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, 1998
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 7, 1998:
CLASS OUTSTANDING PAR VALUE SHARES OUTSTANDING
----------------- --------- ------------------
Common Stock..............................$.01 13,996,573
-1-
MEDALLION FINANCIAL CORP.
FORM 10-Q
JUNE 30, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Basis of Preparation ....................................................................... 3
Medallion Financial Corp. Consolidated Balance Sheets
at June 30, 1998 and December 31, 1997............................................. 4
Medallion Financial Corp. Consolidated Statement of Operations
for the three and six months ended June 30, 1998 and 1997.......................... 5
Medallion Financial Corp. Consolidated Statement of Cash
Flows for the three and six months ended June 30, 1998 and 1997.................... 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, 1998 and 1997)...................................................... 18
Consolidated Results of Operations (for the six months ended
June 30, 1998 and 1997).............................................................. 22
Asset/Liability Management............................................................. 26
Liquidity and Capital Resources........................................................ 27
Investment Considerations.............................................................. 28
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......................................... 31
Item 6. Exhibits and Reports on Form 8-K............................................................ 32
SIGNATURES ................................................................................... 34
-2-
PART I
FINANCIAL INFORMATION
ITEM. 1 BASIS OF PREPARATION
Medallion Financial Corp. (the "Company") was incorporated in Delaware
in 1995 and commenced operations on May 29, 1996 in connection with the closing
of its initial public offering (the "Offering") and the simultaneous
acquisitions (the "1996 Acquisitions") of Medallion Funding Corp. ("MFC"),
Edwards Capital Company, Transportation Capital Corp. ("TCC") and
Medallion Taxi Media, Inc. ("Taxi"). Media and MFC were subsidiaries of Tri-
Magna Corporation ("Tri-Magna") which was merged into the Company. The Company's
acquisition of these businesses in connection with the Offering and the
resulting two-tier structure were effected pursuant to an order of the
Securities and Exchange Commission (the "Commission") (Release No. I.C. 21969,
May 21, 1996) ("the "Acquisition Order") and the approval of the U.S. Small
Business Administration (the "SBA").
The financial information included in this report reflects the
acquisition of Capital Dimensions, Inc. ("CDI"), which occurred on June 16,
1998. The acquisition was accounted for as a pooling of interests and,
accordingly, the information included in the accompanying financial statements
and notes presents the combined financial position and the results of operations
of the Company and CDI as if they had operated as a combined entity for all
periods presented. The financial information in this report is divided into two
sections. The first section, Item 1, includes the unaudited consolidated balance
sheet of the Company as of June 30, 1998 and the related statements of
operations, stockholders' equity and cash flows for the three and six months
ending June 30, 1998 and 1997. Item 1 also sets forth the consolidated balance
sheet of the Company as of December 31, 1997. 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, 1998 and 1997.
The consolidated balance sheet of the Company as of June 30, 1998, the
related statements of operations, stockholders' equity and cash flows for the
three and six months ended June 30, 1998 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, 1998 are not necessarily indicative of the results of operations
for the full year or any other interim period. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10K for the fiscal year ended December
31, 1997.
-3-
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1998 AND DECEMBER 31, 1997
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited) (Restated
See Note 2)
ASSETS
Investments :
Medallion loans $ 266,765,841 $ 225,961,249
Commercial installment loans 97,738,028 87,293,197
------------- --------------
Net investments 364,503,869 313,254,446
Investment in unconsolidated subsidiary 1,482,872 1,140,424
------------- --------------
Total investments 365,986,741 314,394,870
Cash 6,426,985 6,666,613
Accrued interest receivable 4,236,661 3,237,840
Receivable from sale of loans 5,073,805 2,862,981
Fixed assets, net 1,111,673 356,206
Goodwill, net 7,608,127 6,082,515
Servicing fee receivable 1,968,815 1,617,415
Other assets 4,621,936 4,675,204
------------- ------------
Total assets $ 397,034,743 $ 339,893,644
============== =============
LIABILITIES
Accounts payable $4,245,608 $ 7,377,222
Dividends payable - 3,594,402
Accrued interest payable 1,844,840 871,194
Notes payable to banks and demand notes 124,700,000 137,750,000
Commercial paper 70,497,389 -
SBA debentures payable 41,590,000 39,770,000
------------- ------------
Total liabilities 242,877,837 189,362,818
------------- ------------
Negative goodwill, net 1,434,116 1,795,316
------------ ------------
Commitments and contingencies (Note 6)
SHAREHOLDERS' EQUITY (Note 1)
Preferred Stock (1,000,000 shares of $.01 par - -
value stock authorized-none outstanding)
Common stock (15,000,000 shares of $.01 par value stock
authorized -13,996,573 and 13,908,916 shares outstanding
at June 30, 1998 and December 31, 1997, respectively) 139,966 139,089
Capital in excess of par value 143,500,787 143,065,650
Accumulated undistributed income 9,082,037 5,530,771
------------ ------------
Total shareholders' equity 152,722,790 148,735,510
Total liabilities and shareholders' equity $ 397,034,743 $ 339,893,644
============= ==============
Number of common shares and common share equivalents 14,195,427 14,062,318
============= ==============
Net asset value per share $10.76 $10.58
====== ======
See accompanying notes to unaudited consolidated financial statements.
-4-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
(Restated) (Restated)
Investment income:
Interest income on investments $ 8,793,956 $ 5,844,570 $ 17,442,115 $ 11,513,834
Interest income on s/t investments 90,540 56,678 167,637 112,678
--------------- ------------- --------------- --------------
Total investment income 8,884,496 5,901,248 17,609,752 11,626,512
--------------- -------------- -------------- --------------
Interest expense:
Notes payable to banks 3,096,964 1,572,433 5,750,183 3,458,758
SBA debentures 778,867 696,918 1,557,803 1,433,245
--------------- -------------- -------------- --------------
Total interest expense 3,875,831 2,269,351 7,307,986 4,892,003
Net interest income 5,008,665 3,631,897 10,301,766 6,734,509
--------------- -------------- -------------- --------------
Non-interest income:
Equity in earnings of unconsolidated subsidiary 187,058 27,849 342,448 32,802
Accretion of negative goodwill 180,600 180,600 361,200 361,200
Gain on sale of loans 477,000 - 1,157,934 -
Other income 294,012 182,171 588,538 437,981
--------------- -------------- -------------- --------------
Total non-interest income 1,138,670 390,620 2,450,120 831,983
--------------- -------------- -------------- --------------
Expenses:
Administrative and advisory fees 60,058 57,135 16,562 113,892
Professional fees 83,458 137,004 296,779 308,003
Salaries and benefits 1,486,337 431,517 2,711,092 999,534
Other operating expenses 1,042,961 602,310 2,021,380 1,087,816
Amortization of goodwill 123,800 105,060 240,419 210,120
Merger related expenses 1,494,491 - 1,494,491 -
--------------- --------------- -------------- --------------
Total expenses 4,291,105 1,333,026 6,880,723 2,719,365
--------------- -------------- -------------- ---------------
Net investment income 1,856,230 2,689,491 5,911,163 4,847,127
--------------- -------------- -------------- --------------
Net realized gain on investments 1,003,339 314,398 1,026,741 1,804,398
Change in net unrealized depreciation 50,000 56,344 222,402 (125,956)
Income tax benefit (provision) 57,666 (256,000) 38,566 (932,000)
--------------- -------------- -------------- --------------
Net increase in net assets resulting from $ 2,967,235 $ 2,804,233 $ 7,158,757 $ 5,593,569
operations =============== ============== ============= =============
Net increase in net assets resulting from
operations per common share
Basic $ 0.21 $ 0.25 $ 0.51 $ 0.54
======= ======= ======= =======
Diluted $ 0.21 $ 0.24 $ 0.51 $ 0.53
======= ======= ======= =======
Weighted average common shares outstanding:
Basic Average Shares 13,942,732 11,402,524 13,926,520 10,316,430
=========== =========== =========== ===========
Diluted Average Shares 14,143,452 11,558,856 14,125,374 10,483,159
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
-5-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated)
Net increase in net assets resulting from operations $ 7,158,757 $ 5,593,569
Adjustments to reconcile net increase in net assets resulting from operations
to net cash provided by (used for) operating activities:
Depreciation and amortization 120,254 64,089
Increase in equity in earnings of unconsolidated subsidiary (342,448) (32,802)
Change in unrealized depreciation 240,419 25,000
Amortization of goodwill 240,419 210,120
Increase in accrued interest receivable (865,529) (459,712)
Increase in other assets (195,181) (1,474,675)
Decrease in accounts payable and accrued expenses (3,306,614) 1,953,921
Increase in receivable from sale of loans (2,210,824) -
Increase in servicing fee receivable (351,400) -
Accretion of negative goodwill (361,200) (361,200)
Increase (decrease) in accrued interest payable 856,564 (263,033)
------------ -----------------
Net cash provided by (used for) operating activities 742,798 5,254,977
------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of investments (119,562,691) (75,106,942)
Proceeds from sales and maturities of investments 85,058,930 32,586,718
Payment for purchase of VG1, VGII & VOC (11,963,072) -
Capital expenditures (817,103)
------------- -
Net cash provided by (used for) investing activities (47,283,936) (42,520,224)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (Payments of) notes payable to banks (13,050,000) (34,300,000)
Proceeds from issuance of commercial paper 70,497,389 -
Proceeds from (Payment of) SBA debentures (4,380,000) 1,238,082
Proceeds from exercise of stock options 436,014 -
Proceeds from sale of common stock - 74,248,959
Payment of declared dividends to current stockholders (7,201,893) (3,547,500)
-------------- --------------
Net cash provided by (used for) financing activities 46,301,510 37,639,541
-------------- --------------
NET INCREASE (DECREASE) IN CASH (239,628) 374,294
CASH beginning of period 6,666,613 6,099,512
------------- --------------
CASH end of period $ 6,426,985 $ 6,473,806
============== ==============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 6,451,422 $ 5,155,036
============== ==============
See accompanying notes to unaudited consolidated financial statements.
