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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30,1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27812
MEDALLION FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE No. 04-3291176
(State of Incorporation) (IRS Employer Identification No.)
437 Madison Ave, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 328-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock outstanding at the latest practicable date,
August 13, 1999:
Class Outstanding Par Value Shares Outstanding
----------------- --------- ------------------
Common Stock.......................................$.01..........14,019,133
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-1-
MEDALLION FINANCIAL CORP.
FORM 10-Q
June 30, 1999
INDEX
Page
----
PART I. Financial Information
Item 1. Basis of Preparation.............................................. 3
Medallion Financial Corp. Consolidated Balance Sheets
at June 30, 1999 and December 31, 1998...................... 4
Medallion Financial Corp. Consolidated Statement of Operations
for the three and six months ended June 30, 1999 and 1998... 5
Medallion Financial Corp. Consolidated Statement of Cash
Flows for the six months ended June 30, 1999 and 1998....... 6
Notes to Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 17
General........................................................ 17
Consolidated Results of Operations (for the three months
ended June 30, 1999 and 1998)............................... 20
Consolidated Results of Operations (for the six months
ended June 30, 1999 and 1998)............................... 23
Asset/Liability Management..................................... 27
Liquidity and Capital Resources................................ 28
Investment Considerations...................................... 30
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................................. 33
SIGNATURES................................................................. 35
-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.
("Media"). Media and MFC were subsidiaries of Tri-Magna Corporation ("Tri-
Magna") which was merged into the Company. The Company's acquisition of these
businesses in connection with the Offering and the resulting two-tier structure
were effected pursuant to an order of the Securities and Exchange Commission
(the "Commission") (Release No. I.C. 21969, May 21, 1996) ("the "Acquisition
Order") and the approval of the U.S. Small Business Administration (the "SBA").
The financial information included in this report reflects the acquisition
of Capital Dimensions, Inc. ("CDI") which was subsequently renamed Medallion
Capital, Inc. The acquisition was completed on June 16, 1998 and was accounted
for as a pooling-of-interests and, accordingly, the information included in the
accompanying financial statements and notes thereto present the combined
financial position and the results of operations of the Company and CDI as if
they had operated as a combined entity for all periods presented. The financial
information in this report is divided into two sections. The first section,
Item 1, includes the unaudited consolidated balance sheet of the Company as of
June 30, 1999 and the related statements of operations for the three and six
months ended June 30, 1999 and cash flows for the six months ended June 30, 1999
and 1998. Item 1 also sets forth the consolidated balance sheet of the Company
as of December 31, 1998. The second section, Item 2, consists of Management's
Discussion and Analysis of Financial Condition and Results of Operations and
sets forth an analysis of the financial information included in Item 1 for the
three and six months ended June 30, 1999 and 1998.
The consolidated balance sheet of the Company as of June 30, 1999, the
related statements of operations for the three and six months ended June 30,
1999, and cash flows for the six months ended June 30, 1999 included in Item 1
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the accompanying
consolidated financial statements include all adjustments (consisting of normal,
recurring adjustments) necessary to summarize fairly the Company's financial
position and results of operations. The results of operations for the three and
six months ended June 30, 1999 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 10-K for the fiscal year
ended December 31, 1998.
-3-
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1999 and DECEMBER 31, 1998
June 30, December 31,
1999 1998
----------------------------------------------
(Unaudited)
ASSETS
Investments:
Medallion loans $276,049,548 $266,061,808
Commercial installment loans, net 137,319,997 106,422,835
Equity investments, net 16,268,689 11,579,329
------------ ------------
Net investments 429,638,234 384,063,972
Investment in and loans to unconsolidated subsidiary 3,944,528 5,033,661
------------ ------------
Total investments 433,582,762 389,097,633
Cash 8,297,194 6,027,596
Accrued interest receivable 4,172,844 3,640,301
Receivable from sale of loans 5,569,169 9,569,989
Servicing fee receivable 2,494,259 2,290,303
Fixed assets, net 1,762,228 1,662,973
Goodwill, net 6,527,754 6,706,879
Other assets 2,901,407 3,229,568
------------ ------------
Total assets $465,307,617 $422,225,242
============ ============
LIABILITIES
Accounts payable $ 6,617,843 $ 5,593,101
Dividends payable - 4,764,681
Accrued interest payable 1,620,127 2,308,229
Notes payable to banks and demand notes 112,950,000 115,600,000
Private placement debt 22,500,000 -
Commercial paper 137,184,345 103,081,785
SBA debentures payable 29,810,000 41,590,000
------------ ------------
Total liabilities $310,682,315 $272,937,796
Negative goodwill, net 711,716 1,072,916
Commitments and contingencies
SHAREHOLDER'S EQUITY
Preferred Stock (1,000,000 shares of $.01 par value stock
authorized-none outstanding) - -
Common stock (45,000,000 shares of $.01 par value stock
authorized - 14,019,133 and 14,013,768 shares outstanding at
June 30, 1999 and December 31, 1998, respectively)
$ 140,191 $ 140,138
Capital in excess of par value 141,412,014 141,376,068
Accumulated undistributed income 12,361,381 6,698,324
------------ ------------
Total shareholder's equity 153,913,586 148,214,530
------------ ------------
Total liabilities and shareholder's equity $465,307,617 $422,225,242
============ ============
Number of common shares and common stock equivalents 14,090,481 14,143,537
Net asset value per share $10.92 $10.48
See accompanying notes to unaudited consolidated financial statements.
-4-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 and 1998
(Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------------ ---------------- --------------- ----------------
Investment income:
Interest and dividend income on investments $10,774,938 $ 8,793,956 $20,056,692 $17,442,115
Interest income on short-term investments 59,929 90,540 158,049 167,637
----------- ----------- ----------- -----------
Total investment income 10,834,867 8,884,496 20,214,741 17,609,752
Interest expense:
Notes payable to banks 1,891,449 3,096,964 3,810,279 5,750,183
Commercial paper 1,845,311 - 3,406,658 -
SBA debentures 687,108 778,867 1,445,413 1,557,803
Notes payable LT 138,955 - 138,955 -
----------- ----------- ----------- -----------
Total interest expense 4,562,823 3,875,831 8,801,305 7,307,986
Net interest income 6,272,044 5,008,665 11,413,436 10,301,766
Non-interest income:
Equity in earnings (losses)of
unconsolidated subsidiary (82,992) 187,058 300,472 342,448
Accretion of negative goodwill 180,600 180,600 361,200 361,200
Gain on sale of loans 831,278 477,000 1,443,524 1,157,934
Other income 586,444 294,012 1,093,056 588,538
----------- ----------- ----------- -----------
Total non-interest income 1,515,330 1,138,670 3,198,252 2,450,120
Expenses:
Administrative and advisory fees 63,228 60,058 124,988 116,562
Professional fees 523,963 83,458 844,103 296,779
Salaries and benefits 2,454,354 1,486,337 4,264,387 2,711,092
Rent expense 203,146 198,338 393,185 378,993
Other operating expenses 1,017,508 844,623 2,170,721 1,642,387
Amortization of goodwill 147,460 123,800 312,011 240,419
Prepayment penalty on SBA bond 77,272 - 77,272 -
Merger-related expenses - 1,494,491 - 1,494,491
----------- ----------- ----------- -----------
Total expenses 4,486,931 4,291,105 8,186,667 6,880,723
Net investment income 3,300,443 1,856,230 6,425,021 5,871,163
Net realized gains (losses) on investments (168,988) 1,003,339 635,834 1,026,741
Change in unrealized appreciation, net 1,985,691 50,000 2,590,985 222,402
Income tax benefit (provision) (10,857) 57,666 (62,313) 38,566
----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations $ 5,106,289 $ 2,967,235 $ 9,589,527 $ 7,158,872
=========== =========== =========== ===========
Net increase in net assets resulting from
Operations per common share
BASIC $ 0.36 $ 0.21 $ 0.68 $ 0.51
DILUTED $ 0.36 $ 0.21 $ 0.68 $ 0.51
Weighted average common shares outstanding:
Basic Average Shares 14,016,749 13,942,732 14,015,258 13,926,520
Diluted Average Shares 14,096,024 14,143,452 14,086,606 14,125,374
See accompanying notes to unaudited consolidated financial statements.
