U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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,
November 10, 1998:
CLASS OUTSTANDING PAR VALUE SHARES OUTSTANDING
----------------- --------- ------------------
Common Stock........................... $.01 14,000,114
================================================================================
MEDALLION FINANCIAL CORP.
FORM 10-Q
SEPTEMBER 30, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Basis of Preparation............................................................... 3
Medallion Financial Corp. Consolidated Balance Sheets
at September 30, 1998 and December 31, 1997................................... 4
Medallion Financial Corp. Consolidated Statement of Operations
for the three and nine months ended September 30, 1998 and 1997............... 5
Medallion Financial Corp. Consolidated Statement of Cash
Flows for the three and nine months ended September 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.......................................................... 13
General......................................................................... 13
Consolidated Results of Operations (for the three months
ended September 30, 1997 and 1998)............................................ 16
Consolidated Results of Operations (for the nine months ended
September 30, 1997 and 1998).................................................. 20
Asset/Liability Management...................................................... 23
Liquidity and Capital Resources................................................. 25
Investment Considerations....................................................... 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................... 28
SIGNATURES.................................................................................... 30
-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 was subsequently renamed Medallion
Capital, Inc. The acquisition was completed on June 16, 1998 and was accounted
for as a pooling of interests and, accordingly, the information included in the
accompanying financial statements and notes thereto present the combined
financial position and the results of operations of the Company and CDI as if
they had operated as a combined entity for all periods presented. The financial
information in this report is divided into two sections. The first section, Item
1, includes the unaudited consolidated balance sheet of the Company as of
September 30, 1998 and the related statements of operations, stockholders'
equity and cash flows for the three and nine months ending September 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 nine months ended September 30, 1998 and 1997.
The consolidated balance sheet of the Company as of September 30, 1998, the
related statements of operations, and cash flows for the three and nine months
ended September 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 nine months ended September 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 SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
(Unaudited) (Restated
See Note 2)
ASSETS
Investments :
Medallion loans $275,287,532 $225,961,249
Commercial installment loans 92,108,499 79,803,197
Equity investments 9,234,960 7,490,000
------------ ------------
Net investments 376,630,991 313,254,446
Investment in unconsolidated subsidiary 1,963,433 1,140,424
------------ ------------
Total investments 378,594,424 314,394,870
Cash 6,005,865 6,666,613
Accrued interest receivable 4,501,838 3,237,840
Receivable from sale of loans 7,718,541 2,862,981
Fixed assets, net 1,073,694 356,206
Goodwill, net 7,639,999 6,082,515
Servicing fee receivable 2,087,236 1,617,415
Other assets 3,962,258 4,675,204
------------ ------------
Total assets $411,583,855 $339,893,644
============ ============
LIABILITIES
Accounts payable $ 6,184,888 $ 7,377,222
Dividends payable - 3,594,402
Accrued interest payable 2,437,836 871,194
Notes payable to banks and demand notes 128,700,000 137,750,000
Commercial paper 78,634,452 -
SBA debentures payable 41,590,000 39,770,000
------------ ------------
Total liabilities 257,547,176 189,362,818
------------ ------------
Negative goodwill, net 1,253,516 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 (45,000,000 and 15,000,000 shares of $.01 par
value stock authorized -14,000,114 and 13,908,916 shares
outstanding at September 30, 1998 and December 31, 1997,
respectively) 140,002 139,089
Capital in excess of par value 143,560,751 143,065,650
Accumulated undistributed income 9,082,410 5,530,771
------------ ------------
Total shareholders' equity 152,783,163 148,735,510
------------ ------------
Total liabilities and shareholders' equity $411,583,855 $339,893,644
============ ============
Number of common shares and common share equivalents 14,144,331 14,062,318
============ ============
Net asset value per share $ 10.80 $ 10.58
============ ============
See accompanying notes to unaudited consolidated financial statements.