-6-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(1) FORMATION OF MEDALLION FINANCIAL CORP.
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 and its subsidiaries in accordance with the Merger Agreement. In
parallel with the Offering, the Company merged with Tri-Magna; acquired
substantially all of the assets and assumed certain liabilities of Edwards
Capital Company, a limited partnership; and acquired all of the outstanding
voting stock of TCC collectively, the ("1996 Acquisitions") (see Note 3). 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. In accordance with the Merger
Agreement dated December 21, 1995 between the Company and Tri-Magna, MFC and
Taxi, formerly subsidiaries of Tri-Magna, became wholly-owned subsidiaries of
the Company.
MFC, Edwards and TCC are closed-end management investment companies
registered under the 1940 Act and are each licensed as a small business
investment company ("SBIC") by the SBA. As an adjunct to the Company's taxicab
medallion finance business, Medallion Media, Inc. ("Media"), successor to Taxi,
operates a taxicab rooftop advertising business. The Company decided to
merge all of the assets and liabilities of Edwards and TCC into MFC subject to
the approval of the SBA. As of June 30, 1998, the Company is awaiting such
approval from the SBA.
(2) ACQUISITIONS
On October 31, 1997, the Company consummated the purchase of
substantially all of the assets and liabilities of Business Lenders, Inc.
through the Company's wholly owned subsidiary, BLI Acquisition Co., LLC. In
connection with the transaction, BLI Acquisition Co., LLC was renamed Business
Lenders, LLC ("Business Lenders"). Business Lenders is licensed by the SBA under
its section 7a program.
In connection with the 1996 Acquisitions and the Business Lenders
Acquisition, the Company received the approval under the 1940 Act from the
Securities and Exchange Commission, as well as approval from the Small Business
Administration ("SBA").
-7-
On June 16, 1998, the Company completed the acquisition of Capital Dimensions,
Inc. ("CDI"), an SSBIC lender, headquartered in Minneapolis, MN. CDI was
subsequently renamed Medallion Capital, Inc. ("Medallion Capital"). The Company
issued 1,112,677 shares of its common stock for the outstanding shares of CDI;
common stock by exchanging 0.59615 shares of its common stock for each
outstanding share of CDI. 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.
Under this method, the historical book values of the assets and liabilities of
CDI, as reported in it's balance sheet are carried over onto the Company's
consolidated balance sheet, and no goodwill or other intangible assets are
created. The following tables set forth the results of operations of CDI and
the Company for the three and six months ended June 30, 1998 and are included in
the accompanying consolidated statement of operations.
(Dollars in thousands, except shares and per share
amounts)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 The Company CDI Combined
- -------------------------------------------------------------------------
Total Investment Income $ 8,300 $ 584 $ 8,884
Net increase in net assets from operations $ 1,853 $1,114 $ 2,967
Net increase in net assets from operations per share
Basic $ .14 $ 1.05 $ .21
Diluted $ .14 $ .98 $ .21
FOR THE THREE MONTHS ENDED JUNE 30, 1997 The Company CDI Combined
- -------------------------------------------------------------------------
Total Investment Income $ 5,285 $ 616 $ 5,901
Net increase in net assets from operations $ 2,457 $ 347 $ 2,804
Net increase in net assets from operations per share
Basic $ .24 $ .34 $ .25
Diluted $ .24 $ .31 $ .24
FOR THE SIX MONTHS ENDED JUNE 30, 1998 The Company CDI Combined
- -------------------------------------------------------------------------
Total Investment Income $16,322 $1,288 $17,610
Net increase in net assets from operations $ 5,692 $1,467 $ 7,159
Net increase in net assets from operations per share
Basic $ .44 $ 1.40 $ .51
Diluted $ .44 $ 1.29 $ .51
FOR THE SIX MONTHS ENDED JUNE 30, 1997 The Company CDI Combined
- -------------------------------------------------------------------------
Total Investment Income $10,171 $1,456 $11,627
Net increase in net assets from operations $ 4,256 $1,338 $ 5,594
Net increase in net assets from operations per share
Basic $ .46 $ 1.34 $ .54
Diluted $ .45 $ 1.20 $ .53
On May 27, 1998, the Company completed the acquisition of certain assets and
assumption of certain liabilities of VGI, VGII and Venture Opportunities Corp.,
an SBIC lender headquartered in New York City, for an aggregate purchase price
of $11,963,072. This acquisition was accounted for under the purchase method of
accounting. Included in the purchase price was certain premiums paid totaling
$1,545,000, which represented goodwill and the signing of ten year non-compete
agreements with certain individuals associated with the former companies.
In conjunction with the acquisitions, liabilities were assumed as follows:
-8-
VGI, VGII AND VENTURE OPPORTUNITIES CORP
-------------------------------------------------------------
Fair value of assets acquired $ 18,455,155
Cash paid 11,963,072
-------------
Liabilities assumed $ 6,492,083
============
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The 1996 Acquisitions were accounted for under the purchase method of
accounting. Under this accounting method, the Company has recorded as its cost
the fair value of the acquired assets and assumed liabilities. The difference
between the cost of acquired companies and the sum of the fair values of
tangible and identifiable intangible assets less liabilities assumed was
recorded as goodwill or negative goodwill.
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 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 and the Small Business Investment Act of 1958 and
regulations thereunder (the "SBIA"), the Company's long-term loans are
considered investments and are recorded at their fair value. Since no ready
market exists for these loans, fair value is determined by the Board of
Directors in good faith. In determining fair value, the Company and the Board of
Directors take into consideration factors including the financial condition of
the borrower, the adequacy of the collateral, and the relationships between
market interest rates and portfolio interest rates and maturities. Loans are
valued at cost less unrealized depreciation.. Any change in the fair value of
the Company's investments as determined by the Board of Directors is reflected
in net unrealized depreciation of investments. Total unrealized depreciation was
$2,433,717 and $2,233,717 on total investments of $364,503,869 and $313,254,446
at June 30, 1998 and December 31, 1997, 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.
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". SFAS
No. 128 establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock. The Company has applied the provisions of SFAS No. 128 retroactively to
all periods presented. The dilutive effect of potential common shares in 1997
and 1998, consisting of outstanding stock options is determined using the
treasury method in accordance with SFAS No. 128. Basic and fully diluted EPS for
the three and six months ended June 30, 1998 and 1997 are as follows:
-9-
(Dollars in thousands, except shares and per share amounts)
THREE MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997
- ---------------------------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Amount Amount
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 2,967 $ 2,804
Basic EPS:
Income available to 2,967 13,942,732 $ .21 2,804 11,402,524 $ .25
common stockholders
Effect of dilutive options
Stock options 200,720 156,332
Diluted EPS:
Income available to 2,967 14,143,452 $ .21 2,804 11,558,856 $ .24
common stockholders
SIX MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997
- --------------------------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Amount Amount
- --------------------------------------------------------------------------------------------------------------
Net Income $ 7,159 $ 5,594
Basic EPS:
Income available to 7,159 13,926,520 $ .51 5,594 10,316,430 $ .54
common stockholders
Effect of dilutive options
Stock options 198,854 166,729
Diluted EPS:
Income available to 7,159 14,125,374 $ .51 5,594 10,483,159 $ .53
common stockholders
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which is to become effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 established standards for
reporting and display of comprehensive income and its components. Comprehensive
income is the total of net income and all other non-owner changes in equity.
