-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S/Z2an/mryWthb/K/Sa+7zyOzdjCoJS9/N90ZDmjx23/tm/pWzdyY6ESLL475To2 OBPkqetlyZzmHv9eWEtwfw== 0000950130-00-002930.txt : 20000516 0000950130-00-002930.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950130-00-002930 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDALLION FINANCIAL CORP CENTRAL INDEX KEY: 0001000209 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 043291176 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 814-00188 FILM NUMBER: 634475 BUSINESS ADDRESS: STREET 1: 205 E 42ND ST STREET 2: STE 2020 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126823300 MAIL ADDRESS: STREET 1: 205 E 42ND ST STREET 2: STE 2020 CITY: NEW YORK STATE: NY ZIP: 10017 10-Q 1 FORM 10-Q ================================================================================ 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 March 31,2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-27812 MEDALLION FINANCIAL CORP. (Exact name of registrant as specified in its charter) DELAWARE No. 04-3291176 (State of Incorporation) (IRS Employer Identification No.) 437 Madison Ave, New York, New York 10022 (Address of principal executive offices) (Zip Code) (212) 328-2100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ----- Number of shares of Common Stock outstanding at the latest practicable date, May 1, 2000: Class Outstanding Par Value Shares Outstanding ----------------- --------- ------------------ Common Stock................................... $.01 14,029,798 ================================================================================ MEDALLION FINANCIAL CORP. -1- MEDALLION FINANCIAL CORP. FORM 10-Q March 31,2000 INDEX Page ---- PART I. Financial Information Item 1. Basis of Preparation............................................. 3 Medallion Financial Corp. Consolidated Balance Sheets at March 31, 2000 and December 31, 1999...................... 4 Medallion Financial Corp. Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999........... 5 Medallion Financial Corp. Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999..... 6 Notes to Consolidated Financial Statements..................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 14 General........................................................ 14 Consolidated Results of Operations (for the three months ended March 31,2000 and 1999)................................ 18 Asset/Liability Management..................................... 21 Liquidity and Capital Resources................................ 22 Investment Considerations...................................... 25 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K................................. 28 SIGNATURES................................................................. 29 -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 (Edwards), Transportation Capital Corp. (TCC) and Medallion Taxi Media, Inc. (Media). Media and MFC were subsidiaries of Tri-Magna Corporation (Tri- Magna) which was merged into the Company. The Company's acquisition of these businesses in connection with the Offering and the resulting two-tier structure were effected pursuant to an order of the Securities and Exchange Commission (the Commission) (Release No. I.C. 21969, May 21, 1996) (the Acquisition Order) and the approval of the U.S. Small Business Administration (the SBA). The financial information included in this report reflects the acquisition of Capital Dimensions, Inc. (CDI) which was subsequently renamed Medallion Capital, Inc. The acquisition was completed on June 16, 1998 and was accounted for as a pooling-of-interests and, accordingly, the information included in the accompanying financial statements and notes thereto present the combined financial position and the results of operations of the Company and CDI as if they had operated as a combined entity for all periods presented. The financial information in this report is divided into two sections. The first section, Item 1, includes the unaudited consolidated balance sheets of the Company as of March 31, 2000 and December 31,1999 and the related statements of operations and cash flows for the three months ended March 31, 2000 and 1999. The second section, Item 2, consists of Management's Discussion and Analysis of Financial Condition and Results of Operations and sets forth an analysis of the financial information included in Item 1 for the three months ended March 31, 2000 and 1999. The consolidated balance sheet of the Company as of March 31, 2000, the related statements of operations and cash flows for the three months ended March 31, 2000 included in Item 1 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of normal, recurring adjustments) necessary to summarize fairly the Company's financial position and results of operations. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results of operations for the full year or any other interim period nor be indicative of future period performance. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. -3- MEDALLION FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2000 1999 ------------------------------------- ASSETS (unaudited) Investments: Medallion loans $316,791,775 $303,093,283 Commercial installment loans 173,748,551 162,033,462 Equity investments 2,474,210 2,336,185 ------------ ------------ Net investments 493,014,536 467,462,930 Investment in and loans to unconsolidated subsidiary 3,333,144 4,349,651 ------------ ------------ Total investments 496,347,680 471,812,581 Cash 8,441,172 5,961,776 Accrued interest receivable 7,140,271 4,887,142 Receivable from sale of loans 3,131,611 10,563,503 Servicing fee receivable 5,404,586 4,878,783 Fixed assets, net 2,240,042 2,378,686 Goodwill, net 6,046,142 6,180,151 Other assets, net 3,558,090 2,949,906 ------------ ------------ Total assets $532,309,594 $509,612,528 ============ ============ LIABILITIES Accounts payable and accrued expenses $ 7,262,561 $ 9,318,480 Dividends payable - 5,609,773 Accrued interest payable 2,279,109 3,711,199 Notes payable to banks 175,500,000 190,450,000 Senior secured notes 45,000,000 45,000,000 Commercial paper 136,657,275 93,983,792 SBA debentures payable 10,500,000 10,500,000 ------------ ------------ Total liabilities $377,198,945 $358,573,244 Negative goodwill, net 169,916 350,516 Commitments and contingencies SHAREHOLDERS' EQUITY Preferred Stock (1,000,000 shares of $.01 par value $ - $ - stock authorized - none outstanding) Common stock (50,000,000 shares of $.01 par value stock authorized - 14,029,798 and 14,024,433 shares outstanding at March 31, 2000 and December 31, 1999, respectively) 140,298 140,245 Capital in excess of par value 142,051,822 142,015,875 Accumulated undistributed net investment income 12,748,613 8,532,648 ------------ ------------ Total shareholders' equity 154,940,733 150,688,768 ------------ ------------ Total liabilities and shareholders' equity $532,309,594 $509,612,528 ============ ============ Number of common shares and common share equivalents 14,096,721 14,129,210 Net asset value per share $ 10.99 $ 10.67
See accompanying notes to unaudited consolidated financial statements. -4- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Three Months Ended Ended March 31, 2000 March 31, 1999 -------------- -------------- Investment income: Interest income on investments $13,723,570 $ 9,281,755 Interest income on short-term investments 69,937 98,121 ----------- ----------- Total investment income 13,793,507 9,379,876 Interest expense: Notes payable to banks 3,214,066 1,918,830 Commercial paper 2,281,159 1,561,348 SBA debentures 186,915 758,305 Notes payable to bondholders 821,865 - ----------- ----------- Total interest expense 6,504,005 4,238,483 Net interest income 7,289,502 5,141,393 Non-interest income: Equity in earnings (loss) of unconsolidated subsidiary (319,349) 383,464 Accretion of negative goodwill 180,600 180,600 Gain on sale of loans 686,098 612,247 Other income 745,743 506,611 ----------- ----------- Total non-interest income 1,293,092 1,682,922 Expenses: Administrative and advisory fees 61,541 61,760 Professional fees 325,972 320,140 Salaries and benefits 2,414,624 1,810,032 Other operating expenses 1,585,230 1,343,254 Amortization of goodwill 136,578 164,551 ----------- ----------- Total non-interest expenses 4,523,945 3,699,737 Net investment income before income taxes 4,058,649 3,124,578 Income tax benefit (provision) - (51,456) ----------- ----------- Net investment income after income taxes 4,058,649 3,073,122 Increase in net unrealized appreciation 270,027 605,293 Net realized gains (losses) on investments (112,711) 804,822 ----------- ----------- Net increase in net assets resulting from operations $ 4,215,965 $ 4,483,237 =========== =========== Net increase in net assets resulting from operations per common share: Basic $ 0.30 $ 0.32 Diluted $ 0.30 $ 0.32 Weighted average common shares outstanding: Basic Average Shares 14,026,817 14,013,768 Diluted Average Shares 14,093,741 14,084,307