-5-
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 and 1998
(Unaudited)
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 9,589,527 $ 7,158,872
Adjustments to reconcile net increase in net assets resulting from
Operations to net cash provided by (used for) operating
activities:
Depreciation and amortization 264,950 120,254
Increase in equity in earnings of unconsolidated subsidiary (300,472) (342,448)
Decrease (increase) in receivable from unconsolidated subsidiary 1,389,605 (29,151)
Increase in unrealized appreciation, net (2,590,985) -
Amortization of goodwill 312,011 240,419
Decrease (increase) in accrued interest receivable (532,543) (865,529)
Decrease (increase) in other assets 328,161 (166,030)
Increase (decrease) in accounts payable and accrued expenses 1,024,742 (3,306,614)
Decrease (increase) in receivable from sale of loans 4,000,820 (2,210,824)
Increase in servicing fee receivable (203,956) (351,400)
Accretion of negative goodwill (361,200) (361,200)
Decrease (increase) in accrued interest payable 688,102 856,564
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Net cash provided by operating activities 13,608,762 742,913
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CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of investments (126,984,560) (119,562,691)
Proceeds from sales and maturities of investments 82,210,148 85,058,815
Payment for purchase of VGI, VGII and VOC - (11,963,072)
Capital expenditures (481,549) (817,103)
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Net cash used for investing activities (45,255,961) (47,284,051)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable to banks (2,650,000) (13,050,000)
Proceeds from private placement debt 22,500,000 -
Proceeds from issuance of commercial paper 34,102,560 70,497,389
Repayment of notes payable to the SBA (11,780,000) (4,380,000)
Proceeds from exercise of stock options 35,999 436,014
Payment of declared dividends to current stockholders (8,691,151) (7,201,893)
------------- -------------
Net cash provided by financing activities 33,517,408 46,301,510
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NET INCREASE (DECREASE) IN CASH 1,870,209 (239,628)
CASH, beginning of period 6,426,985 6,666,613
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CASH, end of period $ 8,297,194 $ 6,426,985
============= =============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 5,250,925 $ 6,451,422
============= =============
See accompanying notes to unaudited consolidated financial statements.
-6-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(1) Organization of Medallion Financial Corp. And Its Subsidiaries
Medallion Financial Corp. (the "Company") is a closed-end management
investment company organized as a Delaware corporation in 1995. The Company has
elected to be regulated as a business development company under the Investment
Company Act of 1940, as amended (the "1940 Act"). On May 29, 1996, the Company
completed an initial public offering (the Offering) of its common stock, issued
and sold 5,750,000 shares at $11.00 per share and split the existing 200 shares
of common stock outstanding into 2,500,000 shares. All share and related amounts
in the accompanying financial statements have been restated to reflect this
stock split. Offering costs incurred by the Company in connection with the sale
of shares totaling $7,102,944 were recorded as a reduction of capital upon
completion of the Offering. These costs were recorded, net of $200,000 payable
by Tri-Magna Corporation and subsidiaries ("Tri-Magna") in accordance with the
Merger Agreement. In parallel with the Offering, the Company merged with Tri-
Magna; acquired substantially all 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"). The assets acquired and liabilities assumed from
Edwards Capital Company were acquired and assumed by Edwards Capital Corporation
("Edwards"), a newly formed and wholly owned subsidiary of the Company. As a
result of the merger with Tri-Magna in accordance with the Merger Agreement
dated December 21, 1995 between the Company and Tri-Magna, Medallion Funding
Corp. ("MFC") and Medallion Taxi Media, Inc. ("Media"), formerly subsidiaries of
Tri-Magna, became wholly-owned subsidiaries of the Company.
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 Small Business Administration ("SBA"). As an adjunct to the
Company's taxicab medallion finance business, Media operates a taxicab rooftop
advertising business. The Company decided to merge all of the assets and
liabilities of Edwards and TCC into MFC subject to the approval of the SBA. On
June 1, 1999, the SBA gave preliminary approval for the mergers to occur,
subject to certain additional documentation from MFC.
On October 31, 1997, the Company consummated the purchase of substantially all
of the assets and liabilities of Business Lenders, Inc. through the Company's
wholly owned subsidiary, BLI Acquisition Co., LLC (the "Business Lenders
Acquisition"). In connection with the transaction, BLI Acquisition Co., LLC was
renamed Business Lenders, LLC ("BLL"). BLL is licensed by the SBA under its
section 7(a) program.
-7-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
In connection with the 1996 Acquisitions, the Company received the
Acquisition Order under the 1940 Act from the Securities and Exchange
Commission. Approval from the Connecticut State Department of Banking and the
SBA was obtained for the Business Lenders Acquisition.
On May 27, 1998, the Company completed the acquisition of certain assets
and assumption of certain liabilities of Venture Group I, Inc. ("VGI"), Venture
Group II, Inc. ("VGII") and Venture Opportunities Corp., ("VOC"), an SBIC lender
headquartered in New York, New York.
On June 16, 1998, the Company completed the merger with 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 Capital to an SBIC. The transaction was
accounted for as a tax-free reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended, and was treated under the pooling-of-interests
method of accounting.
In September 1998, the Company created Medallion Business Credit LLC
("MBC"), as a wholly-owned subsidiary. MBC originates loans to small businesses
for the purpose of financing inventory and receivables.
(2) Summary of Significant Accounting Policies
The 1996 Acquisitions were accounted for under the purchase method of
accounting. Under this accounting method, the Company has recorded as its cost
the fair value of the acquired assets and assumed liabilities. The difference
between the cost of acquired companies and the sum of the fair values of
tangible and identifiable intangible assets less liabilities assumed was
recorded as goodwill or negative goodwill.
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 appreciation/depreciation of investments. Total net
unrealized appreciation was $5,566,130 and $2,964,917 on total investments of
$429,638,234 and $384,063,972 at June 30, 1999 and December 31, 1998,
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.
-8-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
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 dilutive effect of potential common shares in 1997 and 1998, consisting of
outstanding stock options is determined using the treasury method in accordance
with SFAS No. 128. Basic and fully diluted EPS for the three and six months
ended June 30, 1999 and 1998 are as follows:
(Dollars in thousands, except shares and per share amounts)
Three months ended June 30, 1999 June 30, 1998
- - - ------------------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- - - ------------------------------------------------------------------------------------------------------------------
Net Income $5,106 $2,967
Basic EPS:
Income available to
common stockholders 5,106 14,016,749 $.36 2,967 13,942,732 $.21
Effect of dilutive
options
Stock options 79,275 200,720
Diluted EPS:
Income available to 5,106 14,096,024 $.36 2,967 14,143,452 $.21
common stockholders
(Dollars in thousands, except shares and per share amounts)
Six months ended June 30, 1999 June 30, 1998
- - - ------------------------------------------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- - - ------------------------------------------------------------------------------------------------------------------
Net Income $9,590 $7,159
Basic EPS:
Income available to
common stockholders 9,590 14,015,258 $.68 7,159 13,926,520 $.51
Effect of dilutive
options
Stock options 71,348 198,854
Diluted EPS:
Income available to 9,590 14,086,606 $.68 7,159 14,125,374 $.51
common stockholders
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
all fiscal quarters of all fiscal years beginning after June 15, 1999.
In June 1999, the Board issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." The new standard defers the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000. The Company is presently studying
the effect of the new pronouncement and, as required, will adopt SFAS No. 133
beginning January 1, 2001.