Reclassification of financial statements of earlier periods presented for
comparative purposes is required. The Company has adopted this statement and it
does not have a significant impact on the Company's financial position or
results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". The
new standard establishes new guidelines regarding the disclosure requirements
for business segments. The Company is required to adopt the new standard in its
1998 year end financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes new standards regarding accounting and reporting requirements
for derivative instruments and hedging activities. The new standard is effective
for fiscal years beginning after June 15, 1999. The Company is presently
studying the effect of the new pronouncement and, as required, expects to adopt
SFAS No. 133 beginning January 1, 2000. As of June 30, 1998, the Company
-10-
did not own any derivative instruments.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5). SOP 98-5 requires the costs of start-up activities,
including organization costs, to be expensed as incurred. The Company is
presently studying the effect of the new pronouncement and, as required, expects
to adopt SOP 98-5 beginning January 1, 1999.
(4) INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
The Company's investment in Media is accounted for under the equity
method because as a non-investment company, Media cannot be consolidated with
the Company which is an investment company under the 1940 Act. Financial
information presented for Media includes the balance sheets as of June 30, 1998
and December 31, 1997 and unaudited statement of operations for the three and
six months ended June 30, 1998 and 1997:
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
Cash $ 822,370 $ 594,377
Accounts receivable 1,009,886 700,392
Equipment, net 1,541,062 1,422,284
Other 397,621 533,541
----------- ------------
Total assets $3,770,939 $3,250,594
=========== ============
Notes payable to parent $1,584,788 1,555,637
Accounts payable and accrued expenses 182,680 283,915
Federal income taxes payable 412,000 162,000
----------- ------------
Total liabilities 2,179,468 2,001,552
Equity 1,001,000 1,001,000
Retained earnings 590,471 248,042
----------- ------------
Total equity 1,591,471 1,249,042
----------- ------------
Total liabilities and shareholders' equity $3,770,939 $3,250,594
========== ==========
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
STATEMENT OF OPERATIONS 1998 1997 1998 1997
----------------------- ------------ ------------ ------------ --------------
Advertising revenue $ 1,515,316 $ 540,104 $ 2,972,326 $ 991,160
Cost of service 535,432 237,986 1,071,275 416,573
------------- ------------ ------------ -------------
Gross margin 979,884 302,118 1,901,051 574,587
Other operating expenses 642,826 274,269 1,308,622 541,785
-------------- ------------- ----------- ------------
Income before taxes 337,058 27,849 592,429 32,802
Income taxes 150,000 - 250,000 -
-------------- -------------- ----------- ------------
Net income $ 187,058 $ 27,849 $ 342,429 $ 32,802
============== ============== =========== ===========
-11-
(5) DEBT
The table below summarizes the various debt agreements the Company had
outstanding at June 30, 1998 and December 31, 1997:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Notes payable to banks:
Total facilities $228,000,000 $228,000,000
Maturity of facilities 7/98-6/99 1/98-6/99
Total amounts outstanding $ 124,700,000 $ 137,750,000
============== =============
SBA debentures payable $ 41,590,000 $ 39,770,000
============= =============
Maturity 9/00-9/04 6/98-9/04
Under the revolving credit agreement between MFC and its lenders, as
amended, MFC is required to maintain minimum tangible net assets of $45,000,000
and certain financial ratios. The Company believes that MFC was in compliance
with such requirements at June 30, 1998.
(6) COMMERCIAL PAPER
On March 13, 1998, MFC entered into a commercial paper agreement with
Salomon Smith Barney to sell up to an aggregate principal amount of $195 million
in secured commercial paper through private placements pursuant to Section 4(2)
of the Securities Act of 1933. Amounts outstanding at any time under the program
are limited by certain covenants, including a requirement that MFC retain an
investment grade rating from at least two of the four rating agencies, and
borrowing base calculations set forth in MFC's syndicated credit facilities,
which act as backup to the commercial paper program on a pari passu basis. The
commercial paper program has no specified maturity and may be terminated by the
Company at any time. As of June 30, 1998, MFC had $70,497,389 outstanding at a
weighted average interest rate of 6.16%
(7) SUBSEQUENT EVENTS
On August 5, 1998, MFC declared a dividend payable to the Company in
the amount of $225 per share payable on August 6, 1998 (aggregating $1,498,275),
Edwards declared a dividend payable to the Company in the amount of $4,450 per
share payable on August 6, 1998 (aggregating $445,000) and TCC declared a
dividend payable to the Company in the amount of $1,840 per share payable on
August 6, 1998 (aggregating $184,000). With the proceeds of these dividends, on
August 5, 1998 the Company declared a dividend in the amount of $0.30 per share
(aggregating $4,198,972) payable on August 27, 1998 to the stockholders of
record on August 17, 1998.
On July 31, 1998, the company entered into a revolving credit agreement
with certain banks in the amount of $57.5 million that matures on July 30, 1999.
The agreement contains certain financial ratios and covenants that the Company's
believes it was in compliance with on July 31, 1998.
-12-
On August 5, 1998, the Company entered into an option agreement to
purchase for cash substantially all of the operations and assets, and certain
liabilities of New Orleans-based Taxi Ads, LLC, which is the leading provider of
taxi top advertising in New Orleans. Taxi Ads also has a strong presence in San
Diego and Philadelphia. Taxi Ads currently provides advertising on 2,177
displays on 853 taxis.
-13-
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, 1997. 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 for Medallion Capital, Inc. (formerly
Capital Dimensions, Inc.)
GENERAL
The Company's principal activity is the origination and servicing of
loans secured by taxicab medallions ("Medallion Loans") and loans to small
businesses secured by equipment and other suitable collateral ("Commercial
Installment Loans"). The earnings of the Company depend primarily on its level
of net interest income, which is the difference between interest earned on
interest-earning assets consisting primarily of Medallion Loans and Commercial
Installment Loans, and the interest paid on interest-bearing liabilities
consisting primarily of secured credit facilities with bank syndicates, secured
commercial paper and debentures issued to or guaranteed by the SBA. Net interest
income is a function of the net interest rate spread, which is the difference
between the average yield earned on interest-earning assets and the average
interest rate paid on interest-bearing liabilities, as well as the average
balance of interest-earning assets as compared to interest-bearing liabilities.
Net interest income is affected by economic, regulatory and competitive factors
that influence interest rates, loan demand and the availability of funding to
finance the Company's lending activities. The Company, like other financial
institutions, is subject to interest rate risk to the degree that its
interest-earning assets reprice on a different basis than its interest-bearing
liabilities.
In addition, through its Medallion Capital subsidiary, the Company
invests in minority owned small businesses in selected industries. Medallion
Capital's investments are typically in the form of secured debt instruments with
fixed interest rates accompanied by warrants to purchase 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 unrealized
-14-
appreciation occurs when the gain associated with the asset (if previously
recognized as an unrealized gain) is transferred from the "unrealized" to the
"realized" category. Conversely, when a loss previously recognized as an
unrealized loss is realized by the sale or other disposition of a depreciated
portfolio asset, the reclassification of the loss from "unrealized" to
"realized" causes an increase in net unrealized appreciation and an increase in
realized loss.
Trend in Loan Portfolio Yield. The Company's investment income is driven by the
principal amount of and yields on Medallion Loans and Commercial Installment
Loans. The following table illustrates the Company's weighted average portfolio
yield at the dates indicated:
DECEMBER 31, 1997 JUNE 30, 1998
WEIGHTED PERCENTAGE WEIGHTED PERCENTAGE
AVERAGE PRINCIPAL OF TOTAL AVERAGE PRINCIPAL OF TOTAL
YIELD AMOUNTS PORTFOLIO YIELD AMOUNTS PORTFOLIO
----- ------- --------- ----- ------ ----------
Medallion Loan Portfolio 9.28% $225,961,249 72.1% 9.07% $266,765,841 72.8%
Commercial Installment Loan Portfolio 12.74 79,803,197 25.5% 12.71 90,517,503 25.2%
Equity Investments 7,490,000 2.4% 7,220,525 2.0%
------------- --------- --------------- ---------
Total Portfolio 10.20% $313,254,446 100.0% 10.00% $364,503,868 100.0%
============ ===== ============== =========
The weighted average yield e.o.p./1/ of the Medallion Loan portfolio
decreased 21 basis points from 9.28% at December 31, 1997 to 9.07% at June 30,
1998. Medallion Loans constituted 72.1% of the total portfolio of $313.3 million
at December 31, 1997 and 72.8% of the total portfolio of $364.5 million at June
30, 1998. The decrease in the average yield on Medallion Loans was caused by a
reduction in loan yields due to lower long-term interest rates and competition.
To offset the resulting decline in investment income, the Company increased the
origination of loans with shorter interest rate maturity dates, thereby reducing
the Company's interest rate risk exposure. The Company believes that this time
period 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. As a result of this decline in the Medallion Loan
portfolio yield, the weighted average yield e.o.p. of the entire portfolio
decreased 20 basis points from 10.20% at December 31, 1997 to 10.0% at June 30,
1998.