See accompanying notes to unaudited consolidated financial statements. -5- MEDALLION FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Three Months Ended Ended March 31, 2000 March 31, 1999 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in net assets resulting from operations $ 4,215,965 $ 4,483,237 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Depreciation and amortization 218,484 108,773 Amortization of goodwill 136,578 164,551 Amortization of origination costs 255,874 156,656 Accretion of negative goodwill (180,600) (180,600) Increase in unrealized depreciation (appreciation), net (270,027) (605,294) Net realized gain (loss) on investments 112,711 (804,822) Equity in losses (earnings) of unconsolidated subsidiary 319,349 (383,464) Increase in accrued interest receivable (2,253,129) (231,207) Decrease in receivable from sale of loans 7,431,892 4,688,582 Increase in servicing fee receivable (525,803) (281,470) (Increase) decrease in other assets (573,950) 720,075 Decrease in accounts payable and accrued expenses (2,055,919) (2,390,505) Decrease in accrued interest payable (1,432,090) (775,598) -------------- -------------- Net cash provided by operating activities 5,399,335 4,668,914 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Originations of investments (63,378,567) (51,125,835) Proceeds from sales and maturities of investments 37,728,403 35,901,344 Investment in and loans to unconsolidated subsidiary, net 697,158 439,899 Capital expenditures (116,643) (181,495) -------------- -------------- Net cash used for investing activities (25,069,649) (14,966,087) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to banks (14,950,000) (9,300,000) Proceeds from issuance of commercial paper 42,673,483 26,189,032 Proceeds from exercise of stock options 36,000 - Payment of declared dividends to current shareholders (5,609,773) (4,764,681) -------------- -------------- Net cash provided by financing activities 22,149,710 12,124,351 -------------- -------------- NET INCREASE IN CASH 2,479,396 1,827,178 CASH, beginning of period 5,961,776 6,027,596 -------------- -------------- CASH, end of period $ 8,441,172 $ 7,854,774 ============== ============== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 7,936,005 $ 5,014,081
See accompanying notes to unaudited consolidated financial statements. -6- MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (1) Organization of Medallion Financial Corp. and Its Subsidiaries Medallion Financial Corp. (the Company) is a closed-end management investment company organized as a Delaware corporation in 1995. The Company has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the 1940 Act). On May 29, 1996, the Company completed an initial public offering (the Offering) of its common stock, issued and sold 5,750,000 shares at $11.00 per share and split the existing 200 shares of common stock outstanding into 2,500,000 shares. All share and related amounts in the accompanying financial statements have been restated to reflect this stock split. Offering costs incurred by the Company in connection with the sale of shares totaling $7,102,944 were recorded as a reduction of capital upon completion of the Offering. These costs were recorded, net of $200,000 payable by Tri-Magna Corporation and subsidiaries (Tri-Magna) in accordance with the Merger Agreement. In parallel with the Offering, the Company merged with Tri- Magna; acquired substantially all the assets and assumed certain liabilities of Edwards Capital Company, a limited partnership; and acquired all of the outstanding voting stock of Transportation Capital Corp. (TCC) (collectively, the 1996 Acquisitions). The assets acquired and liabilities assumed from Edwards Capital Company were acquired and assumed by Edwards Capital Corporation (Edwards), a newly formed and wholly owned subsidiary of the Company. As a result of the merger with Tri-Magna in accordance with the Merger Agreement dated December 21,1995 between the Company and Tri-Magna, Medallion Funding Corp. (MFC) and Medallion Taxi Media, Inc. (Media), formerly subsidiaries of Tri-Magna, became wholly owned subsidiaries of the Company. In 1998, the Company merged all of the assets and liabilities of Edwards and TCC into MFC, effective on June 1, 1999. MFC is a closed-end management investment company registered under the 1940 Act and 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. 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) March 31, 2000 In connection with the 1996 Acquisitions, the Company received the Acquisition Orders under the 1940 Act from the Securities and Exchange Commission. Approval from the Connecticut State Department of Banking and the SBA was obtained for the Business Lenders Acquisition. On May 27, 1998, the Company completed the acquisition of certain assets and assumption of certain liabilities of Venture Group I, Inc. (VGI), Venture Group II, Inc. (VGII) and Venture Opportunities Corp. (VOC) an SBIC lender, headquartered in New York. On June 16, 1998, the Company completed the merger with Capital Dimensions, Inc. (CDI), a Specialized Small Business Investment Company (SSBIC) lender, headquartered in Minneapolis, Minnesota. CDI was subsequently renamed Medallion Capital, Inc. (Medallion Capital). The charter was amended to convert Medallion Capital to an SBIC. The transaction was accounted for as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended, and was treated under the pooling-of-interests method of accounting. In September 1998, the Company created Medallion Business Credit LLC (MBC) as a wholly owned subsidiary. MBC originates loans to small businesses for the purpose of financing inventory and receivables. On December 22, 1999, the Company entered into an Agreement and Plan of Merger with Freshstart Venture Capital Corp. (Freshstart), a specialty finance company, located in Long Island City, New York. The shareholders of Freshstart will receive common stock of the Company having a fair value between $4.025 to $4.875 for each share of Freshstart common stock. The closing of the transaction is subject to the approval of the shareholders of Freshstart, regulatory approval and the satisfaction of customary conditions. Proforma information related to the transaction with Freshstart has not been included as the transaction is not expected to be material to the Company. (2) Summary of Significant Accounting Policies Cost of purchased businesses in excess of the fair value of net assets acquired (goodwill) is being amortized on a straight-line basis over fifteen years. The excess of fair value of net assets over cost of business acquired (negative goodwill) is being accreted on a straight-line basis over approximately four years. Under the 1940 Act and the Small Business Investment Act of 1958 and regulations thereunder (the SBIA), the Company's long-term loans are considered investments and are recorded at their fair value. Since no ready market exists for these loans, fair value is determined in good faith by the Board of Directors. In determining the fair value, the Company and the Board of Directors consider factors such as the financial condition of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience and -8- MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2000 the relationships between current and projected market rates and portfolio rates of interest and maturities. Loans are valued at cost less unrealized depreciation. Any change in the fair value of the Company's investments as determined by the Board of Directors is reflected in net unrealized appreciation/depreciation of investments. Total net unrealized depreciation was $8,601,341 and $8,945,552 on total investments of $493,014,537 and $467,462,930 at March 31, 2000 and December 31, 1999, respectively, of which $1,522,417 existed at the date of the Company's 1996 Acquisitions. The Board of Directors has determined that this valuation approximates fair value. During fiscal 2000, the Company commenced origination of a new loan product collateralized by taxi medallions. In consideration for modifications from the Company's normal taxi lending terms, the Company offers loans at higher loan to value ratios and will be entitled to earn additional interest income based upon any increase in value of the collateral. In 1997, the Company adopted SFAS No. 128, "Earnings Per Share", which establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The dilutive effect of potential common shares, consisting of outstanding stock options is determined using the treasury method in accordance with SFAS No. 128. Basic and diluted EPS for the three months ended March 31, 2000 and 1999 are as follows:
(Dollars in thousands, except per share amounts) Three months ended March 31, 2000 March 31, 1999 Per Share Per Share Income Shares Amount Income Shares Amount - -------------------------------------------------------------------------------------------------- Net Income $4,216 $4,483 Basic EPS - --------- Income available to common shareholders 4,216 14,026,817 $ 0.30 $4,483 14,013,768 $ 0.32 Effect of dilutive 66,923 70,539 stock options Diluted EPS - ----------- Income available to common shareholders 4,216 14,093,740 $ 0.30 $4,483 14,084,307 $ 0.32
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes new standards regarding accounting and reporting requirements for derivative instruments and -9- MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2000 hedging activities. In June 1999, the Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -Deferral of the Effective Date of FASB Statement No. 133." The new standard defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company is presently studying the effect of the new pronouncement and, as required, will adopt SFAS No. 133 beginning January 1, 2001. Certain reclassifications have been made to prior year balances to conform with the current year presentation. (3) Investment in Unconsolidated Subsidiary The Company's investment in Media is accounted for under the equity method because as a non-investment company, Media cannot be consolidated with the Company which is an investment company under the 1940 Act. Financial information presented for Media includes the balance sheets as of March 31, 2000 and December 31, 1999 and statements of operations for the three months ended March 31, 2000 and 1999: Balance Sheet March 31, December 31, 2000 1999 ----------- ------------ Cash $ 216,070 $ 189,480 Accounts receivable 2,337,229 3,582,642 Equipment, net 1,814,772 1,683,756 Goodwill 51,682 1,666,091 Other 3,797,010 2,147,534 ----------- ------------ Total assets $ 8,216,763 $ 9,269,503 =========== ============ Notes payable to parent $ 903,644 $ 1,750,351 Accounts payable and accrued expenses 536,675 461,196 Other liabilities and income taxes payable 4,057,322 4,350,037 ----------- ------------ Total liabilities 5,497,641 6,561,584 Equity 1,001,000 1,001,000 Retained earnings 1,718,122 1,706,919 ----------- ------------ Total equity 2,719,122 2,707,919 ----------- ------------ Total liabilities and equity $ 8,216,763 $ 9,269,503 =========== ============ -10- MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2000
Statements of Operations Three Months Three Months Ended Ended March 31, March 31, 2000 1999 ---- ---- Advertising revenue $2,276,321 $2,758,040 Cost of services 1,163,103 989,077 ---------- ---------- Gross margin 1,113,218 1,768,963 Other operating expenses 1,396,216 1,129,857 ---------- ---------- Income before taxes (282,998) 639,106 Income tax benefit (provision) 113,199 (255,642) ---------- ---------- Net (loss) income $ (169,799) $ 383,464 ========== ==========
On February 2, 1999, Media purchased 100% of the common stock of Transit Advertising Displays, Inc. (TAD) for approximately $849,000. TAD is a taxicab rooftop advertising company headquartered in Washington, D.C. operating 1,300 installed displays in the Baltimore, MD and Washington, D.C. areas. The purchase was accounted for under the purchase method of accounting. Included in the purchase price were certain premiums paid totaling approximately $777,000, which represented goodwill and is being amortized over 15 years. During fiscal 2000, the Company purchased taxicab rooftop advertising from its wholly-owned subsidiary Media. The Company paid an average market rate per top totaling $149,550 for the three months ended March 31, 2000. (4) Debt The table below summarizes the various debt agreements outstanding at March 31, 2000 and December 31, 1999:
March 31, 2000 December 31, 1999 -------------- ----------------- Notes payable to banks: Total facilities $320,000,000 $295,000,000 Maturity of facilities 6/00 - 6/01 6/00-6/01 Total amounts outstanding $175,500,000 $190,450,000 SBA debentures payable $ 10,500,000 $ 10,500,000 Maturity date 3/06 - 6/07 3/06-6/07 Senior Secured Notes $ 45,000,000 $ 45,000,000 Maturity date 6/04 6/04
Under the revolving credit agreement between MFC and its lenders, as amended, MFC is required to maintain minimum tangible net assets of $65,000,000 and certain financial -11- MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2000 ratios. The Company believes that MFC was in compliance with such requirements at March 31, 2000. On June 1, 1999, MFC issued $22.5 million of senior secured notes (the Notes) that mature on June 1, 2004. The Notes bear a fixed rate of interest of 7.2% and interest is paid quarterly in arrears. The Notes rank pari pasu with the revolvers and commercial paper through inter-creditor agreements. On September 1, 1999, the note holders purchased an additional $22.5 million under the same terms and conditions. The proceeds of the Notes were used to prepay certain of the Company's outstanding SBA debentures. On June 1, 1999, MFC extended its $195 million revolving credit facility until June 30, 2001. On December 31, 1999, MFC increased the aggregate credit commitment amount to $220 million with an effective date of February 10, 2000. On June 29, 1999, Medallion Financial increased its revolving credit facility to $100 million and extended the maturity until June 28, 2000. (5) Commercial Paper On March 13, 1998, MFC entered into a commercial paper agreement with Salomon Smith Barney Inc. to sell up to an aggregate principal amount of $195 million in secured commercial paper through private placements pursuant to Section 4(2) of the Securities Act of 1933. On August 3, 1999, MFC entered into a commercial paper dealer agreement with USBancorp to sell commercial paper under the same program as Salomon Smith Barney. Amounts outstanding at any time under the program are limited by certain covenants, including a requirement that MFC retain an investment grade rating from at least two of the four nationally recognized rating agencies, and borrowing base calculations as set forth in Revolver. The commercial paper program has a specified maturity date of June 30, 2001 which represents the maturity date of MFC's Revolver, but may be terminated by the Company at anytime. As of March 31, 2000, MFC had approximately $136.7 million outstanding at a weighted average interest rate end of period of 6.56%. (6) Segment Reporting The Company has two reportable business segments, lending and taxicab rooftop advertising. The lending segment originates and services secured commercial loans. The taxicab rooftop advertising segment sells advertising space to advertising agencies and companies in several major markets across the United States. The segment is reported as an unconsolidated subsidiary, Medallion Taxi Media, Inc. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. -12- MEDALLION FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2000 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.