-9-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
(3) Acquisitions
On May 27, 1998, the Company completed the acquisition of certain assets and
assumption of certain liabilities of Venture Group I, Inc. ("VGI"), Venture
Group II, Inc. ("VGII") and Venture Opportunities Corp. ("VOC"), SBIC lenders
headquartered in New York, (hereinafter known as "VG Group"), for an aggregate
purchase price of $18.5 million which included the assumption of $6.5 million in
liabilities. The purchase price was allocated to the assets based on their
estimated fair values and approximately $16.7 million were allocated to
investments. The excess of the purchase price over the fair value of the net
assets acquired (goodwill) was $1.2 million and is being amortized on a
straight-line basis over 15 years.
These acquisitions were accounted for under the purchase method of accounting.
Accordingly, the results of operations for these acquisitions have been included
in the consolidated results of the Company from the date of acquisition. Under
this accounting method, the Company has recorded as its cost the fair value of
the acquired assets and liabilities assumed. 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.
In conjunction with the acquisitions, assets and 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
===========
(4) Merger
On June 16, 1998, the Company completed the merger with Capital Dimensions,
Inc. ("CDI"), a Specialized Small Business Investment Company ("SSBIC") lender,
headquartered in Minneapolis, MN. CDI was subsequently renamed Medallion
Capital, Inc. ("Medallion Capital"). The Company issued 0.59615 shares of its
common stock for each outstanding share of CDI. A total of 1,112,677 shares of
the Company's common stock was issued as a result of the merger, and each of
CDI's outstanding stock options were converted to purchase common shares of the
Company. 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. The following tables set
forth the results of operations of CDI and the Company for the three months June
30, 1998 and are included in the accompanying consolidated statement of
operations.
-10-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
(Dollars in thousands)
For the three months ended June 30, 1998 The Company CDI Combined
-------------------------------------------------------------------------------
Total Investment Income $ 8,300 $ 584 $ 8,884
Net increase in net assets from operations $ 1,853 $1,114 $ 2,967
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
(5) Unrealized Appreciation/(Depreciation) and Realized Gains/(Losses) on
Investments
The change in unrealized appreciation/(depreciation) on investments is the
amount by which the fair value estimated by the Company is greater/(less) than
the cost basis of the investment portfolio. Realized gains or losses on
investments consist of the excess of the proceeds derived upon foreclosure over
the cost basis of a loan, write-offs of loans or assets acquired in satisfaction
of loans, net of recoveries, or sale of investments. For the three and six
months ended June 30, 1999, gross unrealized appreciation and depreciation and
gross realized gains and losses were as follows:
Three months Six months
Ended Ended
June 30, 1999 June 30, 1999
Increase in net unrealized appreciation on investments:
Unrealized appreciation $ 7,556,404 $ 9,304,974
Unrealized depreciation (5,742,848) (6,376,329)
Realized gain - (509,795)
Realized loss 172,135 172,135
----------- -----------
Total $ 1,985,691 $ 2,590,985
----------- -----------
Net realized gain on investments:
Realized gain $ 3,147 $ 807,969
Realized loss (172,135) (172,135)
----------- -----------
Total $ (168,988) $ 635,834
----------- -----------
Unrealized appreciation for the three and six months ended June 30, 1999,
respectively relates primarily to the Company's investment in Radio One, Inc.
("Radio One"). During the three months ended June 30, 1999, Radio One completed
an initial public offering of its stock. At June 30, 1999, the Company's
investment in Radio One consists of 479,122 shares. The Company has certain
restrictions as to the time period over which this investment can be sold. At
June 30, 1999, the per share market price for Radio One was $46.50. At August
11, 1999, such price was $42.875. Due to the restriction related to the
Company's ability to dispose of the stock, the brief time period that Radio One
stock has been publicly traded and the price volatility and the trading volume
of the stock, the Company has applied a discount to market in determining the
Company's unrealized appreciation on this investment. At June 30, 1999, the
Company valued its investment in Radio One at a weighted average per share
amount of $30.00. Subsequent to June 30, 1999, the Company received permission
from the underwriters of the Radio One stock
-11-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
offering to sell 100,000 shares of stock. Such transaction was completed at a
price of approximately $45.00 per share.
(6) Investment in Unconsolidated Subsidiary
The Company's investment in Media is accounted for under the equity method
because as a non-investment company, Media cannot be consolidated with the
Company which is an investment company under the 1940 Act. Financial
information presented for Media includes the balance sheets as of June 30, 1999
(unaudited) and December 31, 1998 and unaudited statement of operations for the
three and six months ended June 30, 1999 and 1998:
Balance Sheet June 30, December 31,
1999 1998
---- ----
Cash $ 247,089 $1,381,893
Accounts receivable 1,965,829 2,614,842
Equipment, net 1,603,239 1,564,341
Goodwill 1,670,399 991,279
Other 704,278 571,058
---------- ----------
Total assets $6,190,834 $7,123,413
========== ==========
Notes payable to parent $1,303,242 $2,692,847
Accounts payable and accrued
expenses 453,175 327,392
Other Liabilities and
income taxes payable 1,684,514 1,653,743
---------- ----------
Total liabilities 3,440,931 4,673,982
Equity
Common Stock 1,001,000 1,001,000
Retained earnings 1,748,903 1,448,431
---------- ----------
Total equity 2,749,903 2,449,431
Total liabilities and shareholders'
equity $6,190,834 $7,123,413
========== ==========
-12-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
Statement of Operations Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------------------------------------------------------------------------
Advertising revenue $2,057,110 $1,515,316 $4,815,150 $2,972,326
Cost of service 1,046,708 535,432 2,035,785 1,071,275
---------- ---------- ---------- ----------
Gross margin 1,010,402 979,884 2,779,365 1,901,051
Other operating expenses 1,186,894 642,826 2,316,751 1,308,622
---------- ---------- ---------- ----------
Income (loss) before taxes (176,492) 337,058 462,614 592,429
Income tax benefit (provision) 93,500 (150,000) (162,142) (250,000)
---------- ---------- ---------- ----------
Net income (loss) $ (82,992) $ 187,058 $ 300,472 $ 342,429
========== ========== ========== ==========
The Company has deferred approximately $300,000 of advertising revenue
during the quarter ended June 30, 1999 related to tops displayed in new markets.
The deferral will continue until such time that documentation is obtained which
will complete the criteria for appropriate revenue recognition. This revenue
will be recognized in future periods when such criteria are met.
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 and is being
amortized over 15 years.
On February 2, 1999, Media purchased 100% of the common stock of Transit
Advertising Displays, Inc. ("TAD") for $848,500. TAD is a taxicab rooftop
advertising company headquartered in Washington, D.C. operating 1,300 installed
rooftop advertising displays in the Baltimore, MD and Washington, D.C. areas.
The purchase was accounted for under the purchase method of accounting and the
results of operations are consolidated with those of Media. Included in the
purchase price was certain premiums paid totaling $712,701, which represented
goodwill and is being amortized over 15 years.
-13-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
(7) Debt
The table below summarizes the various debt agreements the Company and its
subsidiaries had outstanding at June 30, 1999 and December 31, 1998:
June 30, 1999 December 31, 1998
------------- -----------------
Notes payable to banks:
Total facilities $295,000,000 $252,500,000
Maturity of facilities 6/00-6/01 6/99-7/99
Total amounts outstanding $112,950,000 $115,600,000
============ ============
SBA debentures payable $ 29,810,000 $ 41,590,000
============ ============
Maturity date 9/00-6/07 9/00-6/07
Private placement debt $ 22,500,000 $ --
============ ============
Maturity date 6/04 --
Under the revolving credit agreement between MFC and its lenders, as
amended, MFC is required to maintain minimum tangible net assets of $65,000,000
and certain financial ratios. The Company believes that MFC was in compliance
with such requirements at June 30, 1999.
On June 1, 1999, MFC issued $22.5 million of senior secured notes (the
"Notes") that mature on June 1, 2004. The Notes bear a fixed rate of interest of
7.2% and interest is paid quarterly in arrears. The Notes rank pari pasu with
the bank debt and commercial paper through inter-creditor agreements. MFC also
has a commitment from the note-holders to purchase and additional $22.5 million
on September 1, 1999 under the same terms and conditions. The proceeds of the
notes are being used to pre-pay all the outstanding SBA debentures of MFC, TCC
and ECC. Prepayment of some of these SBA debentures will cause MFC to incur
penalties.