The Company had been shifting the portfolio mix toward a higher
percentage of Commercial Installment Loans, which historically have had a yield
of approximately 300 basis points higher than the Company's Medallion Loans and
250 to 600 basis points higher than the Prime Rate; however, the Company was
able to grow the Medallion Loan portfolio faster than anticipated. The weighted
average yield e.o.p. of the Commercial Installment Loan portfolio decreased
three basis points from 12.74% at December 31, 1997 to 12.71% at June 30, 1998.
Although the percentage of the entire portfolio composed of Commercial
Installment Loans decreased from 25.5% at December 31, 1997 to 25.3% at June 30,
1998, the actual outstanding balances increased from $79.8 million at December
31,1997 to $90.5 million at June 30, 1998.
- ----------------------
/1/ e.o.p. or "end of period," indicates that a calculation is made at the date
indicated rather than for the period then ended.
-15-
The Company intends to try to increase both the percentage of Commercial
Installment Loans in the total portfolio and the number of floating rate loan
originations.
Equity Investments represented 2.4% and 2.0% of the Company's entire
portfolio at December 31, 1997 and June 30, 1998, respectively.
Trend in Interest Expense. The Company's interest expense is driven by
the interest rate payable on the Company's LIBOR-based short-term credit
facilities with bank syndicates, secured commercial paper and, to a lesser
degree, fixed-rate, long-term debentures issued to or guaranteed by the SBA. In
recent years, the Company has reduced its reliance on SBA financing and
increased the relative proportion of bank debt to total liabilities. SBA
financing 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, as amended (the "SBIA") and 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 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 60 basis points below the rate charged under the
Company's revolving credit facilities. At December 31, 1997 and June 30, 1998,
short-term LIBOR-based debt constituted 72.7% and 51.4% of total debt,
respectively. At June 30, 1998, commercial paper constituted 29.0% of total
debt. The Company began issuing commercial paper on March 16, 1998.
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 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. decreased from 7.16% or 133 basis points
over the LIBOR Benchmark of 5.83% at December 31, 1997 to 6.59%, or 86 basis
points over the LIBOR Benchmark of 5.73% at June 30, 1998.
Taxicab Rooftop Advertising. In addition to its Medallion Loan 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
-16-
advertising displays ("Displays") that it owns and the occupancy rate and
advertising rate of those Displays. At June 30, 1998, Media had approximately
3,890 installed Displays. 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 Affecting Net Assets. Factors which affect the Company's net
assets include net realized gain/loss on investments and change in net
unrealized depreciation of investments. Net realized gain/loss on investments is
the difference between the proceeds derived upon sale or foreclosure of a loan
and the cost basis of such loan or equity investments. Change in net unrealized
depreciation of investments is the amount, if any, by which the Company's
estimate of the fair market value of its loan portfolio is below the cost basis
of the loan portfolio. Under the 1940 Act and the SBIA, the Company's loan
portfolio and other investments must be recorded at fair market value or "marked
to market." Unlike certain lending institutions, the Company is not permitted to
establish reserves for loan losses, but adjusts quarterly the valuation of its
loan portfolio to reflect the Company's estimate of the current realizable value
of the loan portfolio. Since no ready market exists for the Company's loans,
fair market value is subject to the good faith determination of the Company. In
determining such value, the Company takes into consideration factors such as the
financial condition of its borrowers, the adequacy of its collateral and the
relationships between current and projected market rates of interest and
portfolio rates of interest and maturities. Any change in the fair value of
portfolio loans or other investments as determined by the Company is reflected
in net unrealized depreciation or appreciation of investments and affects net
increase in net assets resulting from operations but has no impact on net
investment income or distributable income. Therefore, if recent increases in
prevailing interest rates lead to a trend of higher interest rates, net increase
in net assets resulting from operations could decline. Upon the completion of
the Acquisitions on May 29, 1996, the Company's loan portfolio was recorded on
the balance sheet at fair market 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. Application of the "marked to market"
policy to the Company's loan portfolio could result in greater volatility in the
Company's earnings than was the case for the businesses acquired in the 1996
Acquisitions since they did not in all cases follow that policy.
-17-
CONSOLIDATED RESULTS OF OPERATIONS
For the Three Months Ended June 30, 1997 and 1998.
Performance Summary. For the three months ended June 30, 1998, net
investment income has been positively impacted by the growth of the Loan
Portfolio and an increase realized gains from the sale of common and preferred
stock warrants, offset by a negative impact on spread, an increase in operating
expenses and the one time charge for merger related expenses. The gross spread
for the period was lower due to lower yields being realized on net investments
offset by a reduction in the Company's cost of funds resulting from a reduction
in the spread over LIBOR on the Company's revolving credit facilities and the
issuance of commercial paper.
Investment Income. Investment income increased $3.0 million or 50.6%
from $5.9 million for the three months ended June 30, 1997 to $8.9 million for
the three months ended June 30, 1998. The Company's investment income reflects
the positive impact of portfolio growth during the three months ended June 30,
1998. Total portfolio growth totaled $32.9 million or 9.0% from $331.6 million
at March 31, 1998 to $364.5 million at June 30, 1998 as compared to $32.3
million or 15.6% from $207.3 million at March 31, 1997 to $239.6 million at June
30, 1997. The average portfolio outstanding was $223.4 million, for the three
month period ended June 30, 1997, which produced investment income of $5.9
million at a weighted average interest rate of 10.46% compared to an average of
$352.5 million for the three-month period ended June 30, 1998, which produced
investment income of $8.9 million at a weighted average interest rate of 10.04%.
Loan originations net of participations increased by $17.2 million or
40.3% from $42.7 million for the three-month period ended June 30, 1997 to $59.9
million for the three-month period ended June 30, 1998. Not included in
originations for the three months ended June 30, 1998 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 $10.2 million for the three month period ended June 30, 1997
compared to $43.0 million for the three month period ended June 30, 1998.
Average yield e.o.p. of the entire portfolio decreased 75 basis points from
10.75% at June 30, 1997 to 10.00% at June 30, 1998. The decrease in the yield of
the entire loan portfolio was caused by a decrease in the average yield on
Medallion Loans, coupled with a decrease in the average yield on Commercial
Installment Loans and a decrease 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 600 basis points higher than the prevailing Prime Rate. The
average yield e.o.p. of the Medallion Loan portfolio decreased 57 basis points
from 9.64% at June 30, 1997 to 9.07% at June 30, 1998 and the average yield of
the Commercial Installment Loan portfolio decreased 43 basis points from 13.14%
at June 30, 1997 to 12.71% at June 30, 1998. The decline in the commercial
portfolio yield is the result of the acquisition and growth of the Business
Lenders portfolio of approximately $21.8 million of floating rate loans tied to
prime at an average yield of 11.05%. This purchase shifts the average yield on
commercial yields lower, however, interest rate exposure is mitigated by the
floating rate nature of these loans. The decrease in the average yield on
Medallion Loans was caused by a reduction in loan yields due to lower long-term
interest rates and competition. To offset the resulting decline in investment
income, the Company increased the origination of loans with shorter interest
rate maturity dates, thereby reducing the Company's interest rate risk exposure.
The decrease in average yield e.o.p. of the entire loan portfolio was offset in
part by the growth in the Medallion loan portfolio during the period. The
percentage of the portfolio composed of Commercial Installment Loans decreased
31.8% at June 30, 1997 to 25.2% at June 30, 1998. Although the Company continues
to pursue a shift in its portfolio mix towards higher yielding Commercial
Installment Loans, this shift reversed by higher than expected growth in the
Medallion Loan portfolio during the period.
Interest Expense. The Company's interest expense increased $1.6 million
or 70.8% from $2.3 million for the three months ended
-18-
June 30, 1997 to $3.9 million for the three months ended June 30, 1998. The
Company's average cost of funds e.o.p. decreased 71 basis points from 7.30% or
141 basis points over the LIBOR benchmark of 5.89% at June 30, 1997 to 6.59% or
86 basis points over the LIBOR benchmark of 5.73% at June 30, 1998. The decrease
in the average cost of funds e.o.p. was caused by a reduction in the premium to
LIBOR paid by the Company combined with a 26 basis point decrease in the LIBOR
benchmark. Also contributing to the decrease in cost of funds e.o.p. was the
Company's issuance of commercial paper, which at the present time is priced
approximately 60 basis points less than the Company's revolving credit
facilities. Average total borrowings increased $96.6 million or 78.2% from
$123.6 million for the three months ended June 30, 1997, which produced an
interest expense of $2.3 million at a weighted average interest rate of 7.34% to
$220.2 million for the three months ended June 30, 1998 which produced an
interest expense of $3.9 million at a weighted average interest rate of 7.04%.
The weighted average interest rates include commitment fees and amortization of
premiums on existing interest rate cap agreements as a reflection of total cost
of funds borrowed. The percentage of the Company's short-term LIBOR based
indebtedness and commercial paper increased as a percentage of total
indebtedness from 58.1% at June 30, 1997 to 80.4% at June 30, 1998.