Three months ended March 31, 2000 Taxicab Lending Advertising Total --------------------------------------------------------- Net interest income $ 7,289,502 $ 7,289,502 Depreciation and amortization 218,484 218,484 Income tax benefit (provision) - - Net increase (decrease) in net assets resulting from operations* 4,535,314 (319,349) 4,215,965 Segment assets 528,976,450 3,333,144 532,309,594 Capital expenditures 116,643 296,234 ** Three months ended March 31, 1999 Taxicab Lending Advertising Total --------------------------------------------------------- Net interest income $ 5,141,393 $ 5,141,393 Depreciation and amortization 108,773 108,773 Income tax benefit (provision) (51,456) (51,456) Net increase in net assets resulting from operations 4,099,773 383,464 4,483,237 Segment assets 430,508,902 4,977,225 435,486,127 Capital expenditures 181,495 67,117 **
* Net income of the taxicab advertising segment excludes $149,550 which represents intercompany taxi top sales from media to the Company. ** Capital expenditures for the Company are equal to expenditures for the lending segment. Capital expenditures related to the taxicab advertising segment are included in order to provide additional information. (7) Subsequent Events On May 10, 2000, MFC declared a dividend payable to the Company in the amount of $240 per share payable on May 11, 2000 (aggregating $1,598,160). With the proceeds of these dividends, on May 10, 2000, the Company declared a dividend in the amount of $0.35 per share (aggregating $4,910,429) payable on June 1, 2000 to the shareholders of record on May 22, 2000. On May 4, 2000, the Company executed an Agreement and Plan of Merger with Ameritrans Capital Corporation, a specialty finance company, pursuant to which Ameritrans will merge into and with a wholly-owned subsidiary of the Company. The merger is subject to the satisfaction of certain customary closing conditions and the completion of due diligence. -13- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in this section should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing in this Report on Form 10-Q and the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. In addition, this Management's Discussion and Analysis contains forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are set forth below in the Investment Considerations section. All amounts have been restated to include the historical amounts of Medallion Capital, Inc. (formerly Capital Dimensions, Inc.) General The Company operates a specialty finance business whose principal activity is the origination and servicing of commercial secured loans. The loans are primarily secured by taxicab medallions ("Medallion Loans") and loans to small businesses secured by equipment and other suitable collateral ("Commercial Installment Loans"). As an adjunct to its finance business, the Company also operates a taxicab rooftop advertising business. The earnings of the Company depend primarily on its level of net interest income, which is the difference between interest earned on interest-earning assets consisting primarily of Medallion Loans and Commercial Installment Loans, and the interest paid on interest-bearing liabilities consisting primarily of secured credit facilities with bank syndicates, secured commercial paper, senior secured notes and debentures issued to or guaranteed by the SBA. Net interest income is a function of the net interest rate spread, which is the difference between the average yield earned on interest-earning assets and the average interest rate paid on interest-bearing liabilities, as well as the average balance of interest-earning assets as compared to interest-bearing liabilities. Net interest income is affected by economic, regulatory and competitive factors that influence interest rates, loan demand and the availability of funding to finance the Company's lending activities. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets reprice on a different basis than its interest-bearing liabilities. The income from the taxicab rooftop advertising business is reflected as earnings from unconsolidated subsidiary. In addition, through its subsidiary Medallion Capital, the Company invests in small businesses in selected industries. Medallion Capital's investments are typically in the form of secured debt instruments with fixed interest rates accompanied by warrants to purchase an equity interest for a nominal exercise price (such warrants constituting "Equity Investments"). Interest income is earned on the debt investments. Realized gains (losses) on investments are recognized when investments are sold and represent the difference between the proceeds received from the disposition of portfolio assets and the cost of such portfolio assets. In addition, changes in unrealized appreciation (depreciation) of investments is recorded and represents the net change in the estimated fair values of the portfolio assets at the end of the period as compared with their estimated fair values at the beginning of the period or the cost -14- of such portfolio assets, if purchased during the period. Generally, "realized gains (losses) on investments" and "changes in unrealized appreciation (depreciation) of investments" are inversely related. When an appreciated asset is sold to realize a gain, a decrease in the previously recorded unrealized appreciation occurs. Conversely, when a loss previously recorded as an unrealized loss is realized by the sale or other disposition of a depreciated portfolio asset, the reclassification of the loss from "unrealized" to "realized" causes an increase in net unrealized appreciation and an increase in realized loss. Trend in Loan Portfolio Yield - The Company's investment income is driven by the principal amount of and yields on its portfolio. To identify trends in the yields, the portfolio is grouped by Medallion Loans, Commercial Installment Loans and Equity Investments. The following table illustrates the Company's investments at fair value and the weighted average portfolio yields calculated using the contractual interest rates of the loans at the dates indicated:
December 31, 1999 March 31, 2000 Contractual Contractual Weighted Percentage Weighted Percentage Average Principal of Total Average Principal of Total Yield Amounts Portfolio Yield Amounts Portfolio ------------ ------------ ----------- ------------ ----------- ------------- Medallion Loan Portfolio 8.90% $303,093,283 64.8% 8.88% 316,791,775 64.3% Commercial Installment Loan Portfolio 11.71% 162,033,462 34.7% 11.86% 173,748,551 35.2% Equity Investments - 2,336,185 0.5% - 2,474,210 .5% ----- ------------ ----- ----- ----------- ----- Total Portfolio 9.91% $467,462,930 100.0% 9.96% 493,014,536 100.0% ===== ============ ===== ===== =========== =====
Yield Summary: The weighted average yields e.o.p./1/. of the Medallion Loan portfolio decreased 2 basis points to 8.88% at March 31, 2000. The decrease in the average yield on Medallion Loans was the result of continuing competition in the New York medallion market partially offset by the Company's expansion into other medallion markets which produce yields 100 to 300 basis points higher than New York. At March 31, 2000, 19.8% of the medallion loan portfolio represented loans outside New York compared to 16.5% at December 31, 1999. The Company is continuing to focus its efforts to originate higher yielding medallion loans outside the New York market. The weighted average yields e.o.p. of the Commercial Installment Loan portfolio increased 15 basis points to 11.86% at March 31, 2000 from 11.71% at December 31, 1999 due to the impact of increases in the prime rate. The Company is continuing to originate adjustable rate loans tied to the prime rate to help mitigate its interest rate risk in a rising interest rate environment. The weighted average yields e.o.p. of the entire portfolio increased 5 basis points to 9.96% at March 31,2000 as compared to 9.91% at December 31, 1999 due to the increase in yield of the commercial