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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, 2002
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 13, 2002:
Class Outstanding Par Value Shares Outstanding
----------------- --------- ------------------
Common Stock..............................................................$.01..............18,242,035
================================================================================
1
MEDALLION FINANCIAL CORP.
FORM 10-Q
INDEX
PART I.....................................................................................................................3
FINANCIAL INFORMATION......................................................................................................3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.............................................................................3
CONSOLIDATED STATEMENTS OF OPERATIONS.............................................................................4
CONSOLIDATED BALANCE SHEETS.......................................................................................5
CONSOLIDATED STATEMENTS OF CASH FLOWS.............................................................................6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................................................20
PART II....................................................................................................................42
OTHER INFORMATION..........................................................................................................43
ITEM 1. LEGAL PROCEEDINGS.............................................................................................43
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.....................................................................43
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...............................................................................43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................................43
ITEM 5. OTHER INFORMATION.............................................................................................43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................................................................43
SIGNATURES........................................................................................................44
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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, 2002.
The consolidated balance sheets of the Company as of March 31, 2002,
the related consolidated statements of operations for the three months ended
March 31, 2002, and the consolidated statements of cash flows for the three
months ended March 31, 2002 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 necessary to summarize fairly the
Company's financial position and results of operations. The results of
operations for the three months ended March 31, 2002 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, 2001.
3
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
===================================================================================================
Three Months Ended
March 31,
------------------------------------
2002 2001
===================================================================================================
Interest and dividend income on investments $ 9,675,378 $13,329,179
Interest income on short-term investments 103,534 44,952
-------------------------------------
Total investment income 9,778,912 13,374,131
Notes payable to banks 3,837,435 5,790,472
Senior secured notes 1,057,859 821,864
SBA debentures 861,259 433,172
Commercial paper - 155,529
-------------------------------------
Total interest expense 5,756,553 7,201,037
-------------------------------------
Net interest income 4,022,359 6,173,094
-------------------------------------
Gain on sale of loans 329,627 433,180
Other income 891,345 971,246
-------------------------------------
Total noninterest income 1,220,972 1,404,426
Salaries and benefits 2,344,843 2,677,076
Professional fees 893,238 395,247
Amortization of goodwill - 132,526
Other operating expenses 1,763,536 1,613,992
-------------------------------------
Total operating expenses 5,001,617 4,818,841
-------------------------------------
Net investment income 241,714 2,758,679
-------------------------------------
Net realized losses on investments (699,633) (898,413)
Net change in unrealized (depreciation) appreciation
on investments (950,908) 466,080
-------------------------------------
Net realized/unrealized loss on investments (1,650,541) (432,333)
Income tax provision - 37,117
-------------------------------------
Net increase (decrease) in net assets resulting from ($1,408,827) $ 2,289,229
operations
===================================================================================================
Net increase (decrease) in net assets resulting from operations
per share
Basic ($0.08) $ 0.16
Diluted (0.08) 0.16
===================================================================================================
Weighted average common shares outstanding
Basic 18,242,035 14,571,731
Diluted 18,242,035 14,583,299
===================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
==================================================================================================================
March 31, 2002 December 31, 2001
==================================================================================================================
Assets
Medallion loans $233,312,486 $252,674,634
Commercial loans 197,512,594 199,328,787
Equity investments 4,649,784 3,591,962
-----------------------------------------
Net investments 435,474,864 455,595,383
Investment in and loans to Media 5,815,196 6,658,052
-----------------------------------------
Total investments 441,290,060 462,253,435
=========================================
Cash 32,063,977 25,409,058
Accrued interest receivable 4,177,809 3,989,989
Servicing fee receivable 3,375,163 3,575,079
Fixed assets, net 1,840,418 1,933,918
Goodwill, net 5,007,583 5,007,583
Other assets, net 6,721,164 5,586,720
- ------------------------------------------------------------------------------------------------------------------
Total assets $494,476,174 $507,755,782
==================================================================================================================
Liabilities
Accounts payable and accrued expenses $ 5,545,745 $ 7,105,309
Dividends payable - 1,643,656
Accrued interest payable 2,181,949 2,138,240
Notes payable to banks 219,288,730 233,000,000
Senior secured notes 44,000,000 45,000,000
SBA debentures 49,845,000 43,845,000
=========================================
Total liabilities 320,861,424 332,732,205
- ------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred stock (1,000,000 shares of $0.01 par value stock authorized -
none outstanding) - -
Common stock (50,000,000 shares of $0.01 par value stock authorized -
18,242,035 shares outstanding at March 31, 2002 and December 31, 2001) 182,421 182,421
Capital in excess of par value 184,552,843 184,486,259
Accumulated net investment losses (11,120,514) (9,645,103)
=========================================
Total shareholders' equity 173,614,750 175,023,577
=========================================
Total liabilities and shareholders' equity $494,476,174 $507,755,782
==================================================================================================================
Number of common shares 18,242,035 18,242,035
Net asset value per share $ 9.52 $ 9.59
==================================================================================================================
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,
----------------------------------------
2002 2001
=====================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase (decrease) in net assets resulting from operations ($1,408,827) $ 2,289,229
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by (used in) operating activities:
Depreciation and amortization 159,884 286,145
Amortization of goodwill - 132,526
Amortization of origination costs 375,472 272,453
Increase in unrealized appreciation (depreciation) (562,927) (893,264)
Net realized (gain) loss on investments 699,633 898,413
Net realized (gain) on sales of loans (329,627) (433,180)
Increase in unrealized depreciation 1,513,835 427,184
Increase in valuation of collateral appreciation participation loans - (700,000)
Increase in accrued interest receivable (187,820) (199,287)
Decrease in servicing fee receivable 199,916 277,162
Increase in other assets (1,134,444) (140,776)
Increase (decrease) in accounts payable and accrued expenses (1,559,561) 1,996,713
Increase (decrease) in accrued interest payable 43,709 (1,962,509)
----------------------------------------
Net cash provided by (used in) operating activities (2,190,757) 2,250,809
=====================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Originations of investments (45,074,287) (20,411,200)
Proceeds from sales and maturities of investments 65,012,254 42,265,628
Investment in and loans to Media, net (670,979) (688,128)
Capital expenditures (66,385) (176,178)
----------------------------------------
Net cash provided by investing activities 19,200,603 20,990,122
=====================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) notes payable to banks (13,711,270) 13,770,000
Repayments of commercial paper - (23,302,560)
Proceeds from issuance of SBA debentures 6,000,000 -
Payments of senior secured notes (1,000,000) -
Proceeds from exercise of stock options - 374,000
Issuance of stock - 23,000
Payments of declared dividends to current stockholders (1,643,657) (5,244,281)
----------------------------------------
Net cash used for financing activities (10,354,927) (14,379,841)
=====================================================================================================================
NET INCREASE IN CASH 6,654,919 8,861,090
CASH, beginning of period 25,409,058 15,652,878
----------------------------------------
CASH, end of period $32,063,977 $ 24,513,968
=====================================================================================================================
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 5,047,138 $ 9,163,547
=====================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(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). (See Note 3.)
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. (MCI) which conducts a mezzanine financing business, and
Freshstart Venture Capital Corp. (FSVC), 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
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 FSVC retroactively combined with the Company's financial statements as if
the merger had occurred at the beginning of the earliest period presented. As a
non-investment company, Media cannot be consolidated with the Company, which is
an investment company under the 1940 Act. See 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,
2002 are marketable and non-marketable securities of approximately $1,136,000
and $3,514,000, respectively. At December 31, 2001, the respective balances were
approximately $925,000 and $2,667,000, 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.
7
The Company's investments consist primarily of long-term loans to
persons defined by Small Business Administration (SBA) regulations as socially
or economically disadvantaged, or to entities that are at least 50% owned by
such persons. Approximately 54% and 56% of the Company's loan portfolio at March
31, 2002 and December 31, 2001, respectively, had arisen in connection with the
financing of taxicab medallions, taxicabs, and related assets, of which 80% and
81%, respectively, were 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 finance companies, wholesalers, dry cleaners,
restaurants, and real estate. 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
$29,800,000, of which $20,850,000 were 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 $29,800,000 of the collateral. At March 31, 2002, the loans were carried
at $8,950,000, which represented approximately 2% of the Company's total
investment portfolio. No additional interest income was recorded in the 2002
first quarter, compared to an increase of $700,000 for the 2001 first quarter,
which was reflected in investment income on the consolidated statements of
operations and in accrued interest receivable on the consolidated balance
sheets. 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 of these investments in each accounting period, by relying
upon information such as recent and historical medallion sale prices. The loans
are due in March 2005, but may be prepaid at the borrower's option. If that
occurs, the Company expects to refinance the loans with the existing borrower,
including the syndicated portion, at the rates and terms prevailing at that
time.
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, 2002 and December 31,
2001, total non-accrual loans were approximately $37,212,000 and $35,782,000.
For the quarters ended March 31, 2002 and 2001, the amount of interest income on
non accrual loans that would have been recognized if the loans had been paying
in accordance with their original terms was approximately $1,462,000 and
$702,000.
Loan Sales and Servicing Fee Receivable
The Company currently accounts for its sales of loans in accordance
with Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-
a Replacement of FASB Statement No. 125." SFAS 140 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The principal portion of loans serviced for
others by the Company was approximately $232,327,000 and $226,421,000 at
March 31, 2002 and December 31, 2001.
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 gains are calculated in
accordance with SFAS 140, which requires that the gain on the sale of a portion
of a loan be based on the relative fair values of the loan sold and the loan
retained. The gain on loan sales is due to the differential between the carrying
amount of the portion of loans sold and the sum of the cash received and the
servicing fee receivable. The servicing
8
fee receivable represents the present value of the difference between the
servicing fee received by the Company (generally 100 to 400 basis points) and
the Company's servicing costs and normal profit, after considering the
estimated effects of prepayments and defaults over the life of the servicing
agreement. In connection with calculating the servicing fee receivable, the
Company must make certain assumptions including the cost of servicing a loan
including a normal profit, the estimated life of the underlying loan that will
be serviced, and the discount rate used in the present value calculation. The
Company considers 40 basis points to be its cost plus a normal profit and uses
the note rate plus 100 basis points for loans with an original maturity of ten
years or less and the note rate plus 200 basis points for loans with an
original maturity of greater than ten years as the discount rate. The note rate
is generally the prime rate plus 2.75%.
The servicing fee receivable is amortized as a charge to loan servicing
fee income over the estimated lives of the underlying loans using the effective
interest rate method. The Company reviews the carrying amount of the servicing
fee receivable for possible impairment by stratifying the receivables based on
one or more of the predominant risk characteristics of the underlying financial
assets. The Company has stratified its servicing fee receivable into pools by
period of creation, generally one year, and the term of the loan underlying the
servicing fee receivable. If the estimated present value of the future servicing
income is less than the carrying amount, the Company establishes an impairment
reserve and adjusts future amortization accordingly. If the fair value exceeds
the carrying value, the Company may reduce future amortization. The servicing
fee receivable is carried at the lower of amortized cost or fair value.
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.
During 2001, the Company began to experience an increase in prepayment activity
and delinquencies. These trends continued to worsen during 2001, and as a result
the Company revised its prepayment assumptions on certain loan pools from 15% to
between 25% and 35%. This resulted in a $2,171,000 charge to operations,
increasing the reserve for impairment of the servicing fee receivable during
2001. The prepayment rate of loans may be affected by a variety of economic and
other factors, including prevailing interest rates and the availability of
alternative financing to borrowers.
