as well as the
period commencing May 29, 1996 and ending September 30, 1996. All references to
shares and per share amounts in this report reflect a 12,500-for-one stock split
effected on May 29, 1996.
The consolidated balance sheet of the Company as of September 30, 1996,
the related statements of operations, shareholders' equity and cash flows for
the period commencing May 29, 1996 and ending September 30, 1996 and the
consolidated statement of operations for the three months ended September 30,
1996 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 period commencing May 29, 1996 and ending September 30, 1996
and the three months ended September 30, 1996 are not necessarily indicative of
the results of operations for the full year or any other interim period. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Registration Statement.
-3-
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 and DECEMBER 31, 1995
September 30, December 31,
-------------- ------------
1996 1995
-------------- ------------
(Unaudited)
Assets
Investments
Medallion loans $125,039,421 $ -
Commercial installment loans 36,766,027 -
------------ --------
Gross investments 161,805,448 -
Unrealized depreciation of investments - -
------------ --------
Net investments 161,805,448 -
Investment in unconsolidated subsidiary (Note 3) 6,241 -
------------ --------
Total investments 161,811,689 -
Cash and cash equivalents 1,446,342 2,000
Accrued interest receivable 1,554,207 -
Fixed assets, net 87,506 -
Goodwill, net (Note 2) 6,133,709 -
Other assets 3,550,443 716,217
------------ --------
Total assets $174,583,896 $718,217
============ ========
Liabilities
Accounts payable and accrued expenses $ 1,781,252 $716,217
Dividends payable 116,725 -
Accrued interest payable 1,188,026 -
Notes payable to banks and demand notes (Note 4) 81,300,000 -
SBA debentures payable (Note 5) 29,263,100 -
Negative goodwill, net (Note 2) 2,694,161 -
------------ --------
Total liabilities $116,343,264 $716,217
------------ --------
Stockholders' equity
Preferred Stock (1,000,000 shares of $.01 par - -
value stock authorized - none outstanding)
Common stock (15,000,000 shares of $.01 par 82,500 2
value stock authorized - 8,250,000 and
2,500,000 shares outstanding at
September 30, 1996 and December 31, 1995,
respectively (Note 1)
Capital in excess of par value (Note 1) 56,066,556 1,998
Accumulated undistributed income 2,091,576 -
------------ --------
Total stockholders' equity 58,240,632 2,000
------------ --------
Total liabilities and stockholders' equity $174,583,896 $718,217
============ ========
See accompanying notes to unaudited consolidated financial statements.
-4-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
AND THE PERIOD COMMENCING WITH THE COMPANY'S INCEPTION
ON MAY 29, 1996 AND ENDING SEPTEMBER 30, 1996
(Unaudited)
Period Commencing
Three Months Ended May 29, 1996 and Ending
September 30, 1996 September 30, 1996
------------------- -----------------------
Investment income:
Interest income on investments $4,255,203 $5,618,718
Interest income on treasury bills 8,419 37,603
---------- ----------
Total investment income 4,263,622 5,656,321
---------- ----------
Interest expense:
Notes payable to bank 1,537,102 2,044,738
SBA debentures 563,168 754,748
---------- ----------
Total interest expense 2,100,270 2,799,486
---------- ----------
Net interest income 2,163,352 2,856,835
---------- ----------
Non-interest income:
Equity in earnings (losses)
of unconsolidated subsidiary (22,697) 6,241
Accretion of negative goodwill 180,615 244,984
Other Income 233,948 291,822
---------- ----------
Total non-interest income 391,866 543,047
---------- ----------
Expenses:
Professional fees 149,726 227,379
Salaries and benefits 348,233 446,172
Other operating expenses 433,266 524,012
Amortization of goodwill 101,612 136,632
---------- ----------
Total expenses 1,032,837 1,334,195
---------- ----------
Net investment income 1,522,381 2,065,687
Change in net unrealized depreciation - -
Net realized gain on investments 25,889 25,889
---------- ----------
Net increase in net assets
resulting from operations $1,548,270 $2,091,576
========== ==========
Net increase in net assets
resulting from operations per share $ 0.19 $0.25
========== ==========
Weighted average shares outstanding 8,250,000 8,250,000
========== ==========
See accompanying notes to unaudited consolidated financial statements.
