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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 March 31, 2001
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 10, 2001:
Class Outstanding Par Value Shares Outstanding
----------------- --------- ------------------
Common Stock....................................$.01..............14,602,846
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1
MEDALLION FINANCIAL CORP.
FORM 10-Q
INDEX
PART I........................................................................................................3
FINANCIAL INFORMATION.........................................................................................3
ITEM.1 Basis Of Preparation.............................................................................3
CONSOLIDATED BALANCE SHEETS..........................................................................4
CONSOLIDATED STATEMENTS OF OPERATIONS................................................................5
CONSOLIDATED STATEMENTS OF CASH FLOWS................................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........14
PART II......................................................................................................29
OTHER INFORMATION............................................................................................29
ITEM 1. Legal Proceedings..............................................................................29
ITEM 2. Changes in Securities and Use of Proceeds......................................................29
ITEM 3. Defaults Upon Senior Securities................................................................29
ITEM 4. Submission of Matters to a Vote of Security Holders............................................29
ITEM 5. Other Information..............................................................................29
ITEM 6. Exhibits and reports on form 8-K...............................................................29
SIGNATURES.............................................................................................30
2
PART I.
FINANCIAL INFORMATION
ITEM.1 Basis Of Preparation
Medallion Financial Corp. (the Company) is a closed-end management
investment company organized as a Delaware corporation. The Company has elected
to be regulated as a business development company under the Investment Company
Act of 1940, as amended (the 1940 Act). The Company conducts its business
through various wholly owned subsidiaries including its primary operating
company, Medallion Funding Corp. (MFC). As an adjunct to the Company's taxicab
medallion finance business, the Company operates a taxicab rooftop advertising
business, Medallion Taxi Media, Inc. (Media).
The financial information is divided into two sections. The first
section, Item 1, includes the unaudited consolidated financial statements of the
Company including related footnotes. The second section, Item 2, consists of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three months ended March 31, 2001.
The consolidated balance sheets of the Company as of March 31, 2001,
the related consolidated statements of operations for the three months ended
March 31, 2001, and the consolidated statements of cash flows for the three
months ended March 31, 2001 included in Item 1 have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
Exchange Commission (SEC). 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, 2001 or for any other interim period may not be indicative of future
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, 2000.
3
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
==================================================================================================================
March 31, 2001 December 31, 2000
==================================================================================================================
Assets
Investments:
Medallion loans $285,341,499 $299,302,548
Commercial loans 205,383,713 212,721,373
Equity investments 1,729,544 2,129,685
-----------------------------------------------------
Net investments 492,454,756 514,153,606
Investment in and loans to unconsolidated subsidiary 2,117,365 1,856,421
-----------------------------------------------------
Total investments 494,572,121 516,010,027
Cash 24,513,968 15,652,878
Accrued interest receivable 9,601,269 8,701,981
Servicing fee receivable 6,355,354 6,632,516
Fixed assets, net 1,940,839 2,050,808
Goodwill, net 5,517,519 5,650,045
Other assets, net 6,157,523 6,016,747
-----------------------------------------------------
Total assets 548,658,593 560,715,002
==================================================================================================================
Liabilities
Accounts payable and accrued expenses 9,720,526 7,723,812
Dividends payable - 5,244,281
Accrued interest payable 1,925,079 3,887,589
Commercial paper 763,708 24,066,269
Notes payable to banks 319,470,000 305,700,000
Senior secured notes 45,000,000 45,000,000
SBA debentures payable 21,360,000 21,360,000
-----------------------------------------------------
Total liabilities 398,239,313 412,981,951
==================================================================================================================
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 - 14,582,035 and 14,546,637 shares outstanding
at March 31, 2001 and December 31, 2000, respectively) 145,821 145,467
Capital in excess of par value 146,776,023 146,379,377
Accumulated undistributed net investment income 3,497,436 1,208,207
-----------------------------------------------------
Total shareholders' equity 150,419,280 147,733,051
-----------------------------------------------------
Total liabilities and shareholders' equity $548,658,593 $560,715,002
==================================================================================================================
Number of common shares 14,582,035 14,546,637
Net asset value per share $10.32 $10.16
==================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
==========================================================================================================
Three Months Ended
March 31,
==========================================================================================================
2001 2000
==========================================================================================================
Investment income
Interest and dividend income on investments $ 13,329,179 $ 14,451,068
Interest income on short-term investments 44,952 79,877
---------------------------------------------------
Total investment income 13,374,131 14,530,945
- ----------------------------------------------------------------------------------------------------------
Interest expense
Notes payable to banks 5,790,472 3,304,556
Commercial paper 155,529 2,281,159
Senior secured notes 821,864 821,865
SBA debentures 433,172 409,418
---------------------------------------------------
Total interest expense 7,201,037 6,816,998
---------------------------------------------------
Net-interest income 6,173,094 7,713,947
- ----------------------------------------------------------------------------------------------------------
Non-interest income
Gain on sale of loans 433,180 686,098
Equity in losses of unconsolidated subsidiary (427,184) (319,349)
Accretion of negative goodwill - 180,600
Other income 971,246 799,907
---------------------------------------------------
Total non-interest income 977,242 1,347,256
- ----------------------------------------------------------------------------------------------------------
Non-interest expense
Salaries and benefits 2,677,076 2,455,981
Professional fees 395,247 416,617
Amortization of goodwill 132,526 136,578
Administrative and advisory fees 3,135 61,541
Other operating expenses 1,610,857 1,624,429
---------------------------------------------------
Total non-interest expenses 4,818,841 4,695,146
- ----------------------------------------------------------------------------------------------------------
Net investment income 2,331,495 4,366,057
Net realized gains (losses) on investments (898,413) 246,749
Change in unrealized appreciation (depreciation), net 893,264 (112,711)
Income tax provision (37,117) (150)
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 2,289,229 $ 4,499,945
Basic .16 $ 0.31
Diluted .16 0.31
Weighted average common shares outstanding
Basic 14,571,731 14,524,428
Diluted 14,583,299 14,591,352
==========================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
=====================================================================================================================
Three Months Ended
March 31,
=====================================================================================================================
2001 2000
=====================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations $ 2,289,229 $ 4,499,945
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Depreciation and amortization 286,151 240,523
Amortization of goodwill 132,526 134,009
Amortization of origination costs 272,447 255,874
Accretion of negative goodwill - (180,600)
Increase in unrealized appreciation (893,264) 112,711
Net realized loss on investments 898,413 (246,749)
Equity in Losses in unconsolidated subsidiary 427,184 319,349
Increase in accrued interest receivable (899,287) (2,156,943)
Decrease in receivable from sale of loans - 7,431,892
Decrease (increase) in servicing fee receivable 277,162 (525,803)
Increase in other assets, net (140,776) (676,341)
Increase (decrease) in accounts payable and accrued expenses 1,996,713 (1,923,646)
Decrease in accrued interest payable (1,962,509) (1,702,549)
-----------------------------------------
Net cash provided by operating activities 2,683,989 5,581,672
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Originations of investments (20,411,200) (85,515,419)
Proceeds from sales and maturities of investments 41,832,448 61,444,491
Investment in and loans to unconsolidated subsidiary, net (688,128) 697,158
Capital expenditures (176,178) (101,780)
-----------------------------------------
Net cash used in investing activities 20,556,942 (23,475,550)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable (repayments) to banks-net 13,770,000 (17,450,000)
Proceeds from issuance of (repayments of) commercial paper-net (23,302,560) 42,673,483
Proceeds from exercise of stock options 374,000 36,000
Issuance of stock 23,000 -
Payment of declared dividends to current stockholders (5,244,281) (5,609,773)
-----------------------------------------
Net cash (used in) provided by financing activities (14,379,841) 19,649,710
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 8,861,090 1,755,832
CASH beginning of period 15,652,878 7,459,284
-----------------------------------------
CASH end of period 24,513,968 9,215,116
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 9,163,547 $ 8,519,546
=====================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(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. The Company has elected
to be regulated as a business development company under the Investment Company
Act of 1940, as amended (the 1940 Act). The Company conducts its business
through various wholly owned subsidiaries including its primary operating
company, Medallion Funding Corp. (MFC). As an adjunct to the Company's taxicab
medallion finance business, the Company operates a taxicab rooftop advertising
business, Medallion Taxi Media, Inc. (Media).
The Company also conducts its business through Business Lenders, LLC
(BLL), licensed under the Small Business Administration (SBA) section 7(a)
program, Medallion Business Credit LLC (MBC), an originator of loans to small
businesses for the purpose of financing inventory and receivables, Medallion
Capital, Inc. (Medallion Capital) which conducts a mezzanine financing business,
and Freshstart Venture Capital Corp. (Freshstart), a Specialized Small Business
Investment Company (SSBIC) which also originates and services medallion and
commercial loans.
(2) Summary of Significant Accounting Policies
Use of Estimates
The accounting and reporting policies of the Company conform with
generally accepted accounting principles and general practices in the investment
company industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reporting and disclosure of assets and
liabilities, including those that are of a contingent nature, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation and Use of the Equity Method
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, except for Media. All significant
intercompany transactions, balances, and profits have been eliminated in
consolidation. The consolidated statements give retroactive effect to the merger
with Freshstart, retroactively combined with the Company's financial statements
as if the merger had occurred at the beginning of the earliest period presented.
The Company's investment in Media is accounted for under the equity
method. All significant intercompany transactions, balances and profits have
been eliminated in the use of the equity method. As a non-investment company,
Media cannot be consolidated with the Company, which is an investment company
under the 1940 Act. Refer to Note 3 for the presentation of financial
information for Media.
Investment Valuation
The Company's loans, net of participations and any unearned discount,
are considered investments under the 1940 Act and are recorded at fair value.