-4-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
(Restated) (Restated)
Investment income:
Interest income on investments $ 8,848,391 $ 6,408,287 $26,290,506 $17,922,121
Interest income on s/t investments 93,372 43,000 261,009 155,678
----------- ----------- ----------- -----------
Total investment income 8,941,763 6,451,287 26,551,515 18,077,799
Interest expense:
Notes payable to banks 2,027,737 1,385,984 6,865,979 4,844,742
Commercial paper 1,112,697 - 2,024,638 -
SBA debentures 794,886 807,256 2,352,689 2,240,501
----------- ----------- ----------- -----------
Total interest expense 3,935,320 2,193,240 11,243,306 7,085,243
Net interest income 5,006,443 4,258,047 15,308,209 10,992,556
----------- ----------- ----------- -----------
Non-interest income:
Equity in earnings of unconsolidated subsidiary 480,561 47,749 823,009 80,551
Accretion of negative goodwill 180,600 180,600 541,800 541,800
Gain on sale of loans 407,369 - 1,565,944 -
Other income 419,114 265,999 1,007,652 703,980
----------- ----------- ----------- -----------
Total non-interest income 1,487,644 494,348 3,938,405 1,326,331
----------- ----------- ----------- -----------
Expenses:
Administrative and advisory fees 64,630 66,832 181,192 180,724
Professional fees 184,794 157,051 481,573 465,054
Salaries and benefits 1,388,080 590,784 3,964,189 1,590,318
Other operating expenses 1,198,496 608,401 3,355,498 1,696,217
Amortization of goodwill 135,542 105,060 375,961 315,180
Merger related expenses - - 1,494,491 -
----------- ----------- ----------- -----------
Total expenses 2,971,542 1,528,128 9,852,904 4,247,493
Net investment income 3,522,545 3,224,267 9,393,710 8,071,394
----------- ----------- ----------- -----------
Net realized gain on investments 595,965 211,000 1,622,591 2,015,398
Change in net unrealized depreciation 41,890 127,783 264,292 1,827
Income tax benefit (provision) 40,007 - 78,573 (932,000)
----------- ----------- ----------- -----------
Net increase in net assets resulting from operations $ 4,200,407 $ 3,563,050 $11,359,166 $ 9,156,619
=========== =========== =========== ===========
Net increase in net assets resulting from
operations per common share
Basic $0.30 $0.26 $0.81 $0.79
=========== =========== =========== ===========
Diluted $0.30 $0.25 $0.81 $0.78
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic Average Shares 13,998,420 13,934,904 13,950,806 11,560,794
=========== =========== =========== ===========
Diluted Average Shares 14,090,424 14,030,078 14,095,023 11,667,536
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
-5-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated)
Net increase in net assets resulting from operations $ 11,359,164 $ 9,156,619
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by (used for) operating activities:
Depreciation and amortization 241,808 38,815
Increase in equity in earnings of unconsolidated subsidiary (823,009) (80,551)
Change in unrealized depreciation - 25,000
Amortization of goodwill 375,961 315,180
Increase in accrued interest receivable (1,130,706) (1,110,474)
Decrease (Increase) in other assets 681,025 (1,716,122)
Increase (Decrease) in accounts payable and accrued expenses (1,367,334) 1,058,020
Increase in receivable from sale of loans (4,855,560) -
Increase in servicing fee receivable (469,821) -
Accretion of negative goodwill (541,800) (541,800)
Increase (decrease) in accrued interest payable 1,449,560 423,747
------------- -------------
Net cash provided by operating activities 4,919,288 7,568,434
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of investments (157,331,497) (119,353,432)
Proceeds from sales and maturities of investments 110,700,614 46,639,443
Payment for purchase of VG1, VGII & VOC (11,963,072) -
Capital expenditures (1,284,620) 4,096
------------- -------------
Net cash used for investing activities (47,283,936) (72,709,893)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable to banks (9,050,000) (5,575,000)
Proceeds from issuance of commercial paper 78,634,452 -
Proceeds from (payment of) SBA debentures (4,380,000) 1,102,082
Proceeds from exercise of stock options 496,014 -
Proceeds from sale of common stock - 74,586,285
Payment of declared dividends to current stockholders (11,401,927) (6,374,500)
------------- -------------
Net cash provided by financing activities 54,298,539 63,738,867
------------- -------------
NET DECREASE IN CASH (660,748) (1,402,592)
CASH beginning of period 6,666,613 6,099,512
------------- -------------
CASH end of period $ 6,005,865 $ 4,696,920
============= =============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 9,676,664 $ 6,661,496
============= =============
See accompanying notes to unaudited consolidated financial statements.
-6-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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. In
connection with the Offering, the Company 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 Transportation
Capital Corp. ("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. As a result of the merger with Tri-
Magna in accordance with the Merger Agreement, dated December 21, 1995, between
the Company and Tri-Magna, MFC and Taxi Media Inc., 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 Small Business Administration ("SBA"). As of September 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 from the Connecticut State
Department of Banking, as well as approval from the SBA.
On June 16, 1998, the Company completed the acquisition of Capital
Dimensions, Inc. ("CDI") an SSBIC lender, headquartered in Minneapolis,
Minnesota. CDI was subsequently renamed Medallion Capital, Inc. ("Medallion
Capital"). The charter was amended to convert Medallion
-7-
Capital to an SBIC. 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 common stock. 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 its 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 six months ended June 30, 1998 and the
three and nine months ended September 30, 1997 and are included in the
accompanying consolidated statement of operations.