The activity in the reserve for servicing fee receivable follows:
- ---------------------------------------------------------------------------------------------------------------
Three months ended March 31,
--------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------
Beginning Balance $ 2,376,000 $205,000
Additions - 31,000
- ---------------------------------------------------------------------------------------------------------------
Ending Balance $ 2,376,000 $236,000
===============================================================================================================
Unrealized Appreciation/(Depreciation) and Realized 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 on net investments (which excludes
Media) was $6,938,000 as of March 31, 2002 and $7,501,000 as of December 31,
2001. The Company's investment in Media, as a wholly-owned portfolio investment
company, is also subject to quarterly assessments of its fair value. The Company
uses Media's actual results of operations as the best estimate of changes in
fair value and records the result as a component of unrealized appreciation
(depreciation) on investments.
9
The tables below shows changes in the unrealized depreciation on net
investments during the quarters ended March 31, 2002 and 2001:
=============================================================================================================================
Equity
Loans Investments Total
=============================================================================================================================
Balance, December 31, 2000 ($6,988,790) ($422,577) ($7,411,367)
Change in unrealized
Appreciation on investments - 176,407 176,407
Depreciation on investments (558,159) - (558,159)
Realized
Gains on investments (3,375) (120,389) (123,764)
Losses on investments 1,384,856 - 1,384,856
Other 236,499 240,779 477,278
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 ($5,928,969) ($125,780) ($6,054,749)
- -----------------------------------------------------------------------------------------------------------------------------
=============================================================================================================================
Equity
Loans Investments Total
=============================================================================================================================
Balance, December 31, 2001 ($9,626,304) $2,125,252 ($7,501,052)
Change in unrealized
Appreciation on investments - 757,822 757,822
Depreciation on investments (890,020) - (890,020)
Realized
Gains on investments (1,411) - (1,411)
Losses on investments 696,536 - 696,536
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 ($9,821,199) $2,883,074 ($6,938,125)
=============================================================================================================================
The table below summarizes components of unrealized and realized gains
and losses in the investment portfolio:
===========================================================================================================
Three months ended
---------------------------------------------
March 31, 2002 March 31, 2001
- -----------------------------------------------------------------------------------------------------------
Increase in net unrealized appreciation
(depreciation) on investments
Unrealized appreciation $ 757,822 $ 176,407
Unrealized depreciation (890,020) (558,159)
Unrealized depreciation on Media (1,513,835) (427,184)
Realized gain (1,411) (123,764)
Realized loss 696,536 1,384,856
Other - 13,924
- -----------------------------------------------------------------------------------------------------------
Total $ 950,908 $ 466,080
===========================================================================================================
Net realized gain (loss) on investments
Realized gain $ 1,411 $ 134,121
Realized loss (696,536) (1,032,534)
Direct charge-off (4,508) -
- -----------------------------------------------------------------------------------------------------------
Total ($ 699,633) ($ 898,413)
===========================================================================================================
Goodwill
Cost of purchased businesses in excess of the fair value of net assets
acquired (goodwill) was amortized on a straight-line basis over fifteen years.
Effective January 1, 2002, coincident with the adoption of SFAS #142, the
Company ceased the amortization of goodwill, and engaged a consultant to
evaluate its carrying value. The amount of goodwill amortized to expense in the
2001 first quarter was $133,000. If goodwill had not been amortized for the 2001
first quarter, net increase in net assets resulting from operations would have
been $2,422,000 or $0.17 per share. See Note 7 for additional information
related to the new accounting pronouncement on goodwill.
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation and
amortization, and are depreciated on a straight-line basis over their estimated
useful lives of 5 to 10 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or the estimated economic
useful life of the improvement. Depreciation and amortization expense was
$160,000 and $286,000 for the 2002 and 2001 first quarters, respectively.
10
Deferred Costs
Deferred financing costs, included in other assets, represents costs
associated with obtaining the Company's borrowing facilities, and is amortized
over the lives of the related financing agreements. Amortization expense for the
three months ended March 31, 2002 and March 31, 2001 was approximately $767,000
and $133,000, respectively. In addition, the Company capitalizes certain costs
for transactions in the process of completion, including those for acquisitions
and the sourcing of other financing alternatives. Upon completion or termination
of the transaction, any amounts will be amortized against income over an
appropriate period or capitalized as goodwill. The amounts on the balance sheet
for all of these purposes as of March 31, 2002 and December 31, 2001 were
$3,261,000 and $2,540,000.
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 US 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.
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, 2002 and
2001 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------
March 31, 2002 March 31, 2001
----------------------------------------------------------------------------
Three months ended # of Shares EPS # of Shares EPS
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets ($1,408,827) $2,289,229
resulting from operations
- ------------------------------------------------------------------------------------------------------------------------------
Basic EPS
Income (loss) available to common shareholders (1,408,827) 18,242,035 ($0.08) 2,289,229 14,571,731 $0.16
Effect of dilutive stock options - 11,568
- ------------------------------------------------------------------------------------------------------------------------------
Diluted EPS
Income (loss) available to common shareholders (1,408,827) 18,242,035 ($0.08) 2,289,229 14,583,299 0.16
==============================================================================================================================
Derivatives
In June 1998, the FASB 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. 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 settlements, if any, are recorded as a reduction of
interest expense over the life of the agreements. The amount charged to earnings
was $0 and $102,000 for the 2002 and 2001 first quarters, respectively. The fair
value of the Company's interest rate cap agreement as of March 31, 2002 was $0.
11
Reclassifications
Certain reclassifications have been made to prior period balances to
conform with the current period presentation.
(3) INVESTMENT IN AND LOANS TO MEDIA
The consolidated statements of operations of Media for the three months
ended March 31, 2002 and 2001 were as follows:
- --------------------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------------
2002 2001
======================================================================================
Advertising revenue $1,420,313 $3,355,226
Cost of fleet services 1,699,372 2,066,959
----------------------------------
Gross profit (loss) (279,059) 1,288,267
Other operating expenses 1,879,266 2,038,592
----------------------------------
Loss before taxes (2,158,325) (750,325)
Income tax benefit (644,490) (323,141)
----------------------------------
Net loss ($1,513,835) ($ 427,184)
- --------------------------------------------------------------------------------------
Included in operating expenses for the 2001 first quarter was $32,073
related to amortization of goodwill.
The consolidated balance sheets at March 31, 2002 and December 31, 2001
for Media were as follows:
===================================================================================================================
March 31, December 31,
---------------------------------------
2002 2001
===================================================================================================================
Cash $ 193,007 $ 270,350
Accounts receivable 1,017,993 1,531,183
Equipment, net 2,825,675 3,068,854
Federal income tax receivable 1,750,769 1,106,778
Prepaid signing bonuses 2,689,166 2,890,613
Goodwill 2,086,760 2,086,760
Other 325,006 342,118
---------------------------------------
Total assets $ 10,888,376 $ 11,296,656
- -------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 2,274,249 $ 1,822,386
Deferred revenue 758,797 755,358
Due to Parent 8,417,845 7,697,309
Federal income tax payable 11,981 9,168
Note payable-bank 2,034,967 2,117,462
---------------------------------------
Total liabilities 13,497,839 12,401,683
---------------------------------------
Equity 1,001,000 1,001,000
Retained deficit (3,610,463) (2,106,027)
---------------------------------------
Total equity (2,609,463) (1,105,027)
---------------------------------------
Total liabilities and equity $ 10,888,376 $ 11,296,656
===================================================================================================================
During 2002 and 2001, Media's operations were constrained by a very
difficult advertising environment compounded by the rapid expansions of tops
inventory that occurred during 1999 and 2000. Media began to recognize losses as
growth in operating expenses exceeded growth in revenue. Also, a substantial
portion of Media's revenues in 2001 arose from the realization of amounts that
had been paid for and deferred from prior periods. Media is actively pursuing
new sales opportunities, including expansion and upgrading of the sales force,
and has taken steps to reduce operating expenses, including renegotiation of
fleet payments for advertising rights to better align ongoing revenues and
expenses, and to maximize cash flow from operations. Media's growth prospects
are currently constrained by the operating environment and distressed
advertising market that resulted from September 11th and the economic downturn,
which has resulted in operating losses and a drain on cash flow, as well as the
limitation on funding that can be provided by the Company in accordance with the
terms of the bank agreements. Media has developed an operating plan to fund only
necessary operations out of available cash flow and to escalate its sales
activities to generate new revenues. Although there can be no assurances, Media
and the Company believe that this plan will enable Media to weather this
downturn in the advertising cycle and maintain operations at existing levels
until such times as business returns to historical levels.
12
Also included in 2001 was a $1,500,000 tax provision to establish a
valuation allowance against the future realization of a deferred tax asset that
was recorded in prior periods relating to actual tax payments made for taxable
revenue that had not been recorded for financial reporting purposes, of which
$656,000 was reversed in the 2002 first quarter as a result of changes in the
tax laws. During 2001, primarily as a result of expansion into numerous cities
and the lag associated with selling those taxi tops, Media began to incur losses
for both financial reporting and tax purposes, indicating that this deferred tax
asset now represents a receivable or refund from the tax authorities for those
taxes previously paid. However, due to statutory limitations in 2001 on Media's
ability to carry these tax losses back more than two years, and the
uncertainties concerning the level of Media's taxable income in the future,
Media determined to reserve against the receivable. In March 2002 Congress
passed, and the President signed, an economic stimulus bill that among its
provisions included a carryback provision for five years. As a result, Media
carried back an additional $656,000 in the 2002 first quarter and retains a tax
carryforward of $1,123,000 for the balance of taxes paid.
In July 2001, Media acquired certain assets and assumed certain
liabilities of Medallion Media Japan, Inc. (MMJ), a taxi advertising operation
similar to those operated by Media in the US, which has advertising rights on
approximately 8,000 cabs (1,000 rooftop displays and 7,000 interior racks)
servicing various cities in Japan. The transaction has been accounted for as a
purchase for financial reporting purposes and is included in Media's financial
statements above. The terms of the agreement provide for an earn-out payment to
the sellers based on average net income over the next two and a half years.
(4) COMMERCIAL PAPER, NOTES PAYABLE TO BANKS, AND SENIOR SECURED NOTES
The Company is not in compliance with various covenants under its credit
facilities. As a result, the Company's lenders have the right to accelerate the
payment on $235,146,000 of its indebtedness. The Company is currently
negotiating with its lending group to obtain waivers of default and amendments
to certain terms and covenants, including extensions with regard to the maturity
date and other payment dates. The Company has secured a non-binding term sheet
from the lenders of its bank loans waiving all defaults. The Company is
negotiating terms of a waiver or forbearance with the holders of MFC's senior
secured notes. There can be no assurances that the Company will ultimately sign
the final agreement with its lenders on such waivers and amendments.
Additionally, the Company is currently engaged in discussions, and has received
a proposal from, a nationally known asset based lender to provide a refinancing
for the obligations owed under its secured notes and lines of credit for better
pricing and more flexibility than under its current agreement but there can be
no assurance that such financing will be obtained, the date that it will
obtained or whether the final terms would provide more operating flexibility
than is provided under our current credit agreements. Additionally, the Company
continues to explore alternative financing options and has also received a
non-binding term sheet that would provide the Company with a warehouse facility
for its medallion lending portfolio.