Loans are valued at cost less unrealized depreciation. Since no ready market
exists for these loans, the fair value is determined in good faith by the Board
of Directors. In determining the fair value, the Company and 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 the
relationships between current and projected market rates and portfolio rates of
interest and maturities.
Investments in equity securities and stock warrants are recorded at
fair value, represented as cost, plus or minus unrealized appreciation or
depreciation, respectively. The fair value of investments that have no ready
market, are determined by the Board of Directors based upon assets and revenues
of the underlying investee company as well as general market trends for
businesses in the same industry. Included in equity investments at March 31,
2001 are marketable and non-marketable securities of approximately $1,090,000
and $640,000, respectively. Included in equity investments at December 31, 2000
are marketable and non-marketable securities
7
of approximately $1,490,000 and $640,000, respectively. Because of the inherent
uncertainty of valuations, the Board of Directors' estimates of the values of
the investments may differ significantly from the values that would have been
used had a ready market for the investments existed and the differences could be
material.
The Company's investments consist primarily of long-term loans to
persons defined by SBA regulations as socially or economically disadvantaged, or
to entities that are at least 50% owned by such persons. Approximately 58% of
the Company's loan portfolio at March 31, 2001 and December 31, 2000, had arisen
in connection with the financing of taxicab medallions, taxicabs, and related
assets, of which 79% and 77%, respectively, are in New York City. These loans
are secured by the medallions, taxicabs and related assets, and are personally
guaranteed by the borrowers, or in the case of corporations, personally
guaranteed by the owners. A portion of the Company's portfolio represents loans
to various commercial enterprises, including dry cleaners, laundromats,
restaurants, garages, and gas stations. These loans are secured by various
equipment and/or real estate and are generally guaranteed by the owners, and in
certain cases, by the equipment dealers. These loans are made primarily in the
metropolitan New York City area. The remaining portion of the Company's
portfolio is from the origination of loans guaranteed by the SBA under its
Section 7(a) program, less the sale of the guaranteed portion of those loans.
Funding for the Section 7(a) program depends on annual appropriations by the
U.S. Congress.
Collateral Appreciation Participation Loans
During the 2000 first half, the Company originated collateral
appreciation participation loans collateralized by Chicago taxi medallions of
$30 million, of which $21 million was syndicated to other financial
institutions. In consideration for modifications from it's normal taxi medallion
lending terms, the Company offered loans at higher loan-to-value ratios and is
entitled to earn additional interest income based upon any increase in the value
of all $30 million of the collateral. The fair value of the collateral
appreciation participation loan portfolio at March 31, 2001 was $12.8 million,
which represented approximately 3% of the total loan portfolio. Additional
interest income totaled approximately $700,000 and $1,100,000 for the quarters
ended March 31, 2001 and 2000, and is included in investment income on the
consolidated statements of operations and in accrued interest receivable on the
consolidated balance sheets. The Company believes that the additional interest
income recorded is fully realizable through operation of the collateral or
orderly sales in the market. As a regulated investment company, the Company is
required to mark-to-market these investments on a quarterly basis, just as it
does on all of its other investments. The Company feels that it has adequately
calculated the fair market value on these investments and relies upon
information such as recent and historical medallion sale prices. If there is a
decrease in the value of taxicab medallions, the reduction in the value of the
investments will be reversed against investment income.
Income Recognition
Interest income is recorded on the accrual basis. Loans are placed on
non-accrual status, and all uncollected accrued interest is reversed, when there
is doubt as to the collectibility of interest or principal or if loans are 90
days or more past due, unless management has determined that they are both
well-secured and in the process of collection. Interest income on non-accrual
loans is recognized when cash is received. At March 31, 2001 and December 31,
2000 total non-accrual loans were approximately $13,601,000 and $13,197,000.
8
Loan Sales and Servicing Fee Receivable
The principal portion of loans serviced for others by the Company at
March 31, 2001 and December 31, 2000 amounted to approximately $232,000,000 and
$231,000,000.
Receivables from loans sold and gain or losses on loan sales are
primarily attributable to the sale of commercial loans which have been at least
partially guaranteed by the SBA. The Company recognizes gains or losses from the
sale of the SBA-guaranteed portion of a loan at the date of the sales agreement
when control of the future economic benefits embodied in the loan is
surrendered.
The estimated net servicing income is based, in part, on management's
estimate of prepayment speeds, including default rates, and accordingly, there
can be no assurance of the accuracy of these estimates. If the prepayment speeds
occur at a faster rate than anticipated, the amortization of the servicing
assets will be accelerated and it's value will decline; and as a result,
servicing income during that and subsequent periods would decline. If
prepayments occur slower than anticipated, cash flows would exceed estimated
amounts and servicing income would increase. The constant prepayment rates
utilized by the Company in estimating the lives of the loans depend on the
original term of the loan, industry trends, and the Company's historical data.
The activity in the reserve for servicing fee receivable follows:
===============================================================================================================
Three Months Ended March 31,
- ---------------------------------------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------------------
Beginning Balance $205,000 $-
Additions charged to operations 31,000 -
- ---------------------------------------------------------------------------------------------------------------
Ending Balance $236,000 $-
===============================================================================================================
Unrealized Appreciation (Depreciation) and Gains/(Losses) on Investments
The change in unrealized appreciation/(depreciation) of 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 are generated through sales of investments, foreclosure on specific
collateral, and write-offs of loans or assets acquired in satisfaction of loans,
net of recoveries. Unrealized depreciation at March 31, 2001 and 2000 amounted
to $6.1 million and $7.4 million, respectively.
Goodwill
Cost of purchased businesses in excess of the fair value of net assets
acquired (goodwill) is amortized on a straight-line basis over fifteen years.
The excess of fair value of net assets over cost of business acquired (negative
goodwill) was accreted on a straight-line basis over approximately four years.
The Company reviews its goodwill for events or changes in circumstances that may
indicate that the carrying amount of the assets may not be recoverable, and if
appropriate, reduces the carrying amount through a charge to income.
Federal Income Taxes
The Company has elected to be treated for tax purposes as a regulated
investment company (RIC) under the Internal Revenue Code of 1986, as amended
(the Code). As a RIC, the Company will not be subject to U.S. federal income tax
on any investment company taxable income (which includes, among other things,
dividends and interest reduced by deductible expenses) that it distributes to
its stockholders if at least 90% of its investment company taxable income for
that taxable year is distributed. It is the Company's policy to comply with the
provisions of the Code applicable to regulated investment companies.
Media, as a non-investment company, has elected to be taxed as a
regular corporation.
9
Net Increase in Net Assets Resulting from Operations per Share (EPS)
Basic earnings per share is computed by dividing net increase in net
assets resulting from operations available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if option
contracts to issue common stock were exercised and has been computed after
giving consideration to the weighted average dilutive effect of the Company's
common stock and stock options. Basic and diluted EPS for the three months ended
March 31, 2001 and 2000 are as follows:
===========================================================================================================================
(Dollars in thousands, except per share amount) 2001 2000
===========================================================================================================================
Net increase in net assets resulting from operations available to common shareholders $ 2,289 $ 4,500
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding applicable to basic EPS 14,571,731 14,524,428
Effect of dilutive stock options 11,568 66,924
--------------------------------
Adjusted weighted average common shares outstanding applicable to diluted EPS 14,583,299 14,591,352
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings per share .16 .31
Diluted earnings per share $ .16 $ .31
===========================================================================================================================
Derivatives
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes new standards regarding accounting and reporting requirements for
derivative instruments and hedging activities. In June 1999, the Board issued
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." The new standard
deferred the effective date of SFAS 133 to fiscal years beginning after June 15,
2000. The Company adopted SFAS 133 beginning January 1, 2001. The cumulative
effect of adoption was not material.
The Company is party to certain interest rate cap agreements. These
contracts were entered into as part of the Company's management of interest rate
exposure and effectively limit the amount of interest rate risk that may be
taken on a portion of the Company's outstanding debt. All interest rate caps are
designated as hedges of certain liabilities, however, any hedge ineffectiveness
is charged to earnings in the period incurred. For the three months ended March
31, 2001 and 2000, the amount charged to earnings was $102,000 and $0.
Premiums paid on the interest rate caps were previously amortized over the lives
of the cap agreements and amortization of these costs was recorded as an
adjustment to interest expense. Upon adoption of SFAS 133, the interest rate
caps are recorded at fair value which is determined based on information
provided by the Company's counterparties. Interest rate settlements, if any, are
recorded as a reduction of interest expense over the lives of the agreements.
The fair value of the Company's interest rate caps as of March 31, 2001 was
$260.
Reclassifications
Certain reclassifications have been made to prior year balances to
conform with the current year presentation.
10
(3) Investment in Unconsolidated Subsidiary
The balance sheets at March 31, 2001 and December 31, 2000 for Media are as
follows:
===================================================================================================================
March 31, December 31,
---------------------------------------
2001 2000
===================================================================================================================
Cash $ 19,087 $ 5,259
Accounts receivable 1,069,669 2,652,055
Equipment, net 3,299,606 3,281,011
Goodwill 1,650,551 1,659,624
Prepaid signing bonuses 1,823,935 1,521,253
Other 3,163,845 2,882,750
Due from parent - 321,723
---------------------------------------
Total assets $ 11,026,693 $ 12,323,675
- -------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued expenses 1,140,131 $ 683,369
Note payable-bank 3,900,000 3,900,000
Notes payable-parent 362,303 -
Deferred revenue 3,713,005 5,453,550
---------------------------------------
Total liabilities 9,115,439 10,036,919
- -------------------------------------------------------------------------------------------------------------------
Equity 1,001,000 1,001,000
Retained Earnings 910,254 1,285,756
---------------------------------------
Total equity 1,911,254 2,286,756
---------------------------------------
Total liabilities and equity $ 11,026,693 $ 12,323,675
===================================================================================================================
The statements of operations of Media for the three months ended March 31, 2001
and 2000 are as follows:
===================================================================================================================
Three Months Ended
===================================================================================================================
March 31,
---------------------------------------
2001 2000
===================================================================================================================
Advertising revenue $3,355,226 $2,276,321
Cost of fleet services 2,066,959 1,163,103
---------------------------------------
Gross profit 1,288,267 1,113,218
Other operating expenses 2,038,592 1,396,216
---------------------------------------
Loss before taxes (750,325) (282,998)
Income tax benefit (323,141) (113,199)
---------------------------------------
Net loss $(427,184) $(169,799)
===================================================================================================================
Included in advertising revenue for the quarter ended March 31, 2001 is
approximately $567,000 related to contracts that were cancelled in prior periods
due to legislative changes and other factors. This revenue was recognized upon
determination that Media had no further obligations under the contract.