-5-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD COMMENCING WITH THE COMPANY'S INCEPTION
ON MAY 29, 1996 AND ENDING SEPTEMBER 30, 1996
(Unaudited)
Shares of Common Capital
Common Stock Stock in Excess Accumulated
Outstanding $.01 Par of Par Undistributed
Value Value Income
---------------- ---------- ----------- -------------
Balance at May 29, 1996 8,250,000 $ 82,500 $56,066,556 -
Distributable net investment income - - - $ 2,091,576
Dividends paid common - - - -
Change in unrealized depreciation - - - -
------------ --------- ----------- -------------
Balance at September 30, 1996 8,250,000 $82,500 $56,066,556 $2,091,576
============ ========= =========== =============
See accompanying notes to unaudited consolidated financial statements.
-6-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD COMMENCING WITH THE COMPANY'S INCEPTION
ON MAY 29, 1996 AND ENDING SEPTEMBER 30, 1996
(Unaudited)
Period Commencing
May 29, 1996 and Ending
September 30, 1996
------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 2,091,576
Adjustments to reconcile net increase in net assets resulting from operations
to net cash provided by (used for) operating activities:
Depreciation and amortization 7,000
Increase in equity in earnings (losses) of unconsolidated subsidiary (6,241)
Amortization of goodwill 136,632
Decrease (increase) in accrued interest receivable (158,933)
Decrease (increase) in other assets (1,879,649)
Increase (decrease) in accounts payable and accrued expenses 308,722
Accretion of negative goodwill (244,984)
Increase (decrease) in accrued interest payable (451,501)
------------
Net cash provided by (used for) operating $ (197,378)
activities ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments $(28,611,154)
Proceeds from sales and maturities of investments 16,249,803
Payment for purchase of Tri-Magna, net (11,848,283)
Payment for purchase of Edwards (15,624,995)
Payment for purchase of TCC, net (3,748,576)
Capital expenditures (80,119)
------------
Net cash provided by (used for) investing activities $(43,663,324)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to banks $ (9,100,000)
Repayment of notes payable to SBA (1,200,000)
Payment of declared dividends to former shareholders (542,012)
Proceeds from initial public offering, net of expenses 56,147,056
------------
Net cash provided by (used for) financing activities $ 45,305,044
------------
NET INCREASE (DECREASE) IN CASH $ 1,444,342
CASH and CASH EQUIVALENTS, beginning of period 2,000
------------
CASH and CASH EQUIVALENTS, end of period $ 1,446,342
============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 3,308,336
============
See accompanying notes to unaudited consolidated financial statements.
-7-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD COMMENCING WITH THE COMPANY'S INCEPTION
ON MAY 29, 1996 AND ENDING SEPTEMBER 30, 1996
(Continued)
(Unaudited)
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
In conjunction with the Acquisitions, liabilities were assumed as follows:
Tri-Magna Edwards TCC
----------- ----------- -----------
Fair value of assets acquired $99,488,871 $51,356,894 $16,357,376
Cash paid 13,378,000 15,624,995 10,545,759
----------- ----------- -----------
Liabilities assumed $86,110,871 $35,731,899 $ 5,811,617
=========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
-8-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(1) Formation of Medallion Financial Corp.
The Company is a closed-end management investment company and has elected
to be regulated as a business development company under the Investment company
Act of 1940, as amended (the "1940 Act"). The Company was organized as a
Delaware corporation in 1995. On May 29, 1996, the Company issued and sold
5,750,000 shares of common stock at $11.00 per share and split the existing 200
shares of common stock outstanding into 2,500,000 shares. In parallel with the
Offering, the Company merged with Tri-Magna, acquired substantially all of the
assets of Edwards, and acquired all of the outstanding voting stock of TCC. As
a result of the merger with Tri-Magna, the Company also acquired Tri-Magna's
wholly-owned subsidiaries, MFC and Media. As a prerequisite to the
Acquisitions, the Company applied for and received the Acquisition Order under
the 1940 Act from the Commission. The Company engages directly and/or through
its principal subsidiaries primarily in the business of making loans to small
businesses and, to a lesser degree, in the business of taxicab rooftop
advertising.
Tri-Magna was a closed-end management investment company registered under
the 1940 Act and was the sole shareholder of MFC and Media. MFC is a closed-end
management investment company registered under the 1940 Act and is licensed as a
specialized small business investment company ("SSBIC") by the U.S. Small
Business Administration (the "SBA"). As an adjunct to the Company's finance
business, Media operates a taxicab rooftop advertising business. MFC and Media
are wholly-owned subsidiaries of the Company.