(Dollars in thousands, except shares and per share
amounts)
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 THREE MONTHS ENDED SEPTEMBER 30, 1997 The Company CDI Combined
- --------------------------------------------------------------------------------------
Total Investment Income $ 5,971 $ 480 $ 6,451
Net increase in net assets from operations $ 3,470 $ 93 $ 3,563
Net increase in net assets from operations per share
Basic $ .27 $ .05 $ .26
Diluted $ .27 $ .05 $ .25
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 The Company CDI Combined
- --------------------------------------------------------------------------------------
Total Investment Income $16,142 $1,936 $18,078
Net increase in net assets from operations $ 7,726 $1,430 $ 9,156
Net increase in net assets from operations per share
Basic $ .73 $ .85 $ .79
Diluted $ .73 $ .76 $ .78
On May 27, 1998, the Company completed the acquisition of certain assets
and assumption of certain liabilities of Venture Group I, Inc. ("VGI"), Venture
Group II, Inc. ("VGII") and Venture Opportunities Corp., an SBIC lender
headquartered in New York, New York 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:
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
-8-
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 $2,143,217 and $2,233,717 on total investments of $376,630,991 and
$313,254,446 at September 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 nine months ended September 30, 1998 and 1997 are as follows:
(Dollars in thousands, except shares and per share amounts)
THREE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Amount Amount
- ------------------------------------------------------------------------------------------------
Net Income $4,200 $3,563
Basic EPS:
Income available to 4,200 13,998,420 $.30 3,563 13,934,904 $.26
common stockholders
Effect of dilutive
options
Stock options 92,004 95,174
Diluted EPS:
Income available to 4,200 14,090,424 $.30 3,563 14,030,078 $.25
common stockholders
-9-
NINE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Amount Amount
- -------------------------------------------------------------------------------------------
Net Income $11,359 $9,157
Basic EPS:
Income available to 11,359 13,950,806 $.81 9,157 11,560,794 $.79
common stockholders
Effect of dilutive
options
Stock options 144,217 106,742
Diluted EPS:
Income available to 11,359 14,095,023 $.81 9,157 11,667,536 $.78
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 September 30, 1998, the Company did not own
any derivative instruments.
(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 September 30,
1998 and December 31, 1997 and unaudited statement of operations for the three
and nine months ended September 30, 1998 and 1997:
-10-
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Cash $ 580,236 $ 594,377
Accounts receivable 1,327,825 700,392
Equipment, net 1,708,369 1,422,284
Goodwill 1,032,111
Other 538,120 533,541
---------- ----------
Total assets $5,186,661 $3,250,594
========== ==========
Notes payable to parent $2,018,192 1,555,637
Accounts payable and accrued expenses 615,818 283,915
Federal income taxes payable 480,599 162,000
---------- ----------
Total liabilities 3,114,609 2,001,552
Equity 1,001,000 1,001,000
Retained earnings 1,071,052 248,042
---------- ----------
Total equity 2,072,052 1,249,042
---------- ----------
Total liabilities and shareholders'
equity $5,186,661 $3,250,594
========== ==========
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
STATEMENT OF OPERATIONS 1998 1997 1998 1997
------------------------------------------------------------
Advertising revenue $2,256,908 $725,766 $5,229,234 $1,716,926
Cost of service 606,150 273,812 1,677,200 690,385
---------- -------- ---------- ----------
Gross margin 1,650,758 451,954 3,552,034 1,026,541
Other operating expenses 870,377 379,205 2,179,024 920,990
---------- -------- ---------- ----------
Income before taxes 780,381 72,749 1,373,010 105,551
Income taxes 300,000 25,000 550,000 25,000
---------- -------- ---------- ----------
Net income $ 480,381 $ 47,749 $ 823,010 $ 80,551
========== ======== ========== ==========
On September 1, 1998, the Company purchased for cash substantially all of the
operations and assets of New Orleans-based Taxi Ads, LLC, for an aggregate
purchase price of $1,200,000. This acquisition was accounted for under the
purchase method of accounting. Included in the purchase price was certain
premiums paid totaling $1,001,766, which represented goodwill.
(5) DEBT
The table below summarizes the various debt agreements the Company and its
subsidiaries had outstanding at September 30, 1998 and December 31, 1997:
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Notes payable to banks:
Total facilities $257,250,000 $228,000,000
Maturity of facilities 10/98-7/00 1/98-6/99
Total amounts outstanding $128,700,000 $137,750,000
============ ============
SBA debentures payable $ 41,590,000 $ 39,770,000
============ ============
Maturity 9/00-9/04 6/98-9/04
-11-
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 September 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 nationally recognized
rating agencies, and borrowing base calculations as 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 September 30,
1998, MFC had $78,634,452 outstanding at a weighted average interest rate of
5.90%
(7) SUBSEQUENT EVENTS
On November 4, 1998, MFC declared a dividend payable to the Company in the
amount of $210 per share payable on November 5, 1998 (aggregating $1,398,390),
Edwards declared a dividend payable to the Company in the amount of $4,400 per
share payable on November 5, 1998 (aggregating $440,000) and TCC declared a
dividend payable to the Company in the amount of $1,240 per share payable on
November 5, 1998 (aggregating $124,000). With the proceeds of these dividends,
on November 4, 1998 the Company declared a dividend in the amount of $0.30 per
share (aggregating $4,200,034) payable on November 30, 1998 to the stockholders
of record on November 16, 1998.
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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 of 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 an equity interest for a
nominal exercise price (such warrants constituting "Equity Investments").
Interest income is earned on the debt investments. Realized gains (losses) on
investments are recognized when investments are sold and represent the
difference between the proceeds received from the disposition of portfolio
assets and the cost of such portfolio assets. In addition, changes in unrealized
appreciation (depreciation) of investments is recorded and represents the net
change in the estimated fair values of the portfolio assets at the end of the
period as compared with their estimated fair values at the beginning of the
period or the cost of such portfolio assets, if purchased during the period.
Generally, "realized gains (losses) on investments" and "changes in unrealized
appreciation (depreciation) of investments" are inversely related. When an
appreciated asset is sold to realize a gain, a decrease in unrealized
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.