11
(4) Commercial Paper, Notes payable to banks and senior secured notes
Borrowings under the commercial paper, revolving credit, and senior
note agreements are secured by the assets of the Company. The outstanding
balances were as follows as of March 31, 2001 and December 31, 2000.
===================================================================================================================
Description 2001 2000
===================================================================================================================
Commercial paper $ 763,708 $ 24,066,269
Revolving credit agreements 319,470,000 305,700,000
Senior secured notes 45,000,000 45,000,000
- -------------------------------------------------------------------------------------------------------------------
Total $ 365,233,708 $374,766,269
===================================================================================================================
(a) Commercial Paper
On March 13, 1998, MFC entered into a commercial paper agreement to
sell up to an aggregate principal amount of $195 million in secured commercial
paper through private placements, and coincident with the extension and
expansion of the Revolving Credit Agreement (the Revolver), the commercial paper
line was expanded to $220,000,000. The commercial paper program ranks on a pari
passu basis with the 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. During December 2000,
MFC'S outstanding commercial paper began to mature and was replaced by draws on
the Revolver at a cost of 7.83%, compared to a cost of 7.10%. On November 22,
2000, Fitch IBCA placed Medallion's "BBB" senior secured debt rating and "F2"
secured commercial paper rating on negative watch. In addition, in December
2000, Medallion's other rating agency, Thompson's Bankwatch, was acquired by
Fitch IBCA, leaving it with only one commercial paper rating. Primarily as a
result of these factors, a substantial portion of Medallion's commercial paper
did not rollover and has subsequently been replaced by Medallion's bank
facility. On January 18, 2001, Fitch IBCA lowered the Company's senior secured
debt rating and secured commercial paper rating to "BB+" and "B", respectively,
and removed them from negative watch. At March 31, 2001 and December 31, 2000,
MFC had approximately $764,000 and $24,066,000 outstanding at a weighted average
interest rate of 7.18% and 7.10%. For the three months ended March 31, 2001 and
year ended December 31, 2000, MFC's weighted average borrowings related to
commercial paper were $7,653,000 and $135,568,000 with a weighted average
interest rate of 7.45% and 7.25%. Commercial paper outstandings are deducted
from the Revolver as the Revolver acts as a liquidity facility for the
commercial paper.
(b) Revolving Credit Agreements
On March 27, 1992 (and as subsequently amended), MFC entered into the
Revolver with a group of banks. Effective on February 10, 2000, MFC extended the
Revolver until June 30, 2001 at an aggregate credit commitment amount of
$220,000,000, an increase from $195,000,000 previously, pursuant to the Loan
Agreement dated December 24, 1997. Amounts available under the Revolver are
reduced by amounts outstanding under the commercial paper program as the
Revolver acts as a liquidity facility for the commercial paper program. As of
March 31, 2001 and December 31, 2000, amounts available under the Revolver were
$0. The Revolver may be extended annually after June 30, 2001 upon the option of
the participating banks and acceptance by MFC. Outstanding borrowings under the
Revolver were $212,670,000 and $195,700,000 at weighted average interest rates
of 6.48% and 7.68% at March 31, 2001 and December 31, 2000.
On July 31, 1998, (and as subsequently amended) the Company closed its
existing $25,000,000 revolving credit line and entered into a committed
revolving credit agreement (the Loan Agreement) with a group of banks. The
aggregate credit commitment amount was $100,000,000 maturing on June 28, 2000
and was extended on September 22, 2000 to September 21, 2001 at an increased
commitment level of $110,000,000. The Loan Agreement may be extended annually
thereafter upon the option of the participating banks and acceptance by the
Company. Outstanding borrowings under the Loan Agreement were $103,300,000 and
$106,500,000 at a weighted average interest rate of 6.40% and 8.09% at March 31,
2001 and December 31, 2000.
On March 6, 1997, Freshstart established a $5,000,000 line of credit
with a bank at a rate of LIBOR plus 1.75%. Persuant to the terms of the line of
credit, the Company is required to comply with certain terms,
12
covenants, and conditions, including maintaining minimum balances with the bank.
The line of credit is unsecured. In connection with the Freshstart merger, the
line was reduced to $3,500,000 with no specific maturity.
The weighted average interest rate for the Company's consolidated
outstanding revolver borrowings at March 31, 2001 and December 31, 2000 was
6.46% and 7.83%. During the three months ended March 31, 2001 and 2000, the
Company's weighted average borrowings were $302,724,000 and $175,687,500 with a
weighted average interest rate of 7.50% and 6.97%, respectively.
On March 30, 2001 Medallion finalized certain amendments and was
granted a waiver of compliance with certain provisions. These amendments
clarified and revised certain provisions of the agreements related to business
activities and financial covenants of Medallion and MFC, and adjusted the rate
of interest paid on the notes. As of the effective date of the amendments,
Medallion believes it and MFC are in compliance with the requirements of the
credit facilities, as amended, and expect to remain in compliance with the
amended credit facilities for the foreseeable future. Medallion, MFC, and their
lenders have initiated discussions as to the next renewal of the existing bank
loans which mature in June and September, 2001. Although, there can be no
assurances, the Company expects a satisfactory result from these discussions.
Periodically MFC must maintain certain covenants under its Revolver. At
March 31, 2001, MFC was not in compliance with the covenant relating to interest
expense ratios (resulting in similar non-compliance under the Notes (as defined
below) and the Loan Agreement). The Company is presently seeking a waiver under
the Revolver which would cure all such non-compliance under these agreements.
(c) Senior Secured Notes
On June 1, 1999, MFC issued $22.5 million of Series A senior secured
notes that mature on June 1, 2004, and on September 1, 1999, MFC issued $22.5
million of Series B senior secured notes that mature on September 1, 2004
(together, the Notes). The Notes bear a fixed rate of interest of 7.20% (7.35%
effective March 30, 2001 pursuant to the amendments discussed above) and
interest is paid quarterly in arrears. The Notes rank pari passu with the
revolvers and commercial paper through inter-creditor agreements.
(d) Interest Rate Cap Agreements
On June 22, 2000, MFC entered into an interest cap agreement limiting
the Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit
facility to 7.25% until June 24, 2002. On July 6, 1999, MFC entered into two
interest rate cap agreements limiting the Company's maximum LIBOR exposure on a
total of $20,000,000 of MFC's revolving credit facility to 6.50% until July 6,
2001. On April 7, 1998, MFC entered into an interest rate cap agreement limiting
the company's maximum LIBOR exposure on $20,000,000 of MFC's revolving credit
facility to 6.50% until September 30, 1999 and 7.0% until March 30, 2001. The
Company is exposed to credit loss in the event of nonperformance by the
counterparties on the interest rate cap agreements. The Company does not
anticipate nonperformance by any of these parties.
13
(5) SBA Debentures Payable
Outstanding SBA debentures are as follows at March 31, 2001 and
December 31, 2000:
=============================================================================================================
Due Date 2001 2000 Interest Rate
=============================================================================================================
December 1, 2006 $5,500,000 $5,500,000 7.08%
March 1, 2007 4,210,000 4,210,000 7.38
September 1, 2007 4,060,000 4,060,000 7.76
June 1, 2007 3,000,000 3,000,000 7.07
March 1, 2006 2,000,000 2,000,000 7.08
December 16, 2002 1,300,000 1,300,000 4.51
June 1, 2005 520,000 520,000 6.69
December 1, 2005 520,000 520,000 6.54
June 1, 2006 250,000 250,000 7.71
---------------------------------------------------
$21,360,000 $21,360,000
=============================================================================================================
(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.
The lending segment is presented in the consolidated financial statements of the
Company. Financial information relating to the taxicab rooftop advertising
segment is presented in Note 3, and represents an immaterial part of total
Company revenues, expenses, income, assets and liabilities.
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, 2000. In addition, this section contains forward-looking
statements. These forward-looking statements are subject to 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.
General
We are a specialty finance company that originates and services loans
that finance taxicab medallions and various types of commercial loans. We have a
leading position in taxicab medallion financing. Since 1996, we have increased
our medallion loan portfolio at a compound annual growth rate of 18% and our
commercial loan portfolio at a compound annual growth rate of 38%. Our total
assets under our management was approximately $780 million and has grown from
$215 million at the end of 1996, a compound annual growth rate of 35%.
Medallion's loan related earnings depend primarily on its level of net
interest income. Net interest income is the difference between the total yield
on Medallion's loan portfolio and the average cost of funds. Medallion funds its
operations through a wide variety of interest-bearing sources, such as revolving
bank facilities, secured commercial paper, senior secured notes and debentures
issued to and guaranteed by the SBA.