Net Interest Income. Net interest income increased $1.4 million or
37.9% from $3.6 million for the three months ended June 30, 1997 to $5.0 million
for the three months ended June 30, 1998. Net interest income reflects the
positive impact of the portfolio growth during the three months ended June 30,
1998 offset by a decrease 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 decreased 12 basis points or 6.09% from 3.12% for the
three-month period ended June 30, 1997 to 3.00% for the three-month period ended
June 30, 1998.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $975,000 or 180.6% from $540,000 for the three months ended June 30,
1997 to $1,515,000 for the three months ended June 30, 1998. Display rental
costs increased $297,000 or 125.0% from $238,000 for the three months ended June
30, 1997 to $535,000 for the three months ended June 30, 1998. This resulted in
a gross margin of approximately $302,000 or 55.9% of advertising revenue for the
three months ended June 30, 1997 compared to $980,000 or 64.7% for the three
months ended June 30, 1998. The significant increase in advertising revenue and
display rental cost is directly related to the increase in Displays owned by
Media. The number of Displays owned by Media increased 1,890 or 94.5% from 2,000
at June 30, 1997 to 3,890 at June 30, 1998. Operating costs increased $369,000
or 134.4% from $274,000 for the three months ended June 30, 1997 to $643,000 for
the three months ended June 30, 1998. The increase in operating costs is a
reflection of the expansion of the Media operations. Income tax expense amounted
to $150,000 for the three months ended June 30, 1998. Media generated net income
of $28,000 for the three-month period ended June 30, 1997 compared to net income
of $187,000 for the three-month period ended June 30, 1998. The increase in net
income is primarily the result of increases in the number of Displays owned and
occupancy rates. Display occupancy increased from 65.5% for the three months
ended June 30, 1997 to 100% for the three months ended June 30, 1998. 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
-19-
portion of SBA 7a loans in the amount of $477,000 on loans sold amounting to $
5.1 million of the $8.9 million available during the three months ended June 30,
1998. There were no sales during the three months June 30, 1997. The Company
accounts for gains on sale of loans in accordance with SFAS No. 125 (Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities) and EIFT 88-11. Because of its limited experience with this
portfolio, the Company has assumed a 15% discount rate and a 15% prepayment
speed in calculating of the gains and excess servicing assets. Management will
continue to review industry data as well as its experience with the portfolio
and will adjust discount rates and prepayment speeds, if deemed appropriate.
Other Income. The Company's other income increased $112,000 or 61.4%
from $182,000 for the three months ended June 30, 1997 to $294,000 for the three
months ended June 30, 1998. Other income was primarily derived from late
charges, prepayment fees and miscellaneous income. Prepayment fees are heavily
influenced by the level and volatility of interest rates and competition.
Non-Interest Expenses. The Company's non-interest expenses increased
$3.0 million or 221.9% from $1.3 million for the three months ended June 30,
1997 to $4.3 million for the three months ended June 30, 1998. Included in
non-interest expenses for the three months ended June 30, 1998 are $1.5 million
of expenses related to the merger with Medallion Capital. Exclusive of these
expenses, non-interest expenses increased $1.5 million or 109.8% from $1.3
million for the three months ended June 30, 1997 to $2.8 million for the three
months ended June 30, 1998. Other operating expenses increased $441,000 or 73.2%
from $602,000 for the three months ended June 30, 1997 to $1,043,000 for the
three months ended June 30, 1998. Salaries and benefits increased $1,055,000 or
244.4% from $432,000 for the three months ended June 30, 1997 to $1,486,000 for
the three months ended June 30, 1998. Professional fees decreased $54,000 or
39.1% from $137,000 for the three months ended June 30, 1997 to $83,000 for the
three months ended June 30, 1998. Investment advisory fees increased $3,000 from
$57,000 for the three months ended June 30, 1997 to $60,000 for the three months
ended June 30, 1998. The operating expense ratio is computed as non-interest
expenses divided by average assets excluding the merger related expenses. The
operating expense ratio decreased to 2.8% for the three-month period ended June
30, 1998 from 3.9% for the three-month period ended June 30, 1997, on an
annualized basis. The increase in other operating expenses and salary expense is
principally the result of the acquisition of certain assets and operations of
Business Lenders LLC, which added 50 full time employees and the related
overhead of seven satellite offices principally around the eastern part of the
country, to the Company's non-interest expense for the three month period ended
June 30, 1998 compared to the three month period ended June 30, 1997. The
additional staff and lending offices should help to provide additional loan
growth for the Company.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill was $105,000 for the three months ended June 30, 1997
and $124,000 for the three months ended June 30, 1998, and relates to $6.5
million of goodwill generated in the acquisitions of Edwards and TCC. The
increase in amortization of goodwill is primarily related to the purchases of
assets of VGI, VGII and Venture Opportunities Corp. The goodwill resulting from
these acquisitions amounted to $1,545,000. The acquisition of certain assets and
operations of Business Lenders resulted in the addition of $200,000 of goodwill.
Goodwill is the amount by
-20-
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. Negative goodwill of
$2.9 million was generated in the acquisition of Tri-Magna and is being
amortized on a straight-line basis over four years.
Net Investment Income. Net investment income decreased $833,000 or
31.0% from $2.7 million for the three-month period ended June 30, 1997 to $1.8
million for the three months ended June 30, 1998. Exclusive of the merger
related expenses of $1.5 million, net investment income increased $661,000 or
24.6% from $2.7 million for the three months period ended June 30, 1997 to $3.4
million for the three months ended June 30, 1998. The increase was attributable
to the positive impact of portfolio growth offset by a decrease in the spread
between average yield and average cost of funds. Also included in the increase
was a realized gain of approximately $1.0 million from the sale of common and
preferred stock warrants in connection with the repayment of certain loans.
Change in Net Unrealized Depreciation. The change in net unrealized
depreciation decreased $6,000 from $56,000 for the three months ended June 30,
1997 to $50,000 for the three months ended June 30, 1998.
Net Realized Gain/Loss on Investments. The Company had an increase in
realized net gain on investments of $689,000 from $314,000 for the three months
ended June 30, 1997 to $1,003,000 for the three months ended June 30, 1998. The
increase in realized gains was the result of the sale of common and preferred
stock warrants in connection with the repayment of three loans.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations decreased $163,000 or 5.8% from $2.8
million for the three months ended June 30, 1997 to $3.0 for the three months
ended June 30, 1998. Exclusive of the merger related expenses $1.5 million, net
investment income increased $1.7 million or 59.1% from $2.8 million for the
three months ended June 30, 1997 to $4.5 million for the three months ended June
30, 1998. The increase was attributable to the positive impact of portfolio
growth offset by a decrease in the spread between average yield and average cost
of funds. Also included in the increase was a realized gain of approximately
$1.0 million from the sale of common and preferred stock warrants in connection
with the repayment of certain loans. Return on assets and return on equity for
the three months ended June 30, 1998, on an annualized basis, were 3.1% and
7.8%, respectively, compared to 6.3% and 13.6% for the three months ended June
30, 1997.
-21-
CONSOLIDATED RESULTS OF OPERATIONS
For the Six Months Ended June 30, 1997 and 1998.
Performance Summary. For the six months ended June 30, 1998, net
investment income has been positively impacted by the growth of the Loan
Portfolio and an increase in realized gains from the sale of common and
preferred stock warrants, offset by a negative impact on spread, an increase in
operating expenses and the one time charge for merger related expenses. The
gross spread for the period was higher due mostly to the fact that slightly
lower average yields on net investments were more than offset by a reduction in
the Company's cost of funds resulting from a reduction in the spread over LIBOR
on the Company's secured revolving credit facilities and the issuance of secured
commercial paper.
Investment Income. Investment income increased $6.0 million or 51.5%
from $11.6 million for the six months ended June 30, 1997 to $17.6 million for
the six months ended June 30, 1998. The Company's investment income reflects the
positive impact of portfolio growth during the six months ended June 30, 1998.
Total portfolio growth totaled $51.2 million or 9.0% from $313.3 million at
December 31, 1997 to $364.5 million at June 30, 1998 as compared to $43.2
million or 15.6% from $196.4 million at December 31, 1996 to $239.6 million at
June 30, 1997. The average portfolio outstanding was $218.0 million, for the six
month period ended June 30, 1997, which produced investment income of $11.6
million at a weighted average interest rate of 10.56% compared to an average of
$338.9 million for the six-month period ended June 30, 1998, which produced
investment income of $17.6 million at a weighted average interest rate of
10.29%.