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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 SEPTEMBER 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% 9.03% $275,287,534 73.1%
Commercial Installment Loan Portfolio 12.74 79,803,197 25.5 12.69 92,108,497 24.4
Equity Investments - 7,490,000 2.4 - 9,234,960 2.5
----- ------------ ----- ----- ------------ -----
Total Portfolio 10.20% $313,254,446 100.0% 9.96% $376,630,991 100.0%
============ ===== ============ =====
The weighted average yield e.o.p./1/ of the Medallion Loan portfolio
decreased 25 basis points from 9.28% at December 31, 1997 to 9.03% at September
30, 1998. Medallion Loans constituted 72.1% of the total portfolio of $313.3
million at December 31, 1997 and 73.1% of the total portfolio of $376.6 million
at September 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 24 basis points from 10.20% at December 31,
1997 to 9.96% at September 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 5 basis
points from 12.74% at December 31, 1997 to 12.69% at September 30, 1998.
Although the percentage of the entire portfolio composed of Commercial
Installment Loans decreased from 25.5% at December 31, 1997 to 24.4% at
September 30, 1998, the actual outstanding balances increased from $79.8 million
at December 31,1997 to $92.1 million at September 30, 1998. The Company expects
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 2.5% of the Company's entire portfolio
at December 31, 1997 and September 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
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/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.
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relative proportion of bank debt to total liabilities. SBA financing has offered
attractive rates however, such financing is restricted in its application and
its availability is uncertain. In addition, SBA financing subjects its
recipients to limits on the amount of secured bank debt they may incur.
Accordingly, the Company plans to limit its use of SBA funding and will seek
such funding only when advantageous, such as when SBA financing rates are
particularly attractive, and to fund loans that qualify under the Small Business
Investment Act of 1958, as amended (the "SBIA") and SBA Regulations through
subsidiaries subject to SBA restrictions. The Company believes that its
transition to financing operations primarily with short-term LIBOR-based secured
bank debt and secured commercial paper has generally decreased its interest
expense thus far, but has also increased the Company's exposure to the risk of
increases in market interest rates which the Company attempts to mitigate with
certain matching strategies. The Company also expects that net interest income
should increase as the Company issues more commercial paper in lieu of bank debt
and will thus permit an increase in the size of the loan portfolio. At the
present time commercial paper is generally priced at approximately 40-50 basis
points below the rate charged under the Company's revolving credit facilities.
At December 31, 1997 and September 30, 1998, short-term LIBOR-based debt
constituted 70.3% and 51.7% of total debt, respectively. At September 30, 1998,
commercial paper constituted 31.6% 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 over LIBOR paid by the Company on
its LIBOR-based debt and secured commercial paper, and (iii) the ratio of LIBOR-
based debt to SBA financing. The Company incurs LIBOR-based debt for terms
generally ranging from 1-180 days. The Company's debentures issued to or
guaranteed by the SBA typically have initial terms of ten years. The Company's
cost of funds reflect fluctuations in LIBOR to a greater 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 7.14% or 131 basis points
over the LIBOR Benchmark of 5.83% at December 31, 1997 to 6.51%, or 91 basis
points over the LIBOR Benchmark of 5.60% at September 30, 1998.
Taxicab Rooftop Advertising. In addition to its finance business, the Company
also conducts a taxicab rooftop advertising business through Media, which began
operations in November 1994. Media's revenue is affected by the number of
taxicab rooftop advertising displays ("Displays") that it owns and the occupancy
rate and advertising rate of those Displays. At September 30, 1998, Media had
approximately 4,790 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, with investment companies.
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
-15-
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 decrease in prevailing interest rates lead to a
trend of lower interest rates, net increase in net assets resulting from
operations could increase. Upon the completion of the Acquisitions on May 29,
1996, the Company's loan portfolio was recorded on the balance sheet at fair
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 because the
"marked to market" policy was not applied in all cases to the 1996 Acquisitions.
CONSOLIDATED RESULTS OF OPERATIONS
For the Three Months Ended September 30, 1997 and 1998.
Performance Summary. For the three months ended September 30, 1998, net
investment income has been positively impacted by the growth of the Loan
Portfolio, an increase in spread and an increase in realized gains from the sale
of stock warrants, offset by an increase in operating expenses. The gross
spread for the period was higher due to 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 offset by lower
yields being realized on net investments.
Investment Income. Investment income increased $2.5 million or 38.6% from
$6.5 million for the three months ended September 30, 1997 to $8.9 million for
the three months ended September 30, 1998. The Company's investment income
reflects the positive impact of portfolio growth during the three months ended
September 30, 1998. Total portfolio growth was $12.1 million or 3.3% from $364.5
million at June 30, 1998 to $376.6 million at September 30, 1998 as compared to
$30.2 million or 12.6% from $239.6 million at June 30, 1997 to $269.8 million at
September 30, 1997. The average portfolio outstanding was $255.7 million, for
the three month period ended September 30, 1997, which produced investment
income of $6.5 million at a weighted average interest rate of 10.39% compared to
an average of $372.3 million for the three month period ended September 30,
1998, which produced investment income of $8.9 million at a weighted average
interest rate of 9.76%.