Net interest income fluctuates with changes in the yield on Medallion's
loan portfolio and changes in the cost of funds, as well as changes in the
amount of interest-bearing assets and interest-bearing liabilities held
14
by Medallion. Net interest income is also affected by economic, regulatory and
competitive factors that influence interest rates, loan demand and the
availability of funding to finance Medallion's lending activities. Medallion,
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.
Medallion originates loans under the Section 7(a) loan program of the
SBA through its wholly owned subsidiary BLL. Up to 75% of the amount of these
loans (up to $1,000,000) are guaranteed by the SBA. Medallion regularly sells
the guaranteed portion of these loans in the secondary market and holds the
non-guaranteed portion until maturity.
Medallion also invests in small businesses in selected industries
through its subsidiary Medallion Capital. 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 are included in "Equity Investments"). Interest income is
earned on the debt investments.
Realized gains or losses on investments are recognized when the
investments are sold or written-off. The realized gains or losses represent the
difference between the proceeds received from the disposition of portfolio
assets, if any, and the cost of such portfolio assets. In addition, changes in
unrealized appreciation or depreciation of investments are recorded and
represent 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. 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.
Medallion's income from the taxicab rooftop advertising business,
operated by Media, is reflected on Medallion's books as earnings from an
unconsolidated subsidiary. Medallion continues to explore other opportunities in
the taxicab and lending industries, including possible strategies to participate
directly and/or indirectly in the appreciation of taxicab medallions.
15
Trend in Loan Portfolio
Medallion's investment income is driven by the principal amount of and
yields on its loan portfolio. To identify trends in the yields, the portfolio is
grouped by medallion loans, commercial loans, and equity investments. Since
December 31, 1998, medallion loans, while still making up a significant portion
of the total portfolio, have decreased in relation to the total portfolio
composition and commercial loans have increased.
The following table illustrates Medallion's investments at fair value
and the weighted average portfolio yields calculated using the contractual
interest rates of the loans at the dates indicated:
===================================================================================================================================
3/31/2000 12/31/2000 3/31/2001
% of Interest Principal % of Interest Principal % of Interest Principal
Portfolio Rate Balance Portfolio Rate Balance Portfolio Rate Balance
===================================================================================================================================
Medallion Loans
New York 49.8% 8.41% $259,039 41.5% 8.67% $215,607 42.5% 8.62% $211,103
Fresh Start-New York 3.1% 9.27% 15,889 2.5% 9.10% 12,851 3.0% 9.17% 15,088
Boston 1.6% 10.38% 8,549 3.3% 11.21% 17,279 3.1% 11.16% 15,612
Cambridge 0.5% 9.97% 2,718 0.2% 10.58% 927 0.4% 11.78% 1,742
Chicago 5.3% 10.75% 27,599 6.3% 10.47% 32,621 5.0% 10.38% 24,825
Newark 2.4% 11.79% 12,377 2.1% 11.59% 11,092 2.0% 11.54% 9,783
Other 1.1% 10.29% 5,596 1.6% 11.16% 8,230 1.3% 11.42% 6,477
- -----------------------------------------------------------------------------------------------------------------------------------
Total Medallion Loans 63.7% 8.87% 331,767 57.5% 9.22% 298,607 57.3% 9.12% 284,630
- -----------------------------------------------------------------------------------------------------------------------------------
Add: FASB 91 915 697 712
===================================================================================================================================
Medallion Loans, net 65.0% 332,682 58.2% 299,304 57.9% $285,342
===================================================================================================================================
Commercial Loans
Dry Cleaning 1.9% 13.30% 10,013 1.4% 13.26% 7,438 1.3% 13.14% $ 6,597
Laundromat 2.7% 12.56% 14,162 1.9% 12.37% 9,844 1.8% 12.23% 9,041
Commercial Secured 12.3% 12.49% 64,294 16.6% 12.84% 86,216 17.7% 12.16% 88,087
7 a Loans 11.0% 11.25% 57,439 12.7% 11.50% 66,058 12.2% 11.05% 60,573
Asset based receivable 6.6% 10.72% 34,241 8.3% 12.98% 43,120 8.2% 12.06% 40,611
Fresh Start 1.1% 11.00% 5,729 1.1% 11.00% 5,927 1.1% 10.00% 5,429
- -----------------------------------------------------------------------------------------------------------------------------------
Total Commercial Loans 35.7% 11.78% 185,878 42.1% 12.41% 218,603 42.3% 11.80% 210,338
- -----------------------------------------------------------------------------------------------------------------------------------
Add: FASB 91 1,639 1,107 974
Less: Reserve (8,852) (6,989) (5,929)
===================================================================================================================================
Commercial loans, net 35.0% 178,665 41.4% 212,721 41.7% 205,383
===================================================================================================================================
Equity investments 0.0061 3,037 0.5% 0.00% 2,552 0.4% 0.00% 1,855
------------------------------------------------------------------------------------------------------
Less: Unrealized depreciation (562) (423) (125)
-------------- -------------- -------------
2,475 2,129 1,730
===================================================================================================================================
Total investments at cost 100.0% 9.91% 520,682 100.0% 10.56% 519,762 100% 10.26% 496,823
===================================================================================================================================
Add: FASB 91 2,554 1,804 1,686
Less: Net depreciation on
equities (562) (423) (125)
Less: Reserve (8,852) (6,989) (5,929)
===================================================================================================================================
Total investments, net 100.0% $513,822 100% $514,154 100% $492,455
===================================================================================================================================
16
PORTFOLIO SUMMARY
Total Portfolio Yield
The weighted average yield of the total portfolio at March 31, 2001 was
10.26%, which is an increase of 35 basis points from 9.91% at March 31, 2000,
but down 30 basis points from year end. The increase in the total portfolio
yield compared to a year ago was due to the shift in the composition of the
portfolio to an increased percentage of higher yielding commercial loans. The
decline compared to the prior quarter resulted from the decrease in the yields
of the medallion and commercial loan portfolios primarily due to the Federal
Reserve's lowering of interest rates during the quarter, partially offset by an
increased percentage of commercial loans in Medallion's portfolio. Medallion
expects to try to continue increasing both the percentage of commercial loans in
the total portfolio and the origination of floating and adjustable-rate loans
and non-New York medallion loans.
Medallion Loan Portfolio
Medallion loans comprised 58% of the total portfolio of $492 million at
March 31, 2001 and $514 million at December 31, 2000, compared to 65% of the
total portfolio of $514 million at March 31, 2000. The medallion loan portfolio
decreased by $14.0 million or 5% in the quarter, reflecting a decrease in
medallion loan originations in most markets, and Medallion's execution of
participation agreements with third parties for $26.1 million of low yielding
New York medallion loans. Medallion retains a portion of these participating
loans and earns a fee for servicing the loans for the third parties.
The weighted average yield of the medallion loan portfolio at March 31,
2001 was 9.12%, an increase of 25 basis points from 8.87% at March 31, 2000,
which was down 10 basis points from 9.22% at December 31, 2000. The decrease
from year end primarily reflected the reduction in interest rates during the
quarter and the increase compared to March 31, 2000, primarily reflects
Medallion's expansion into markets outside of New York, which produced yields
100 to 300 basis points higher than loans originated in the New York medallion
market, offset by the effects of continuing competition in the New York
medallion market. At March 31, 2001, 21% of the medallion loan portfolio
represented loans outside New York compared to 23% at year-end 2000 and 17% a
year ago. Medallion continues to focus its efforts on originating higher
yielding medallion loans outside the New York market.
Collateral Appreciation Participation Loans
During the 2000 first half, we originated collateral appreciation
participation loans collateralized by Chicago taxi medallions of $30 million, of
which $21 million was syndicated to other financial institutions. In
consideration for modifications from its normal taxi medallion lending terms,
the Company offered loans at higher loan-to-value ratios and is entitled to earn
additional interest income based upon any increase in the value of all $30
million of the collateral. The fair value of the collateral appreciation
participation loan portfolio at March 31, 2001 was $12.8 million, which
represented 2.6% of the total loan portfolio. Additional interest income totaled
approximately $700,000, ($400,000) and $1.1 million in the 2001 first quarter,
2000 fourth quarter, and 2000 first quarter respectively, and is included in
investment income on the consolidated statements of operations and in accrued
interest receivable on the consolidated balance sheets. The Company believes
that the additional interest income recorded is fully realizable through
operation of the collateral or orderly sales in the market. As a regulated
investment company, Medallion is required to mark-to-market these investments on
a quarterly basis, just as it does on all of its other investments. Medallion
feels that it has adequately calculated the fair market value on these
investments and relies upon information such as recent and historical medallion
sale prices. If there is a decrease in the value of taxicab medallions, the
reduction in the value of the investments will be reversed against investment
income. The additional interest income is not reflected in the yield
calculations shown in the table above.
Commercial Loan Portfolio
Since 1997, Medallion has continued to shift the total portfolio mix
toward a higher percentage of commercial loans, which historically have had
higher yields than its medallion loans. Commercial loans were 42% of the total
portfolio at March 31, 2001 compared to 41% and 36% at December 31, 2000 and
March 31, 2000. The increase in the commercial loan portfolio was due to strong
growth in the SBA Section 7(a) loan program and in the asset-based lending
portfolio, compared to a year ago, and the decline since year end primarily
reflected contractions in the SBA Section 7(a) loan programs, primarily
reflecting sales and paydowns.
17
The weighted average yield of the commercial loan portfolio at March
31, 2001 was 11.80%, a decrease of 61 basis points from 12.41% at year end, and
compared to March 31, 2000, the yield increased 2 basis points from 11.78%. The
decrease from year-end primarily reflected the drop of interest rates in the
economy. The rate movement primarily reflected a shift in the mix within the
commercial portfolio from fixed-rate loans to floating-rate or adjustable-rate
loans tied to the prime rate, and the corresponding sensitivity of the yield to
movements in the prime rate. Medallion continues to originate adjustable-rate
and floating-rate loans tied to the prime rate to help mitigate its interest
rate risk in a rising interest rate environment. At March 31, 2001, floating-
rate loans represented approximately 69% of the commercial portfolio, unchanged
from year end. Although this strategy initially produces a lower yield, we
believe that this strategy mitigates interest rate risk by better matching our
earning assets to their adjustable-rate funding sources.