On June 1, 1999, MFC extended its $195 million revolving credit facility
until June 30, 2001.
On June 29, 1999, Medallion Financial increased its revolving credit
facility to $100 million and extended the maturity until June 28, 2000.
(8) 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,
-14-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
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 June 30, 1999, MFC had $137,184,345 outstanding at a weighted
average interest rate of 5.93%.
(9) Segment Reporting
The Company has two reportable business segments, lending and taxicab rooftop
advertising. The lending segment originates and services secured commercial
loans. The taxicab rooftop advertising segment sells advertising space to
advertising agencies and companies in several major markets across the United
States. The segment is reported as an unconsolidated subsidiary, Medallion Taxi
Media, Inc. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies.
For taxicab advertising, the increase in net assets resulting from operations
represents the Company's equity in net income from Media. Segment assets for
taxicab advertising represents the Company's investment in and loan to Media.
Six months ended June 30, 1999 Taxicab
Lending Advertising Total
---------------------------------------------------------------
Net interest income $ 11,413,436 $ 11,413,436
Depreciation and amortization 264,950 264,950
Income tax benefit (provision) (62,313) (62,313)
Net increase in net assets resulting from 9,289,055 300,472 9,589,527
operations
Segment assets 461,363,089 3,944,528 465,307,617
Capital expenditures 481,549 189,008 **
Six months ended June 30, 1998 Taxicab
Lending Advertising Total
---------------------------------------------------------------
Net interest income $ 10,301,766 $ 10,301,766
Depreciation and amortization 120,254 120,254
Income tax benefit (provision) 38,566 38,566
Net increase in net assets resulting from
operations 6,816,424 342,448 7,158,872
Segment assets 393,967,083 3,067,660 397,034,743
Capital expenditures 817,103 274,719 **
** Capital expenditures for the Company are equal to expenditures for the
lending segment. Capital expenditures related to the taxicab advertising
segment are included in order to provide additional information.
-15-
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
(10) Subsequent Events
On August 12, 1999, MFC declared a dividend payable to the Company in the
amount of $250 per share payable on August 13, 1999 (aggregating $1,664,750) and
Medallion Capital declared a dividend payable to the Company in the amount of
$1.40 per share payable on August 13, 1999 (aggregating $1,866,438). With the
proceeds of these dividends, on August 12, 1999, the Company declared a dividend
in the amount of $0.31 per share (aggregating $4,345,931) payable on September
1, 1999 to the shareholders of record on August 23, 1999.
-16-
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, 1998. 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
-17-
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.
Trend in Loan Portfolio. 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, 1998 June 30, 1999
Weighted Percentage Weighted Percentage
Average Principal of Total Average Principal of Total
Yield Amounts Portfolio Yield Amounts Portfolio
----- ------- --------- ----- ------- ---------
Medallion Loan Portfolio 9.03% $266,061,808 69.0% 9.01% $276,049,548 64.0%
Commercial Installment Loan Portfolio 12.13% 106,422,835 28.0% 11.74% 137,319,997 32.0%
Equity Investments - 11,579,329 3.0% - 16,268,689 4.0%
----- ------------ ----- ----- ------------ -----
Total Portfolio 9.93% $384,063,972 100.0% 9.95% $429,638,234 100.0%
===== ============ ===== ===== ============ =====
Yield Summary:
The weighted average yields e.o.p./1/ of the Medallion Loan portfolio
decreased 2 basis points to 9.01% at June 30, 1999. 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. The weighted average yields e.o.p. of the
Commercial Installment Loan portfolio decreased 39 basis points to 11.74% at
June 30, 1999 from 12.13% at December 31, 1998 due to the drop in prime rate and
the increase in the number of loans tied to the prime rate. The weighted
average yields e.o.p. of the entire portfolio increased 2 basis points to 9.95%
at June 30,1999 from 9.93% at December 31, 1998 due to the decline in the
Commercial portfolio offset by a shift in mix of the portfolio to the higher
yielding Commercial loans.
Portfolio Summary:
Medallion Loans constituted 64.0% of the total portfolio of $429.6 million
at June 30, 1999 and 69.0% of the total portfolio of $384.1 million at December
31, 1998. The Medallion Loan portfolio increased by $10.0 million or 3.8%. The
increase is due to growth in markets outside New York such as Chicago, Newark
and Baltimore. The Commercial Installment loan portfolio comprised 32.0%, of
the total portfolio at June 30, 1999 compared to 28.0% at December 31, 1998.
The Commercial Loan portfolio grew by $30.9 million or 29.0% due to strong
growth in the mezzanine finance, SBA 7(a) program and asset-based lending
portfolios.
- - - ------------------
/1/ e.o.p. or "end of period," indicates that a calculation is made at the date
indicated rather than for the period then ended.
-18-
Equity Investments represented 4.0% and 3.0% of the Company's entire
portfolio at June 30, 1999 and December 31, 1998, respectively.
Trend in Interest Expense. The Company's interest expense is driven by the
interest rate payable on the Company's LIBOR-based short-term credit facilities
with bank syndicates, secured commercial paper and, to a lesser degree, fixed-
rate, long-term debentures issued to or guaranteed by the SBA. In recent years,
the Company has reduced its reliance on SBA financing and increased the relative
proportion of bank debt to total liabilities. SBA financing 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 70 basis
points below the rate charged under the Company's revolving credit facilities.
At June 30, 1999 and December 31, 1998, short-term LIBOR-based debt including
commercial paper constituted 82.7% and 84.0% of total debt, respectively. At
June 30, 1999 and December 31, 1998, commercial paper constituted 45.4% and
39.6% of total debt, respectively.
The Company's cost of funds is primarily driven by (i) the average maturity
of debt issued by the Company, (ii) the premium over LIBOR paid by the Company
on its LIBOR-based debt and secured commercial paper, and (iii) the ratio of
LIBOR-based debt to SBA financing. The Company incurs LIBOR-based debt for
terms generally ranging from 1-180 days. The Company's debentures issued to or
guaranteed by the SBA typically have initial terms of ten years. The Company's
cost of funds reflect fluctuations in LIBOR to a greater degree than in the past
because LIBOR-based debt has come to represent a greater proportion of the
Company's debt. The Company measures its cost of funds as its aggregate
interest expense for all of its interest-bearing liabilities divided by the face
amount of such liabilities. The Company analyzes its cost of funds in relation
to the average of the 90- and 180-day LIBOR (the "LIBOR Benchmark"). The
Company's average cost of funds e.o.p. at June 30, 1999 was 6.21% or 107 basis
points over the LIBOR Benchmark of 5.14% down from 6.42% or 121 basis points
over the LIBOR Benchmark of 5.21% at December 31, 1998.
-19-
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 June 30, 1999, Media
had approximately 6,900 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 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.
Consolidated Results of Operations
For the Three Months Ended June 30, 1999 and 1998.
Performance Summary. For the three months ended June 30, 1999, net
increase in net assets resulting from operations has been positively impacted by
the growth of the loan portfolio, a decrease in the average cost of funds and an
increase in unrealized gains from the shares of stock held in an investment.
Investment Income. Investment income increased $2.0 million or 22.0% to
$10.8 million for the three months ended June 30, 1999 from $8.9 million for the
three months ended June 30, 1998. The Company's investment income reflects the
positive impact of portfolio growth and dividend income from equity investments.
The average portfolio outstanding was $400.6 million, for the second quarter of
1999, which produced interest income of $9.6 million at a weighted average
interest rate of 9.59% compared to an average of
-20-
$352.5 million for the second quarter of 1998, which produced investment income
of $8.9 million at a weighted average interest rate of 10.04%.
Loan originations net of participations increased by $17.1 million or 29.1%
to $75.9 million for the three month period ended June 30, 1999 compared to
$59.9 million for the three month period ended June 30, 1998. The originations
were offset by prepayments, terminations and refinancings by the Company
aggregating $47.0 million in the second quarter of 1999 compared to $43.2
million in the second quarter of 1998.