Loan originations net of participations increased by $6.4 million or 16.9%
from $44.2 million for the three month period ended September 30, 1997 to $37.8
million for the three-month period ended September 30, 1998. The originations
were offset by prepayments, terminations and refinancings by the Company
aggregating $14.1 million for the three month period ended September 30, 1997
compared to $25.7 million for the three month period ended September 30, 1998.
Average yield e.o.p. of the entire portfolio decreased 25 basis points from
10.20% at September 30, 1997 to 9.96% at September 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
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yielding Commercial Installment Loans which historically were 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 35 basis points from 9.38% at
September 30, 1997 to 9.03% at September 30, 1998 and the average yield of the
Commercial Installment Loan portfolio decreased 59 basis points from 13.28% at
September 30, 1997 to 12.69% at September 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 acquisition 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 increased
from 21.2% at September 30, 1997 to 24.4% at September 30, 1998. Although the
Company continues to pursue a shift in its portfolio mix towards higher yielding
Commercial Installment Loans, this shift was reversed by higher than expected
growth in the Medallion Loan portfolio during the period.
Interest Expense. The Company's interest expense increased $1.7 million or
79.4% from $2.2 million for the three months ended September 30, 1997 to $3.9
million for the three months ended September 30, 1998. The Company's average
cost of funds e.o.p. decreased 105 basis points from 7.13% or 124 basis points
over the LIBOR benchmark of 5.89% at September 30, 1997 to 6.51% or 91 basis
points over the LIBOR benchmark of 5.60% at September 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 29 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 40-50 basis points less than the Company's revolving credit
facilities. Average total borrowings increased $126.4 million or 108.5% from
$116.5 million for the three months ended September 30, 1997, which produced an
interest expense of $2.2 million at a weighted average interest rate of 7.53% to
$242.9 million for the three months ended September 30, 1998 which produced an
interest expense of $3.9 million at a weighted average interest rate of 6.48%.
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 67.1% at September 30, 1997 to 80.5% at September 30, 1998.
Net Interest Income. Net interest income increased $748,000 or 17.6% from
$4.3 million for the three months ended September 30, 1997 to $5.0 million for
the three months ended September 30, 1998. Net interest income reflects the
positive impact of the portfolio growth during the three months ended September
30, 1998 in conjunction with an increase in the spread between average yield and
average cost of funds. The average spread between the average yield on the
portfolio and the average cost of funds increased 42 basis points or 14.7% from
2.86% for the three-month period ended September 30, 1997 to 3.28% for the
three-month period ended September 30, 1998.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue increased
$1,531,000 or 211.0% from $726,000 for the three months ended September 30, 1997
to $2,257,000 for the three months ended September 30, 1998. Display rental
costs increased $332,000 or 121.4% from $274,000 for the three months ended
September 30, 1997 to $606,000 for the three months ended
-17-
September 30, 1998. This resulted in a gross margin of approximately $452,000 or
62.3% of advertising revenue for the three months ended September 30, 1997
compared to $1,650,000 or 73.1% for the three months ended September 30, 1998.
The significant increase in advertising revenue and display rental cost is
directly related to the increase in the number of Displays owned by Media. The
number of Displays owned by Media increased 1,163 or 24.3% from 3,625 at
September 30, 1997 to 4,790 at September 30, 1998. Operating costs increased
$491,000 or 129.5% from $379,000 for the three months ended September 30, 1997
to $870,000 for the three months ended September 30, 1998. The increase in
operating costs is a reflection of the expansion of the Media operations. Income
tax expense amounted to $300,000 for the three months ended September 30, 1998.
Media generated net income of $48,000 for the three-month period ended September
30, 1997 compared to net income of $480,000 for the three-month period ended
September 30, 1998. The increase in net income is the result of increases in the
number of Displays owned and improved margin and occupancy rates. Display
occupancy increased from 97.9% for the three months ended September 30, 1997 to
100% for the three months ended September 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 portion of SBA 7a loans in the amount of $407,000 on loans sold
amounting to $6.9 million during the three months ended September 30, 1998.
There were no sales during the three months ended September 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% 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 $153,000 or 57.5% from
$266,000 for the three months ended September 30, 1997 to $419,000 for the three
months ended September 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 $1.5
million or 94.5% from $1.5 million for the three months ended September 30, 1997
to $3.0 million for the three months ended September 30, 1998. Other operating
expenses increased $590,000 or 97.0% from $608,000 for the three months ended
September 30, 1997 to $1,198,000 for the three months ended September 30, 1998.
Salaries and benefits increased $797,000 or 135.0% from $591,000 for the three
months ended September 30, 1997 to $1,388,000 for the three months ended
September 30, 1998. Professional fees increased $28,000 or 17.7% from $157,000
for the three months ended September 30, 1997 to $185,000 for the three months
ended September 30, 1998. Administrative and advisory fees decreased $2,000
from $67,000 for the three months ended September 30, 1997 to $65,000 for the
three months ended September 30, 1998. The operating expense ratio increased to
2.7% for the three-month period ended September 30, 1998 from 2.2% for the
three-month period ended September 30, 1997, on an annualized basis. The
operating expense ratio is computed as non-interest expenses divided by average
assets excluding the merger related expenses. 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
located in the eastern part of the country, to the Company's non-interest
expense for the three month period ended September 30, 1998 compared to the
three month
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period ended September 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 September 30, 1997 and
$136,000 for the three months ended September 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 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 $298,000 or 9.3% from
$3.2 million for the three-month period ended September 30, 1997 to $3.5 million
for the three months ended September 30, 1998. The increase was attributable to
the positive impact of portfolio growth in conjunction with an increase in the
spread between average yield and average cost of funds offset by an increase in
operating expenses.