Equity Investments
Equity Investments were 0.4%, 0.5%, and 0.6% of Medallion's total
portfolio at March 31, 2001, December 31, 2000, and March 31, 2000. Equity
investments are comprised of common stock and warrants.
Trend in Interest Expense
Medallion's interest expense is driven by the interest rate payable on
its LIBOR-based short-term credit facilities with bank syndicates, long-term
notes payable and, to a lesser degree, secured commercial paper and fixed-rate,
long-term debentures issued to or guaranteed by the SBA.
The following table provides the interest rates and interest expense of
Medallion's major credit facilities for the three months ended March 31, 2001,
December 31, 2000 and March 31, 2000.
=============================================================================================================
Percentage
Actual of Total
Interest Interest
Average Cost of Funds Expense Expense
=============================================================================================================
March 31, 2001
Notes payable to banks 7.50% $ 5,790,472 80.41%
SBA debentures 7.33% 433,172 6.0
Commercial paper 7.45% 155,529 2.2
Senior secured notes 7.06% 821,864 11.4
- -------------------------------------------------------------------------------------------------------------
December 31, 2000
Notes payable to banks 8.18% $ 4,024,483 51.0%
Commercial paper 7.38% 2,471,784 31.3
Senior secured notes 7.27% 821,864 10.4
SBA debentures 10.48% 572,093 7.3
- -------------------------------------------------------------------------------------------------------------
March 31, 2000
Notes payable to banks 7.48% $ 3,304,556 48.5%
Commercial paper 7.15% 2,281,159 33.5
Senior Secured Notes 7.27% 821,865 12.1
SBA debentures 7.15% 409,418 5.9
=============================================================================================================
Medallion will continue to seek SBA funding to the extent it offers
attractive rates. SBA financing subjects its recipients to limits on the amount
of secured bank debt they may incur. Accordingly, Medallion plans to limit its
use of SBA funding to the subsidiary level to fund loans that qualify under the
SBIA and SBA regulations. Further, Medallion 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, but has
also increased Medallion's exposure to the risk of increases in market interest
rates, which Medallion attempts to mitigate with certain hedging strategies. At
March 31, 2001, December 31, 2000 and March 31, 2000, short-term LIBOR-based
debt including commercial paper constituted 82.8%, 83.2% and 82.3% of total
debt, respectively.
Medallion's cost of funds is primarily driven by the rates paid on its
various debt instruments and their relative mix and changes in the levels of
average borrowings outstanding. Medallion incurs LIBOR-based debt for terms
generally ranging from 1 to 180 days. Medallion's debentures issued to or
guaranteed by the SBA typically have initial terms of ten years. Medallion's
cost of funds reflects changes in LIBOR to a greater degree than in the past
because LIBOR-based debt represents a greater proportion of Medallion's debt.
Medallion measures its cost of funds as its aggregate interest expense for all
of its interest-bearing liabilities divided by the
18
face amount of such liabilities. Medallion analyzes its cost of funds in
relation to the average of the 90 and 180 day LIBOR (the "LIBOR Benchmark").
Medallion's average cost of funds for the 2001 first quarter was 7.44%, down
from 7.93% in the 2000 fourth quarter, but up from 7.32% in the 2000 first
quarter. The increase compared to a year ago, reflects the higher rate
environment resulting from the series of rate increases initiated by the Federal
Reserve Board during 2000, and the decline from the fourth quarter reflects the
rate reductions which occurred in the first quarter, partially offset by the
impact of the shift from commercial paper to bank debt.
During December 2000, Medallion's outstanding commercial paper began to
mature and was replaced by draws on the notes payable to banks, at costs of
approximately 75 basis points higher than if the commercial paper program had
been maintained. The commercial paper was not renewed, partially as a result of
the loss of a credit rating due to the merger of the two rating agencies
providing credit ratings to Medallion and due to the remaining rating agency
placing Medallion's rating on negative credit watch.
Taxicab Advertising
In addition to its finance business, Medallion 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, currently showing advertisements, and the rate charged customers for
those displays. At March 31, 2001, Media had approximately 10,800 installed
displays. Medallion 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. Although Media is a wholly-owned subsidiary of
Medallion, its results of operations are not consolidated with Medallion's
operations because the Securities and Exchange Commission regulations prohibit
the consolidation of non-investment companies with investment companies.
On February 8, 2001, we announced that Media entered into an agreement
to acquire Taxi Media Network, the largest taxicab advertising company in Japan,
which holds the rights to provide advertising on 7,000 taxis in Japan. The
transaction is subject to due diligence reviews and other customary closing
conditions.
On August 30, 2000, Media purchased all the assets of Out There Media
L.L.C. ("Out There"), a privately held company headquartered in Cleveland. Out
There has the right to place an advertisement on top of more than 250 taxis in
Cleveland, Columbus, and Toledo, and has contracts with some of the largest taxi
fleets in these cities.
On August 7, 2000, Media entered into an agreement for up to ten years
with Yellow Cab Service Corp., the taxi division of Coach USA, the leading taxi
and bus charter company in the U.S., to sell advertising space on the top of
over 2,300 taxicabs throughout the United States. Going forward, as Coach USA
acquires taxi companies around the U.S., Media will have the right to place
advertisements on top of those taxis as well
Factors Affecting Net Assets
Factors that affect Medallion's net assets include, net realized gain
or loss on investments and change in net unrealized appreciation or depreciation
of investments. Net realized gain or loss on investments is the difference
between the proceeds derived upon sale or foreclosure of a loan or an equity
investment and the cost basis of such loan or equity investment. Change in net
unrealized appreciation or depreciation of investments is the amount, if any, by
which Medallion'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, Medallion's loan portfolio and other
investments must be recorded at fair value.
Unlike certain lending institutions, Medallion is not permitted to
establish reserves for loan losses, but adjusts quarterly the valuation of our
loan portfolio to reflect Medallion's estimate of the current value of the total
loan portfolio. Since no ready market exists for Medallion's loans, fair value
is subject to the good faith determination of Medallion. In determining such
fair value, Medallion and its Board of Directors takes into consideration
factors such as the financial condition of its borrowers and the adequacy of its
collateral. Any change in the fair value of portfolio loans or other investments
as determined by Medallion 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.
19
CONSOLIDATED RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000.
Net increase in net assets resulting from operations was $2.3 million
or $0.16 per share in the 2001 first quarter, a decrease of $2.2 million or 49%
from $4.5 million or $0.31 per share in the 2000 first quarter, primarily
reflecting the net interest and non-interest income.
Investment income was $13.4 million in the quarter, down $1.2 million
or 8% from $14.5 million in 2000. The decrease compared to 2000 reflected a
decreased level of loans and reduced additional interest income recorded on the
collateral appreciation participation loans, partially offset by improved yields
on the portfolios. Net investments declined $21.4 million or 4% to $492.4
million in 2001 from $513.8 million in 2000.
The yield on the total portfolio at March 31, 2001 was 10.26%, an
increase of 35 basis points compared with a yield of 9.91% a year-ago. The
increase primarily reflects the series of rate hikes initiated by the Federal
Reserve bank during late 1999 and continuing through most of 2000. Also
impacting the improvement in investment income was the continuing movement of
portfolio composition towards higher-yielding commercial loans from
lower-yielding medallion loans. Yields on medallion loans at quarter end were
9.12%, up from 8.87% a year ago, and the yields on commercial loans were 11.80%
at year-end, down from 11.78% a year ago. As rates began to rise, management
made a conscious effort to sell or not renew these typically fixed, lower-rate
medallion loans and replace them with floating, higher-rate commercial loans.
Medallion loans were $285.3 million at March 31, 2001, down $47.3
million or 14.2% from $332.7 million a year ago, and were down $14.0 million or
5% from $299.3 million at year end, primarily reflecting reductions in most
markets. The commercial loan portfolio was $205.4 million at quarter end,
compared to $178.7 million a year earlier, an increase of $26.7 million or 15%,
but was down $7.3 million or 3% from $212.7 million at year end. The increase
compared to a year ago was in most commercial lending categories, including
$6.4 million in the asset-based lending business and $3.1 million in the SBA
7(a) lending program. The balance of the commercial loan increase was spread
amongst many generic commercial lending categories, including restaurants, real
estate, mezzanine financing, and other small business pursuits. The decline from
year-end was spread amongst all loan categories.
During the 2000 first half, we originated collateral appreciation
participation loans collateralized by Chicago taxi medallions of $30.0 million,
of which $21.0 million was syndicated to other financial institutions. In
consideration for modifications from our normal taxi medallion lending terms, we
offered loans at higher loan-to-value ratios, and we are entitled to earn
additional interest income based upon any increase in the value of the taxi
medallion collateral on the entire $30.0 million portfolio. The value of Chicago
taxi medallions increased during 2001 and 2000, and accordingly, additional
interest of $700,000 million was recorded as investment income during the 2001
first quarter compared to $1.1 million recorded during the 2000 first quarter.
Interest expense was $7.2 million in the 2001 first quarter, up
$384,000 or 5.3% compared to 2000 period, primarily reflecting increased
borrowing levels, coupled with the impact of an increased interest rate
environment. The increase in average debt outstanding was $6.5 million, a 8%
increase compared to the 2000 period. In addition to the higher borrowing
levels, Medallion's debt is primarily tied to floating rate indexes, which rose
during most of 2000. As a result, the average cost of funds was 7.44% in 2001,
compared to 7.32% in 2000, a 2% increase of 12 basis points. Approximately 83%
of Medallion's debt is short-term and floating rate, up slightly from 82% in
2000.