The weighted average yield e.o.p. of the entire portfolio decreased 5 basis
points to 9.95% at June 30, 1999 from 10.00% at June 30, 1998. The decrease in
the yield of the entire loan portfolio was caused by a decrease in the average
yield on Medallion Loans, coupled with a decrease in the average yield on
Commercial Installment Loans offset by an increase in the percentage of the
portfolio composed of higher 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
6 basis points to 9.01% at June 30, 1999 from 9.07% at June 30, 1998. The
decrease in the average yield on Medallion Loans was caused by a reduction in
loan yields due to lower long-term interest rates and competition. The average
yield of the Commercial Installment Loan portfolio decreased 97 basis points to
11.74% at June 30, 1999 from 12.71% at June 30, 1998. The decline in the
commercial portfolio yield is due in part to the drop in prime rate as the
quantity of floating rate loans tied to prime has increased as a percentage of
the Commercial portfolio. Thus, shifting the average yield on commercial loans
lower. In addition, the current interest rate environment is such that the
Company has increased the origination of loans with shorter interest rate
maturity dates, which are issued at a lower interest rate further contributing
to the decline in the portfolio yield. However, the shorter maturity dates
further reduces 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 Commercial loan portfolio during the period.
Interest Expense. The Company's interest expense increased $687,000 or
17.7% to $4.6 million for the three months ended June 30, 1999 from $3.9 million
for the three months ended June 30, 1998. The Company's average cost of funds
e.o.p. decreased 38 basis points to 6.21% or 107 basis points over the LIBOR
benchmark of 5.14% at June 30, 1999 from 6.59% or 86 basis points over the LIBOR
benchmark of 5.73% at June 30, 1998. The decrease in the average cost of funds
e.o.p. was caused by a reduction in the premium to LIBOR paid by the Company
combined with a 59 basis point decrease in the LIBOR benchmark. Also
contributing to the decrease in average cost of funds e.o.p. was the Company's
issuance of commercial paper, which at the present time is priced approximately
70 basis points less than the Company's revolving credit facilities. Average
total borrowings increased $69.6 million or 31.6% from $220.2 million for the
three months ended June 30, 1998, which produced an interest expense of $3.9
million at a weighted average interest rate of 7.04%, to $289.8 million for the
three months ended June 30, 1999, which produced an interest expense of $4.6
million at a weighted average interest rate of 6.30%. 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
-21-
LIBOR based indebtedness and commercial paper decreased as a percentage of total
indebtedness from 80.4% at June 30, 1998 to 82.7% at June 30, 1999.
Net Interest Income. Net interest income increased $1.3 million or 25.2%
to $6.3 million for the three months ended June 30, 1999 from $5.0 million for
the three months ended June 30, 1998. The increase in net interest income is
the result of the 29 basis point or 21.7% increase in the average spread between
the average yield on the portfolio and the average cost of funds to 3.29% for
the three-month period ended June 30, 1999 from 3.00% for the three-month period
ended June 30, 1998.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $542,000 or 35.8% to $2.1 million in the second quarter of 1999
compared to $1.5 million in the second quarter of 1998. Display rental costs
increased $511,000 or 95.5% for the quarter. Gross margin was $1.0 million or
49.1% of advertising revenue for the second quarter of 1999 compared to $980,000
or 64.7% for the second quarter of 1998. The increase in advertising revenue and
display rental cost is directly related to the increase in the number of taxicab
rooftop advertising displays ("Displays") owned by Media. The number of Displays
owned by Media increased approximately 3,000 or 77.3% to approximately 6,900 at
June 30, 1999 from approximately 3,890 at June 30, 1998. Operating costs
increased $544,000 or 84.6% to $1.2 million in the second quarter of 1999 from
$643,000 in the second quarter of 1998. The increase in operating costs is a
reflection of the expansion of Media's operations. Media experienced a net loss
of $83,000 in the second quarter of 1999 compared to net income of $187,000 in
the second quarter of 1998. The decrease in net income is the result of the loss
of tobacco advertising contracts due to the nationwide tobacco ban which took
effect in March 1999. Net income is recorded as equity in earnings or losses of
unconsolidated subsidiary on the Company's statement of operations.
Gain on sale of loans. The Company experienced a gain on the sale of the
guaranteed portion of SBA 7(a) loans in the amount of $831,000 during the second
quarter of 1999 compared to $477,000 during the second quarter of 1998. The
increase of $354,000 is due to an increase in the volume of loans sold in the
secondary market. The Company accounts for gains on sale of loans in accordance
with SFAS No. 125 (Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities) and EITF 88-11.
Other Income. The Company's other income increased $292,000 or 99.5% to
$586,000 for the three months ended June 30, 1999 from $294,000 for the three
months ended June 30, 1998. Other income was primarily derived from late
charges, prepayment fees and miscellaneous income. The increase in other income
is primarily due to an increase in fees collected in connection with several
refinancings completed during the quarter.
Non-Interest Expenses. The Company's non-interest expenses increased
$196,000 or 4.6% to $4.5 million for the three months ended June 30, 1999 from
$4.3 million for the three months ended June 30, 1998. Included in non-interest
expenses for the three months ended June 30, 1998 are $1.5 million of expenses
related to the merger with Medallion Capital. Exclusive of these expenses, non-
interest expenses increased $1.7 million or 60.4% from $2.8 million for the
three months ended June 30, 1998 to $4.5 million for the three months ended June
30, 1999. Other operating expenses increased $173,000 or 20.5% as compared to
the second quarter of 1998 due to expenditures related to a new loan accounting
system. The
-22-
increase in salaries and benefits of $968,000 or 65.1% in the second quarter of
1999 compared to the second quarter of 1998 is the result of the effect of
year-end raises, salaries of personnel hired since June 30, 1998, and bonuses
paid and accrued for in the quarter.
Net Investment Income. Net investment income increased $1.4 million or
77.8% to $3.3 million in the second quarter of 1999 from $1.9 million in the
second quarter of 1998. Exclusive of the merger-related expenses of $1.5
million, net investment income decreased $50,000 or 1.5% from $3.35 million for
the three months ended June 30, 1998 to $3.3 million for the three months ended
June 30, 1999. The decrease is attributable to an increase in operating
expenses and the $250,000 decline in earnings of the unconsolidated Media
subsidiary.
Net Realized Gain on Investments. The Company had net realized losses of
$169,000 for the three months ended June 30, 1999, a decrease of $1.2 million
from net realized gains of $1.0 million for the three months ended June 30,
1998. The realized gains during the second quarter of 1998 were primarily the
result of the sale of common and preferred stock warrants in connection with the
repayment of three loans.
Change in Net Unrealized Appreciation (Depreciation). The change in net
unrealized appreciation increased $1.9 million for the three months ended June
30, 1999 from $50,000 for the three months ended June 30, 1998. The unrealized
appreciation during the second quarter of 1999 resulted from unrealized gains
recognized on the increase in value of common stock of one investment offset by
an increase in the depreciation of loan values.
Net Increase in Net Assets Resulting from Operations. Net increase in net
assets resulting from operations increased $2.1 million or 72.1% to $5.1 million
for the three months ended June 30, 1999 from $3.0 million for the three months
ended June 30, 1998. Exclusive of the merger-related expenses $1.5 million, net
increase in net assets resulting from operations increased $645,000 or 14.4%
from $4.5 million for the three months ended June 30, 1998 to $5.1 million for
the three months ended June 30, 1999. The increase was attributable to the
positive impact of portfolio growth, higher unrealized gains on investments
offset by an increase in interest and operating expenses. Return on average
assets and return on average equity for the three months ended June 30, 1999, on
an annualized basis, were 4.5% and 13.3%, respectively, compared to 3.1% and
7.8% for the three months ended June 30, 1998.
Consolidated Results of Operations
For the Six Months Ended June 30, 1998 and 1999.