Loan originations net of participations increased by $32.9 million or
38.1% from $86.6 million for the six-month period ended June 30, 1997 to $119.5
million for the six-month period ended June 30, 1998. Not included in
originations for the six months ended June 30, 1998 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 $43.3 million for the six month period ended June 30, 1997
compared to $85.2 million for the six month period ended June 30, 1998. Average
yield e.o.p. of the entire portfolio decreased 75 basis points from 10.75% at
June 30, 1997 to 10.00% at June 30, 1998. The decrease in the yield of the
entire loan portfolio was caused by a decrease in the average yield on Medallion
Loans, coupled with a decrease in the average yield on Commercial Installment
Loans and a decrease 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
600 basis points higher than the prevailing Prime Rate. The average yield e.o.p.
of the Medallion Loan portfolio decreased 57 basis points from 9.64% at June 30,
1997 to 9.07% at June 30, 1998 and the average yield of the Commercial
Installment Loan portfolio decreased 43 basis points from 13.14% at June 30,
1997 to 12.71% at June 30, 1998. The decline in the commercial portfolio yield
is the result of the acquisition and growth of the Business Lenders portfolio of
approximately $21.8 million of floating rate loans tied to prime at an average
yield of 11.05%. This purchase shifts the average yield on commercial yields
lower, however, interest rate exposure is mitigated by the floating rate nature
-22-
of these loans. The decrease in the average yield on Medallion Loans was caused
by a reduction in loan yields due to lower long-term interest rates and
competition. To offset the resulting decline in investment income, the Company
increased the origination of loans with shorter interest rate maturity dates,
thereby reducing the Company's interest rate risk exposure. The decrease in
average yield e.o.p. of the entire loan portfolio was offset in part by the
growth in the Medallion loan portfolio during the period. The percentage of the
portfolio composed of Commercial Installment Loans decreased 31.8% at June 30,
1997 to 25.2% at June 30, 1998. Although the Company continues to pursue a shift
in its portfolio mix towards higher yielding Commercial Installment Loans, this
shift slowed by higher than expected growth in the Medallion Loan portfolio
during the period.
Interest Expense. The Company's interest expense increased $2.4 million
or 49.4% from $4.9 million for the six months ended June 30, 1997 to $7.3
million for the six months ended June 30, 1998. The Company's average cost of
funds e.o.p. decreased 71 basis points from 7.30% or 141 basis points over the
LIBOR benchmark of 5.89% at June 30, 1997 to 6.59% or 86 basis points over the
LIBOR benchmark of 5.73% at June 30, 1998. The decrease in the average cost of
funds e.o.p. was caused by a reduction in the premium to LIBOR paid by the
Company combined with a 26 basis point increase in the LIBOR benchmark. Also
contributing to the decrease in cost of funds e.o.p. was the Company's issuance
of commercial paper, which at the present time is priced approximately 60 basis
points less than the Company's revolving credit facilities. Average total
borrowings increased $88.4 million or 74.5% from $131.7 million for the six
months ended June 30, 1997, which produced an interest expense of $4.9 million
at a weighted average interest rate 7.43% to $207.2 million for the six months
ended June 30, 1998 which produced an interest expense of $7.3 million at a
weighted average interest rate of 7.06%. 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
58.1% at June 30, 1997 to 80.4% at June 30, 1998.
Net Interest Income. Net interest income increased $3.6 million or
53.0% from $6.7 million for the six months ended June 30, 1997 to $10.3 million
for the six months ended June 30, 1998. Net interest income reflects the
positive impact of the portfolio growth during the six months ended June 30,
1998 coupled with a 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 10 basis points or 3.2% from 3.13% for the
six-month period ended June 30, 1997 to 3.23% for the six-month period ended
June 30, 1998.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $1,981,000 or 199.9% from $991,000 for the six months ended June 30,
1997 to $2,972,000 for the six months ended June 30, 1998. Display rental costs
increased $655,000 or 157.2% from $416,000 for the six months ended June 30,
1997 to $1,071,000 for the six months ended June 30, 1998. This resulted in a
gross margin of approximately $575,000 or 58.0% of advertising revenue for the
six months ended June 30, 1997 compared to $1,901,000 or 64.0% for the six
months ended June 30, 1998. The significant increase in advertising revenue and
display rental cost is directly related to the increase in Displays owned by
Media. The number of Displays
-23-
owned by Media increased 1,890 or 94.5% from 2,000 at June 30, 1997 to 3,890 at
June 30, 1998. Operating costs increased $767,000 or 141.5% from $542,000 for
the six months ended June 30, 1997 to $1,309,000 for the six months ended June
30, 1998. The increase in operating costs is a reflection of the expansion of
the Media operations. Income tax expense amounted to $250,000 for the six months
ended June 30, 1998. Media generated net income of $33,000 for the six month
period ended June 30, 1997 compared to net income of $342,000 for the six month
period ended June 30, 1998. The increase in net income is primarily the result
of increases in the number of Displays owned and occupancy rates. Display
occupancy increased from 65.5% for the six months ended June 30, 1997 to 100%
for the six months ended June 30, 1998. Net income is recorded as equity in
earnings or losses of unconsolidated subsidiary on the Company's statement of
operations as a result of increases in the number of Displays owned and
occupancy rates.
Gain on sale of loans. The Company experienced a gain on the sale of
the guaranteed portion of SBA 7a loans in the amount of $1.2 million on loans
sold amounting to $ 12.1 million of the $18.9 million available during the six
months ended June 30, 1998. There were no sales during the six months June 30,
1997. The Company accounts for gains on sale of loans in accordance with SFAS
No. 125 (Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities) and SOP 88-5 11. Because of its limited
experience with this portfolio, the Company has assumed a 15% discount rate and
a 15% prepayment speed in calculating of the gains and excess servicing assets.
Management will continue to review industry data as well as its experience with
the portfolio and will adjust discount rates and prepayment speeds, if deemed
appropriate.
Other Income. The Company's other income increased $151,000 or 34.4%
from $438,000 for the six months ended June 30, 1997 to $589,000 for the six
months ended June 30, 1998. Other income was primarily derived from late
charges, prepayment fees and miscellaneous income. Prepayment fees are heavily
influenced by the level and volatility of interest rates and competition.
Non-Interest Expenses. The Company's non-interest expenses increased
$4.2 million or 153.0% from $2.7 million for the six months ended June 30, 1997
to $6.9 million for the six months ended June 30, 1998. Included in non-interest
expenses for the six months ended June 30, 1998 are $1.5 million of expenses
related to the merger with Medallion Capital. Exclusive of these expenses,
non-interest expenses increased $2.7 million or 98.1% from $2.7 million for the
six months ended June 30, 1997 to $5.4 million for the six months ended June 30,
1998. Other operating expenses increased $934,000 or 85.8% from $1,088,000 for
the six months ended June 30, 1997 to $2,021,000 for the six months ended June
30, 1998. Salaries and benefits increased $1.7 million or 171.2% from $1.0
million for the six months ended June 30, 1997 to $2.8 million for the six
months ended June 30, 1998. Professional fees decreased $11,000 or 3.6% from
$308,000 for the six months ended June 30, 1997 to $297,000 for the six months
ended June 30, 1998. Investment advisory fees increased $3,000 from $114,000 for
the six months ended June 30, 1997 to $117,000 for the six months ended June 30,
1998. The operating expense ratio is computed as non-interest expenses divided
by average assets excluding the merger related expenses. The operating expense
ratio increased to 2.9% for the six-month period ended June 30, 1998 from 2.3%
for the six-month period ended June 30, 1997, on an annualized basis. The
-24-
significant increase in other operating expenses and salary expense is
principally the result of the acquisition of certain assets and operations of
Business Lenders LLC, which added 50 full time employees and the related
overhead of seven satellite offices principally around the eastern part of the
country, to the Company's non-interest expense. The additional staff and lending
offices should help to provide additional loan growth for the Company.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill was $210,000 for the six months ended June 30, 1997 and
$240,000 for the six months ended June 30, 1998, and relates to $6.5 million of
goodwill generated in the acquisitions of Edwards and TCC. The increase in
amortization of goodwill is primarily related to the purchases of assets of VGI,
VGII and Venture Opportunities Corp. The goodwill resulting from these
acquisitions amounted to $1,545,000. The acquisition of Business Lenders LLC
resulted in the addition of $200,000 of goodwill. 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. Negative goodwill of
$2.9 million was generated in the acquisition of Tri-Magna and is being
amortized on a straight-line basis over four years.
Net Investment Income. Net investment income increased $1.0 million or
21.1% from $4.8 million for the six-month period ended June 30, 1997 to $5.9
million for the six months ended June 30, 1998. Exclusive of the merger related
expenses of $1.5 million, net investment income increased $2.5 million or 52.1%
from $4.8 million for the six months period ended June 30, 1997 to $7.4 million
for the six months ended June 30, 1998. The increase was attributable to the
positive impact of portfolio growth coupled with an increase in the spread
between average yield and average cost of funds. Also included in the increase
for the six month period ended June 30, 1998 was a realized gain of
approximately $1.0 million from the sale of common and preferred stock warrants
in connection with the repayment of certain loans compared to net realized gains
after taxes of $872,000 for the six month period ended June 30, 1997.