If the Company is unable to (i) obtain an extension of the maturity
date, waivers of default and amendments to certain terms and covenants, (ii)
enter into a forbearance agreement or (iii) obtain favorable replacement
financing, the Company may be required to sell assets in order to make required
payments under its credit facilities. If such sales are required, the Company
believes it could sell assets at or above their current carrying cost; if they
were sold below cost, the Company could incur substantial losses on its
investments that could adversely affect the Company's financial position and
results of operations in the period they were sold. The unaudited financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Borrowings under the revolving credit and senior note agreements are
secured by the assets of the Company. The outstanding balances were as follows
as of March 31, 2002 and December 31, 2001.
- ----------------------------------------------------------------------
Description 2002 2001
- ----------------------------------------------------------------------
Bank loans $219,288,730 $233,000,000
Senior secured notes 44,000,000 45,000,000
- ----------------------------------------------------------------------
Total $263,288,730 $278,000,000
======================================================================
(A) COMMERCIAL PAPER
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. At March 31, 2002 and December 31, 2001, MFC had no
commercial paper outstanding. Commercial paper outstandings were deducted from
the bank loans which acted as a liquidity facility for the commercial paper.
During the 2001 third quarter, the commercial paper program matured and was
terminated.
13
(B) BANK LOANS
We are a party to three financing agreements: 1) the Second Amended and
Restated Loan Agreement, dated as of September 22, 2000, among the Company, MBC
and the parties thereto (the Company Bank Loan); 2) the Amended and Restated
Loan Agreement, dated as of December 24, 1997, as amended, among MFC and the
parties thereto (the MFC Bank Loan); and 3) the Note Purchase Agreements, each
dated as of June 1, 1999, as amended, between the Company and the note
purchasers thereto (the MFC Note Agreements).
The MFC Bank Loan
On March 27, 1992 (and as subsequently amended and restated), MFC
entered into the MFC Bank Loan, a line of credit with a group of banks.
Effective on June 1, 1999, MFC extended the MFC Bank Loan until June 30, 2001
at an aggregate credit commitment amount of $220,000,000, an increase from
$195,000,000 previously, pursuant to the Amended and Restated Loan Agreement
dated December 24, 1997. Amounts available under the MFC Bank Loan were reduced
by amounts outstanding under the commercial paper program as the MFC Bank Loan
acted as a liquidity facility for the commercial paper program. The MFC Bank
Loan was further amended on March 30, 2001, June 30, 2001, December 31, 2001,
and April 1, 2002. As of March 31, 2002 and December 31, 2001, amounts
available under the MFC Bank Loan were $0.
The MFC Bank Loan matures on June 28, 2002. The MFC Bank Loan provides
that each bank shall, if there is no default, extend a term loan equal to its
share of the principal amount outstanding. Maturity of the term notes shall be
the earlier of one year with a two year amortization schedule or any other date
on which it becomes payable in accordance with the MFC Bank Loan Agreement.
Interest and principal payments are paid monthly. Interest is calculated
monthly at either the bank's prime rate or a rate based on the adjusted London
Interbank Offered Rate of interest (LIBOR), at the option of MFC.
Substantially, all promissory notes evidencing MFC's investments are held by a
bank as collateral agent under this agreement. MFC is required to pay an annual
facility fee of 20 basis points on the unused portion of the MFC Bank Loan's
aggregate commitment. Commitment fee expense for the three months ended
March 31, 2002 and 2001 was $22,000 and $13,000. Outstanding borrowings under
the MFC Bank Loan were $148,000,000 at weighted average interest rates of 4.81%
and 4.75% at March 31, 2002 and December 31, 2001, respectively. Average
borrowings outstanding under the MFC Bank Loan were $148,000,000 and
$194,078,000 for the 2002 and 2001 first quarters. MFC is required under the
MFC Bank Loan to maintain minimum tangible net assets of $65,000,000 and
certain financial ratios, as defined therein. The MFC Bank Loan agreement
contains other restrictive covenants, including a limitation of $500,000 for
capital expenditures.
The Company Bank Loan
On July 31, 1998 (and as subsequently amended and restated), the
Company and MBC entered into the Company Bank Loan, a committed revolving credit
agreement with a group of banks. On September 21, 2001, the Company Bank Loan
was extended to November 5, 2001 to allow for continuation of renewal
discussions which were completed and an amendment signed on February 20, 2002.
As of March 31, 2002 and December 31, 2001, amounts available under this loan
agreement were $0 and $25,000,000. The Company's bank loan matured on May 15,
2002.
MFC Note Agreements
See the discussion of the Senior Secured Notes below.
Covenants and Limitations
The Company Bank Loan, MFC Bank Loan, and the MFC Note Agreements contain
substantial limitations on the Company's ability to operate and in some cases
require modifications to our previous normal operations. Under all of the
agreements, if outstanding debt exceeds the borrowing base, as defined in each
agreement, the excess must be repaid within five business days. The agreements,
collectively, also contain financial covenants, including a maximum consolidated
leverage ratio, a maximum combined leverage ratio, minimum EBIT to interest
expense ratio, minimum asset quality ratio, minimum tangible net worth and
maximum losses of Media. The agreements also impose limitations on our ability
to incur liens and indebtedness, merge, consolidate, sell or transfer assets,
loan and invest in third parties and our subsidiaries, repurchase or redeem
stock, purchase portfolios, acquire other entities, amend certain material
agreements, make capital expenditures, have outstanding intercompany receivables
and securitize our assets. They prohibit MFC from (a) paying dividends prior to
July 1, 2002, (b) paying more than $2 million of dividends between July 1, 2002
and September 12, 2002 and (c) paying dividends after September 12, 2002 unless
it certifies that it will be in pro forma compliance with amortization
requirements for the remainder of 2002 after paying the dividend. They prohibit
the Company from paying dividends. Lastly, the agreements limit the amount of
investments we can make in our subsidiaries and the creation of new
subsidiaries. If replacement financing is completed as specified in the letter
of intent that the Company entered into, the Company would not have any of these
restrictions.
14
Amendments to the MFC Bank Loan, Company Bank Loan and MFC Note Agreements
In the fourth quarter of 2001, the Company Bank Loan matured and MFC
was in default under its bank loan and its senior secured notes. As of April 1,
2002, the Company and MFC obtained amendments to their bank loans and senior
secured notes. The amendments, in general, changed the maturity dates of the
loans and notes, modified the interest rates borne on the bank loans and the
secured notes, required certain immediate, scheduled or other prepayments of the
loans and notes and reductions in the commitments under the bank loans and
required the Company and MFC to engage or seek to engage in certain asset sales,
and instituted additional operating restrictions and reporting requirements. As
modified by the amendments, the scheduled amortization on the bank loans and
secured notes is as follows:
Maturity
-----------------------------------------------------------------
Payments Principal
Principal from January Principal Monthly outstanding
outstanding 1, 2002 - outstanding from July at and
at December March 31, at March 31, 2002 - May after June
31, 2001 2002 2002 April, 2002 May, 2002 2003 June, 2003 30, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Medallion Financial $ 85,000,000 $13,711,270 $ 71,288,730 $ 5,000,000 $66,288,730 $ - $ - $-
loans
MFC loans 148,000,000 - $148,000,000 - - 6,166,667 80,166,663 -
MFC loans senior 45,000,000 1,000,000 $ 44,000,000 13,143,125 - 1,285,703 16,714,142 -
secured notes
---------------------------------------------------------------------------------------------------------------
Total $278,000,000 $14,711,270 $263,288,730 $18,143,125 $66,288,730 $7,452,370 $96,880,805 $-
===================================================================================================================================
In addition to the changes in maturity, the interest rates on the
Company's bank loan and MFC's secured notes were increased, and additional fees
were charged to renew and maintain the facilities and notes. The recent
amendments contain substantial limitations on our ability to operate and in some
cases require modifications to our previous normal operations. Covenants
restricting investment in the Media and BLL subsidiaries, elimination of various
intercompany balances between affiliates, limits on the amount and timing of
dividends, and continuation of the prior financial and operating covenants were
all tightened as a condition of renewal.
In addition to imposing maturities and scheduled amortization
requirements, the amendments also instituted various other prepayment
requirements: (a) the Company is required to repay to MFC an intercompany
receivable in excess of $8,000,000 by May 15, 2002, and (b) MFC is required
to use its best efforts to sell a portion its laundromat and dry cleaning loans
in its commercial loan portfolio by May 31, 2002, and its Chicago Yellow Cab
loan portfolio before November 1, 2002. The proceeds from these repayments and
sales must be used to repay MFC's indebtedness. In addition, the amendments
require MFC to further amend the MFC Note Agreements and the MFC Bank Loan to
provide for periodic prepayments of the indebtedness thereunder out of excess
cash flow. While we fully intend to comply with the covenants in recent
amendments, we have failed to comply with similar covenants in our existing
agreements.
Current Status of the MFC Bank Loan, the Company Bank Loan and the MFC
Note Agreements
As of May 15, 2002, the Company's $56,289,000 bank loan matured and the
Company and MFC are in default under the bank loans and the note agreements due
to noncompliance with financial covenants and failure to make the payments due
under the note agreements. The Company and MFC are currently negotiating with
these lenders to amend the agreements or obtain a waiver or forbearance
agreement and the Company has received a non-binding term sheet from the bank
group that would waive all of the noncompliance; however there can be no
assurance that the lenders will grant an amendment, waiver or forbearance.
Unless such amendments or waivers are obtained, the Company's lenders have the
right to accelerate the payment on $178,857,000 of its other indebtedness.
15
New Financing Arrangements
We are currently exploring refinancing options which would replace our
obligations under the Company and MFC loans and the senior secured notes. We
have signed a non-binding preliminary term sheet and are currently engaged in
discussions, and have received a proposal from, a nationally known asset-based
lender to provide a refinancing for the obligations owed under our senior
secured notes and bank loans. The proposed financing would enable the Company to
refinance its existing indebtedness and provide additional capital with longer
maturities, but there can be no assurance that such financing will be obtained,
the date that it will be obtained or whether such financing would provide more
operating flexibility than is provided under our current credit agreements. The
failure to obtain such financing or alternative financing on a timely basis
could have a material adverse effect on the Company. In addition, the Company is
actively pursuing other financing options for individual subsidiaries with
alternate financing sources, and is continuing the ongoing program of loan
participations and sales to provide additional sources of funds for both
external expansion and continuation of internal growth. The Company has also
received a non-binding preliminary proposal from another nationally recognized
lender for a warehouse facility for its medallion leading portfolio. The
Company has also signed a letter of intent with a third lender to refinance a
certain subsidiary of the Company. Furthermore, the Company is considering the
possibility of submitting an application to receive a bank charter, which if
granted, would permit the Company to receive deposits insured by the Federal
Deposit Insurance Corporation. The Company has held meetings with the relevant
regulatory bodies in connection with such an application. There can be no
assurances that such financings will be obtained or that any application related
to a bank charter would be approved.
As a result of the recent amendments to the bank loans and senior
secured notes, the Company's cost of funds will increase in 2002 until the debts
mature and are paid off. As noted above, the amendments entered into during 2002
to the Company's bank loans and senior secured notes involved changes, and in
some cases increases, to the interest rates payable thereunder. In addition,
during events of default, the interest rate borne on the lines of credit is
based upon a margin over the prime rate rather than LIBOR. The bank lines of
credit are priced on a grid depending on leverage. The senior secured notes
adjusted to 8.35% effective April 1, 2002, and thereafter adjust upwards an
additional 50 basis points on a quarterly basis until maturity. In addition to
the interest rate charges, $2,568,000 has been incurred through May 15, 2002 for
attorneys and other professional advisors, most working on behalf of the
lenders, of which $627,000 was expensed during the 2002 first quarter, and
$1,080,000 which will be expensed in the 2002 second quarter, with the balance
expensed over the remaining lives of the related debt outstanding.