Change in Net Unrealized Depreciation. The change in net unrealized
depreciation increased $86,000 from $128,000 for the three months ended
September 30, 1997 to $42,000 for the three months ended September 30, 1998.
Net Realized Gain/Loss on Investments. The Company had an increase in
realized net gain on investments of $385,000 from $211,000 for the three months
ended September 30, 1997 to $596,000 for the three months ended September 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 one loan.
Net Increase in Net Assets Resulting from Operations. Net increase in net
assets resulting from operations increased $637,000 or 17.9% from $3.5 million
for the three months ended September 30, 1997 to $4.2 for the three months ended
September 30, 1998. The increase was attributable to the positive impact of
portfolio growth in conjunction with an increase in the spread between average
yield and average cost of funds offset by an increase in operating expenses.
Also included in the increase is a realized gain of approximately $596,000 from
the sale of common and preferred stock warrants in connection with the repayment
of certain loans. Return on average assets and return on average equity for the
three months ended September 30, 1998, on an annualized basis, were 4.4% and
11.0%, respectively, compared to 5.2% and 9.4% for the three months ended
September 30, 1997.
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CONSOLIDATED RESULTS OF OPERATIONS
For the Nine Months Ended September 30, 1997 and 1998.
Performance Summary. For the nine months ended September 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 an increase in operating expenses and the
one time charge for merger related expenses.
Investment Income. Investment income increased $8.5 million or 46.9% from
$18.1 million for the nine months ended September 30, 1997 to $26.6 million for
the nine months ended September 30, 1998. The Company's investment income
reflects the positive impact of portfolio growth during the nine months ended
September 30, 1998. Total portfolio growth was $63.3 million or 20.2% from
$313.3 million at December 31, 1997 to $376.6 million at September 30, 1998 as
compared to $73.4 million or 37.4% from $196.4 million at December 31, 1996 to
$269.8 million at September 30, 1997. The average portfolio outstanding was
$234.4 million, for the nine month period ended September 30, 1997, which
produced investment income of $18.1 million at a weighted average interest rate
of 10.49% compared to an average of $346.5 million for the nine month period
ended September 30, 1998, which produced investment income of $26.6 million at a
weighted average interest rate of 10.41%.
Loan originations net of participations increased by $37.9 million or 31.7%
from $119.4 million for the nine month period ended September 30, 1997 to $157.3
million for the nine month period ended September 30, 1998. Not included in
originations for the nine months ended September 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 $46.6 million for the nine month period ended September 30,
1997 compared to $110.7 million for the nine month period ended September 30,
1998. Average yield e.o.p. of the entire portfolio decreased 8 basis points
from 10.49% at September 30, 1997 to 10.41% at September 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 35 basis points from 9.38% at September 30, 1997 to 9.03% at September
30, 1998 and the average yield of the Commercial Installment Loan portfolio
decreased 59 basis points from 13.28% at September 30, 1997 to 12.69% at
September 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 increased from 21.2% at
September 30, 1997 to 24.4% at September 30, 1998. Although the Company
continues to pursue a
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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 $4.2 million or
58.7% from $7.1 million for the nine months ended September 30, 1997 to $11.2
million for the nine months ended September 30, 1998. The Company's average
cost of funds e.o.p. decreased 7 basis points from 7.13% or 124 basis points
over the LIBOR benchmark of 5.89% at September 30, 1997 to 6.51% or 91 basis
points over the LIBOR benchmark of 5.60% at September 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 29 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 generally
priced approximately 40-50 basis points less than the Company's revolving credit
facilities. Average total borrowings increased $80.2 million or 60.3% from
$133.0 million for the nine months ended September 30, 1997, which produced an
interest expense of $7.1 million at a weighted average interest rate 7.10% to
$213.2 million for the nine months ended September 30, 1998 which produced an
interest expense of $11.2 million at a weighted average interest rate of 7.03%.
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 67.1% at September 30, 1997 to 80.5% at
September 30, 1998.
Net Interest Income. Net interest income increased $4.3 million or 39.3% from
$11.0 million for the nine months ended September 30, 1997 to $15.3 million for
the nine months ended September 30, 1998. Net interest income reflects the
positive impact of the portfolio growth during the nine months ended September
30. The average spread between the average yield on the portfolio and the
average cost of funds decreased 1 basis point or 0.3% from 3.39% for the nine
month period ended September 30, 1997 to 3.38% for the nine month period ended
September 30, 1998.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue increased
$3,512,000 or 204.6% from $1,717,000 for the nine months ended September 30,
1997 to $5,229,000 for the nine months ended September 30, 1998. Display rental
costs increased $987,000 or 142.9% from $690,000 for the nine months ended
September 30, 1997 to $1,677,000 for the nine months ended September 30, 1998.