Edwards, a wholly-owned subsidiary of the Company, is licensed as a small
business investment company ("SBIC") by the SBA and is registered as a closed-
end management investment company under the 1940 Act.
TCC, a wholly-owned subsidiary of the Company, is licensed as an SSBIC by
the SBA and is registered as a closed-end management investment company, under
the 1940 Act.
(2) Summary of Significant Accounting Policies
The Acquisitions were accounted for under the purchase method of
accounting. Under this accounting method, the Company has recorded as its cost
the fair value of the acquired assets and assumed liabilities. The difference
between the cost of acquired companies and the sum of the fair values of
tangible and identifiable intangible assets less liabilities assumed was
recorded as goodwill or negative goodwill.
Deferred offering costs incurred by the Company in connection with the sale
of shares were recorded as a reduction of capital upon completion of the
Offering. These costs were
-9-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 1996
recorded net of $200,000 payable by Tri-Magna in accordance with the merger
agreement between the Company and Tri-Magna.
Under the 1940 Act, the Small Business Investment Act of 1958 and
regulations thereunder (the "SBIA"), the Company's long-term loans are
considered investments and are recorded at their fair value. Since no ready
market exists for these loans, fair value is determined by the Board of
Directors in good faith. In determining fair value, the directors take into
consideration factors including the financial condition of the borrower, the
adequacy of the collateral, and the relationships between market interest rates
and portfolio interest rates and maturities. Any change in the fair value of
the Company's investments as determined by the directors is reflected in net
unrealized depreciation of investments. Loans were valued at cost and there was
no unrealized depreciation of investments at September 30, 1996. The directors
have determined that this valuation approximates fair value.
(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 for Media for the three months ended September 30, 1996 and the
period commencing with the Company's acquisition of Media on May 29, 1996 and
ending on September 30, 1996 is as follows:
Period Ended
September 30,
Balance Sheet 1996
------------- --------------
Cash $ 139,239
Accounts receivable 259,528
Equipment, net 1,020,592
Other 349,000
----------
Total assets $1,768,359
==========
Notes payable parent $1,684,079
Accrued expenses 77,039
----------
Total liabilities 1,761,118
----------
Common stock 1,000
Retained earnings 6,241
----------
Total equity 7,241
----------
Total liabilities and
shareholders equity $1,768,359
==========
Period
Commencing
Three May 29, 1996
Months Ended and Ending
Statement September 30, September 30,
of operations 1996 1996
- -------------------------- ------------- -------------
Advertising revenue $452,943 $604,196
Cost of service 215,846 261,274
-------- --------
Gross margin 237,097 342,922
Other operating expenses 272,295 334,182
-------- --------
Income (loss) before taxes (35,197) 8,741
Income tax provision (benefit) (12,500) 2,500
-------- --------
Net Income (loss) $(22,697) $ 6,241
======== ========
-10-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 1996
On July 25, 1996, Media, acquired all of the assets of See-Level
Management, Inc. and See-Level Advertising, Inc. for $700,000. The assets
represent 450 taxicab rooftop advertising display units and certain contracts
for advertising and fleet rental. The sellers also entered into noncompete and
consulting agreements with the Company for a period of thirty months. The
purchase was funded from intercompany debt.
(4) Notes Payable to Banks
On June 28, 1996, MFC increased the amount of its revolving credit
agreement to $85,000,000 from $78,000,000. Previously, MFC had extended this
credit facility until June 30, 1997 pursuant to a Renewal and Extension
Agreement dated March 29, 1996.
(5) SBA Debentures Payable
On September 2, 1996, Edwards paid upon maturity two debentures totaling
$1,200,000 in principal amount. The SBA also increased the senior secured third
party debt limit to $12,700,000 from $11,500,000. This limit is the principal
amount of debentures that will be subordinated to senior secured third-party
debt.