Fees
The Company paid amendment fees of $255,000, and MFC paid amendment
fees of $478,000 and is obligated to pay an additional amendment fee on June 28,
2002 equal to 0.20% of the amount committed under the MFC Bank Loan and of the
amount outstanding under the MFC Note Agreements. Additionally, under the MFC
Note Agreements and MFC Bank Loan, MFC is obligated to pay the lenders and note
holders an aggregate monthly fee of $25,000 commencing on June 30, 2002 and
increasing by $25,000 each month.
Interest and Principal Payments
Interest and principal payments are paid monthly. Interest on the bank
loans are calculated monthly at either the bank's prime rate or a rate based on
the adjusted LIBOR rate at the option of the Company. Substantially all
promissory notes evidencing the Company's investments are held by a bank as
collateral agent under the Loan Agreement. The Company is required to pay an
annual facility fee of 20 basis points on the amount of the aggregate
commitment. Commitment fee expense for the three months ended March 31, 2002 and
2001 was $45,000 and $0. Outstanding borrowings under the Loan Agreement were
$71,289,000 and $85,000,000 at a weighted average interest rate of 5.02% and
6.25% at March 31, 2002 and December 31, 2001. The Company is required under the
MFC Bank Loan Agreement to maintain certain levels of medallion loans and
certain financial ratios, as defined therein. The MFC and the Company Bank Loan
Agreement contains other restrictive covenants, including a limitation of
$500,000 and $1,000,000 respectively for capital expenditures per annum.
The weighted average interest rate for the Company's consolidated
outstanding revolver borrowings at March 31, 2002 and December 31, 2001 was
5.02% and 5.80%. During the three months ended March 31, 2002 and 2001, the
Company's weighted average borrowings were $225,217,000 and $316,828,000 with a
weighted average interest rate of 6.90% and 7.41%, respectively.
16
(C) SENIOR SECURED NOTE
On June 1, 1999, MFC issued $22,500,000 million of Series A senior
secured notes that mature on June 30, 2003 and on September 1, 1999, MFC issued
$22,500,000 million of Series B senior secured notes that mature on June 30,
2003 (together, the Notes). Outstanding borrowings were $44,000,000 and
$45,000,000 at March 31, 2002 and December 31, 2001. The Notes bear a fixed rate
of interest of 7.35% and interest is paid monthly in arrears effective with the
amendments described above. The notes reprice quarterly beginning April 1, 2002
to 8.35% and further adjust to 8.85% on July 1, 2002 and increase an additional
50 basis points every quarter to maturity. The Notes rank pari passu with the
bank agreements through inter-creditor agreements and generally are subject to
the same terms, conditions, and covenants as the bank agreements. See also the
discussion of recent amendments in the Bank Loans section above.
(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. Premiums paid under interest rate cap
agreements of $0 and $17,000 were expensed in the three months ended March 31,
2002 and 2001. There are no unamortized premiums on the balance sheet as of
March 31, 2002.
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 the counterparty.
(5) SBA DEBENTURES PAYABLE
Outstanding SBA debentures were as follows:
- ------------------------------------------------------------------------------------------
Due Date March 31, December 31, Interest Rate
2002 2001
- ------------------------------------------------------------------------------------------
September 1, 2011 $17,985,000 $17,985,000 6.77%
June 23, 2012 6,000,000 - 6.34
December 1, 2006 5,500,000 5,500,000 7.08
December 1, 2011 4,500,000 4,500,000 3.38
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
----------------------------------------------------
$49,845,000 $43,845,000 6.55%
===========================================================================================
During 2001, FSVC and MCI were approved by the SBA to receive $36
million each in funding over a period of 5 years. MCI drew down $10,500,000
during June 2001 and $4,500,000 during December, 2001. FSVC drew down
$7,485,000 in July, 2001, $6,000,000 in January 2002, and $3,000,000 in April
2002.
(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 roof top advertising segment sells advertising
space to advertising agencies and companies in several major markets across the
United States and Japan. The Media segment is reported as a portfolio investment
of the Company and 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.
For taxicab advertising, the increase in unrealized appreciation
(depreciation) on the Company's investment in Media represents Media's net
income or loss, which the Company uses as the basis for assessing the fair
Market Value of Media.
17
(7) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has adopted SFAS
No.141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible
Assets" which the Company adopted January 1, 2002, as required. The new
standards prohibit pooling accounting for mergers and requires the use of the
purchase method of accounting for all prospective acquisitions, which requires
that all assets acquired and liabilities assumed in a business combination be
recorded at fair value with any excess amounts recorded as goodwill. The
standards further require that amortization of all goodwill cease, and in lieu
of amortization, goodwill must be evaluated for impairment in each reporting
period. Management has not yet determined the impact, if any, upon adoption of
the new pronouncement, other than that the Company has no separately
identifiable intangible assets. Management intends to evaluate its goodwill for
impairment quarterly beginning in 2002, and has engaged a consulting firm to
determine the valuation which is expected to be completed by June 30, 2002. Any
impact on the financial conditions or results operations of the Company will be
retroactively recorded effective with the adoption date of January 1, 2002. At
March 31, 2002, the Company had $5,008,000 of goodwill on its consolidated
balance sheet and $2,087,000 recorded on the balance sheet of Media, its
wholly-owned subsidiary that is subject to the asset impairment review required
by SFAS 142.
(8) OTHER INCOME AND OTHER OPERATING EXPENSES
The major components of other income for the three months ended March
31 were as follows:
- ------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------
Late charges and prepayment penalties $337,361 $339,833
Servicing fee income 229,389 213,200
Accretion of discount 173,991 70,673
Other 150,604 347,540
-----------------------------
Total other income $891,345 $971,246
==============================================================================
The major components of other operating expenses for the three months
ended March 31 were as follows:
- ------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------
Rent expense $ 249,151 $ 255,826
Office expense 193,079 95,122
Travel, meals, and entertainment 175,702 146,299
Depreciation and amortization 159,884 286,151
Insurance 149,074 70,481
Computer expense 70,915 123,878
Telephone 54,413 57,018
Temporary help 51,176 107,836
Bank charges 50,235 22,592
Advertising, marketing and public relations 14,126 66,323
Other expenses 595,781 382,466
-----------------------------
Total operating expenses $1,763,536 $1,613,992
==============================================================================
18
(9) SELECTED FINANCIAL RATIOS AND OTHER DATA
The following table provides selected financial ratios and other data
for the three month periods ended as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Mar 31, Dec 31, Sept 30, Jun 30, Mar 31,
2002 2001 2001 2001 2001
---------------------------------------------------------------------
Net Share Data:
Net asset value at the beginning of the period $ 9.59 $ 9.67 $ 10.32 $ 10.32 $ 10.16
Net investment income (loss) (0.02) 0.09 (0.23) 0.13 0.19
Realized gain (loss) on investments (0.04) (0.03) (0.05) (0.03) (0.06)
Net unrealized appreciation (depreciation) on investments (0.05) (0.05) (0.22) 0.03 0.03
---------------------------------------------------------------------
Increase (decrease) in shareholders' equity from operations (0.07) 0.01 (0.50) 0.13 0.16
Issuance of common stock 0.00 0.00 0.00 0.01 0.00
Distribution of net investment income 0.00 (0.09) (0.15) (0.11) 0.00
---------------------------------------------------------------------
Net asset value at the end of the period $ 9.52 $ 9.59 $ 9.67 $ 10.32 $ 10.32
- -----------------------------------------------------------------------------------------------------------------------------------
Per share market value at beginning of period $ 7.90 $ 8.25 $ 10.25 $ 10.13 $ 14.63
Per share market value at end of period 7.77 7.90 8.25 10.25 10.13
Total return /(1)/ (1.65%) (43.89%) (28.27%) (23.83%) (30.74%)
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio/Supplemental Data
Average net assets at the end of the period (in thousands) $173,615 $175,024 $ 176,397 $187,561 $150,419
Ratio of operating expenses to average net assets 0.87% 2.57% 2.75% 2.02% 3.23%
Ratio of net investment income (loss) to average net assets (72.98%) 0.78% (3.22%) 1.54% 1.56%
===================================================================================================================================
/(1)/ Total return is calculated by comparing the change in value of a share
of common stock assuming the reinvestment of dividends on the payment
date.
----------------------------------------------------------------------------
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements and the notes to those statements and other financial
information appearing elsewhere in this report.
This report contains forward-looking statements relating to future
events and future performance of the Company within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of The Securities Exchange Act of
1934, including, without limitation, statements regarding the Company's
expectations, beliefs, intentions or future strategies that are signified by the
words "expects," "anticipates," "intends," "believes" or similar language.
Actual results could differ materially from those anticipated in such
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any forward-looking statements.
The Company cautions investors that its business and financial performance are
subject to substantial risks and uncertainties.
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 11% and our
commercial loan portfolio at a compound annual growth rate of 30%. Our total
assets under our management were approximately $735,693,000 and have grown from
$215,000,000 at the end of 1996, a compound annual growth rate of 23%.
The Company's loan related earnings depend primarily on its level of
net interest income. Net interest income is the difference between the total
yield on the Company's loan portfolio and the average cost of funds. The Company
funds its operations through a wide variety of interest-bearing sources, such as
revolving bank facilities, senior secured notes, and debentures issued to and
guaranteed by the SBA. Net interest income fluctuates with changes in the yield
on the Company'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 by the Company. 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 the Company's lending
activities. The Company, like other financial institutions, is subject to
interest rate risk to the degree that its interest-earning assets reprice on a
different basis than its interest-bearing liabilities.
The Company also invests in small businesses in selected industries
through its subsidiary MCI. MCI'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.
The Company's investment in Media, as a wholly-owned portfolio
investment company, is also subject to quarterly assessments of its fair value.
The Company uses Media's actual results of operations as the best estimate of
changes in fair value and records the result as a component of unrealized
appreciation (depreciation) on investments.