This resulted in a gross margin of approximately $1,026,000 or 59.8% of
advertising revenue for the nine months ended September 30, 1997 compared to
$3,552,000 or 67.9% for the nine months ended September 30, 1998. The
significant increase in advertising revenue and display rental cost is directly
related to the increase in the number of Displays owned by Media. The number of
Displays owned by Media increased 1,165 or 24.3% from 3,625 at September 30,
1997 to 4,790 at September 30, 1998. Operating costs increased $1,258,000 or
136.6% from $921,000 for the nine months ended September 30, 1997 to $2,179,000
for the nine months ended September 30, 1998. The increase in operating costs
is a reflection of the expansion of the Media operations. Income tax expense
amounted to $550,000 for the nine months ended September 30, 1998. Media
generated net income of $81,000 for the nine month period ended September 30,
1997 compared to net income of $823,000 for the nine month period ended
September 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 97.8% for the nine months ended September 30, 1997 to 100% for
the nine months ended September 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, improved
margin and occupancy rates.
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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 $19.0 million on loans sold
during the nine months ended September 30, 1998. There were no sales during the
nine months September 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%
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 $304,000 or 43.2% from
$704,000 for the nine months ended September 30, 1997 to $1,008,000 for the nine
months ended September 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 $5.6
million or 132.0% from $4.2 million for the nine months ended September 30, 1997
to $9.9 million for the nine months ended September 30, 1998. Included in non-
interest expenses for the nine months ended September 30, 1998 are $1.5 million
of expenses related to the merger with Medallion Capital. Exclusive of these
expenses, non-interest expenses increased $4.2 million or 100.0% from $4.2
million for the nine months ended September 30, 1997 to $8.4 million for the
nine months ended September 30, 1998. Other operating expenses increased $1.5
million or 89.8% from $1.7 million for the nine months ended September 30, 1997
to $3.2 million for the nine months ended September 30, 1998. Salaries and
benefits increased $2.5 million or 151.8% from $1.6 million for the nine months
ended September 30, 1997 to $4.1 million for the nine months ended September 30,
1998. Professional fees decreased $17,000 or 3.6% from $465,000 for the nine
months ended September 30, 1997 to $482,000 for the nine months ended September
30, 1998. Investment advisory fees were unchanged from $181,000 for the nine
months ended June 30, 1997 to $181,000 for the nine months ended September 30,
1998. The operating expense ratio increased to 3.0% for the nine-month period
ended September 30, 1998 from 2.2% for the nine-month period ended September 30,
1997, on an annualized basis. The operating expense ratio is computed as non-
interest expenses divided by average assets excluding the merger related
expenses. The 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 located in 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 $315,000 for the nine months ended September 30, 1997 and
$376,000 for the nine months ended September 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
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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 $1.3 million or 16.4%
from $8.1 million for the nine month period ended September 30, 1997 to $9.4
million for the nine months ended September 30, 1998. Exclusive of the merger
related expenses of $1.5 million, net investment income increased $6.1 million
or 127.1% from $4.8 million for the nine months period ended September 30, 1997
to $10.9 million for the nine months ended September 30, 1998. The increase was
attributable to the positive impact of portfolio.
Change in Net Unrealized Depreciation/Appreciation. The change in net
unrealized appreciation increased $262,000 from a depreciation of $2,000 for
the nine months ended September 30, 1997 to an appreciation $264,000 for the
nine months ended September 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 $539,000 from net realized gains after taxes
of $1.1 million for the nine months ended September 30, 1997 to $1.6 million for
the nine months ended September 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 $2.2 million or 24.1% from $9.2
million for the nine months ended September 30, 1997 to $11.4 million for the
nine months ended September 30, 1998. Exclusive of the merger related expenses
$1.5 million, net investment income increased $3.7 million or 40.2% from $9.2
million for the nine months period ended September 30, 1997 to $12.9 million for
the nine months ended September 30, 1998. The increase was attributable to the
positive impact of portfolio growth offset by an increase in operating expenses.
Also included in the increase was a realized gain of approximately $1.6 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 $1.1
million in the same period. Return on assets and return on equity for the nine
months ended September 30, 1998, on an annualized basis, were 4.0% and 10.0%,
respectively, compared to 4.8% and 10.9% for the nine months ended September 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
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given time interval expressed as a percentage of total assets.
Having interest-bearing liabilities that mature or reprice more frequently on
average than assets may be beneficial in times of declining interest rates,
although such an asset/liability structure may result in declining net earnings
during periods of rising interest rates. Conversely, having interest-earning
assets that mature or reprice more frequently on average than liabilities may be
beneficial in times of rising interest rates, although this asset/liability
structure may result in declining net earnings during periods of falling
interest rates. The mismatch between maturities and interest rate sensitivities
of the Company's interest-earning assets and interest-bearing liabilities
results in interest rate risk. Abrupt increases in market rates of interest may
have an adverse impact on the Company's earnings until the Company is able to
originate new loans at the higher prevailing interest rates.