(6) Pro Forma Results of Operations
The unaudited pro forma combined financial information for the nine months
ended September 30, 1996 is presented as follows assuming the formation of the
Company and the Acquisitions described in Note 1 have occurred on January 1 of
each respective fiscal year:
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
Investment income $12,224,362 $11,662,273
Net investment income 6,473,256 6,066,527
Net increase in net assets resulting
from operations $ 4,547,665 $ 4,298,095
=========== ===========
Earnings per share $ 0.55 $ 0.52
=========== ===========
Pro forma weighted average
Shares outstanding 8,250,000 8,250,000
=========== ===========
(7) Subsequent Events
On October 31, 1996, Edwards increased its line of credit by $5,500,000
through the addition of two banks to its syndicate of lenders and the Company
extended its $2,000,000 revolving line of credit to September 30, 1997.
-11-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 1996
On November 6, 1995, MFC declared a dividend payable to the Company in the
amount of $130 per share payable on November 6, 1996 (aggregating $865,670),
Edwards declared a dividend payable to the Company in the amount of $3,500 per
share payable on November 6, 1996 (aggregating $350,000) and TCC declared a
dividend payable to the Company in the amount of $4,500 per share payable on
November 6, 1996 (aggregating $450,000). With the proceeds of these dividends,
on November 6, 1996 the Company declared a dividend in the amount of $.20 per
share (aggregating $1,650,000) payable on November 26, 1996 to the shareholders
of record on November 12, 1996.
As a result of recent amendments to the SBIA, MFC and TCC will be permitted to
lend to any small business concern as defined in the SBIA rather than being
restricted, as is currently the case, to financing small business concerns that
are at least 50% owned and managed by persons deemed to be socially or
economically disadvantaged. MFC and TCC will be permitted to make such loans as
soon as they amend their charters and intend to do so in the near future.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
This discussion is intended to assist investors in their analysis of the
financial condition and results of operations of the Company. The information
contained in this section should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing in this report.
The Company's principal activity is the origination and servicing of loans
financing the purchase of taxicab medallions and related assets ("Medallion
Loans") and commercial installment loans financing small businesses in other
targeted industries ("Commercial Installment Loans"). The earnings of the
Company depend primarily on its level of net interest income, which is the
difference between interest earned on interest-earning assets consisting
primarily of Medallion Loans and Commercial Installment Loans, and the interest
paid on interest-bearing liabilities consisting primarily of credit facilities
with bank syndicates and subordinated debentures issued to or guaranteed by the
SBA. Net interest income is a function of the net interest rate spread, which
is the difference between the average yield earned on interest-earning assets
and the average interest rate paid on interest-bearing liabilities, as well as
the average balance of interest-earning assets as compared to interest-bearing
liabilities. Net interest income is affected by economic, regulatory and
competitive factors that influence interest rates, loan demand and the
availability of funding to finance the Company's lending activities. The
Company, like other financial institutions, is subject to interest rate risk to
the degree that its interest-earning assets reprice on a different basis than
its interest-bearing liabilities.
The Company's investment income is driven by the yield on Medallion Loans
and Commercial Installment Loans. The extent to which the yield of the
Company's Medallion Loan origination's exceed the prevailing prime rate of
interest charged by major commercial banks (the "Prime Rate") has been in a
long-term decline. However, since December 1994 the average yield of the
combined Medallion Loan and Commercial Installment Loan portfolios has slightly
increased. Weighted average yield at September 30, 1996 was 10.70% for the
entire portfolio. The increase in average yield is the result of continued
stabilization in market interest rates for Medallion Loans, which began in July
1994, combined with the maturity or prepayment of older, lower interest rate
loans and originations of newer, higher interest rate loans that have
constituted a greater proportion of the portfolio and the shifting in portfolio
mix towards a higher percentage of Commercial Installment Loans. These loans
historically have had a yield of approximately 350 basis points higher than the
Company's Medallion Loans and 500 to 700 basis points higher than the Prime
Rate.
The Medallion Loans represented 77.3% of the total portfolio or $125.0
million at September 30, 1996. The weighted average yield of the Medallion Loan
portfolio was 9.85% at September 30, 1996. From inception of its business in
1979 through 1995, the period between the origination and final payment of all
Medallion Loans originated by MFC (formerly a wholly-owned subsidiary of Tri-
Magna) has been estimated by the Company to be 29 months. The Company believes
that this time period varies to some extent as a
-13-
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. Commercial Installment Loans had a weighted average yield of
13.49% and represented 22.7% of the total portfolio or $36.8 million at
September 30, 1996. The Company intends to continue to increase the percentage
of Commercial Installment Loans in the total portfolio.