TREND IN LOAN PORTFOLIO
The Company'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
20
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 the Company's investments at fair value and the
weighted average portfolio yields calculated using the contractual interest
rates of the loans at the dates indicated (assuming continuity of operations,
realization of assets and satisfaction of liabilities in the normal course of
business):
============================================================================================================================
March 31, 2002 December 31, 2001 March 31, 2001
% of Interest Principal % of Interest Principal % of Interest Principal
Portfolio Rate Balance Portfolio Rate Balance Portfolio Rate Balance
============================================================================================================================
Medallion Loans
New York 42.2% 8.04% $ 187,409 44.4% 8.48% $ 205,598 45.5% 8.66% $ 226,191
Chicago 4.8 10.02 21,171 4.5 9.86 20,910 5.0 10.38 24,825
Boston 2.6 11.80 11,327 2.8 11.41 13,170 3.1 11.16 15,612
Newark 1.7 9.83 7,344 1.3 10.33 6,208 2.0 11.54 9,783
Cambridge 0.3 10.99 1,374 0.4 11.66 1,718 0.4 11.78 1,742
Other 1.3 11.49 5,798 1.4 11.30 6,548 1.3 11.42 6,477
-------- ------------ --------- ------------ -------- ------------
Total Medallion Loans 52.9% 8.56% 234,423 54.89% 8.88 254,152 57.3% 9.12 284,630
------------------- ------------------- -------------------
Add: FASB 91 671 541 712
Less: Reserve (1,782) (2,019) -
--------------- -------------- ------------
Medallion Loans, net 53.6% $ 233,312 55.5% $ 252,674 57.9% $ 285,342
============================================================================================================================
Commercial Loans
7 a Loans 11.9 7.96 52,860 12.2 5.73 56,702 12.2 11.05 60,573
Asset based receivable 11.5 8.89 50,719 11.6 9.20 53,955 8.2 12.06 40,611
Mezzanine loans 9.1 12.75 40,372 7.8 12.77 36,313 5.4 13.25 26,716
Commercial Secured 14.2 9.82 62,694 13.1 10.38 60,773 16.6 11.74 82,437
-------- ------------ --------- ----------- --------- ------------
Total Commercial Loans 46.7% 9.69 206,645 44.8% 9.22 207,743 42.3% 11.80 210,338
------------------- ------------------- -------------------
Add: FASB 91 1,271 1,608 974
Less: Discount on Loans Sold (2,363) (2,415) -
Less: Reserve (8,040) (7,607) (5,929)
--------------- -------------- ------------
Commercial loans, net 45.4% $ 197,513 43.8% $ 199,329 41.7% $ 205,383
============================================================================================================================
Equity Investments 0.4% 0.00% $ 1,767 0.3% $ 1,467 0.4% 0.00% $ 1,855
--------------------------------------------------------------------------------------------------
Plus: Unrealized depreciation 2,883 2,125 (125)
--------------- -------------- ------------
Net Equity Investments $ 4,650 $ 3,592 $ 1,730
============================================================================================================================
Total investments at cost 100.0% 9.09% $ 442,835 100% 9.04% $ 463,362 100% 10.26% $ 496,823
Add: FASB 91 1,942 2,149 1,686
Plus: Unrealized (depreciation)
appreciation 2,883 2,125 (125)
Less: Discount on Loans Sold (2,363) (2,415) -
Less: Reserve (9,822) (9,626) (5,929)
- ----------------------------------------------------------------------------------------------------------------------------
Total investments, net $ 435,475 $ 455,595 $ 492,455
============================================================================================================================
21
INVESTMENT ACTIVITY
The following table sets forth the components of activity in the net
investment portfolios for the period indicated:
- -----------------------------------------------------------------------------------------------------
Three months ended March 31,
-------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------
Net investments at beginning of period $455,595,383 $514,153,606
Investments originated 45,074,287 20,411,200
Sales and maturities of investments (65,012,255) (42,265,628)
Increase in unrealized appreciation, net 562,927 893,264
Realized losses, net (699,633) (898,413)
Realized gain on sales of loans 329,627 433,180
Amortization of origination costs (375,472) (272,453)
-------------------------------------------
Net decrease in investments (20,120,519) (21,698,850)
-------------------------------------------
Net investments at end of period $435,474,864 $492,454,756
- -----------------------------------------------------------------------------------------------------
PORTFOLIO SUMMARY
Total Portfolio Yield
The weighted average yield of the total portfolio at March 31, 2002 was
9.09%, which is an increase of 5 basis points from 9.04% at year end and down
117 basis points from 10.26% at March 31, 2001. The decreases primarily reflect
the reductions in the general level of interest rates in the economy,
demonstrated by the reduction in the prime rate from 9.5% to 4.75% during the
course of 2001.
Medallion Loan Portfolio
The Company's medallion loans comprised 54% of the total portfolio of
$435,475,000 at March 31, 2002, compared to 55% of the total portfolio of
$455,595,000 at December 31, 2001 and 58% of the total portfolio of $492,455,000
at March 31, 2001. The medallion loan portfolio decreased by $19,362,000 or 8%
in the quarter, reflecting a decrease in medallion loan originations,
principally in New York City, Chicago, and Boston, and the Company's execution
of participation agreements with third parties for $4,090,000 of low yielding
New York medallion loans. The Company 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,
2002 was 8.56%, a decrease of 32 basis points from 8.88% at December 31, 2001,
and 56 basis points from 9.12% at March 31, 2001. The decrease in yields at
March 31, 2002 reflects the generally lower level of rates in the economy. At
March 31, 2002, 20% of the medallion loan portfolio represented loans outside
New York, compared to 19% at year-end 2001 and 21% 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, the Company originated collateral
appreciation participation loans collateralized by Chicago taxi medallions of
$29,800,000, of which $20,850,000 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 $29,800,000 of the collateral. At March 31, 2002, the loans were carried
at $8,950,000, which represented approximately 2% of the Company's total
investment portfolio. No additional interest income was recorded in 2002,
compared to an increase of $700,000 for 2001 which is reflected in investment
income on the consolidated statements of operations and in accrued interest
receivable on the consolidated balance sheets. 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 in each accounting period, by relying upon information such as
recent and historical medallion sale prices. The loans are due in March 2005,
but may be prepaid at the borrower's option. If that occurs, the Company expects
to refinance the loans with the existing borrower, including the syndicated
portion, at the rates and terms prevailing at that time.
Commercial Loan Portfolio
Since 1997, the Company 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 45% of the total
portfolio at March 31, 2001, respectively compared to a year ago. The commercial
loan portfolio continued to experience strong growth in the asset-based lending
portfolio and the mezzanine financing business, which was more than offset by
the decline in the other commercial lending segments. The overall decline in the
commercial lending business reflects the slowdown in organizations due to
constraints
22
2002 compared to 44% and 42% at December 31, 2001 and March 31, 2001,
respectively. Compared to a year ago, the commercial loan portfolio continued to
experience strong growth in the asset-based lending portfolio and the mezzanine
financing business, which was more than offset by the decline in the other
commercial lending segments. The overall decline in the commercial lending
business reflects the slowdown in originations due to liquidity constraints.
The weighted average yield of the commercial loan portfolio at March
31, 2002 was 9.69%, an increase of 47 basis points from 9.22% at December 31,
2001, and a decrease of 211 basis points from 11.80% at March 31, 2001. The
decrease compared to prior years first quarters 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, which fell 475 basis
points during 2001 after rising for much of 2000. The Company 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, 2002, floating-rate loans represented approximately 66% of the commercial
portfolio compared to 68% and 69% December 31, 2001 and March 31, 2001,
respectively. 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.
Delinquency Trends
The following table shows the trend in loans 90 days or more past due:
- --------------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001 March 31, 2001
----------------------------------------------------------------
in thousands $ %/(1)/ $ %/(1)/ $ %/(1)/
- --------------------------------------------------------------------------------------------------------
Medallion loans $ 9,339 2.1% $12,352 2.7% $11,139 2.3%
- --------------------------------------------------------------------------------------------------------
Commercial loans
SBA Section 7(a) loans 11,934 2.7 12,637 2.7 10,838 2.2
Secured mezzanine 10,297 2.4 8,426 1.9 2,987 0.6
Asset-based receivable - 0.0 - 0.0 - 0.0
Other commercial secured loans 9,941 2.3 10,000 2.2 6,896 1.4
----------------------------------------------------------------
Total commercial loans 32,172 7.4% 31,063 6.8% 20,721 4.2%
- --------------------------------------------------------------------------------------------------------
Total loans 90 days or more past due $ 41,511 9.5% $43,415 9.5% $31,860 6.4%
- --------------------------------------------------------------------------------------------------------
/(1)/ Percentage is calculated against the total investment portfolio.
The decrease in medallion delinquencies primarily represents improvements
as the events of September 11, 2001 have receded and business for many fleet
owners and individual drivers has begun to normalize and return to more normal
patterns of delinquencies. The increase in medallion loan delinquencies at year
end resulted partially from the impact of the events of September 11, 2001 on
the New York City taxicab fleet. The shutdown of New York City impacted the cash
flow of a number of borrowers which we proactively worked with to modify
payments due over a 2-4 month period to ease the borrowers' short-term cash flow
shortfalls. The increase in delinquencies in the SBA Section 7(a) portfolio
compared to a year ago primarily reflects the deterioration in the economy and
its impact on the small businesses which constitute the majority of this
portfolio. In addition, this business segment has undergone management changes
and staffing losses which exacerbated the situation. The Company has addressed
these concerns by stabilizing management of the portfolio and refocusing
collection efforts. Included in the SBA Section 7(a) delinquency figures are
$4,481,000, $5,407,000, and $5,391,000 at March 31, 2002, December 31, 2001, and
March 31, 2001, respectively, which represent loans repurchased for the purpose
of collecting on the SBA guarantee. Likewise, the increase in secured mezzanine
financing primarily reflects the impact of the economy, and September 11th on
certain concession and media properties which is believed to be of temporary
nature. The increase in other commercial secured delinquencies compared to a
year ago was largely concentrated in one large restaurant borrower and a number
of smaller credits, some of which were impacted by the events of September 11,
2001, and the overall deterioration in the economy. The Company is actively
working with each delinquent borrower to bring them current, and believes that
any potential loss exposure is reflected in the Company's mark-to-market
estimates on each loan. Although there can be no assurances as to changes in the
trend rate, management believes that any loss exposures are properly reflected
in reported asset values.
23
The following table presents credit-related information for the net investment
portfolio as of March 31:
- -------------------------------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------------------------
Total loans
Medallion loans $ 233,312,486 $285,341,498
Commercial loans 197,512,594 205,383,714
------------------ ----------------
Total loans 430,825,080 490,725,212
Equity investments/(1)/ 4,649,784 $1,729,544
------------------ ----------------
Total loans and equity investments $ 435,474,864 $492,454,756
- -------------------------------------------------------------------------------------------------------------------
Realized losses (gains) on loans and equity investments
Medallion loans $ 28,649 $ -
Commercial loans 670,984 1,025,081
------------------ ----------------
Total loans 699,633 1,025,081
Equity investments - (126,668)
------------------ ----------------
Total realized losses (gains) on loans and equity investments $ 699,633 $ 898,413
- -------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation (appreciation) on investments
Medallion loans $ 1,141,247 $ -
Commercial loans 8,679,952 5,928,969
------------------ ----------------
Total loans 9,821,199 5,928,969
Equity investments (2,883,074) 125,780
------------------ ----------------
Total net unrealized depreciation (appreciation) on investments $ 6,938,125 $ 6,054,749
- -------------------------------------------------------------------------------------------------------------------
Realized losses (gains) as a % of average balance outstanding/(2)/
Medallion loans 0.05% 0.00%
Commercial loans 1.37 1.99
Total loans 0.64 0.83
Equity investments 0.00 (25.12)
Net investments 0.64 0.73%
- -------------------------------------------------------------------------------------------------------------------
Unrealized depreciation (appreciation) as a % of balance outstanding
Medallion loans 0.49% 0.00%
Commercial loans 4.39 2.89
Total loans 2.28 1.21
Equity investments (62.00) 7.27
Net investments 1.59 1.23
- -------------------------------------------------------------------------------------------------------------------
/1)/ Represents common stock and warrants held as investments.
/2)/ Realized losses (gains) as a % of average balance outstanding has been
annualized.