Net interest income was $6.2 million for 2001, down $1.5 million or 20%
from 2000, primarily reflecting the decrease in the loan portfolio, the
additional interest recorded on the collateral appreciation participation loans
in 2000 and higher borrowing costs in 2001.
Medallion had gains on the sale of the guaranteed portion of SBA 7(a)
loans of $433,000 in 2000, down $253,000 or 37% from $686,000 in 2000. During
2001, $5.7 million of loans were sold under the SBA program compared to $13.4
million during 2000. The decline in gains on sale reflected a decrease in loans
sold of $7.7 million or 57%, along with a decrease in the level of
market-determined premiums received on the sales. Equity in earnings (losses) of
unconsolidated subsidiary reflects the operations of the Media division of
Medallion. The loss of $427,000 in 2001 increased $108,000 from losses of
$319,000 in 2000, and reflected the greater costs associated with the rapid
increase in tops under contract and cities serviced, which outpaced the $1.0
million or 47% increase in revenue. Included in advertising revenue for the
quarter ended March 31, 2001 is $567,000
20
related to contracts that were cancelled in prior periods due to legislative
changes and other factors. This revenue was recognized upon determination that
Media had no further continued obligations under the contract. During 2001,
vehicles under contract increased 3,600 or 50% to 10,800 from 7,200 in 2000. As
a result of the substantial growth in tops inventory, Media's fleet payment
costs and related operating expenses to service those tops increased, at a
greater rate than the growth in revenue, resulting in a loss for the quarter.
Negative goodwill was fully accreted during 2000, and accordingly, accretion of
$181,000 in 2000 compared to $0 in 2001. Other income of $971,000 increased
$171,000 from $800,000 in 2000, primarily reflecting an increase in servicing
fee income, prepayment fees, late charges, and other miscellaneous income.
Non-interest expense was $4.8 million, up $124,000 or 3%, from $4.7
million in 2000. Salaries and benefits expense of $2.7 million was up $221,000
or 9%, reflecting normal salary increases and the impact of new senior
management hires. Professional fees of $395,000 were down $21,000 or 5% from
$416,000 in 2000. Rent expense of $256,000 was up $ 12,000 or 5% from $244,000 a
year ago, reflecting normal rent escalation adjustments. Amortization of
goodwill was $133,000 in 2001, essentially unchanged from 2000. Administration
and advisory fees were $3,000 in 2001, down $58,000 from $61,000 in 2000,
reflecting the completion of the advisory services contract in early 2000. Other
operating expenses of $1.4 million were down $28,000 or 2% from $1.4 million in
2000.
Net unrealized appreciation on investments was $893,000 in 2001,
compared to net unrealized depreciation of $113,000 in 2000, an increase of $1.0
million. Unrealized appreciation/(depreciation) arises when Medallion makes
valuation adjustments to the investment portfolio. When investments are sold or
written-off, any resulting realized gain/(loss) is grossed up to reflect
previously recorded unrealized components. As a result, movement between periods
can appear distorted. The increase in 2001 activity primarily resulted from the
reversal of unrealized depreciation related to the final disposition of a
portfolio investment that resulted in realized losses of $693,000 (that had been
fully reserved in prior periods) and recoveries of $565,000, partially offset a
net increase in unrealized depreciation of $207,000 in 2000.
Net realized loss on investments in 2001 was $898,000, compared to a
net gain of $247,000 in 2000, a decrease of $1.1 million, primarily reflecting
the realized loss reflected above. The balance of the increase in 2001, net
realized loss of $205,000 represented the write-off of various commercial loans
that had previously been fully written down through the quarterly valuation
adjustment process
Medallion's net realized/unrealized loss on investments in 2001 was
$5,000, which primarily reflected losses on commercial loans, compared to a net
realized/unrealized gain in 2000 of $134,000, which primarily represented
increased valuation allowances for commercial loans.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
Medallion, like other financial institutions, is subject to interest
rate risk to the extent its interest-earning assets (consisting of medallion
loans and commercial 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, senior secured notes and
subordinated SBA debentures).
Having interest-bearing liabilities that mature or reprice more
frequently on average than assets may be beneficial in times of declining
interest rates, although such an asset/liability structure may result in
declining net earnings during periods of rising interest rates. Abrupt increases
in market rates of interest may have an adverse impact on our earnings until we
are able to originate new loans at the higher prevailing interest rates.
Conversely, having interest-earning assets that mature or reprice more
frequently on average than liabilities may be beneficial in times of rising
interest rates, although this asset/liability structure may result in declining
net earnings during periods of falling interest rates. This mismatch between
maturities and interest rate sensitivities of our interest-earning assets and
interest-bearing liabilities results in interest rate risk.
The effect of changes in interest rates is mitigated by regular
turnover of the portfolio. Based on past experience, Medallion anticipates that
approximately 40% of the portfolio will mature or be prepaid each year.
Medallion believes that the average life of its loan portfolio varies to some
extent as a function of changes in interest rates. Borrowers are more likely to
exercise prepayment rights in a decreasing interest rate environment
21
because the interest rate payable on the borrower's loan is high relative to
prevailing interest rates. Conversely, borrowers are less likely to prepay in a
rising interest rate environment.
Interest Rate Cap Agreements
Medallion seeks to manage the exposure 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.
We entered into an interest rate cap agreements limiting our maximum
LIBOR exposure on our revolving credit facility in accordance with the terms
shown in the following table:
==========================================================================================
Libor Effective Maturity
Amount Rate Date Date
- ------------------------------------------------------------------------------------------
$10,000,000 6.5 7/6/99 7/6/01
10,000,000 6.5 7/6/99 7/6/01
10,000,000 7.25 6/22/00 6/24/02
==========================================================================================
Medallion will seek to manage interest rate risk by originating
adjustable-rate loans, by incurring fixed-rate indebtedness, by evaluating and
purchasing, if appropriate, additional derivatives, and by revising, if
appropriate, its overall level of asset and liability matching.
In addition, Medallion manages its exposure to increases in market
rates of interest by incurring fixed-rate indebtedness, such as five year senior
secured notes and subordinated SBA debentures. Medallion currently has
outstanding $45 million of senior secured notes maturing June 1, 2004, at a
fixed interest rate of 7.20% (7.35% beginning March 30, 2001) and SBA debentures
in the principal amount of $21.4 million with a weighted average interest rate
of 7.47%. At March 31, 2001, these notes and debentures constituted 11.6% and
5.5% of Medallion's total indebtedness respectively.
Liquidity and Capital Resources
Our sources of liquidity are credit facilities with bank syndicates,
senior secured notes, long-term SBA debentures that are issued to or guaranteed
by the SBA, our secured commercial paper program and loan amortization and
prepayments. As a RIC, we distribute at least 90% of our investment company
taxable income; consequently, we primarily rely upon external sources of funds
to finance growth. At March 31, 2001, our $386.6 million of outstanding debt was
comprised as follows: 82.6% bank debt, substantially all of which was at
variable effective interest rates with a weighted average interest rate of
6.46%, 0.2% secured commercial paper with an annual weighted average interest
rate of 7.18%, 11.64% long-term senior secured notes fixed at an interest rate
of 7.20%, and 5.53% subordinated SBA debentures, with fixed-rates of interest
with an annual weighted average rate of 7.47%. Medallion is eligible to seek SBA
funding and will seek such funding when the rates presented are advantageous. In
March 2001, we applied for $72.0 million of additional funding with the SBA
($108.0 million to be committed by the SBA, subject to our raising of additional
equity capital.) This application is currently under review, although no
assurance can be given that such funding will be obtained. Since SBA financing
subjects its recipients to certain regulations, Medallion will seek funding at
the subsidiary level to maximize its benefits.
Currently, Medallion has fully drawn down its existing bank lines of
credit. Medallion 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.
Additionally, Medallion's lead member in the lending syndicate has approximately
doubled its exposure to Medallion and MFC to $95 million as a result of a merger
between such lead member and another bank in the lending syndicate in September
2000. This bank has asked Medallion to find an additional participant to reduce
its exposure. Medallion is actively seeking new members for the lending
syndicate. As a result, Medallion is currently unable to expand its borrowing
lines until new banks join the lending syndicate or a debt offering is
completed.
Medallion's bank and commercial paper facilities are subject to
periodic reviews by the lending syndicate funding the borrowings and are also
subject to certain covenants and restrictions. On March 30, 2001 Medallion
finalized certain amendments and was granted a waiver of compliance with certain
provisions. These amendments
22
clarified and revised certain provisions of the agreements related to business
activities and financial covenants of Medallion and MFC, and adjusted the rate
of interest paid on the notes. Medallion, MFC, and their lenders have initiated
discussions as to the next renewal of the existing bank loans which mature in
June and September, 2001. Although, there can be no assurances, the Company
expects a satisfactory result from these discussions.
Periodically MFC must maintain certain covenants under its Revolver. At
March 31, 2001, MFC was not in compliance with the covenant relating to interest
expense ratios (resulting in similar non-compliance under the Notes and the Loan
Agreement). The Company is presently seeking a waiver under the Revolver which
would cure all such non-compliance under these agreements.
On November 22, 2000, Fitch IBCA placed Medallion's "BBB" senior
secured debt rating and "F2" secured commercial paper rating on negative watch.
In addition, in December 2000, Medallion's other rating agency, Thompson's
Bankwatch was acquired by Fitch IBCA, leaving it with only one commercial paper
rating. Primarily as a result of these factors, a substantial portion of
Medallion's commercial paper did not rollover and has subsequently been replaced
by Medallion's bank facility. On January 18, 2001, Fitch IBCA lowered our senior
secured debt rating and secured commercial paper rating to "BB+" and "B",
respectively, and removed them from negative watch.