portfolio. _______________ /1/ e.o.p. or "end of period," indicates that a calculation is made at the date indicated rather than for the period then ended. -15- Portfolio Summary: Medallion Loans constituted 64.3% of the total portfolio of $493.0 million at March 31, 2000 and 64.8% of the total portfolio of $467.5 million at December 31, 1999. The Medallion Loan portfolio increased by $13.7 million or 4.5%. The increase is due to growth in the New York and Chicago markets. The Commercial loan portfolio comprised 35.2%, of the total portfolio at March 31, 2000 compared to 34.7% at December 31, 1999. The Commercial Loan portfolio grew by $11.7 million or 7.2% due to strong growth in the SBA 7(a) program and asset- based lending portfolios. Equity Investments represented 0.5% of the Company's entire portfolio at both March 31, 2000 and December 31, 1999. Trend in Interest Expense. The Company's interest expense is driven by the interest rate payable on the Company's LIBOR-based short-term credit facilities with bank syndicates, secured commercial paper and, to a lesser degree, fixed- rate, long-term debentures issued to or guaranteed by the SBA. In recent years, the Company has reduced its reliance on SBA financing and increased the relative proportion of bank debt to total liabilities. SBA financing has offered attractive rates, however, such financing is restricted in its application and its availability is uncertain. In addition, SBA financing subjects its recipients to limits on the amount of secured bank debt they may incur. Accordingly, the Company plans to limit its use of SBA funding and will seek such funding only when advantageous, such as when SBA financing rates are particularly attractive, and to fund loans that qualify under the Small Business Investment Act of 1958, as amended (the "SBIA") and SBA Regulations through subsidiaries subject to SBA restrictions. As of March 31, 2000, the Company has repaid the $31.9 million of SBA debentures which had a 7.38% rate of interest that was to increase to 7.50% at MFC with $45 million of fixed 7.20% long term notes. Further, the Company believes that its transition to financing operations primarily with short-term LIBOR-based secured bank debt and secured commercial paper has generally decreased its interest expense thus far, but has also increased the Company's exposure to the risk of increases in market interest rates which the Company attempts to mitigate with certain matching strategies. The Company also expects that net interest income should increase as the Company issues more commercial paper in lieu of bank debt and will thus permit an increase in the size of the loan portfolio. At the present time commercial paper is generally priced at approximately 70 basis points below the rate charged under the Company's revolving credit facilities. At March 31, 2000 and December 31, 1999, short-term LIBOR-based debt including commercial paper constituted 84.9% and 83.7% of total debt, respectively. The Company's cost of funds is primarily driven by (i) the average maturity of debt issued by the Company, (ii) the premium over LIBOR paid by the Company on its LIBOR-based debt and secured commercial paper, and (iii) the ratio of LIBOR-based debt to SBA financing. The Company incurs LIBOR-based debt for terms generally ranging from 1-180 days. The Company's debentures issued to or guaranteed by the SBA typically have initial terms of ten years. The Company's cost of funds reflect fluctuations in LIBOR to a greater -16- 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 March 31, 2000 was 6.91% or 66 basis points over the LIBOR Benchmark of 6.25% down from 7.09% or 108 basis points over the LIBOR Benchmark of 6.01% at December 31, 1999. The decline in the cost of funds is due to the 42 basis point improvement in the spread paid over the LIBOR Benchmark partially offset by the 24 basis point increase in the LIBOR Benchmark. Taxicab Advertising. In addition to its finance business, the Company also conducts a taxicab rooftop advertising business through Media, which began operations in November 1994. Media's revenue is affected by the number of taxicab rooftop advertising displays ("Displays") that it owns, the occupancy rate and advertising rate of those Displays. At March 31, 2000, Media had approximately 7,150 installed Displays. The Company expects that Media will continue to expand its operations by entering new markets on its own or through acquisition of existing taxicab rooftop advertising companies. On September 30, 1999, Media entered into an agreement with Yellow Cab Service Corp. to sell advertising space on a commission basis on its 3,000 taxicab trunk signs located throughout the Southeast. Although Media is a wholly-owned subsidiary of the Company, its results of operations are not consolidated with the Company because the Securities and Exchange Commission regulations prohibit the consolidation of non-investment companies with investment companies. Under the Master Settlement Agreement between tobacco manufacturers and the Attorneys General of various states (including those states in which the Company conducts its taxitop advertising business), the tobacco manufacturers agreed to eliminate general outdoor and transit advertising of tobacco products by March 31, 1999. The loss of such advertising had an initial adverse effect upon the taxicab rooftop advertising business of the Company. The Company believes, however, that it has replaced some of the revenue which was lost due to the elimination of tobacco taxicab rooftop advertising through contracts with new advertisers from new industry sectors (i.e. internet companies) and expansion into new markets. The Company believes that it will be able to continue to replace the tobacco advertising contracts and in the long term this agreement will not have a significant adverse impact on Media's financial position or results of operations. Factors Affecting Net Assets. Factors which affect the Company's net assets include net realized gain/loss on investments and change in net unrealized appreciation/depreciation of investments. Net realized gain/loss on investments is the difference between the proceeds derived upon sale or foreclosure of a loan and the cost basis of such loan or equity investment. Change in net unrealized appreciation/depreciation of investments is the amount, if any, by which the Company's estimate of the fair value of its investment portfolio is above/below the previously established fair value or the cost basis of the portfolio. Under the 1940 Act and the SBIA, the Company's loan portfolio and other investments must be recorded at fair value or "marked to market." Unlike certain lending institutions, the Company is not permitted to establish reserves for loan losses, but adjusts quarterly the valuation of its loan portfolio to -17- reflect the Company's estimate of the current value of the loan portfolio. Since no ready market exists for the Company's loans, fair value is subject to the good faith determination of the Company. In determining such value, the Company and its Board of Directors takes into consideration factors such as the financial condition of its borrowers, the adequacy of its collateral and the relationships between current and projected market rates of interest and portfolio rates of interest and maturities. Any change in the fair value of portfolio loans or other investments as determined by the Company is reflected in net unrealized depreciation or appreciation of investments and affects net increase in net assets resulting from operations but has no impact on net investment income or distributable income. Therefore, if recent decreases in prevailing interest rates lead to a trend of lower interest rates, net increase in net assets resulting from operations could increase. Upon the completion of the Acquisitions on May 29, 1996, the Company's loan portfolio was recorded on the balance sheet at fair value, which included $1.5 million of net