Change in Net Unrealized Depreciation/Appreciation. The change in net
unrealized appreciation increased $348,000 from a depreciation of $126,000 for
the six months ended June 30, 1997 to an appreciation $222,000 for the six
months ended June 30, 1998. The increase was the result of the increase in the
value of equity investments that the Company owns.
Net Realized Gain/Loss on Investments. The Company had an increase in
realized net gain on investments of $131,000 from net realized gains after taxes
of $872,000 for the six months ended June 30, 1997 to $1,003,000 for the six
months ended June 30, 1998. The increase in realized gains was the result of the
sale of common and preferred stock warrants in connection with the repayment of
several loans.
Net Increase in Net Assets Resulting from Operations. Net increase in
net assets resulting from operations increased $1.6 million or 28.0% from $5.6
million for the six months ended June 30, 1997 to $7.2 million for the six
months ended June 30, 1998. Exclusive of the merger related expenses $1.5
million, net investment income increased $3.1 million or 55.4% from $5.6 million
for the six months period ended June 30, 1997 to $8.7 million for the six months
ended June 30,
-25-
1998. The increase was attributable to the positive impact of portfolio growth
coupled with an increase in the spread between average yield and average cost of
funds. Also included in the increase was a realized gain of approximately $1.0
million from the sale of common and preferred stock warrants in connection with
the repayment of certain loans compared to net realized gains of after tax of
$874,000. Return on assets and return on equity for the six months ended June
30, 1998, on an annualized basis, were 4.7% and 11.5%, respectively, compared to
4.7% and 10.0% for the six months ended June 30, 1997.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity. The Company, like other financial
institutions, is subject to interest rate risk to the extent its
interest-earning assets (consisting of Medallion Loans and Commercial
Installment Loans) reprice on a different basis over time in comparison to its
interest-bearing liabilities (consisting primarily of credit facilities with
bank syndicates, secured commercial paper and subordinated SBA debentures).
A relative measure of interest rate risk can be derived from the
Company's interest rate sensitivity gap. The interest rate sensitivity gap
represents the difference between interest-earning assets and interest-bearing
liabilities which mature and/or reprice within specified intervals of time. The
gap is considered to be positive when repriceable assets exceed repriceable
liabilities and negative when the inverse situation exists. A relative measure
of interest rate sensitivity is provided by the cumulative difference between
interest sensitive assets and interest sensitive liabilities for a given time
interval expressed as a percentage of total assets.
Having interest-bearing liabilities that mature or reprice more
frequently on average than assets may be beneficial in times of declining
interest rates, although such an asset/liability structure may result in
declining net earnings during periods of rising interest rates. Conversely,
having interest-earning assets that mature or reprice more frequently on 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
-26-
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
------ ---- ---- ----
$10,000,000 7.0% 5/13/97 5/13/99
$20,000,000 7.0% 5/13/98 11/13/99
$20,000,000 6.5% 4/7/98 9/30/99
$20,000,000 7.0% 9/30/99 3/30/01
Total premiums paid under the agreements are being amortized over the
respective terms of the agreements. In addition, the Company manages its
exposure to increases in market rates of interest by incurring fixed rate
indebtedness, such as SBA debentures. The Company currently has outstanding SBA
debentures in the principal amount of $41.6 million with a weighted average rate
of interest of 7.32%. At June 30, 1998, these debentures constituted 17.1% of
the Company's total indebtedness.
The Company will seek to manage interest rate risk by evaluating and
purchasing, if appropriate, additional derivatives, originating adjustable-rate
loans, incurring fixed-rate indebtedness and revising, if appropriate, its
overall level of asset and liability matching. Nevertheless, the Company accepts
varying degrees of interest rate risk depending on market conditions and
believes that the resulting asset/liability interest rate mismatch results in
opportunities for higher net interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity are credit facilities with bank syndicates,
secured commercial paper, fixed rate, long-term debentures that are issued to or
guaranteed by the SBA and loan amortization and prepayments. As a Regulated
Investment Company ("RIC") under the Internal Revenue Code of 1986, as amended,
the Company distributes at least 90% of its investment company taxable income;
consequently, the Company primarily relies upon external sources of funds to
finance growth. At June 30, 1998, 52.7% of the Company's $236.8 million of debt
consisted of bank debt, substantially all of which was at variable effective
rates of interest with a weighted average rate of 6.60% or 190 basis points
below the Prime Rate, 29.8% or $70.5 million consisted of short-term commercial
paper at a weighted average interest rate of 6.16% and 17.6% or $41.6 million
consisted of SBA debentures with fixed rates of interest with a weighted average
rate of 7.32%. The Company is eligible to seek SBA funding but plans to continue
to limit its use of SBA funding and will seek such funding only when
advantageous, such as when SBA financing rates are particularly attractive, or
to fund loans that qualify under SBA regulations through MFC and Medallion
Capital which are already subject to certain SBA restrictions. In the event that
the Company seeks SBA funding, no assurance can be given that such funding will
be obtained. In addition to possible additional SBA funding, an additional $32.8
million of debt was available at June 30, 1998 at variable effective rates of
interest averaging below the Prime Rate under the Company's $228.0 million bank
credit facilities.
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The following table illustrates the Company's and each of the
subsidiaries' sources of available funds and amounts outstanding under credit
facilities at June 30, 1998.
MEDALLION
FINANCIAL MFC EDWARDS TCC BLLC CDI TOTAL
--------- --- ------- --- ---- --- -----
(DOLLARS IN THOUSANDS)
Cash and cash equivalents $ 77 $ 1,736 $ 552 $ 1,387 $ 81 $ 2,594 $6,427
Revolving lines of credit 25,000 195,000 8,000 -- -- -- 228,000
Amounts available 500 30,703(a) 1,600 -- -- -- 32,803(a)
Amounts outstanding 24,500 93,800 6.400 -- -- -- 124,700
Average interest rate 6.66% 6.56% 6.96% -- -- -- 6.60%
Maturity 7/98(b) 6/99 7/98 -- -- -- 7/98-6/99
Commercial paper
Amounts outstanding -- 70,497 -- -- -- -- 70,497
Average interest rate -- 6.16% -- -- -- -- 6.16%
Maturity -- 6/99 -- -- -- -- 6/99
SBA debentures -- 6,200 19,250 5,640 -- 10,500 41,590
Average interest rate -- 6.27% 7.58% 8.00% -- 7.08% 7.32%
Maturity -- 9/00-9/05 9/02-9/04 6/02 -- 3/06-6/07 9/00-9/07
Total cash and remaining amounts
available under credit facilities 577 32,439 2,152 1,387 81 2,594 39,230
Total debt outstanding $24,500 $170,497 $25,250 $5,640 $ - $ 10,500 $ 236,787
(a) Commercial paper outstanding is deducted from revolving credit lines
available as the line of credit acts as a liquidity facility for the
commercial paper.
(b) On July 31, 1998, the Company entered into a $57.5 million revolving credit
facility maturing on July 30, 2000. This facility replaced the line of
credit maturing on July 31, 1998 for Medallion Financial Corp.
Loan amortization and prepayments also provide a source of funding for
the Company. Prepayments on loans are influenced significantly by general
interest rates, medallion loan market rates, economic conditions and
competition. Medallion loan prepayments have slowed since early 1994, initially
because of increases, and then stabilization in the level of interest rates and
more recently because of an increase in the percentage of the Company's
medallion loans which are refinanced with the Company rather than through other
sources of financing.
The Company makes limited use of SBA funding and will seek such funding
only when advantageous. Since May 30, 1996, the Company has expanded its loan
portfolio, reduced its level of SBA financing and increased its level of bank
funding.
Media funds its operations through internal cash flow and inter-company
debt. Media is not a RIC and, therefore, is able to retain earnings to finance
growth.
INVESTMENT CONSIDERATIONS
The following are certain of the factors which could affect the
Company's future results. They should be considered in connection with
evaluating forward-looking statements contained in this Management's Discussion
and Analysis and elsewhere in this Report and otherwise made by or on behalf of
the Company since these factors, among others, could cause actual results and
conditions to differ materially from those projected in these forward-looking
statements.
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Interest Rate Spread. The Company's net interest income is largely
dependent upon achieving a positive interest rate spread and other factors.
Leverage. The Company's use of leverage poses certain risks for holders
of the Common Stock, including the possibility of higher volatility of both the
net asset value of the Company and the market price of the Common Stock and,
therefore, an increase in the speculative character of the Common Stock.
Availability of Funds. The Company has a continuing need for capital to
finance its lending activities. The Company funds its operations through credit
facilities with bank syndicates and, to a lesser degree, through subordinated
SBA debentures. Reductions in the availability of funds from banks and under SBA
programs on terms favorable to the Company could have a material adverse effect
on the Company. Because the Company distributes to its shareholders at least 90%
of its investment company taxable income, such earnings are not available to
fund loan originations.