Performance Summary. For the six months ended June 30, 1999, net increase
in net assets resulting from operations has been positively impacted by the
growth of the loan portfolio, a increase in the spread of average yield over
average cost of funds and an increase in unrealized gains on common stock of an
investment offset by an increase in operating expenses.
-23-
Investment Income. Investment income increased $2.6 million or 14.8% from
$17.6 million for the six months ended June 30, 1998 to $20.2 million for the
six months ended June 30, 1999. The Company's investment income reflects the
positive impact of portfolio growth and dividend income on equity investments
during the six months ended June 30, 1999. Total portfolio growth totaled $45.6
million or 11.9% from $384.0 million at December 31, 1998 to $429.6 million at
June 30, 1999 as compared to $51.2 million or 16.3% from $313.3 million at
December 31, 1997 to $364.5 million at June 30, 1998. The average portfolio
outstanding was $393.0 million for the six month period ended June 30, 1999,
which produced interest income of $19.0 million at a weighted average interest
rate of 9.66% compared to an average of $338.9 million for the six-month period
ended June 30, 1998, which produced investment income of $17.6 million at a
weighted average interest rate of 10.29%.
Loan originations net of participations increased by $7.4 million or 6.21%
from $119.6 million for the six-month period ended June 30, 1998 to $127.0
million for the six-month period ended June 30, 1999. Not included in
originations for the six months ended June 30, 1998 are purchases of $16.9
million of loans acquired from VGI, VGII and Venture Opportunities Corp. The
originations were offset by prepayments, terminations and refinancings by the
Company aggregating $85.2 million for the six month period ended June 30, 1998
compared to $82.2 million for the six month period ended June 30, 1999.
Weighted average yield e.o.p. of the entire portfolio decreased 5 basis
points from 10.00% at June 30, 1998 to 9.95% at June 30, 1999. 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 offset by an increase in the percentage of the
portfolio composed of higher yielding Commercial Installment Loans which
historically have been originated at a yield of approximately 300 basis points
higher than Medallion Loans and 250 to 600 basis points higher than the
prevailing Prime Rate. The average yield e.o.p. of the Medallion Loan portfolio
decreased 6 basis points from 9.07% at June 30, 1998 to 9.01% at June 30, 1999.
The decrease in the average yield on Medallion Loans was caused by a reduction
in loan yields due to loans being originated at lower long-term interest rates
due to 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 average
yield of the Commercial Installment Loan portfolio decreased 97 basis points
from 12.71% at June 30, 1998 to 11.74% at June 30, 1999. The decline in the
commercial portfolio yield is the result of the decrease in prime rate and the
increase in the number of loans tied to prime. This shifts the average yield on
commercial yields lower, however, interest rate exposure is mitigated by the
floating rate nature of these loans... The percentage of the portfolio composed
of Commercial Installment Loans increased from 25.2% at June 30, 1998 to 32.0%
at June 30, 1999. The Company continues to pursue a shift in its portfolio mix
towards higher yielding Commercial Installment Loans.
Interest Expense. The Company's interest expense increased $1.5 million or
20.4% from $7.3 million for the six months ended June 30, 1998 to $8.8 million
for the six months ended June 30, 1999. The Company's average cost of funds
e.o.p. decreased 38 basis points from 6.59% or 86 basis points over the LIBOR
benchmark of 5.73% at June 30, 1998 to 6.21% or 107 basis points over the LIBOR
benchmark of 5.14% at June 30, 1999. The decrease in the average cost of funds
e.o.p. was caused by a reduction in the premium to
-24-
LIBOR paid by the Company combined with 59 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 70 basis points less than the Company's revolving credit
facilities. Average total borrowings increased $62.4 million or 30.1% from
$207.2 million for the six months ended June 30, 1998, which produced an
interest expense of $7.3 million at a weighted average interest rate of 7.06% to
$269.6 million for the six months ended June 30, 1999 which produced an interest
expense of $8.8 million at a weighted average interest rate of 6.26%. The
weighted average interest rates include commitment fees and amortization of
premiums on existing interest rate cap agreements as a reflection of total cost
of funds borrowed. The percentage of the Company's short-term LIBOR based
secured indebtedness which includes secured commercial paper increased as a
percentage of total indebtedness from 80.4% at June 30, 1998 to 82.7% at June
30, 1999.
Net Interest Income. Net interest income increased $1.1 million or 10.8%
from $10.3 million for the six months ended June 30, 1998 to $11.4 million for
the six months ended June 30, 1999. Net interest income reflects the positive
impact of the portfolio growth during the six months ended June 30, 1999 coupled
with an increase in the spread between average yield and average cost of funds.
The average spread between the average yield on the portfolio and the average
cost of funds increased 17 basis points or 14.2% from 3.23% for the six-month
period ended June 30, 1998 to 3.40% for the six-month period ended June 30,
1999.
Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue
increased $1.8 million or 62.0% from $3.0 million for the six months ended June
30, 1998 to $4.8 million for the six months ended June 30, 1999. Display rental
costs increased $965,000 or 90.0% from $1.1 million for the six months ended
June 30, 1998 to $2.0 million for the six months ended June 30, 1999. This
resulted in a gross margin of approximately $1.9 million or 64.0% of advertising
revenue for the six months ended June 30, 1998 compared to $2.8 million or 57.7%
for the six months ended June 30, 1999. The 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 77.4%
from 3,890 at June 30, 1998 to 6,900 at June 30, 1999. Operating costs increased
$1.0 million or 77.0% from $1.3 million for the six months ended June 30, 1998
to $2.3 million for the six months ended June 30, 1999. The increase in
operating costs is a reflection of the expansion of Media's operations. Income
tax expense amounted to $162,000 for the six months ended June 30, 1999. Media
generated net income of $342,000 for the six month period ended June 30, 1998
compared to net income of $300,000 for the six month period ended June 30, 1999.
The decrease in net income is primarily the result of an increase in operating
expenses. Net income is recorded as equity in earnings or losses of the
unconsolidated subsidiary on the Company's statement of operations.
Gain on sale of loans. The Company experienced a gain on the sale of the
guaranteed portion of SBA 7(a) loans in the amount of $1.4 million on $22.5
million loans sold during the six months ended June 30, 1999 as compared to a
gain of $1.2 million on $12.1 million of loans sold during the six months ended
June 30, 1998. 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.
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Other Income. The Company's other income increased $504,000 or 85.7% from
$589,000 for the six months ended June 30, 1998 to $1,093,000 for the six months
ended June 30, 1999. 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 $1.3
million or 19.0% from $6.9 million for the six months ended June 30, 1998 to
$8.2 million for the six months ended June 30, 1999. Included in non-interest
expenses for the six months ended June 30, 1998 are $1.5 million of expenses
related to the merger with Medallion Capital. Exclusive of these expenses, non-
interest expenses increased $2.8 million or 52.0% from $5.4 million for the six
months ended June 30, 1998 to $8.2 million for the six months ended June 30,
1999. Other operating expenses increased $528,000 or 32.2% from $1.6 million for
the six months ended June 30, 1998 to $2,171,000 for the six months ended June
30, 1999 due to cost associated with the installation of a new loan accounting
program. Salaries and benefits increased $1.5 million or 57.3% from $2.7
million for the six months ended June 30, 1998 to $4.2 million for the six
months ended June 30, 1999 is the result of the effect of year-end raises,
salaries of personnel hired since June 30, 1998, and bonuses paid and accrued
for in the period. Professional fees increased $547,000 or 184.4% from $297,000
for the six months ended June 30, 1998 to $844,000 for the six months ended June
30, 1999. Investment advisory fees increased $8,000 from $117,000 for the six
months ended June 30, 1998 to $125,000 for the six months ended June 30, 1999.