unrealized depreciation, as estimated by the Company in accordance with the 1940 Act and the purchase method of accounting. In connection with the VGI, VGII and Venture Opportunities portfolio acquisition, the Company recorded the investments on the balance sheet at fair value, which included $200,000 of net unrealized depreciation. Consolidated Results of Operations For the Three Months Ended March 31, 2000 and 1999. Performance Summary. For the three months ended March 31, 2000, net increase in net assets resulting from operations has been positively impacted by the growth of the loan portfolio, offset by an increase in the average cost of funds and a decrease in realized gains from the shares of stock held in an investment. Investment Income. Investment income increased $4.4 million or 47.1% to $13.8 million for the three months ended March 31, 2000 from $9.4 million for the three months ended March 31, 1999. Investment income contains a component, which is derived from a new loan product collateralized by taxi medallions. In consideration for modifications from the Company's normal taxi lending terms, the Company offers loans at higher loan to value ratios and will be entitled to earn additional interest income based upon any increase in the value of the collateral. The increase in investment income reflects the positive impact of portfolio growth, a higher than usual balance of SBA 7(a) loans not sold, recovery of non-accrual interest from prior period delinquencies, income related to the appreciation in collateral values from the new loan product. The average portfolio outstanding was $477.8 million, for the first quarter of 2000, which produced interest income of $13.7 million at a weighted average interest rate of 11.37% compared to an average of $380.2 million for the first quarter of 1999, which produced investment income of $9.3 million at a weighted average interest rate of 9.77%. Loan originations net of participations increased by $12.2 million or 24.0% to $63.4 million for the three month period ended March 31, 2000 compared to $51.1 million for the three month period ended March 31, 1999. The originations were offset by prepayments, -18- terminations and refinancings by the Company aggregating $37.7 million in the first quarter of 2000 compared to $35.3 million in the first quarter of 1999. The weighted average yield e.o.p. of the entire portfolio increased 8 basis points to 9.96% at March 31, 2000 from 9.88% at March 31, 1999. The increase in the yield of the entire loan portfolio was caused by an increase in the average yield on commercial loans, coupled with an increase in the percentage of the portfolio composed of higher yielding commercial loans which historically were originated at a yield of approximately 200 to 300 basis points higher than Medallion loans and 250 to 600 basis points higher than the prevailing Prime Rate. The average yield e.o.p. of the medallion loan portfolio decreased 13 basis points to 8.88% at March 31, 2000 from 9.01% at March 31, 1999. The decrease in the average yield on medallion loans was caused by a reduction in loan yields due to the lowering of rates due to increased competition. The average yield of the commercial loan portfolio increased 5 basis points to 11.86% at March 31, 2000 from 11.81% at March 31, 1999. The increase in the commercial portfolio yield is due in part to the increase in the quantity of floating rate loans tied to prime as a percentage of the commercial portfolio and the prime rate increases. In addition, the current interest rate environment is such that the Company has increased the origination of loans with shorter interest rate maturity dates, which are issued at a lower interest rate which limited the rise in the yield. However, the shorter maturity dates helps to mitigate the Company's interest rate risk exposure. Interest Expense. The Company's interest expense increased $2.3 million or 53.4% to $6.5 million for the three months ended March 31, 2000 from $4.2 million for the three months ended March 31, 1999. The Company's average cost of funds e.o.p. increased 103 basis points to 6.91% or 66 basis points over the LIBOR benchmark of 6.25% at March 31, 2000 from 5.88% or 75 basis points over the LIBOR benchmark of 5.13% at March 31, 1999. The increase in the average cost of funds e.o.p. results from a 112 basis point increase in the LIBOR benchmark which was partially offset by a 9 basis point reduction in the premium paid over LIBOR. Average total borrowings increased $80.9 million or 29.2% from $277.4 million for the three months ended March 31, 1999, which produced an interest expense of $4.2 million at a weighted average interest rate of 6.11%, to $353.8 million for the three months ended March 31, 2000, which produced an interest expense of $6.5 million at a weighted average interest rate of 7.26%. 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 indebtedness and commercial paper as a percentage of total indebtedness was 84.9% and 85.0% at March 31, 2000 and March 31, 1999, respectively. Net Interest Income. Net interest income increased $2.1 million or 29.5% to $7.2 million for the three months ended March 31, 2000 from $5.1 million for the three months ended March 31, 1999. The increase in net interest income is the result of the 45 basis point or 12.3% increase in the average spread between the average yield on the portfolio and the average cost of funds to 4.11% for the three-month period ended March 31, 2000 from 3.66% for the three-month period ended March 31, 1999. -19- Equity in Earnings of Unconsolidated Subsidiary. Advertising revenue decreased approximately $500,000 or 17.5% to $2.3 million in the first quarter of 2000 compared to $2.8 million in the first quarter of 1999. Display rental costs increased $174,000 or 17.6% for the quarter. Gross margin was $1.1 million or 48.9% of advertising revenue for the first quarter of 2000 compared to $1.8 million or 64.1% for the first quarter of 1999. The decrease in gross margin is partly due to normal industry seasonality post - Christmas and the loss of tobacco advertising contracts, some of which have not been replaced, which contributed to a 77.5% occupancy rate in the first quarter of 2000. Further, an overall cost of sales increase results from an increase in the number of Displays installed. The number of Displays owned by Media increased approximately 450 or 6.7% to approximately 7150 at March 31, 2000 from approximately 6,700 at March 31, 1999. Operating costs increased $266,000 or 23.6% to $1.4 million in the first quarter of 2000 from $1.1 million in the first quarter of 1999. The increase in operating costs reflects the expansion of Media's operations into six new markets. The resulting net loss for the first quarter of 2000 was $170,000 compared to net income of $383,000 in the first quarter of 1999. Net income is recorded as equity in earnings or losses of unconsolidated subsidiary on the Company's statement of operations. Gain on sale of loans. The Company experienced a gain on the sale of the guaranteed portion of SBA 7(a) loans in the amount of $686,000 on loans sold amounting to $13.4 million during the first quarter of 2000 compared to $612,000 on loans sold amounting to $9.0 million during the first quarter of 1999. The increase of $74,000 is due to an increase in the volume of loans sold offset by a slight decline in the premiums received from 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 $239,000 or 47.2% to $745,000 for the three months ended March 31, 2000 from $506,000 for the three months ended March 31, 1999. Other income was primarily derived from late charges, prepayment fees and miscellaneous income. Non-Interest Expenses. The Company's non-interest expenses increased $824,000 or 22.3% to $4.5 million for the three months ended March 31, 2000 from $3.7 million for the three months ended March 31, 1999. The increase in salaries and benefits of $605,000 or 33.4% in the first quarter of 2000 compared to the first