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 and,
to a lesser degree, fixed-rate, long-term subordinated debentures issued to or
guaranteed by the U.S. Small Business Administration (the "SBA"). Recently, the
Company has generally reduced its reliance on SBA financing and increased the
relative proportion of bank debt to total liabilities. SBA financing can offer
very attractive rates, but such financing is restricted in its application and
its availability is uncertain. In addition, SBA financing subjects its
recipients to limits on the amount of secured bank debt they may incur.
Accordingly, the Company plans to continue to limit its use of SBA funding and
will seek such funding only when advantageous, such as when SBA financing rates
are particularly attractive, and to fund loans that qualify under the Small
Business Investment Act of 1958 (the "SBIA") and the regulations thereunder
("SBA Regulations"), through subsidiaries already subject to SBA restrictions.
The Company believes that its transition to financing its operations primarily
with short-term LIBOR-based bank debt 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. The Company also expects that net interest
income should increase because bank debt is more available than SBA financing
and will thus permit an increase in the size of the loan portfolio. At
September 30, 1996, short-term LIBOR-based debt constituted 73% of total debt.
The Company's cost of funds is primarily driven by (i) the average maturity
of debt issued by the Company, (ii) the premium to LIBOR paid by the Company on
its LIBOR-based debt, and (iii) the ratio of LIBOR-based debt to SBA financing.
The Company incurs LIBOR-based debt for terms generally ranging from 30-180
days. The Company's subordinated debentures issued to or guaranteed by the SBA
typically have terms of ten years. The Company's cost of funds reflects
fluctuations in LIBOR to a greater degree than in the past because LIBOR-based
debt has come to represent a greater proportion of the Company's debt. The
Company measures its cost of funds as its aggregate interest expense for all of
its interest-bearing liabilities divided by the face amount of such liabilities.
The Company analyzes its cost of funds in relation to the average of the monthly
90- and 180-day LIBOR (the "LIBOR Benchmark"). At September 30, 1996, the
Company's average cost of funds, e.o.p. was 7.12%, or 140 basis points over the
LIBOR Benchmark of 5.72%.
In connection with its Medallion Loan finance business, the Company also
conducts a taxicab rooftop advertising business through Media. Media began
operations in November 1994. Media's revenue is affected by the number of
taxicab rooftop advertising displays ("Displays") that it owns and the occupancy
rate of those Displays. At September 30, 1996, Media had 2,120 installed
Displays, 450 of which were acquired in connection with the acquisition of the
assets of See-Level Advertising, Inc. and See Level Management, Inc.
-14-
which closed on July 25, 1996. The Company expects that Media will continue to
expand its operations. Although Media is a wholly-owned subsidiary of the
Company, its results of operations are not consolidated with the Company because
Securities and Exchange Commission regulations prohibit the consolidation of
non-investment companies, such as Media, with investment companies, such as the
Company.
Factors which affect the Company's net assets include net realized
gain/loss on investments and change in net unrealized depreciation of
investments. Net realized gain/loss on investments is the difference between
the proceeds derived upon foreclosure of a loan and the cost basis of such loan.
Change in net unrealized depreciation of investments is the amount, if any, by
which the Company's estimate of the fair market value of its loan portfolio is
below the cost basis of the loan portfolio. Under the Investment Company Act of
1940, as amended (the "1940 Act"), the SBIA and SBA Regulations, the Company's
loan portfolio must be recorded at fair market value or "marked to market."
Unlike certain lending institutions, the Company is not permitted to establish
reserves for loan losses, but adjusts quarterly the valuation of its loan
portfolio to reflect the Company's estimate of the current realizable value of
the loan portfolio. Since no ready market exists for the Company's loans, fair
market value is subject to the good faith determination of the Company. In
determining such value, the Company takes into consideration factors such as the
financial condition of its borrowers, the adequacy of its collateral and the
relationships between current and projected market rates of interest and
portfolio rates of interest and maturities. Any change in the fair value of
portfolio loans as determined by the Company is reflected in net unrealized
depreciation of investments and affects net increase in net assets resulting
from operations but has no impact on net investment income or distributable
income. Upon completion of the acquisitions of Edwards, TCC and Tri-Magna's
subsidiaries, MFC and Media (collectively, the "Founding Companies"), on May 29,
1996, the Company's loan portfolio was recorded on the balance sheet at fair
market value as estimated by the Company in accordance with the 1940 Act and the
purchase method of accounting. The Company believes that there was no change in
the fair market value of the loan portfolio between May 29, 1996 and September
30, 1996.