Amortization of Goodwill and Accretion of Negative Goodwill. The
amortization of goodwill was $240,000 for the six months ended June 30, 1998 and
$312,000 for the six months ended June 30, 1999, and relates to $6.5 million of
goodwill generated in the acquisitions of Edwards and TCC. The increase in
amortization of goodwill is primarily related to the purchases of assets of VGI,
VGII and Venture Opportunities Corp. The goodwill resulting from these
acquisitions amounted to $1,545,000. The acquisition of Business Lenders LLC
resulted in the addition of $200,000 of goodwill. Goodwill is the amount by
which the cost of acquired businesses exceeds the fair value of the net assets
acquired. Goodwill is being amortized on a straight-line basis over 15 years.
Negative goodwill is the excess of fair market value of net assets of an
acquired business over the cost basis of such business. Negative goodwill of
$2.9 million was generated in the acquisition of Tri-Magna and is being
amortized on a straight-line basis over four years.
Net Investment Income. Net investment income increased $554,000 or 9.4%
from $5.9 million for the six-month period ended June 30, 1998 to $6.4 million
for the six months ended June 30, 1999. Exclusive of the merger-related
expenses of $1.5 million, net investment income decreased $940,000 or 12.8% from
$7.4 million for the six months period ended June 30, 1998 to $6.4 million for
the six months ended June 30, 1999. The decrease is attributable to a faster
decline in the average yield a compared to the decline in the cost of funds
together with an increase in operating expenses.
-26-
Change in Net Unrealized Depreciation/Appreciation. The change in net
unrealized appreciation increased $2.4 million from a net appreciation of
$222,000 for the six months ended June 30, 1998 to an appreciation $2.6 million
for the six months ended June 30, 1999. 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 a decrease in
realized net gain on investments of $391,000 from net realized gains of $1.0
million for the six months ended June 30, 1998 to $636,000 for the six months
ended June 30, 1999. The decrease in realized gains was the result of the lower
volume of sales of warrants in connection with repayments of loans in 1999
compared to 1998.
Net Increase in Net Assets Resulting from Operations. Net increase in net
assets resulting from operations increased $2.4 million or 34.0% from $7.2
million for the six months ended June 30, 1998 to $9.6 million for the six
months ended June 30, 1999. Exclusive of the merger-related expenses $1.5
million, net increase in net assets resulting from operations increased $936,000
or 10.8% from $8.7 million for the six months period ended June 30, 1998 to $9.6
million for the six months ended June 30, 1999. The increase was attributable to
the positive impact of portfolio growth coupled with an increase in the spread
between average yield and average cost of funds. Return on assets and return on
equity for the six months ended June 30, 1999, on an annualized basis, were 4.3%
and 12.7%, respectively, compared to 4.7% and 11.5% for the six months ended
June 30, 1998.
Asset/Liability Management
Interest Rate Sensitivity. The Company, like other financial institutions,
is subject to interest rate risk to the extent its interest-earning assets
(consisting of Medallion Loans and Commercial Installment Loans) reprice on a
different basis over time in comparison to its interest-bearing liabilities
(consisting primarily of credit facilities with bank syndicates, secured
commercial paper and subordinated SBA debentures).
A relative measure of interest rate risk can be derived from the Company's
interest rate sensitivity gap. The interest rate sensitivity gap represents the
difference between interest-earning assets and interest-bearing liabilities,
which mature and/or reprice within specified intervals of time. The gap is
considered to be positive when repriceable assets exceed repriceable liabilities
and negative when the inverse situation exists. A relative measure of interest
rate sensitivity is provided by the cumulative difference between interest
sensitive assets and interest sensitive liabilities for a given time interval
expressed as a percentage of total assets.
Having interest-bearing liabilities that mature or reprice more frequently
on average than assets may be beneficial in times of declining interest rates,
although such an asset/liability structure may result in declining net earnings
during periods of rising interest rates. Conversely, having interest-earning
assets that mature or reprice more frequently on average than liabilities may be
beneficial in times of rising interest rates, although this
-27-
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% 5/12/97 5/13/99
$10,000,000 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 $29.8 million with a weighted average rate
of interest of 7.16%. At June 30, 1999, these debentures constituted 9.9% of the
Company's total indebtedness.
The Company will seek to manage interest rate risk by evaluating and
purchasing, if appropriate, additional derivatives, originating adjustable-rate
loans, incurring fixed-rate indebtedness and revising, if appropriate, its
overall level of asset and liability matching. Nevertheless, the Company
accepts varying degrees of interest rate risk depending on market conditions and
believes that the resulting asset/liability interest rate mismatch results in
opportunities for higher net interest income.
Liquidity and Capital Resources
The Company's sources of liquidity are credit facilities with bank
syndicates, secured commercial paper, fixed rate, long-term debentures that are
issued to or guaranteed by the SBA and loan amortization and prepayments. As a
Regulated Investment Company ("RIC") under the Internal Revenue Code of 1986, as
amended, the Company distributes at least 90%
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of its investment company taxable income; consequently, the Company primarily
relies upon external sources of funds to finance growth. At June 30, 1999, the
Company's total debt outstanding was $302.4 million at a weighted average
interest rate of 6.21%. Of the total debt outstanding, $113 million or 37.3%
consisted of bank debt, substantially all of which was at variable effective
rates of interest with a weighted average rate of 6.11% or 189 basis points
below the Prime Rate, 45.4% or $137.2 million consisted of short-term commercial
paper at a weighted average interest rate of 5.93%, 9.9% or $29.8 million
consisted of SBA debentures with fixed rates of interest with a weighted average
rate of 7.16% and 7.4% or $22.5 million consisted of private placement debt with
a weighted average interest rate of 7.20%. 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 $44.9 million of debt was available at June 30, 1999
at variable effective rates of interest averaging below the Prime Rate under the
Company's $295.0 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
June 30, 1999:
Medallion
Financial MFC BLLC MCI MBC Total
--------- --- ---- --- --- -----
(dollars in thousands)
Cash and cash equivalents $ 57 $ 4,105 $ -- $ 3,069 $1,066 $ 8,297
Revolving lines of credit 100,000 195,000 -- -- -- 295,000
Amounts available 37,500 7,366 -- -- -- 44,866*
Amounts outstanding 62,500 50,450 -- -- -- 112,950
Average interest rate 6.11% 6.11% -- -- -- 6.11%
Maturity 7/00 6/01 -- -- -- 7/00-6/01
Commercial paper
Amounts outstanding -- 137,184 -- -- -- 137,184
Average interest rate -- 5.93% -- -- -- 5.93%
Maturity -- 6/01 -- -- -- 6/01
SBA debentures -- 19,310 -- 10,500 -- 29,810
Average interest rate -- 7.20% -- 7.08% -- 7.16%
Maturity -- 9/00-9/05 -- 3/06-6/07 -- 9/00-6/07
Bonds -- 22,500 -- -- -- 22,500
Average interest rate -- 7.20% -- -- -- 7.20%
Maturity -- 6/04 -- -- -- 6/04
Total cash and remaining amounts
available under credit facilities 37,557 11,471 -- 3,069 1,066 53,163
Total debt outstanding $ 62,500 $ 229,444 $ -- $ 10,500 $ -- $ 302,444
* Note 1) Commercial paper outstanding is deducted from revolving credit lines
available as the line of credit acts as a liquidity facility for the commercial
paper.
Loan amortization and prepayments also provide a source of funding for the
Company. Prepayments on loans are influenced significantly by general interest
rates, medallion loan market rates, economic conditions and competition.
Medallion loan prepayments have slowed since early 1994, initially because of
increases, and then stabilization in the level of interest
-29-
rates and more recently because of an increase in the percentage of the
Company's medallion loans which are refinanced with the Company rather than
through other sources of financing.
The Company makes limited use of SBA funding and will seek such funding
only when advantageous. Since May 30, 1996, the Company has expanded its loan
portfolio, reduced its level of SBA financing and increased its level of bank
funding.
Media funds its operations through internal cash flow and inter-company
debt. Media is not a RIC and, therefore, is able to retain earnings to finance
growth.
Investment Considerations
The following are certain of the factors which could affect the Company's
future results. They should be considered in connection with evaluating
forward-looking statements contained in this Management's Discussion and
Analysis and elsewhere in this Report and otherwise made by or on behalf of the
Company since these factors, among others, could cause actual results and
conditions to differ materially from those projected in these forward-looking
statements.