quarter of 1999 is the result of the effect of year-end raises and salaries of personnel hired since March 31, 1999. Other operating expenses increased $242,000 or 18.0% as compared to the first quarter of 1999 due to expenditures related to opening of new offices and expanded operations. Net Investment Income. Net investment income increased $1.0 million or 32.3% to $4.1 million in the first quarter of 2000 from $3.1 million in the first quarter of 1999. The increase is attributable to increases in net investment income offset by an increase in operating expenses and the decline in earnings of the unconsolidated Media subsidiary. -20- Net Realized Gain on Investments. The Company had a net realized loss of $113,000 for the three months ended March 31, 2000, a decrease of $918,000 from net realized gains of $805,000 for the three months ended March 31, 1999. The realized gains during the first quarter of 2000 reflected the charge-off of loan losses compared to the realized gains earned on equity investments in the first quarter of 1999. Change in Net Unrealized Appreciation (Depreciation). The change in net unrealized depreciation decreased $335,000 to $270,000 for the three months ended March 31, 2000 from $605,000 for the three months ended March 31, 1999. The unrealized depreciation during the first quarter of 2000 resulted from a $7,000 of net unrealized depreciation from increase of loan loss reserves, $139,000 unrealized appreciation from charge-offs of loan balances previously reserved and $138,000 of unrealized appreciation on equity investments held by the Company. Net Increase in Net Assets Resulting from Operations. Net increase in net assets resulting from operations decreased $300,000 or 6.0% to $4.2 million for the three months ended March 31, 2000 from $4.5 million for the three months ended March 31, 1999. The decrease was attributable to the positive impact of portfolio growth, an increase in average spread between average yield and average cost of funds and offset by an increase in operating expenses, a decline in earnings from Media and lower realized gains on investments. Return on average assets and return on average equity for the three months ended March 31, 2000, on an annualized basis, were 3.24% and 11.0%, respectively, compared to 4.2% and 11.9% for the three months ended March 31, 1999. Asset/Liability Management Interest Rate Sensitivity. The Company, like other financial institutions, is subject to interest rate risk to the extent its interest-earning assets (consisting of Medallion Loans and 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 -21- average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. The mismatch between maturities and interest rate sensitivities of the Company's interest-earning assets and interest-bearing liabilities results in interest rate risk. Abrupt increases in market rates of interest may have an adverse impact on the Company's earnings until the Company is able to originate new loans at the higher prevailing interest rates. The effect of changes in market rates of interest is mitigated by regular turnover of the portfolio. The Company anticipates that approximately 40% of the portfolio will mature or be prepaid each year. The Company believes that the average life of its loan portfolio varies to some extent as a function of changes in interest rates because borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment when the interest rate payable on the borrower's loan is high relative to prevailing interest rates and are less likely to prepay in a rising interest rate environment. The Company seeks to manage the exposure of the balance of the portfolio to increases in market interest rates by entering into interest rate cap agreements to hedge a portion of its variable-rate debt against increases in interest rates and by incurring fixed-rate debt consisting primarily of subordinated SBA debentures. MFC has entered into interest rate cap agreements to limit the Company's LIBO interest rate exposure on MFC's revolving credit facility as summarized below:
LIBO Effective Maturity Amount Rate Date Date ------ ---- ---- ---- $20,000,000 6.5% 4/9/98 3/30/01 $10,000,000 6.5% 7/6/99 7/6/01 $10,000,000 6.5% 7/6/99 7/6/01
Total premiums paid under the agreements are being amortized over the respective terms of the agreements. In addition, the Company manages its exposure to increases in market rates of interest by incurring fixed rate indebtedness, such as senior secured notes and SBA debentures. The Company currently has outstanding $45 million of senior secured notes at a fixed interest rate of 7.20% and SBA debentures in the principal amount of $10.5 million with a weighted average rate of interest of 7.12%. At March 31, 2000, these notes and debentures constituted 12.2% and 2.9% of the Company's total indebtedness respectively. The Company will seek to manage interest rate risk by evaluating and purchasing, if appropriate, additional derivatives, originating adjustable-rate loans, incurring fixed-rate indebtedness and revising, if appropriate, its overall level of asset and liability matching. Nevertheless, the Company accepts varying degrees of interest rate risk depending on market conditions and believes that the resulting asset/liability interest rate mismatch results in opportunities for higher net interest income. -22- Liquidity and Capital Resources The Company's sources of liquidity are credit facilities with bank syndicates, senior secured notes, fixed rate, long-term SBA debentures that are issued to or guaranteed by the SBA, loan amortization and prepayments and a secured commercial paper program with Salomon Smith Barney and USBancorp. As a RIC, the Company distributes at least 90% of its investment company taxable income; consequently, the Company primarily relies upon external sources of funds to finance growth. At March 31, 2000, the Company's $367.7 million of outstanding debt was comprised as follows: 47.7% bank debt, substantially all of which was at variable effective rates of interest with an weighted average interest rate of 7.89% or 174 below the Prime Rate, 37.2% secured commercial paper with an annual weighted average interest rate of 6.53% or 254 below the Prime Rate, 12.2% long-term senior secured notes fixed at an interest rate of 7.2% and 2.9% subordinated SBA debentures, with fixed rates of interest with an annual weighted average rate of 7.12%. The Company is eligible to seek SBA funding but plans to continue to limit its use of SBA funding and will seek such funding only when advantageous. In the event that the Company seeks SBA funding, no assurance can be given that such funding will be obtained. In addition to possible additional SBA funding, an additional $6.6 million of debt was available at March 31, 2000 at variable effective rates of interest averaging below the Prime Rate under the Company's $320.0 million bank credit facilities. The Company has observed a practice of minimizing credit facility fees associated with the unused component of credit facilities by keeping the unused component as small as possible and periodically increasing the amounts available under such credit facilities only when necessary to fund portfolio growth. The following table illustrates the Company's and each of the subsidiaries' sources of available funds, and amounts outstanding under credit facilities and their respective end of period weighted average interest rate at March 31, 2000: -23-
Medallion Financial MFC BLLC MCC MBC Total ---------- (dollars in thousands) Cash $ 2,213 $ 2,468 $ 194 $ 2,233 $ 1,333 $ 8,441 Revolving lines of credit 100,000 220,000(1) -- -- 320,000 Amounts available 500 6,133 -- -- 6,633 Amounts outstanding 99,500 76,000 -- -- 175,500 Average interest rate 7.09% 7.10% -- -- 7.09% Maturity 7/00 7/01 -- -- 7/00-7/01 Commercial paper Amounts outstanding -- 136,657 -- -- 136,657 Average interest rate -- 6.56% -- -- 6.56% Maturity -- 6/01 -- -- 6/01 SBA debentures Amounts outstanding -- -- -- 10,500 10,500 Average interest rate -- -- -- 7.08% 7.08% Maturity -- -- -- 3/06-6/07 3/06-6/07 Senior secured notes Amounts outstanding -- 45,000 -- -- 45,000 Average interest rate -- 7.20% -- -- 7.20% Maturity -- 6/04 -- -- 6/04 Total cash and remaining amounts available under credit facilities 2,713 8,601 194 2,233 1,333 15,074 Total debt outstanding $ 99,500 $257,657 $ - $ 10,500 $ - $ 367,657