Prior to the Acquisitions, the Company had no results of operations and
each of Tri-Magna, Edwards and TCC had been operating independently of each
other.
Results of Operations
For the three months Ended September 30, 1996.
Performance Summary. Net increase in net assets resulting from operations
was $1,548,000 for the three months ended September 30, 1996. This amount
represents the earnings of the Company for the three months ended September 30,
1996. The Company did not have operations prior to May 29, 1996; therefore,
there is no prior comparable period.
Net Interest Income. Net interest income was $2,163,000 for the three
months ended September 30, 1996. The average interest rate spread was 3.10% and
the Company's investment income was $4,264,000. The Company's portfolio growth
was $5.7 million or 3.6% from $156.2 million at June 30, 1996 to $161.8 million
at September 30, 1996. The
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average portfolio yield was 10.70% for the three months ended September 30,
1996. Medallion Loans had a weighted average yield of 9.85% and represented
approximately 77.3% of the total portfolio at September 30, 1996. Commercial
Installment Loans had a weighted average yield of 13.49% and represented
approximately 22.7% of the total portfolio at September 30, 1996.
The Company's interest expense was $2,100,000 for the three months ended
September 30, 1996. The average interest rate on borrowings was 7.50% for the
three months ended September 30, 1996. The Company's average cost of funds,
e.o.p. was 7.12% or 140 basis points over the LIBOR Benchmark of 5.72%. The
Company's net borrowings increased $0.5 million or 0.4% from $110.1 million at
June 30, 1996 to $110.6 million at September 30, 1996.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
generated by Media was $453,000, for the three months ended September 30, 1996
and the number of Displays owned by Media on such date was 2,120. Display
rental cost was $216,000 resulting in a gross margin of $237,000, or 52.2%, for
the three months ended September 30, 1996. Display occupancy was 65% for the
three months ended September 30, 1996. Net loss generated by Media was $22,700
for the three months ended September 30, 1996. Media's net loss is recorded as
equity in earnings of unconsolidated subsidiary on the Company's statement of
operations. The loss primarily resulted from the write-off of accounts
receivable in the amount of $64,000 due under an advertising contract with Kiwi
International Airlines which filed for bankruptcy protection on October 1, 1996.
The Company does not believe any of the amounts owed by Kiwi will be collected.
The net loss was also the result of reduced Display occupancy rates. The number
of Displays owned by Media increased from 1,670 at June 30, 1996 to 2,120 at
September 30, 1996.
Other Income. The Company's other income was $233,900 for the three months
ended September 30, 1996.
Accretion of Negative Goodwill. Negative goodwill is the excess of fair
market value of net assets of an acquired business over the cost basis of such
business. Negative goodwill of $2.9 million was generated in the acquisition of
Tri-Magna.
Non-Interest Expenses. The Company's non-interest expense was $1,033,000
for the three months ended September 30, 1996. The Company will seek to reduce
non-interest expense as a percentage of assets by consolidating the operations
of the Company, maximizing efficiencies of scale and eliminating redundant
services and functions.
Amortization of Goodwill. Goodwill is the excess of cost of an acquired
business over the fair value of net assets acquired. Goodwill of $6.3 million
was generated in the Acquisition of Edwards.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. There was a realized gain of $26,000 during the
three months ended September 30, 1996. The gain was the result of recoveries on
certain radio loans previously written off. Upon completion of the Acquisitions
on May 29, 1996, the Company's loan
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portfolio was recorded on the balance sheet at fair market value as estimated by
the Company in accordance with the 1940 Act and the purchase method of
accounting. For the three months ended September 30, 1996 there was no change
in unrealized depreciation of investments.
Results of Operations
For the Period Commencing May 29, 1996 and Ending September 30, 1996.
Performance Summary. Net increase in net assets resulting from operations
was $2,092,000 for the period ended September 30, 1996. This amount represents
the earnings of the Company from the commencement of operations on May 29, 1996
through September 30, 1996; therefore, there is no prior comparable period.