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
-30-
can be no assurance that an economic downturn in New York City in general, or in
the New York City taxicab industry in particular, would not have an adverse
impact on the Company.
Reliance on Management. The success of the Company will be largely
dependent upon the efforts of senior management. The death, incapacity or loss
of the services of any of such individuals could have an adverse effect on the
Company.
Taxicab Industry Regulation. Every city in which the Company originates
Medallion Loans, and most other major cities in the United States, limit the
supply of taxicab medallions. In many markets, regulation results in supply
restrictions which, in turn, support the value of medallions; consequently,
actions which loosen such restrictions and result in the issuance of additional
medallions into a market could decrease the value of medallions in that market
and, therefore, the collateral securing the Company's then outstanding Medallion
Loans, if any, in that market. The Company is unable to forecast with any
degree of certainty whether any potential increases in the supply of medallions
will occur. In New York City, and in other markets where the Company originates
Medallion Loans, taxicab fares are generally set by government agencies, whereas
expenses associated with operating taxicabs are largely unregulated. As a
consequence, in the short term, the ability of taxicab operators to recoup
increases in expenses is limited. 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. In 1998, approximately 58.7%
of Media's taxicab rooftop advertising revenue was 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. Effective March 31, 1999, under the Master Settlement
Agreement between tobacco manufactures and the attorneys general of various
states (including the states in which the Company conducts its outdoor
advertising business), the tobacco manufacturers have agreed to eliminate
general outdoor and transit advertising of tobacco products. Accordingly, such
restrictions may have an adverse effect upon the taxicab rooftop advertising
business of the Company.
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 and such initiatives are expected to be Year
2000 compliant. The Company has implemented a five phase plan to remediate its
information technology ("IT") and non-IT systems: (1) compiling an inventory of
the company's computer hardware and software ("IT systems") and equipment ("non-
IT systems"); (2) identifying and verifying the Year 2000 readiness of third
parties; (3) assessing whether the systems can be remediated or must be
replaced; (4) remediating or replacing IT and non-IT systems; (5) testing the
remediated or replaced IT and non-IT systems. An
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inventory of IT and non-IT systems was completed by December 31, 1998. The
Company has received Year 2000 compliance letters from each of its major
software vendors and its major office systems vendors and is awaiting responses
from additional parties. Phase three is substantially complete as of June 30,
1999. Planning for phases four and five began in the first quarter of 1999 and
testing of critical systems are continuing and are scheduled to be completed by
the end of the third quarter. Software and operating system tests are being
conducted using fictitious transactions and each individual workstation and
network server will be tested for Year 2000 compliance.
The Company estimates that the total cost involved in the Year 2000 project
is approximately $30,000. This excludes the costs related to new loan servicing
software and an update of the general ledger system. These costs will be
expenses as incurred, except for capitalizable hardware. The project is staffed
with both external contractors and internal personnel. Approximately $12,500 has
been spent to date.
Management believes that the Year 2000 project is on schedule and such
measures will adequately address the Year 2000 issues, although there can be no
assurance in this regard. Further, both the cost estimates and completion
timeframes are subject to change based on new circumstances that may arise. 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 has
sent 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. The Company is in the process of developing a contingency plan to address
the potential for business disruption due to systems failure or the failure of
third parties to modify their systems timely that may have a material or adverse
effect on the Company's operations. The Year 2000 disclosure set forth above is
a "year 2000 statement" as defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent the disclosure
related to year 2000 processing of the Company or to products or services
offered by the Company, is also a "year 2000 readiness disclosure" as defined in
the Year 2000 Act.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on June 16, 1999 (the
"Annual Meeting").
The Company's stockholders were asked to take the following actions at the
meeting:
(1) Elect two Class III Directors to serve until the 2002 annual meeting of
stockholders or until their successors shall otherwise be elected (the
"Board Proposal");
(2) Approve certain amendments to the Company's 1996 Non-employee Director
Stock Option Plan to adjust the calculation of the number of shares of the
Company's Common Stock issuable under options to be granted to a Non-
employee Director upon his or her re-election. (the "Incentive Plan
Proposal");
(3) Approve the renewal of the sub-advisory agreement between the Company and
FMC Advisers, Inc. (the "Advisory Contract Proposal"); and
(4) Ratify the Board of Directors' selection of Arthur Andersen LLP to serve as
the Company's independent auditors for the fiscal year ending December 31,
1999 (the "Auditors Proposal").
With respect to the Board Proposal, the two individuals nominated for director
were elected by the affirmative vote of a majority of shares of common stock
present at the Annual Meeting.
The nominees and the votes received by each are as follows:
Votes cast for Withheld
----------------------------------------------------------------
Alvin Murstein 10,880,427 36,817
Benjamin Ward 10,880,427 36,817
The Incentive Plan Proposal, Advisory Contract Proposal and Auditors Proposal
were also approved by affirmative vote of a majority of shares of common stock
present at the Annual Meeting. Each of the proposals received the following
votes:
Votes cast for Against Abstentions
----------------------------------------------------------------
Incentive Plan Proposal 10,576,029 287,329 53,886
Advisory Contract Proposal 10,709,091 172,241 35,912
Auditors Proposal 10,878,741 14,346 24,157
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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(a) Exhibits
10.1 Amended and Restated Loan Agreement by and among Medallion Financial
Corp., Medallion Business Credit, LLC, the Lenders Party Hereto, Fleet
Bank, National Association as Agent and Swing Line Lender and Fleet
Bank, National Association as Arranger, dated June 29, 1999.
10.2 Medallion Funding Corp. $22,500,000 7.20% Senior Secured Notes, Series
A Due June 1, 2004 Note Purchase Agreement, dated as of June 1, 1999.
10.3 Security Agreement between Medallion Funding Corp., as debtor, and
Fleet Bank, N.A., as Agent and secured party, for the benefit of the
Travelers Insurance Company, the First Citicorp Life Insurance
Company, Citicorp Life Insurance Company, United of Omaha Life
Insurance Company and Companion Life Insurance Company dated June 1,
1999.
10.4 Security Agreement between Medallion Business Credit, LLC, as debtor
and Fleet Bank, N.A., as Agent and secured party, for the benefit of
The Banks and Swing Line Lender Signatory to the Amended and Restated
Loan Agreement, dated as of June 29, 1999, among Medallion Financial
Corp., Medallion Business Credit LLC, the Banks Signatory thereto, the
Swing Line Lender and Fleet Bank, N.A., as Arranger and Agent, dated
as of June 29, 1999.
10.5 Intercreditor Agreement, dated June 1, 1999, among Fleet Bank, N.A.,
as agent for and on behalf of the Banks, the Banks, the Senior
Noteholders, Fleet, acting as collateral agent to the Senior
Noteholders and Fleet as intercreditor collateral agent for the Senior
Creditors.
10.6 $5,000,000 Swing Line Note, dated June 29, 1999.
10.7 $20,000,000 Revolving Credit Note No. 1, dated June 29, 1999.
10.8 $15,000,000 Revolving Credit Note No. 2, dated June 29, 1999.
10.9 $10,000,000 Revolving Credit Note No. 3, dated June 29, 1999.
10.10 $10,000,000 Revolving Credit Note No. 4, dated June 29, 1999.
10.11 $10,000,000 Revolving Credit Note No. 5, dated June 29, 1999.
10.12 $5,000,000 Revolving Credit Note No. 6, dated June 29, 1999.
10.13 $10,000,000 Revolving Credit Note No. 7, dated June 29, 1999.
10.14 $10,000,000 Revolving Credit Note No. 8, dated June 29, 1999.
10.15 $10,000,000 Revolving Credit Note No. 9, dated June 29, 1999.
27 Mediallion Financial Corp. Financial Data Schedule. Filed herewith.
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MEDALLION FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDALLION FINANCIAL CORP.
Date: August 13, 1999 By: /s/ Daniel F. Baker
-------------------
Daniel F. Baker
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial and accounting officer
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