Note (1) Commercial paper outstanding is deducted from revolving credit lines available as the line of credit acts as a liquidity facility for the commercial paper. Loan amortization and prepayments also provide a source of funding for the Company. Prepayments on loans are influenced significantly by general interest rates, Medallion Loan market rates, economic conditions and competition. Medallion Loan prepayments have slowed since early 1994, initially because of increases, and then stabilization, in the level of interest rates and more recently because of an increase in the percentage of the Company's Medallion Loans which are refinanced with the Company rather than through other sources of financing. The Company makes limited use of SBA funding and will seek such funding only when advantageous and has consistently reduced its reliance on such funding. On June 1, 1999, the Company issued $22.5 million of senior secured notes (the Notes) that mature on June 1, 2004. The Notes bear a fixed rate of interest of 7.2% and interest is paid quarterly in arrears. The Notes rank pari pasu with the revolving credit facilities and commercial paper through inter- creditor agreements. On September 1, 1999, the note-holders purchased an additional $22.5 million under the same terms and conditions. The proceeds of the Notes were used to pre-pay $31.1 million of the Company's outstanding SBA debentures. At March 31, 2000 only $10.5 million of debentures were still outstanding. Media funds its operations through internal cash flow and inter-company debt. Media is not a RIC and, therefore, is able to retain earnings to finance growth. -24- The Company believes that its bank credit facilities and cash flow from operations (after distributions to stockholders) will be adequate to fund the continuing operations of the Company's loan portfolio and advertising business in the short-term. The Company is exploring several options to increase its available funds in order to meet the Company's growth and expansion strategy. Investment Considerations The following are certain of the factors which could affect the Company's future results. They should be considered in connection with evaluating forward-looking statements contained in this Management's Discussion and Analysis and elsewhere in this Report and otherwise made by or on behalf of the Company since these factors, among others, could cause actual results and conditions to differ materially from those projected in these forward-looking statements. Interest Rate Spread. The Company's net interest income is largely dependent upon achieving a positive interest rate spread and other factors. Leverage. The Company's use of leverage poses certain risks for holders of the Common Stock, including the possibility of higher volatility of both the net asset value of the Company and the market price of the Common Stock and, therefore, an increase in the speculative character of the Common Stock. Availability of Funds. The Company has a continuing need for capital to finance its lending activities. The Company funds its operations through credit facilities with bank syndicates and, to a lesser degree, through subordinated SBA debentures. Reductions in the availability of funds from banks and under SBA programs on terms favorable to the Company could have a material adverse effect on the Company. Because the Company distributes to its shareholders at least 90% of its investment company taxable income, such earnings are not available to fund loan originations. Industry and Geographic Concentration. A substantial portion of the Company's revenue is derived from operations in New York City and these operations are substantially focused in the area of financing New York City taxicab medallions and related assets. There can be no assurance that an economic downturn in New York City in general, or in the New York City taxicab industry in particular, would not have an adverse impact on the Company. -25- 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. Risk Relating to Integration of Freshstart and Medallion On December 22, 1999, the Company entered into an Agreement and Plan of Merger with Freshstart Venture Capital Corp., a specialty finance company, located in Long Island City, New York. The closing of the transaction is subject to the approval of the shareholders of Freshstart, regulatory approval and the satisfaction of customary conditions. The realization of certain benefits anticipated as a result of the merger will depend in part on the integration of Freshstart's investment portfolio and specialty finance business with the Company and the successful inclusion of Freshstart's investment portfolio in the Company's financing operations. The dedication of management resources to such integration may detract attention from the day-to-day business of the Company and there can be no assurance that there will not be substantial costs associated with the transition process or that there will not be other material adverse effects as a result of these integration efforts. There can be no assurance that Freshstart's 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. Year 2000. The Year 2000 problem concerns the inability of systems, primarily computer software programs, to properly recognize and process date sensitive information relating to the Year 2000 and beyond. The Company, in the ordinary course of business, has for several years had several information system improvement initiatives underway. These initiatives included the installation of new loan servicing software and update of the general ledger system and such initiatives are expected to be Year 2000 compliant. The Company has completed these installations as of December 31, 1999. The Company received Year 2000 compliance letters from each of its major software vendors and its major office systems vendors. The Company estimates that the total cost involved in the Year 2000 project was approximately $30,000. This excludes the costs related to new loan servicing software and update of the general ledger system. Management believes that the Company did not suffer any material effects relating to the Year 2000. Management further believes its third party vendors were Year 2000 -26- compliant and the Company not been informed of any material problems with its third party vendors relating to Year 2000 problem. -27- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27 Medallion Financial Corp. Financial Data Schedule. Filed herewith. -28- 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: May 15, 2000 By: /s/ Daniel F. Baker ------------------------------------------ Daniel F. Baker Chief Financial Officer Signing on behalf of the registrant and as principal financial and accounting officer -29- EX-27 2 FINANCIAL DATA SCHEDULE
6 3-MOS 3-MOS DEC-31-2000 DEC-31-1999 JAN-01-2000 JAN-01-1999 MAR-31-2000 MAR-31-1999 0 0 493,014,536 467,642,930 15,676,468 20,329,428 3,558,090 2,949,906 20,060,500 18,870,264 532,309,594 509,612,528 0 0 55,500,000 55,500,000 321,868,861 303,423,760 377,368,861 358,923,760 140,298 140,245 142,051,822 142,015,875 14,029,798 14,024,433 14,024,433 14,013,768 12,748,613 8,532,648 0 0 0 0 0 0 0 0 154,940,733 150,688,768 0 0 13,793,507 9,379,876 1,293,092 1,682,922 11,027,950 7,989,671 4,058,649 3,073,122 (112,711) 804,822 270,027 605,293 4,215,965 4,483,237 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8,532,648 6,698,324 0 0 0 0 0 0 61,541 61,760 6,504,005 4,238,483 0 0 0 0 10.99 10.67 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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