- -------------------------------------------------------------------------------
Equity Investments
Equity investments were 0.4%, 0.3%, and 0.4% of the Company's total
portfolio at March 31, 2002, December 31, 2001, and March 31, 2001. Equity
investments are comprised of common stock and warrants.
Trend in Interest Expense
The Company'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, fixed-rate, long-term debentures issued to or guaranteed by the
SBA, and, to a lesser degree, secured commercial paper. As a result of the
recent amendments to the bank lines of credit and senior secured notes, the
Company's cost of funds will increase in 2002 until the debts mature and are
paid off. As noted below, the amendments entered into during 2002 to the
Company's bank loans and senior secured notes involved changes, and in some
cases increases, to the interest rates payable thereunder. In addition, during
events of default, the interest rate borne on the bank loans is based upon a
margin over the prime rate rather than LIBOR. The bank loans are priced on a
grid depending on leverage and were 3.25% for the Company and 6.25% for MFC as
of May 15, 2002. The senior secured notes adjusted to 8.35% effective March 29,
2002, and thereafter adjust upwards an additional 50 basis points on a quarterly
basis until maturity. In addition to the interest rate charges, $2,568,000 has
been incurred through May 15, 2002 for attorneys and other professional
advisors, most working on behalf of the lenders, of which $627,000 was expensed
during the 2002 first quarter, and $1,080,000 which will be expensed in the 2002
second quarter, with the balance to be expensed over the remaining lives of the
related debt outstanding.
The Company'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. The Company incurs LIBOR-based debt for terms
generally ranging from 30-90 days. The Company's debentures issued to the SBA
typically have initial terms of ten years. The Company measures its cost of
funds as its aggregate interest expense for all of its interest-bearing
liabilities divided by
24
the average amount of such liabilities outstanding during the period. The
following table shows the average borrowings and related costs of funds for the
three months ended March 31, 2002, December 31, 2001 and March 31, 2001. Average
balances have declined during 2001, primarily reflecting the initial use of the
equity proceeds raised during 2001 for debt reductions and the growth in
participations sold to other financial institutions to raise capital for debt
reductions and other corporate purposes. The decline in the costs of funds
reflects the trend of declining interest rates in the economy, partially offset
by the switch from lower cost commercial paper to higher cost bank debt and
related renewal expenses, and additional long-term SBA debt also at higher
rates.
=======================================================================================================
Percentage
of Total
Average Average Interest Interest
Balance Cost of Funds Expense Expense
- -------------------------------------------------------------------------------------------------------
March 31, 2002
Notes payable to banks $ 225,216,548 6.90% $ 3,831,185 66.6%
Senior secured notes 44,500,000 9.64 1,057,859 18.4
SBA debentures 48,345,000 7.22 861,260 15.0
Commercial paper - - 6,249 -
---------------- ------------------------------
Total $ 318,061,548 7.34 $ 5,756,553 100.0%
=======================================================================================================
December 31, 2001
Notes payable to banks $ 245,725,000 6.16% $ 3,816,548 70.2%
Senior secured notes 45,000,000 7.37 836,490 15.4
SBA debentures 40,470,000 7.54 769,105 14.2
Commercial paper - - 14,583 0.2
---------------- ------------------------------
Total $ 331,195,000 6.51 $ 5,436,726 100.0%
=======================================================================================================
March 31, 2001
Notes payable to banks $ 316,827,500 7.41% $ 5,790,472 80.4%
Commercial paper 8,002,554 7.88 155,529 2.2
SBA debentures 21,360,000 8.22 433,172 6.0
Senior secured notes 45,000,000 7.41 821,864 11.4
---------------- ------------------------------
Total $ 391,190,054 7.47 $ 7,201,037 100.0%
=======================================================================================================
The Company 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. The Company uses SBA funding to fund loans
that qualify under the SBIA and SBA regulations. Further, the Company believes
that its transition to financing operations primarily with short-term
LIBOR-based secured bank debt has generally decreased its interest expense, but
has also increased the Company's exposure to the risk of increases in market
interest rates, which the Company mitigates with certain hedging strategies. At
March 31, 2002, December 31, 2001 and March 31, 2001, short-term LIBOR-based
debt including commercial paper constituted 70%, 70%, and 83% of total debt,
respectively.
Taxicab Advertising
In addition to its finance business, the Company also conducts a
taxicab rooftop advertising business through Media, which began operations in
November 1994. Media's revenue is affected by: the number of taxicab rooftop
advertising displays, currently showing advertisements, and the rate charged
customers for those displays. At March 31, 2002, Media had approximately 10,300
installed displays in the US. Although Media is a wholly-owned subsidiary of the
Company, its results of operations are not consolidated with the Company's
operations because the Securities and Exchange Commission regulations prohibit
the consolidation of non-investment companies with investment companies.
During 2002 and 2001, Media's operations were constrained by a very
difficult advertising environment compounded by the rapid expansions of tops
inventory that occurred during 1999 and 2000. Media began to recognize losses as
growth in operating expenses exceeded growth in revenue. Also, a substantial
portion of Media's revenues in 2001 arose from the realization of amounts that
had been paid for and deferred from prior periods. Media is actively pursuing
new sales opportunities, including expansion and upgrading of the sales force,
and has taken steps to reduce operating expenses, including renegotiation of
fleet payments for advertising rights, to better align ongoing revenues and
expenses, and to maximize cash flow from operations. Media's growth prospects
are currently constrained by the operating environment and distressed
advertising market that resulted from September 11th and the economic downturn,
as well as the limitation on funding that can be provided by the Company in
accordance with the terms of the bank agreements. Media has developed an
operating plan to fund only necessary operations out of available cash flow and
to escalate its sales activities to generate new revenues. Although there can be
no assurances, Media and the
25
Company believe that this plan will enable Media to weather this downturn in the
advertising cycle and maintain operations at existing levels until such times as
business returns to historical levels.
Also included in 2001 was a $1,500,000 tax provision to establish a
valuation allowance against the future realization of a deferred tax asset that
was recorded in prior periods relating to actual tax payments made for taxable
revenue that had not been recorded for financial reporting purposes. During
2001, primarily as a result of expansion into numerous cities and the lag
associated with selling those taxi tops, Media began to incur losses for both
financial reporting and tax purposes, indicating that this deferred tax asset
now represents a receivable or refund from the tax authorities for those taxes
previously paid. However, due to statutory limitations on Media's ability to
carry these tax losses back more than two years, and the uncertainties
concerning the level of Media's taxable income in the future, Media determined
to reserve against the receivable. In March 2002 Congress passed, and the
President signed, an economic stimulus bill that among its provisions included a
carryback provision for five years. As a result, Media will be able to carryback
an additional $656,000 in 2002 and retains a tax carryforward of $1,123,000 for
the balance of taxes paid.
In July 2001, Media acquired certain assets and assumed certain
liabilities of MMJ, a taxi advertising operation similar to those operated by
Media in the US, which has advertising rights on approximately 7,000 cabs (1,000
rooftop displays and 6,000 interior racks) servicing various cities in Japan.
The terms of the agreement provide for an earn-out payment to the sellers based
on average net income over the next three years.
Factors Affecting Net Assets
Factors that affect the Company'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 the Company's estimate of the fair value of its investment portfolio is
above or below the previously established fair value or the cost basis of the
portfolio. Under the 1940 Act and the SBIA, the Company's loan portfolio and
other investments must be recorded at fair value.
Unlike certain lending institutions, the Company is not permitted to
establish reserves for loan losses, but adjusts quarterly the valuation of our
loan portfolio to reflect the Company's estimate of the current value of the
total loan portfolio. Since no ready market exists for the Company's loans, fair
value is subject to the good faith determination of the Company. In determining
such fair value, the Company and its Board of Directors take 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 the Company is reflected in net unrealized depreciation or
appreciation of investments and affects net increase in net assets resulting
from operations but has no impact on net investment income or distributable
income.
The Company's investment in Media, as a wholly-owned portfolio
investment company, is also subject to quarterly assessments of its fair value.
The Company uses Media's actual results of operations as the best estimate of
changes in fair value and records the result as a component of unrealized
appreciation (depreciation) on investments.
26
SELECTED FINANCIAL DATA
Summary Consolidated Financial Data
You should read the consolidated financial information below with the
Consolidated Financial Statements and Notes thereto for the quarters ended March
31, 2002 and 2001.
======================================================================================================================
Three Months
Ended March 31,
--------------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Statement of Operations Data
Investment income $ 9,778,912 $ 13,374,131
Interest expense 5,756,553 7,201,037
-------------------------------------
Net interest income 4,022,359 6,173,094
Other income 891,345 971,246
Gain on sale of loans 329,627 433,180
Accretion of negative goodwill
Operating expenses 5,001,617 4,686,315
Amortization of goodwill - 132,526
Income tax provision - 37,117
-------------------------------------
Net investment income 241,714 2,758,679
-------------------------------------
Net realized losses on investments (699,633) (898,413)
Net change in unrealized appreciation (depreciation) of investments /(1)/ (950,908) 466,080
-------------------------------------
Net increase (decrease) in net assets resulting from operations /(2)/ $ (1,408,827) $ 2,289,229
=====================================================================================================================
Per Share Data
$ (0.07) $ 0.16
Net investment income (loss)
Net increase (decrease) in net assets resulting from operations (0.08) 0.16
=====================================================================================================================
Weighted average common shares outstanding
Basic $ 18,242,035 $ 14,571,731
Diluted $ 18,242,035 $ 14,583,299
=====================================================================================================================
Balance Sheet Data
Investments, net of unrealized depreciation on investments $ 435,474,864 $ 492,454,756
Total assets 494,476,174 548,658,593
Notes payable 219,288,730 319,470,000
Senior secured notes 44,000,000 45,000,000
Subordinated SBA debentures 49,845,000 21,360,000
Commercial paper - 763,708
Total liabilities 320,861,427 398,239,313
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 173,614,750 $ 150,419,280
=====================================================================================================================
27
=====================================================================================================================
Three Months Ended March 31,
-------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios And Other Data
Return on average assets /(3)/
Net investment income (loss) (0.25%) 0.41%
Net increase (decrease) in net assets resulting from operations (0.28) 0.41
Return on average equity /(4)/
Net investment income (loss) (0.73) 1.54
Net increase (decrease) in net assets resulting from operations (0.81) 1.54
=====================================================================================================================
Weighted average yield 8.78% 10.77%
Weighted average cost of funds 5.17 5.80
Net interest margin, /(5)/ 3.61 4.97
Other income ratio /(6)/ 0.20 0.19
Operating expense ratio /(7)/ 1.00 0.84
As a percentage of total investment portfolio
Medallion loans 53.58% 57.94%
Commercial loans 45.36 41.71
Equity investments 1.06 0.35
=====================================================================================================================
Investments to assets /(8)/ 88.07% 89.76%
Equity to assets /(9)/ 35.66 27.42
Debt to equity /(10)/ 177.60 257.01
=====================================================================================================================
/(1)/ Change in unrealized appreciation (depreciation) of investments
represents the increase (decrease) for the period in the fair value of
the Company's investments, including the results of operations for
Media for the periods presented.
/(2)/ Net increase in net assets resulting from operations is the sum of net
investment income, realized gains or losses on investments and change
in unrealized appreciation (depreciation) on investments.
/(3)/ Return on average assets represents the net investment income (loss) or
net increase (decrease) in net assets resulting from operations, for
the period indicated, divided by average total assets.