Medallion believes that its bank credit facilities and cash flow from
operations (after distributions to stockholders) will be adequate to fund the
continuing operations of Medallion's loan portfolio and advertising business.
Nevertheless, Medallion continues to explore additional options, which may
increase available funds for Medallion's growth and expansion strategy. In
addition, to the application for SBA funding described above, these financing
options would provide additional sources of funds for both external expansion
and continuation of internal growth.
We are working with investment banking firms to investigate the
viability of a number of other financing options which include an equity
offering of securities, the sale or spin-off of certain assets or divisions, and
the development of a securitization conduit program. These financing options
would also provide additional sources of funds for both external expansion and
continuation of internal growth. If none of these financing options occur,
management believes liquidity would still be adequate to fund the continuing
operations of Medallion's loan portfolio and advertising business. Deferred
costs related to these financing options was approximately $257,000 as of March
31, 2001 and were included in other assets on Medallion's consolidated balance
sheets.
The following table illustrates sources of available funds for
Medallion and each of the subsidiaries, and amounts outstanding under credit
facilities and their respective end of period weighted average interest rate at
March 31, 2000:
=============================================================================================================================
Medallion
(dollars in thousands) Financial MFC BLLC MCC MBC FSVC Total
=============================================================================================================================
Cash $9,934 $8,320 $188 $397 $3,275 $2,400 $24,514
Revolving credit lines (1) 110,000 220,000 3,500 333,500
Amounts undisbursed 6,700 6,566 13,266
Amounts outstanding 103,300 212,670 3,500 319,470
Average interest rate 6.40% 6.48% 7.02% 6.46%
Maturity 9/01 6/01 On Demand 6/01 - 9/01
Commercial paper 764 764
Average interest rate 7.18% 7.18%
Maturity 6/01 6/01
SBA debentures 10,500 10,860 21,360
Average interest rate 7.08% 7.86% 7.47%
Maturity 3/06 - 6/07 12/02 - 9/07 12/02 - 9/07
Senior secured notes 45,000 45,000
Average interest rate 7.20% 7.20%
Maturity 6/04 - 9/04 6/04-9/04
- -----------------------------------------------------------------------------------------------------------------------------
Total cash and remaining
amounts undisbursed under
credit facilities 16,634 14,886 188 397 3,275 2,400 37,780
- -----------------------------------------------------------------------------------------------------------------------------
Total debt outstanding $103,300 $258,434 $10,500 $14,360 $386,594
=============================================================================================================================
(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.
- --------------------------------------------------------------------------------
23
Loan amortization, prepayments, and sales also provide a source of
funding for Medallion. 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 medallion loans,
which are refinanced with Medallion rather than through other sources of
financing. Loan sales are a major focus of the SBA Section 7(a) loan program
conducted by BLL, which is primarily set up to originate and sell loans.
Increases in SBA 7(a) loan balances in any given period generally reflect timing
differences in selling and closing transactions.
On June 1, 1999, MFC issued $22.5 million of Series A senior secured
notes that mature on June 1, 2004, and on September 1, 1999, MFC issued $22.5
million of Series B senior secured notes that mature on September 1, 2004
(together, the Notes). The Notes bear a fixed rate of interest of 7.2% (7.35% as
of March 31, 2000) and interest is paid quarterly in arrears. The Notes rank
pari passu with the revolvers and commercial paper through inter-creditor
agreements. The proceeds of the Notes were used to prepay certain of the
Company's outstanding SBA debentures. See also description of amendments
referred to above.
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
Interest rate fluctuations may adversely affect the interest rate spread we
receive on our taxicab medallion and commercial loans.
Because we borrow money to finance the origination of loans, our income
is dependent upon the difference between the rate at which we borrow funds and
the rate at which we loan funds. While the loans in our portfolio in most cases
bear interest at fixed-rates or adjustable-rates, we finance a substantial
portion of such loans by incurring indebtedness with floating interest rates. As
short-term interest rates rise, our interest costs increase, decreasing the net
interest rate spread we receive and thereby adversely affect our profitability.
Although we intend to continue to manage our interest rate risk through asset
and liability management, including the use of interest rate caps, general rises
in interest rates will tend to reduce our interest rate spread in the short
term. In addition, we rely on our counterparties to perform their obligations
under such interest rate caps.
A decrease in prevailing interest rates may lead to more loan prepayments, which
could adversely affect our business.
A borrower is likely to exercise prepayment rights at a time when the
interest rate payable on the borrower's loan is high relative to prevailing
interest rates. In a lower interest rate environment, we will have difficulty
re-lending prepaid funds at comparable rates, which may reduce the net interest
spread we receive.
Lending to small businesses involves a high degree of risk and is highly
speculative.
Our commercial loan activity has increased in recent years. Lending to
small businesses involves a high degree of business and financial risk, which
can result in substantial losses and should be considered speculative. Our
borrower base consists primarily of small business owners that have limited
resources and that are generally unable to achieve financing from traditional
sources. There is generally no publicly available information about these small
business owners, and we must rely on the diligence of our employees and agents
to obtain information in connection with our credit decisions. In addition,
these small businesses often do not have audited financial statements. Some
smaller businesses have narrower product lines and market shares than their
competition. Therefore, they may be more vulnerable to customer preferences,
market conditions or economic downturns, which may adversely affect the return
on, or the recovery of, our investment in these businesses.
Our borrowers may default on their loans.
We primarily invest in and lend to companies that may have limited
financial resources. Numerous factors may affect a borrower's ability to repay
its loan, including:
o the failure to meet its business plan;
o a downturn in its industry or negative economic conditions;
24
o the death, disability or resignation of one or more of the key
members of management; or
o the inability to obtain additional financing from traditional
sources.
Deterioration in a borrower's financial condition and prospects may be
accompanied by deterioration in the collateral for the loan. Expansion of our
portfolio and increases in the proportion of our portfolio consisting of
commercial loans could have an adverse impact on the credit quality of the
portfolio.
Because we must distribute our income, we have a continuing need for capital.
We have a continuing need for capital to finance our lending
activities. Our current sources of liquidity are the following:
o bank credit facilities;
o senior secured notes;
o sales of participations in loans;
o fixed-rate, long-term SBA debentures that are issued to or guaranteed
by the SBA;
o a secured commercial paper program; and
o loan amortization and prepayments.
As a RIC, we distribute at least 90% of our investment company taxable
income. Consequently, we primarily rely upon external sources of funds to
finance growth. At March 31, 2001, we had fully drawn all capacity available
under our $334 million bank credit facilities at variable effective rates of
interest averaging below the prime rate. We minimize 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 the credit facilities only when necessary to fund portfolio growth. In
addition, we are eligible to seek SBA funding. In the event that we seek SBA
funding, no assurance can be given that the funding will be obtained.
We may have difficulty raising capital to finance our planned level of lending
operations.
We may have difficulty raising the capital necessary to finance our
planned level of lending operations. During December 2000, our outstanding
commercial paper began to mature and was replaced by draws on the notes payable
to our bank facility. The commercial paper was not renewed as a result of the
loss of a credit rating due to the merger of our rating agencies and due to the
remaining rating agency lowering our rating.
In addition, we are currently unable to expand our borrowing lines
until new banks join the lending syndicate or a debt offering is completed. The
lead bank in our lending syndicate has recently approximately doubled its
exposure to Medallion and MFC to $95 million as a result of a merger between the
lead bank and another member of the lending syndicate. In September 2000, this
bank asked us to find an additional participant to reduce its exposure. We are
actively seeking new members for the lending syndicate.
If we are unable to continue to diversify geographically, our business may be
adversely affected if the New York taxicab industry experiences an economic
downturn.
Although we are diversifying from the New York City area, a significant
portion of our taxicab advertising and loan revenue is derived from New York
City taxicabs and medallion loans collateralized by New York City taxicab
medallions. An economic downturn in the New York City taxicab industry could
lead to an increase in defaults on our medallion loans and may also adversely
affect the operation of our taxicab rooftop advertising business. In addition,
an economic downturn could impact the value of our medallion collateral. There
can be no assurance that we will be able to sufficiently diversify our
operations geographically.
If there is an economic downturn, our commercial loan customers may experience
difficulty in servicing their debt with us and the level of our delinquencies
and loan losses may increase
An economic downturn could result in certain of our commercial loan
customers experiencing declines in business activities, which could lead to
difficulties in their servicing of their loans with us. If this were to happen,
the level of delinquencies, defaults, and loan losses in commercial loan
portfolio could increase.
The loss of certain key members of our senior management could adversely affect
us.
25
Our success is largely dependent upon the efforts of senior management.
The death, incapacity or loss of the services of certain of these individuals
could have an adverse effect on our operation and financial results. There can
be no assurance that other qualified officers could be hired.
Acquisitions may lead to difficulties that could adversely affect our
operations.
By their nature, corporate acquisitions entail certain risks, including
those relating to undisclosed liabilities, the entry into new markets and
personnel matters. Difficulties could also arise integrating the acquired
operations or managing problems due to sudden increases in the size of our loan
portfolio. In such instances, we might be required to modify our operating
systems and procedures, hire additional staff, obtain and integrate new
equipment and complete other tasks appropriate for the assimilation of new and
increased business activities. There can be no assurance that we would be
successful, if and when necessary, in minimizing these inherent risks or in
establishing systems and procedures which will enable us to effectively achieve
our desired results in respect of any of these or any future acquisitions.
Competition from entities with greater resources and less regulatory
restrictions may decrease our profitability.