Risk Relating to Integration of CDI and Medallion. The realization of
certain benefits anticipated as a result of the acquisition of Medallion
Capital will depend in part on the integration of Medallion Capital's investment
portfolio and specialty finance business with the Company and the successful
inclusion of Medallion Capital's investment portfolio in the Company's financing
operations. There can be no assurance that Medallion Capital's business can be
operated profitably or integrated successfully into the Company's operations.
Such effects could have a material adverse effect on the financial results of
the Company.
Industry and Geographic Concentration. A substantial portion of the
Company's revenue is derived from operations in New York City and these
operations are substantially focused in the area of financing New York City
taxicab medallions and related assets. There can be no assurance that an
economic downturn in New York City in general, or in the New York City taxicab
industry in particular, would not have an adverse impact on the Company.
Reliance on Management. The success of the Company will be largely
dependent upon the efforts of senior management. The death, incapacity or loss
of the services of any of such individuals could have an adverse effect on the
Company.
Taxicab Industry Regulation. Every city in which the Company originates
Medallion Loans, and most other major cities in the United States, limit the
supply of taxicab medallions. In many markets, regulation results in supply
restrictions which, in turn, support the value of medallions; consequently,
actions which loosen such restrictions and result in the issuance of additional
medallions into a market could decrease the value of medallions in that market
and, therefore, the collateral securing the Company's then outstanding Medallion
Loans, if any, in that market. The Company is unable to forecast with any degree
of certainty whether any potential increases in the supply of medallions will
occur. In New York City, and in other markets where the Company originates
Medallion Loans, taxicab fares are generally set by government agencies, whereas
expenses associated with operating taxicabs are largely unregulated. As a
consequence, in the short term, the ability of taxicab operators to recoup
increases in expenses is limited.
-29-
Escalating expenses, therefore, can render taxicab operation less profitable and
make it more difficult for borrowers to service loans from the Company and could
potentially adversely affect the value of the Company's collateral.
Government Regulation of Tobacco Advertising. Currently, approximately
47% of Media's taxicab rooftop advertising revenue is derived from tobacco
products advertising. Various federal, state and local government agencies,
including the U.S. Food and Drug Administration (the "FDA") have from, time to
time, proposed regulations restricting the sale and advertising of cigarette and
smokeless tobacco products. Additionally, various tobacco companies have
voluntarily proposed eliminating outdoor tobacco advertising in exchange for
immunity from class action suits. Accordingly, such regulations or voluntary
restrictions could have an adverse effect upon the taxicab rooftop advertising
business of the Company. The Company believes, however, that it could replace
some of the revenue which may be lost due to the loss of tobacco taxicab rooftop
advertising.
Year 2000. The Company is addressing the Year 2000 problem, which
concerns the inability of systems, primarily computer software programs, to
properly recognize and process date sensitive information relating to the year
2000 and beyond. The Company, in the ordinary course of business, has for
several years had several information system improvement initiatives underway.
These initiatives include the installation of new loan servicing software.
Management believes that such initiatives will adequately address the Year 2000
problem, although there can be no assurance in this regard. Costs related to new
information systems will be capitalized and amortized over their useful lives.
Management does not believe that the other costs associated with addressing the
Year 2000 problem will be material. The Company will continue to address the
Year 2000 issue in connection with its future acquisitions. The ability of third
parties with which the Company transacts business to adequately address their
Year 2000 issues is outside of the Company's control. Failure of such third
parties or the Company to adequately address their respective Year 2000 issues
could have a material adverse effect on the Company's financial condition or
results of operations.
-30-
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on June 11, 1998 (the
"Annual Meeting").
The Company's stockholders were asked to take the following actions at the
meeting:
(1) Elect three Class II Directors to serve until the 2001 annual meeting of
stockholders or until their successors shall otherwise be elected (the "Board
Proposal");
(2) Amend the Company's Restated Certificate of Incorporation to increase the
number of authorized shares of common stock therein (the "Charter Proposal");
(3) Approve certain amendments to the Company's 1996 Stock Option Plan to
increase the number of authorized shares of common stock reserved for issuance
thereunder (the "Incentive Plan Proposal");
(4) Approve the renewal of the sub-advisory agreement between the Company and
FMC Advisers, Inc. (the "Advisory Contract Proposal"); and
(5) Ratify the Board of Directors' selection of Arthur Andersen LLP to serve
as the Company's independent auditors for the fiscal year ending December 31,
1998 (the "Auditors Proposal").
With respect to the Board Proposal, the three individuals nominated for
director were elected by the affirmative vote of a majority of shares of
common stock present at the Annual Meeting.
The nominees and the votes received by each are as follows:
Votes cast for Withheld
-------------------------------------------------
Mario M. Cuomo 11,215,210 23,185
Frederick S. Hammer 11,215,210 23,185
Andrew M. Murstein 11,215,210 23,185
The Charter Proposal, Incentive Plan Proposal, Advisory Contract Proposal and
Auditors Proposal were also approved by affirmative vote of a majority of
shares of common stock present at the Annual Meeting. Each of the proposals
received the following votes:
Votes cast for Against Abstentions
------------------------------------------------
Charter Proposal 8,701,755 1,685,375 851,162
Incentive Plan Proposal 10,919,794 275,559 30,810
Advisory Contract Proposal 9,911,598 1,581,541 52,562
Auditors Proposal 11,204,803 6,154 27,430
-31-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of March 6, 1998, by and among
Medallion Financial Corp., CD Merger Corp. and Capital Dimensions, Inc.
(Exhibits and Schedules thereto omitted). Filed herewith.
3.1 Medallion Financial Corp. Restated Certificate of Incorporation. Filed
as Exhibit 3.1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1996 and incorporated by reference
herein.
3.1.1 Certificate of Amendment of Medallion Financial Corp. Restated
Certificate of Incorporation. Filed herewith.
3.2 Medallion Financial Corp. Restated By-Laws. Filed as Exhibit b to the
Company's Registration Statement on Form K-2 (File No. 333-1670) and
incorporated by reference herein.
4.1 Debenture due April 1, 1997 in the amount of $1,500,000 issued by
Edwards Capital Company and payable to Chemical Bank as Trustee under
the Trust Agreement dated January 15, 1987 among the Trustee, the U.S.
Small Business Administration and SBIC Funding Corporation (the "Trust
Agreement"). Filed as Exhibit f.2 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
4.2 Debenture due September 1, 2002 in the amount of $3,500,000 issued by
Edwards Capital Company and payable to Chemical Bank as Trustee under
the Amended and Restated Trust Agreement dated March 1, 1990 among the
Trustee, the U.S. Small Business Administration and SBIC Funding
Corporation (the "Amended Trust Agreement"). Filed as Exhibit f.4 to
the Company's Registration Statement on Form N-2 (File No.
333-1670) and incorporated by reference herein.
4.3 Debenture due September 1, 2002 in the amount of $6,050,000 issued by
Edwards Capital Company and payable to Chemical Bank under the Amended
Trust Agreement. Filed as Exhibit f.5 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
4.4 Debenture due June 1, 2004 in the amount of $4,600,000 issued by
Edwards Capital Company and payable to Chemical Bank under the Amended
Trust Agreement. Filed as Exhibit f.6 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
4.5 Debenture due September 1, 2004 in the amount of $5,100,000 issued by
Edwards Capital Company and payable to Chemical Bank under the Amended
Trust Agreement. Filed as Exhibit f.7 to the Company's Registration
Statement on Form N-2 (File No. 333-1670) and incorporated by reference
herein.
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4.6 Letter Agreement, dated September 8, 1992, between the U.S. Small
Business Administration and Edwards Capital Company regarding limit on
incurrence of senior indebtedness, as amended on January 17, 1996.
Filed as Exhibit f.8 to the Company's Registration Statement on Form
N-2 (File No. 333-1670) and incorporated by reference herein. Letter
dated September 19, 1996 from the U.S. Small Business Administration to
Edwards Capital Corp. amending such Letter Agreement was filed as
Exhibit 4.7 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1996 and is incorporated by reference
herein.
4.7 Debenture due June 1, 2002 in the amount of $5,640,000 issued by
Transportation Capital Corp: and payable to Chemical Bank under the
Amended Trust Agreement. Filed as Exhibit f.10 to the Company's
Registration Statement on Form N-2 (File No. 333-1670) and incorporated
by reference herein.
10.1 Medallion Financial Corp. Amended and Restated 1996 Stock Option Plan.
Filed herewith.
27 Medallion Financial Corp. Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K.
There were no reports on Form 8-K were filed during the fiscal
quarter ended June 30, 1998.
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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: August 14, 1998 By: /s/ Daniel F. Baker
----------------------
Daniel F. Baker
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
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