/(4)/ Return on average equity represents the net investment income (loss) or
net increase (decrease) in net assets resulting from operations, for
the period indicated, divided by average shareholders' equity.
/(5)/ Net interest margin represents weighted average yield less weighted
average cost of funds.
/(6)/ Other income ratio represents other income for the year indicated,
divided by average interest earning assets.
/(7)/ Operating expense ratio represents operating expenses for the year
indicated, divided by average interest earning assets.
/(8)/ Represents total investments divided by total assets as of March 31.
/(9)/ Represents total shareholders' equity divided by total assets as of
March 31.
/(10)/ Represents total debt (commercial paper, notes payable to banks, senior
secured notes, and SBA debentures payable) divided by total
shareholders' equity as of March 31.
28
CONSOLIDATED RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
Net assets resulting from operations of ($1,409,000) or ($0.08) per
common share in the 2002 first quarter, decreased $3,698,000 from $2,289,000 or
$0.16 per share in the 2001 first quarter, primarily reflecting decreased net
interest income and increased losses in Media. Net investment income after taxes
was $242,000 in the quarter, down $2,517,000 from net investment
income of $2,759,000 in the 2001 first quarter.
Investment income was $9,779,000 in the 2002 first quarter, down
$3,595,000 or 27% from $13,374,000 in the 2001 first quarter, primarily
reflecting the lower yields on the portfolio primarily due to the lower interest
rate environment and a higher level of nonaccrual loans, a decreased level of
loans, and $700,000 included in the 2001 quarter for appreciation on the
collateral appreciation participation loans. Total net investments at quarter
end were $435,475,000, down $56,980,000 or 12% from $492,455,000 in the year ago
quarter.
The yield on the total portfolio for the 2002 quarter was 8.78%,
compared to 10.77% for the 2001 quarter, a decline of 199 basis points. The
decrease primarily reflected the series of rate drops initiated by the Federal
Reserve bank during late 2000 and continuing through 2001, which reduced the
prime lending rate by 475 basis points, and by the $700,000 of additional
interest income related to the collateral appreciation loans recorded in the
2001 quarter. Adjusted for the effect of the additional income recorded on the
collateral appreciation participation loans, the yield was 10.21% for the 2001
quarter, 143 basis points higher than the 2002 first quarter. Partially
offsetting the decreased yield was the continuing movement of portfolio
composition towards higher-yielding commercial loans from lower-yielding
medallion loans, partially as a result of the continued efforts at participating
or selling off medallion loans, and their generally shorter maturity profile.
Commercial loans represented 47% of the investment portfolio at March 31, 2002,
compared to 42% at March 31, 2001. Yields on medallion loans were 8.56% at
quarter end, compared to 9.12% a year ago, and yields on commercial loans were
9.69% compared to 11.80% for the 2001 period.
Medallion loans were $233,312,000 at quarter end, down $52,030,000 or
18% from $285,342,000 at the end of the 2001 first quarter, reflecting
reductions in all markets. The commercial loan portfolio was $197,513,000 at
quarter end, compared to $205,383,000 for the 2001 quarter, a decrease of
$7,870,000 or 4%, reflecting increases in mezzanine financing, up $13,656,000 or
51%, and asset-based receivable lending, up $10,108,000 or 25%, which were more
than offset by reductions in all other commercial lending categories. In
general, the decrease in the loan portfolios was a result of the bank lenders
requiring the Company to reduce the level of outstandings in the revolving lines
of credit.
During the 2000 first half, the Company originated collateral
appreciation participation loans collateralized by Chicago taxi medallions of
$29,800,000, of which $20,850,000 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 $29,800,000 of the collateral. During the 2002 first quarter, $0
additional interest income was recorded, compared to $700,000 for the 2001 first
quarter, which was reflected in investment income on the consolidated statements
of operations and in accrued interest receivable on the consolidated balance
sheets.
Interest expense was $5,757,000 in the 2002 first quarter, down
$1,444,000 or 20% from $7,201,000 in the 2001 first quarter, primarily
reflecting the lower rate environment and lower average balances outstanding,
partially offset by the impact of higher bank fees and charges related to the
renewals and amendments of the bank loans and senior secured notes. The
Company's borrowings from its bank lenders generally were repriced during late
2001 and early 2002 as a result of the negotiations and amendments to the loan
agreements. The impact of all of this was to increase the Company's cost of
funds by $1,708,000 or 256 basis points during the 2002 first quarter compared
to the year ago quarter. Outstanding balances under all financing arrangements
were $313,134,000 at March 31,2002, a decrease of $72,696,000 or 19% from
$385,830,000 a year ago. The Company's debt is primarily tied to floating rate
indexes, which began falling during early 2001, and continued to drop until late
in the year. The Company's average borrowing costs were 7.34% in 2002, compared
to 7.47% a year ago, a decrease of 13 basis points, compared to declines in
market rates in excess of 300 basis points during the period. Approximately 68%
of the Company's debt is short-term and floating rate, compared to 83% a year
ago. See page 25 for a table which shows average balances and cost of funds for
the Company's funding sources.
Net interest income was $4,022,000, and the net interest margin was
3.61% in the 2002 quarter, down $2,151,000 or 35% from $6,173,000 and 4.97% in
2001, reflecting the items discussed above. The net interest margin was 4.41% in
the 2001 quarter, adjusted for the impact of the additional interest on the
collateral appreciation participation loans.
Noninterest income was a loss of $293,000 in the quarter, down
$1,270,000 from income of $977,000 in 2001. The Company had gains on the sale of
the guaranteed portion of SBA 7(a) loans of $330,000 in 2002, down $103,000 or
24%
29
from $433,000 in the year ago quarter. During 2002, $5,460,000 of loans were
sold under the SBA program compared to $5,706,000 during the 2001 first quarter.
The decline in gains on sale reflected a decrease in loans sold of $246,000 or
4%, mostly offset by an increase in the level of market-determined premiums
received on the sales. Other income, which is comprised of servicing fee income,
prepayment fees, late charges, and other miscellaneous income, of $891,000 in
the quarter, was down $80,000 or 8% from $971,000 a year ago, primarily
reflecting a reduced level of fees from a smaller investment portfolio.
Noninterest expenses were $5,002,000 in the 2002 first quarter, up $183,000
or 4% from $4,819,000 in the 2001 quarter. Salaries and benefits expense of
$2,345,000 was down $332,000 or 12% from $2,677,000 in 2001, primarily
reflecting an 8% reduction in headcount. Professional fees of $893,000 were up
$498,000 from $395,000 a year ago, reflecting $250,000 in legal and accounting
expenses compared to the prior year and $248,000 of increased amortization of
capitalized costs associated with debt and other financial transactions.
Amortization of goodwill was $0 in 2002, compared to $133,000 a year-ago,
reflecting the change in accounting rules which no longer allow for goodwill
amortization. Other operating expenses of $1,764,000 in the quarter were up
$149,000 or 9% from $1,614,000 in 2001, primarily reflecting increased insurance
and other office-related expenses, a higher level of collection costs on
delinquent loans, and the continued cleanups of financial records and
operations.
Net unrealized depreciation on investments was $951,000 in the quarter,
compared to appreciation of $466,000 in the year ago quarter, a decrease of
$1,417,000. Net unrealized appreciation on net investments (which excludes
Media) was $563,000 in the quarter, compared to $893,000 in the year ago
quarter, a decrease of $330,000. Unrealized appreciation/(depreciation) arises
when the Company 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 2002 activity resulted from
the increase in valuation of equity investments of $758,000, and by the
reversals of unrealized depreciation associated with fully depreciated loans
which were charged off of $696,000, partially offset by unrealized depreciation
of $891,000, reflecting the recessionary impact on borrower operations and
collateral values. The 2001 activity resulted from the reversals of unrealized
depreciation primarily related to the final disposition of a portfolio
investment that was written off of $898,000, and recoveries of $565,000,
partially offset by net unrealized depreciation of $570,000.
Also included in equity in net losses was unrealized appreciation
(depreciation) on investment of the Media division of the Company. In the 2002
first quarter, Media generated a net loss of $1,514,000, an increase of
$1,087,000 compared to a net loss of $427,000 for the 2001 quarter. Included in
the 2002 quarter was a $656,000 tax benefit to reverse a portion of the charge
taken in the 2001 third quarter writing down the refund receivable from the IRS
for the tax net operating loss. The reversal resulted from the change in the tax
law allowing for an additional two year carryback. The decline in profits in
2002 primarily reflected the greater costs associated with the rapid increase in
tops under contract and cities serviced, which outpaced the increase in revenue,
which continued to be impacted by contract cancellations and other business
retrenchments resulting from the terrorist attacks in New York City and the
economic downturn. Advertising revenues were $1,420,000 in the quarter, down
$1,935,000 or 58% from $3,355,000 in the 2001 quarter. Revenue in 2001 also
included $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 continued obligations under the
contract. Adjusting for this, the decline in revenue in the 2002 quarter was
$1,368,000 or 49%. During 2001, Media exerted a greater effort to reduce the
amount of deferred revenue by increasing capacity utilization, resulting in a
drop of $2,954,000 in deferred revenue to $759,000 compared to a year ago, which
included a reduction of $1,741,000 in deferred revenue during the 2001 quarter,
including the $567,000 related to contract cancellations referred to above. To
the extent that Media cannot generate additional advertising revenue to replace
the deferred revenue recorded in 2001, Media's results of operations may be
negatively impacted. Vehicles under contract decreased 500 or 5% to 10,300 from
10,800 a year ago. As a result of the substantial growth in tops inventory
during the later part of 2000, Media's fleet payment costs and related operating
expenses to service those tops has increased at a greater rate than the growth
in revenue, resulting in lower profits in recent periods. Media's results for
2002 also included losses of $201,000 related to foreign operations.
The Company's net realized/unrealized loss on investments was $1,651,000 in
2002, compared to $432,000 for 2001, reflecting the above.
30
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
The Company, like other financial institutions, is subject to interest
rate risk to the extent its interest-earning assets (consisting of medallion
loans and commercial loans) reprice on a different basis over time in comparison
to its interest-bearing liabilities (consisting primarily of credit facilities
with bank syndicates, 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, the Company anticipates
that approximately 40% of the portfolio will mature or be prepaid each year. The
Company believes that the average life of its loan portfolio varies to some
extent as a function of changes in interest rates. Borrowers are more likely to
exercise prepayment rights in a decreasing interest rate environment 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
The Company 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
and private term notes.
We entered into an interest rate cap agreement on a notional amount of
$10,000,000 limiting our maximum LIBOR exposure on our revolving credit facility
until June 24, 2002 to 7.25%.
Total premiums paid under the interest rate cap agreements have been
expensed. The Company will seek to manage interest rate risk by originating
adjustable-rate loans, by incurring fixed-rate indebtedness, by evaluating
appropriate derivatives, pursuing securitization opportunities, and by other
options consistent with managing interest rate risk.
In addition, the Company manages its exposure to increases in market
rates of interest by incurring fixed-rate indebtedness, such as five year senior
secured notes and ten year subordinated SBA debentures. The Company had
outstanding $44,000,000 of senior secured notes at March 31, 2002, all of which
mature on June 30, 2003, with a fixed interest rate of 8.35% and SBA debentures
in the principal amount of $49,845,000 with a weighted average interest rate of
6.50%. At March 31, 2002, these notes and debentures constituted 14% and 16%,
respectively, of the Company's total indebtedness. On March 29, 2002, the
Company amended its agreements with the senior noteholders which, among other
provisions, accelerated the maturity of the notes to June 30, 2003 from June 30,
2004 and September 30, 2004.