Net Interest Income. Net interest income was $2,857,000 for the period
ended September 30, 1996. The average interest rate spread was 3.23% and the
Company's investment income was $5,656,000. The Company's portfolio growth was
$12.4 million or 8.4% from $149.4 million at May 29, 1996 to $161.8 million at
September 30, 1996. The average portfolio yield was 10.71% for the period ended
September 30, 1996. Medallion Loans had a weighted average yield of 9.85% and
represented approximately 77.3% of the total portfolio at September 30, 1996.
Commercial Installment Loans has a weighted average yield of 13.49% and
represented approximately 22.7% of the total portfolio at September 30, 1996.
The Company's interest expense was $2,799,000 for the period ended
September 30, 1996. The average interest rate on borrowings was 7.48% for the
period ended September 30, 1996. The Company's average cost of funds, e.o.p.
was 7.12% or 140 basis points over the LIBOR Benchmark of 5.72%. Although the
portfolio grew, the Company's net borrowings decreased $10.2 million or 8.4%
from $120.8 million at May 29, 1996 to $110.6 million at September 30, 1996.
The decreased borrowings were the result of the repayment of LIBOR-based debt
with the proceeds from the Offering.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
generated by Media was $604,000, for the period ended September 30, 1996 and the
number of Displays owned by Media on that date was 2,120. Display rental cost
was $261,000 resulting in a gross margin of $343,000, or 56.8%, for period ended
September 30, 1996. Display occupancy was 65% for the period ended September
30, 1996. Net income generated by Media was $6,241 for the period ended
September 30, 1996. Media's net income is recorded as equity in earnings of
unconsolidated subsidiary on the Company's statement of operations.
Other Income. The Company's other income was $291,800 for the period ended
September 30, 1996.
Accretion of Negative Goodwill. Negative goodwill is the excess of fair
market value of net assets of an acquired business over the cost basis of such
business. Negative goodwill of $2.9 million was generated in the acquisition of
Tri-Magna.
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Non-Interest Expenses. The Company's non-interest expense was $1,334,000
for the period ended September 30, 1996. The Company will seek to reduce non-
interest expense as a percentage of assets by consolidating the operations of
the Company, maximizing efficiencies of scale and eliminating redundant services
and functions.
Amortization of Goodwill. Goodwill is the excess of cost of an acquired
business over the fair value of net assets acquired. Goodwill of $6.3 million
was generated in the Acquisition of Edwards.
Net Realized Gain/Loss on Investments and Change in Net Unrealized
Depreciation of Investments. There was a realized gain of $26,000 during the
period ended September 30, 1996. The gain was the result of recoveries on
certain radio loans previously written off. Upon completion of the Acquisitions
on May 29, 1996, the Company's loan portfolio was recorded on the balance sheet
at fair market value as estimated by the Company in accordance with the 1940 Act
and the purchase method of accounting. From that date through September 30,
1996 there was no change in unrealized depreciation of investments.
Asset/Liability Management
Interest Rate Sensitivity. Financial institutions such as the Company are
subject to interest rate risk to the extent their interest-earning assets
(consisting of Medallion Loans and Commercial Installment Loans) reprice on a
different basis over time in comparison to their interest-bearing liabilities
(consisting primarily of credit facilities with bank syndicates and subordinated
SBA debentures).
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.
The effect of changes in market rates of interest is mitigated by regular
turnover of the portfolio. From inception of its business in 1979 through 1995,
the period between the origination and final payments of all Medallion Loans
originated by MFC (formerly a wholly-owned subsidiary of Tri-Magna) is estimated
by the Company to have been 29 months on a weighted average basis. Accordingly,
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.