The effect of changes in market rates of interest is mitigated by regular
turnover of the portfolio. The Company anticipates that approximately 40% of
the portfolio will mature or be prepaid each year. The Company believes that
the average life of its loan portfolio varies to some extent as a function of
changes in interest rates because borrowers are more likely to exercise
prepayment rights in a decreasing interest rate environment when the interest
rate payable on the borrower's loan is high relative to prevailing interest
rates and are less likely to prepay in a rising interest rate environment.
The Company seeks to manage the exposure of the balance of the portfolio to
increases in market interest rates by entering into interest rate cap agreements
to hedge a portion of its variable-rate debt against increases in interest rates
and by incurring fixed-rate debt consisting primarily of subordinated SBA
debentures. MFC has entered into interest rate cap agreements to limit the
Company's LIBO interest rate exposure on MFC's revolving credit facility as
summarized below:
LIBO EFFECTIVE MATURITY
AMOUNT RATE DATE DATE
------------- ----- --------- --------
$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 September 30, 1998, these debentures constituted 16.1%
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
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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 September 30, 1998, 51.7% of the Company's $248.9 million of
debt consisted of bank debt, substantially all of which was at variable
effective rates of interest with a weighted average rate of 6.63% or 187 basis
points below the Prime Rate, 31.6% or $78.6 million consisted of short-term
commercial paper at a weighted average interest rate of 5.90% and 16.7% 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
$49.9 million of debt was available at September 30, 1998 at variable effective
rates of interest averaging below the Prime Rate under the Company's $257.3
million bank credit facilities.
The following table illustrates the Company's and each of the subsidiaries'
sources of available funds and amounts outstanding under credit facilities at
September 30, 1998.
MEDALLION
FINANCIAL MFC EDWARDS TCC BLLC CDI TOTAL
---------- ------------- ------------- -------- ---- ----------- --------------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents $ 67 $ 1,726 $ - $1,420 $ -- $ 2,792 $ 6,006
Revolving lines of credit 57,500 195,000 4,750 -- -- -- 257,250
Amounts available 26,800 23,116(a) - -- -- -- 49,916(a)
Amounts outstanding 30,700 93,250 4,750(b) -- -- -- 128,700
Average interest rate 6.70% 6.59% 6.91% -- -- -- 6.63%
Maturity 7/00 6/99 10/98 -- -- -- 10/98-7/99
Commercial paper
Amounts outstanding -- 78,634 -- -- -- -- 78,634
Average interest rate -- 5.90% -- -- -- -- 5.90%
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 26,867 23,116 - 1,420 -- 2,792 55,916
Total debt outstanding $30,700 $ 178,084 $ 24,000 $5,640 $ -- $ 10,500 $ 248,924
(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 October 4, 1998, the Company paid off the line of credit for Edwards that
matured.
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
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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.
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
(formerly CDI) 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
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medallions into a market could decrease the value of medallions in that market
and, therefore, the collateral securing the Company's then outstanding Medallion
Loans, if any, in that market. The Company is unable to forecast with any
degree of certainty whether any potential increases in the supply of medallions
will occur. In New York City, and in other markets where the Company originates
Medallion Loans, taxicab fares are generally set by government agencies, whereas
expenses associated with operating taxicabs are largely unregulated. As a
consequence, in the short term, the ability of taxicab operators to recoup
increases in expenses is limited. Escalating expenses, therefore, can render
taxicab operation less profitable and make it more difficult for borrowers to
service loans from the Company and could potentially adversely affect the value
of the Company's collateral.
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 currently 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 and
update of the general ledger system; such initiatives are expected to be Year
2000 compliant. The Company has received Year 2000 compliance letters from each
of its major software vendors and its major office systems vendors. Software
system tests will be conducted using fictitious transactions and each individual
workstation and network server will be tested for Year 2000 compliance.
Management anticipates completing testing by the end of the second quarter of
1999. 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
company has not yet completed its evaluation as to whether its third party
vendors will be able to resolve their year 2000 issues in a satisfactory and
timely manner, or the magnitude of the adverse impact it would have on the
Company's operations, if they fail to do so. Management will send Year 2000
compliance surveys to its third party vendors, however, 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. At this point in time, management is unable to quantify
the potential loss due to failure of systems to comply with the Year 2000 and is
in the process of developing a contingency plan.
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
-27-
omitted). Filed as Exhibit 2.1 to the Company's Quarterly Report on
Form 10-Q, for the quarter ended June 30, 1998 and incorporated by
reference herein.
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 as Exhibit 3.1.1 to the Company's
Quarterly Report on Form 10-Q, for the quarter ended June 30, 1998 and
incorporated by reference herein.
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.
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
-28-
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 as Exhibit 10.1 to the Company's Quarterly report on Form 10-Q,
for the quarter ended June 30, 1998 and incorporated by reference
herein.
10.2 Loan Agreement, dated as of July 31, 1998, by and among Medallion
Financial Corp., the Lenders Party thereto, Fleet Bank, National
Association as Agent and Swing Line Lender and Fleet Bank, National
Association as Arranger (Exhibits included). 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 September 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: By: /s/ Daniel F. Baker
---------------------------------------
Daniel F. Baker
Chief Financial Officer
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