We compete with banks, credit unions and other finance companies, some
of which are Small Business Investment Companies, or SBICs, in the origination
of taxicab medallion loans and commercial loans. We also compete with finance
subsidiaries of equipment manufacturers. Many of these competitors have greater
resources than Medallion and certain competitors are subject to less restrictive
regulations than Medallion. As a result, there can be no assurance that we will
be able to continue to identify and complete financing transactions that will
permit us to continue to compete successfully.
Our taxicab rooftop advertising business competes with other taxicab
rooftop advertisers as well as with all segments of the out-of-home advertising
industry. We also compete with other types of advertising media, including cable
and network television, radio, newspapers, magazines and direct mail marketing.
Certain of these competitors have also entered into the rooftop advertising
business. Many of these competitors have greater financial resources than
Medallion and offer several forms of advertising as well as production
facilities. There can be no assurance that we will continue to compete with
these businesses successfully.
The valuation of our loan portfolio is subjective and we may not be able to
recover our estimated value in the event of a foreclosure.
Under the 1940 Act, our loan portfolio must be recorded at fair value
or "marked to market." Unlike other lending institutions, we are not permitted
to establish reserves for loan losses. Instead, we adjust quarterly the
valuation of our portfolio to reflect our estimate of the current realizable
value of our loan portfolio. Since no ready market exists for this portfolio,
fair value is subject to the good faith determination of our management and the
approval of our Board of Directors. Because of the subjectivity of these
estimates, there can be no assurance that in the event of a foreclosure or the
sale of portfolio loans we would be able to recover the amounts reflected on our
balance sheet.
In determining the value of our portfolio, management and the board of
directors may take into consideration various factors such as the financial
condition of the borrower and the adequacy of the collateral. For example, in a
period of sustained increases in market rates of interest, management and the
Board of Directors could decrease its valuation of the portfolio if the
portfolio consists primarily of fixed-rate loans. Our valuation procedures are
designed to generate values which approximate the value that would have been
established by market forces and are therefore subject to uncertainties and
variations from reported results.
Considering these factors, we have determined that the fair value of
our portfolio is below its cost basis. At March 31, 2001, our net unrealized
depreciation on investments was approximately $6.1 million. Based upon current
market conditions and current loan-to-value ratios, our Board of Directors
believes that the net unrealized depreciation of investments is adequate to
reflect the fair value of the portfolio.
Changes in taxicab industry regulations that result in the issuance of
additional medallions could lead to a decrease in the value of our medallion
loan collateral.
Every city in which we originate medallion loans, and most other major
cities in the United States, limits the supply of taxicab medallions. This
regulation results in supply restrictions that support the value of medallions.
Actions that loosen these restrictions and result in the issuance of additional
medallions into a market could decrease the value of medallions in that market.
As a result, the value of the collateral securing our
26
then outstanding medallion loans in that market could be adversely affected. We
are unable to forecast with any degree of certainty whether any potential
increases in the supply of medallions will occur.
In New York City, Chicago and Boston, and in other markets where we
originate medallion loans, taxicab fares are generally set by government
agencies. Expenses associated with operating taxicabs are largely unregulated.
As a result, the ability of taxicab operators to recoup increases in expenses is
limited in the short term. Escalating expenses can render taxicab operations
less profitable, and could cause borrowers to default on loans from Medallion,
and could potentially adversely affect the value of Medallion's collateral.
A significant portion of our taxicab advertising and loan revenue is
derived from loans collateralized by New York City taxicab medallions. According
to New York City Taxi and Limousine Commission data, over the past 20 years New
York City taxicab medallions have appreciated in value an average of 10.0% each
year. However, for sustained periods during that time, taxicab medallions have
declined in value. Over the past year, the value of New York City taxicab
medallions has declined by approximately 9%.
Our failure to maintain our Subchapter M status could lead to a substantial
reduction in the amount of income distributed to our shareholders.
We, along with some of our subsidiaries, have qualified as regulated
investment companies under Subchapter M of the Internal Revenue Code. Thus, we
will not be subject to federal income tax on investment company taxable income
(which includes, among other things, dividends and interest reduced by
deductible expenses) distributed to our shareholders. If we or those of our
subsidiaries that are also regulated investment companies were to fail to
maintain Subchapter M status for any reason, our respective incomes would become
fully taxable and a substantial reduction in the amount of income available for
distribution to us and to our shareholders would result.
To qualify under Subchapter M, we must meet certain income,
distribution and diversification requirements. However, because we use leverage,
we are subject to certain asset coverage ratio requirements set forth in the
1940 Act. These asset coverage requirements could, under certain circumstances,
prohibit us from making distributions that are necessary to maintain our
Subchapter M status or require that we reduce our leverage.
In addition, the asset coverage and distribution requirements impose
significant cash flow management restrictions on us and limit our ability to
retain earnings to cover periods of loss, provide for future growth and pay for
extraordinary items. Certain of our loans, including the medallion collateral
appreciation participation loans, could also be re-characterized in a manner
that would generate non-qualifying income for purposes of Subchapter M. In this
event, if such income exceeds the amount permissible, we could fail to satisfy
the requirement that a regulated investment company derive at least 90% of its
gross income from qualifying sources, with the result that we would not meet the
requirements of Subchapter M for qualification as a regulated investment
company. Qualification as a regulated investment company under Subchapter M is
made on an annual basis and, although we and some of our subsidiaries are
qualified as regulated investment companies, no assurance can be given that we
will each continue to qualify for such treatment. Failure to qualify under
Subchapter M would subject us to tax on our income and would have material
adverse effect on our financial condition and results operations.
Our SBIC subsidiaries may be unable to meet the investment company requirements,
which could result in the imposition of an entity-level tax.
The Small Business Investment Act of 1958 regulates some of our
subsidiaries. The Small Business Investment Act restricts distributions by an
SBIC. Our SBIC subsidiaries that are also regulated investment companies could
be prohibited by SBA regulations from making the distributions necessary to
qualify as a regulated investment company. Each year, in order to comply with
the SBA regulations and the regulated investment company distribution
requirements, we must request and receive a waiver of the SBA's restrictions.
While the current policy of the SBA's Office of SBIC Operations is to grant such
waivers if the SBIC makes certain offsetting adjustments to its paid-in capital
and surplus accounts, there can be no assurance that this will continue to be
the SBA's policy or that our subsidiaries will have adequate capital to make the
required adjustments. If our subsidiaries are unable to obtain a waiver,
compliance with the SBA regulations may result in loss of regulated investment
company status and a consequent imposition of an entity-level tax.
The Internal Revenue Code's diversification requirements may limit our ability
to expand our taxicab rooftop advertising business and our medallion collateral
appreciation participation loan business.
27
We intend to continue to pursue an expansion strategy in our taxicab
rooftop advertising business. We believe that there are growth opportunities in
this market. However, the asset diversification requirements under the Internal
Revenue Code could restrict such expansion. These requirements provide that, as
a RIC, not more than 25% of the value of our total assets may be invested in the
securities (other than U.S. Government securities or securities of other
regulated investment companies) of any one issuer. While our investments in our
regulated investment company subsidiaries are not subject to this
diversification test so long as these subsidiaries are regulated investment
companies, our investment in Media is subject to this test.
At the time of the commencement of our operations in May 1996, Media
represented less than 25% of our assets and the diversification test was
satisfied. Presently, Media represents approximately 1% of our assets. The
subsequent growth in the value of Media by itself will not re-trigger the test
even if Media represents in excess of 25% of our assets. However, under the
Internal Revenue Code, the test must be reapplied in the event that we make a
subsequent investment in Media, lend to it or acquire another taxicab rooftop
advertising business. If we were to fail a subsequent test, we would lose our
regulated investment company status. As a result, our maintenance of regulated
investment company status could limit our ability to expand our taxicab rooftop
advertising business. It will be our policy to expand our advertising business
through internally generated growth. We will only consider an acquisition in
this area if we will be able to meet the Internal Revenue Code's diversification
requirements.
The fair value of the collateral appreciation participation loan
portfolio at March 31, 2001 was $12.8 million, which represented approximately
3.0% of the total loan portfolio. We will continue to monitor the levels of
these asset types in conjunction with the diversification tests.
We depend on cash flow from our subsidiaries to make dividend payments
and other distributions to our shareholders.
We are a holding company and we derive most of our operating income and
cash flow from our subsidiaries. As a result, we rely heavily upon distributions
from our subsidiaries to generate the funds necessary to make dividend payments
and other distributions to our shareholders. Funds are provided to us by our
subsidiaries through dividends and payments on intercompany indebtedness, but
there can be no assurance that our subsidiaries will be in a position to
continue to make these dividend or debt payments.
We operate in a highly regulated environment.
We are regulated by the Securities Exchange Commission and the SBA. In
addition, changes in the laws or regulations that govern business development
companies, RIC's or SBIC's may significantly affect our business. Laws and
regulations may be changed from time to time, and the interpretations of the
relevant laws and regulations also are subject to change. Any change in the laws
or regulations that govern our business could have a material impact on our
operations or us.
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PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, the Company is subject to legal proceedings and
claims in the ordinary course of business. The Company is not currently aware of
any legal proceedings or claims that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company's
financial position or results of operations.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
Periodically MFC must maintain certain covenants under its Revolver. At
March 31, 2001, MFC was not in compliance with the covenant relating to interest
expense ratios (resulting in similar non-compliance under the Notes and the Loan
Agreement). The Company is presently seeking a waiver under the Revolver which
would cure all such non-compliance under these agreements.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and reports on form 8-K
Exhibits
27. Medallion Financial Corp. Financial Data Schedule. Filed herewith.
29
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, 2001 By: /s/ Larry D. Hall
--------------------------
Larry D. Hall
Corporate Controller
Signing on behalf of the registrant and as principal
financial and accounting officer.
30