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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. The Company has entered into interest rate
cap agreements to limit the Company's interest rate exposure to 7.5% on $20.0
million of its LIBOR-based debt through April 7, 1997 and to 7.0% on an
additional $20.0 million of its LIBOR-based debt through November 16, 1997. The
Company will seek to manage interest rate risk by evaluating and purchasing, if
appropriate, additional derivatives, originating adjustable-rate loans 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, fixed rate, long-term subordinated SBA debentures that are issued to
or guaranteed by the SBA and loan amortization and prepayments. As a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended,
the Company distributes at least 90% of its investment company taxable income;
consequently, the Company primarily relies upon external sources of funds to
finance growth. At September 30, 1996, 73% of the Company's $110.6 million of
debt consisted of bank debt, substantially all of which was at variable
effective rates of interest averaging below the Prime Rate and 27% consisted of
subordinated SBA debentures with fixed rates of interest with a weighted average
rate of 7.4%. The Company is eligible to seek SBA funding but plans to continue
to limit its use of SBA funding and will seek such funding only when
advantageous, such as when SBA financing rates are particularly attractive, or
to fund loans that qualify under SBA regulations through Edwards and TCC which
are already subject to SBA restrictions. In the event that the Company seeks
SBA funding, no assurance can be given that such funding will be obtained. In
addition to SBA funding, an additional $17.2 million of debt was available at
September 30, 1996 at variable effective rates of interest averaging below the
Prime Rate under the Company's $96.5 million bank credit facilities. On October
31, 1996, Edwards increased its line of credit by $5,500,000 and the Company
extended its $2,000,000 revolving line of credit to September 30, 1997.
The following table illustrates the Company's and each of the Founding
Companies' sources of available funds and amounts outstanding under credit
facilities at September 30, 1996.
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Medallion
Financial
Corp. MFC Edwards TCC Total
------- ----------- ----------- ------- --------
(dollars in thousands)
Cash and cash equivalents... $ 1 $ 1,002 $ 163 $ 280 $ 1,446
Revolving lines of credit... 2,000 85,000 9,500 -- 96,500
Amounts available......... 600 16,400 200 -- 17,200
Amounts outstanding....... 1,400 68,600 9,300 -- 79,300
Average interest rate.... 7.98% 6.99% 7.02%
Maturity................. 9/97 6/97 4/97-7/97
Term loans.................. -- 2,000 2,000
Interest rate............. -- 7.50%
Maturity.................. -- 7/97
SBA debentures.............. 23,750 5,513 29,263
Average interest rate..... 7.95% 5.00%
Maturity.................. 4/97-9/04 6/02
Total cash and remaining
amounts available under
credit facilities.......... 601 17,402 363 280 18,646
Total debt outstanding...... $ 1,400 $ 70,600 $ 33,050 $ 5,513 $ 110,563
Loan amortization and prepayments also provide a source of funding for the
Company. Prepayments on loans are influenced significantly by general interest
rates, economic conditions and competition. Medallion Loan prepayments
accelerated throughout virtually all of 1993 and the first three months of 1994
because of the generally lower level of interest rates which prompted
significant Medallion Loan refinancing activity. However, these prepayments have
slowed since early 1994, initially because of increases, and then stabilization,
in the level of interest rates which have caused a decrease in Medallion Loan
refinancing activity and also 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 has limited its use of SBA funding and will seek such funding
only when advantageous. Over the past two years the Company has expanded its
loan portfolio, reduced its level of SBA financing and increased its level of
bank funding. At September 30, 1996, SBA financing represented 27% of total
debt. While bank funding often carries higher interest rates than SBA funding,
the Company believes that such higher rates will be offset by the increased
volume of funding and loan originations which should result in increased net
interest margin.
Media funds its operations through internal cash flow and intercompany
debt. Media is not a RIC and, therefore, is able to retain earnings to finance
growth.
The Company believes that the net proceeds of its initial public offering
remaining after application of such proceeds to the purchase of the Founding
Companies, application of the cash acquired in connection with the Acquisitions,
anticipated borrowings from the SBA and under its bank credit facilities and
cash flow from operations (after distributions to stockholders) will be adequate
to fund the continuing growth of the Company's loan portfolio
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and advertising business through at least the third quarter of 1997. In
addition, in order to provide the funds necessary for the Company's expansion
strategy, the Company expects to incur, from time to time, additional short- and
long-term bank and (to the extent permitted) SBA leverage, and to issue, in
public or private transactions, its equity and debt securities. The
availability and terms of any such securities will depend upon market,
regulatory and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to the Company.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Agreement between Medallion Taxi Media, Inc., See Level
Advertising, Inc. and See Level Management, Inc., dated
July 25, 1996
10.2 Agreement between Medallion Taxi Media, Inc. and Glenn
Gruman, dated July 25, 1996
27 Financial Data Schedules
(b) Reports on Form 8-K.
No reports on Form 8-K were filed.
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MEDALLION FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDALLION FINANCIAL CORP.
Date: November 11, 1996 By: /s/ Daniel F. Baker
-------------------------------------
Daniel F. Baker
Chief Financial Officer
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