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, loan amortization and prepayments, and participations of loan's with
third parties. 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, 2002, our $313,134,000 of outstanding debt was
comprised as follows: 70% bank debt, at variable effective interest rates with
an weighted average interest rate of 5.02%, 14% long-term senior secured notes
fixed at an interest rate of 8.35%, and 16% subordinated SBA debentures with
fixed-rates of interest with an annual weighted average rate of 6.50%. In May
2001, the Company applied for and received $72.0 million of additional funding
with the SBA ($111,700,000 to be committed by the SBA in total for March 31,
2002 subject to the
31
infusion of additional equity capital into the respective subsidiaries.) Since
SBA financing subjects its recipients to certain regulations, the Company will
seek funding at the subsidiary level to maximize its benefits.
Financing Arrangements
We are a party to three financing agreements: 1) the Second Amended
and Restated Loan Agreement, dated as of September 22, 2000, among the Company,
MBC and the parties thereto (the Company Bank Loan); 2) the Amended and Restated
Loan Agreement, dated as of December 24, 1997, as amended, among MFC and the
parties thereto (the MFC Bank Loan); and 3) the Note Purchase Agreements, each
dated as of June 1, 1999, as amended, between the Company and the note
purchasers thereto (the MFC Note Agreements).
The MFC Bank Loan
On March 27, 1992 (and as subsequently amended and restated), MFC
entered into the MFC Bank Loan, a line of credit with a group of banks.
Effective on June 1, 1999, MFC extended the MFC Bank Loan until June 30, 2001 at
an aggregate credit commitment amount of $220,000,000, an increase from
$195,000,000 previously, pursuant to the Amended and Restated Loan Agreement
dated December 24, 1997. Amounts available under the MFC Bank Loan were reduced
by amounts outstanding under the commercial paper program as the MFC Bank Loan
acted as a liquidity facility for the commercial paper program. The MFC Bank
Loan was further amended on March 30, 2001, June 30, 2001, December 31, 2001 and
April 1, 2002. As of March 31, 2002 and December 31, 2001, amounts available
under the MFC Bank Loan were $0.
The MFC Bank Loan matures on June 28, 2002. The MFC Bank Loan provides
that each bank shall, if there is no default, extend a term loan equal to its
share of the principal amount outstanding. Maturity of the term notes shall be
the earlier of one year with a two year amortization schedule or any other date
on which it becomes payable in accordance with the MFC Bank Loan Agreement.
Interest and principal payments are paid monthly. Interest is calculated monthly
at either the bank's prime rate or a rate based on the adjusted London Interbank
Offered Rate of interest (LIBOR), at the option of MFC. Substantially, all
promissory notes evidencing MFC's investments are held by a bank as collateral
agent under this agreement. MFC is required to pay an annual facility fee of 20
basis points on the unused portion of the MFC Bank Loan's aggregate commitment.
Commitment fee expense for the three months ended March 31, 2002 and 2001 was
$22,000 and $13,000. Outstanding borrowings under the MFC Bank Loan were
$148,000,000 for both periods, at weighted average interest rates of 4.81% and
4.75% at March 31, 2002 and December 31, 2001, respectively. Average borrowings
outstanding under the MFC Bank Loan were $148,000,000 and $194,078,000 for the
2002 and 2001 first quarters. MFC is required under the MFC Bank Loan to
maintain minimum tangible net assets of $65,000,000 and certain financial
ratios, as defined therein. The MFC Bank Loan agreement contains other
restrictive covenants, including a limitation of $500,000 for capital
expenditures.
The Company Bank Loan
On July 31, 1998 (and as subsequently amended and restated), the
Company and MBC entered into the Company Bank Loan, a committed revolving
credit agreement with a group of banks. On September 21, 2001, the Company Bank
Loan was extended to November 5, 2001 to allow for continuation of renewal
discussions which were completed and an amendment signed on February 20, 2002.
As of March 31, 2002 and December 31, 2001, amounts available under this loan
agreement were $0 and $25,000,000. The Company's bank loan matured on May 15,
2002.
MFC Note Agreement
See the discussion of the Senior Secured Notes below.
Covenants and Limitations
The Company Bank Loan, MFC Bank Loan, and the MFC Note Agreements
contain substantial limitations on the Company's ability to operate and in some
cases require modifications to our previous normal operations. Under all of the
agreements, if outstanding debt exceeds the borrowing base, as defined in each
agreement, the excess must be repaid within five business days. The agreements,
collectively, also contain financial covenants, including a maximum consolidated
leverage ratio, a maximum combined leverage ratio, a minimum EBIT to interest
expense ratio, minimum asset quality ratio, minimum tangible net worth and
maximum losses of Media. The agreements also impose limitations on our ability
to incur liens and indebtedness, merge, consolidate, sell or transfer assets,
loan and invest in third parties and our subsidiaries, repurchase or redeem
stock, purchase portfolios, acquire other entities, amend certain material
agreements, make capital expenditures, have outstanding intercompany receivables
and securitize our assets. They prohibit MFC from (a) paying dividends prior to
July 1, 2002, (b) paying more than $2 million of dividends between July 1, 2002
and
32
September 12, 2002 and (c) paying dividends after September 12, 2002 unless it
certifies that it will be in pro forma compliance with amortization requirements
for the remainder of 2002 after paying the dividend. They prohibit the Company
from paying dividends. Lastly, the agreements limit the amount of investments we
can make in our subsidiaries and the creation of new subsidiaries. If
replacement financing is completed as specified in the letter of intent that the
Company entered into, the Company would not have any of those restrictions.
Amendments to the MFC Bank Loan, Company Bank Loan and MFC Note Agreements
In the fourth quarter of 2001, the Company Bank Loan matured and MFC
was in default under its bank loan and its senior secured notes. As of April 1,
2002, the Company and MFC obtained amendments to their bank loans and senior
secured notes. The amendments, in general, changed the maturity dates of the
loans and notes, modified the interest rates borne on the bank loans and the
secured notes, required certain immediate, scheduled or other prepayments of the
loans and notes and reductions in the commitments under the bank loans and
required the Company and MFC to engage or seek to engage in certain asset sales,
instituted additional operating restrictions and reporting requirements. As
modified by the amendments, the scheduled amortization on the bank loans and
secured notes is as follows:
Maturity
-----------------------------------------------------------------
Payments Principal
Principal from January Principal Monthly outstanding
outstanding 1, 2002 - outstanding from July at and
at December March 31, at March 31, 2002 - May after June
31, 2001 2002 2001 April, 2002 May, 2002 2003 June, 2003 30, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Medallion Financial $ 85,000,000 $13,711,270 $ 71,288,730 $ 5,000,000 $66,288,730 $ - $ - $-
loans
MFC loans 148,000,000 - $148,000,000 - - 6,166,667 80,166,663 -
MFC loans senior 45,000,000 1,000,000 $ 44,000,000 13,143,125 - 1,285,703 16,714,142 -
secured notes
--------------------------------------------------------------------------------------------------------------
Total $278,000,000 $14,711,270 $263,288,730 $18,143,125 $66,288,730 $7,452,370 $96,880,805 $-
===================================================================================================================================
In addition to the changes in maturity, the interest rates on the
Company's bank loan and MFC's secured notes were increased, and additional fees
were charged to renew and maintain the facilities and notes. The recent
amendments contain substantial limitations on our ability to operate and in some
cases require modifications to our previous normal operations. Covenants
restricting investment in the Media and BLL subsidiaries, elimination of various
intercompany balances between affiliates, limits on the amount and timing of
dividends, and continuation of the prior financial and operating covenants were
all tightened as a condition of renewal.
In addition to imposing maturities and scheduled amortization
requirements, the amendments also instituted various other prepayment
requirements: (a) the Company is required to repay to MFC an intercompany
receivable in excess of $8,000,000 by May 15, 2002, and (b) MFC is required to
use its best efforts to sell a portion its laundromat and dry cleaning loans in
its commercial loan portfolio by May 31, 2002, and its Chicago Yellow Cab loan
portfolio before November 1, 2002. The proceeds from these repayments and sales
must be used to repay MFC's indebtedness. In addition, the amendments require
MFC to further amend the MFC Note Agreements and the MFC Bank Loan to provide
for periodic prepayments of the indebtedness thereunder out of excess cash flow.
While we fully intend to comply with the covenants in recent amendments, we have
failed to comply with similar covenants in our existing agreements.
Current Status of the MFC Bank Loan, the Company Bank Loan and the MFC
Note Agreements
As of May 15, 2002, the Company's $56,289,000 bank loan matured, and
the Company and MFC are in default under the bank loans and the note agreements
due to noncompliance with financial covenants and failure to make payments due
under the note agreements. The Company and MFC are currently negotiating with
these lenders to amend the agreements or obtain a waiver or forbearance
agreement, and the Company has received a term sheet that would waive all of the
noncompliance; however there can be no assurance that the lenders will grant an
amendment, waiver or forbearance. Unless such amendments or waivers are
obtained, the Company's lenders have the right to accelerate the payment on
$178,857,000 of its indebtedness.
33
New Financing Arrangements
We are currently exploring refinancing options which would replace our
obligations under the Company and MFC loans and the senior secured notes. We
have signed a non-binding preliminary term sheet and are currently engaged in
discussions, and have received a proposal from, a nationally known asset-based
lender to provide a refinancing for the obligations owed under our senior
secured notes and bank loans. The proposed financing would enable the Company to
refinance its existing indebtedness and provide additional capital with longer
maturities, but there can be no assurance that such financing will be obtained,
the date that it will be obtained or whether such financing would provide more
operating flexibility than is provided under our current credit agreements. The
failure to obtain such financing or alternative financing on a timely basis
could have a material adverse effect on the Company. In addition, the Company is
actively pursuing other financing options for individual subsidiaries with
alternate financing sources, and is continuing the ongoing program of loan
participations and sales to provide additional sources of funds for both
external expansion and continuation of internal growth. The Company has also
received a non-binding preliminary proposal from another nationally recognized
lender for a warehouse facility for its medallion lending portfolio. The Company
has also signed a letter of intent with a third lender to refinance a certain
subsidiary of the Company. Furthermore, the Company is considering the
possibility of submitting an application to receive a bank charter, which if
granted, would permit the Company to receive deposits insured by the Federal
Deposit Insurance Corporation. The Company has held meetings with the relevant
regulatory bodies in connection with such an application. There can be no
assurances that such financings will be obtained or that any application related
to a bank charter would be approved.
As a result of the recent amendments to the bank loans and senior
secured notes, the Company's cost of funds will increase in 2002 until the debts
mature and are paid off. As noted above, the amendments entered into during 2002
to the Company's bank loans and senior secured notes involved changes, and in
some cases increases, to the interest rates payable thereunder. In addition,
during events of default, the interest rate borne on the lines of credit is
based upon a margin over the prime rate rather than LIBOR. The bank lines of
credit are priced on a grid depending on leverage. The senior secured notes
adjusted to 8.35% effective April 1, 2002, and thereafter adjust upwards an
additional 50 basis points on a quarterly basis until maturity. In addition to
the interest rate charges, $2,568,000 has been incurred through May 15, 2002 for
attorneys and other professional advisors, most working on behalf of the
lenders, of which $627,000 was expensed during the 2002 first quarter, and
$1,080,000 which will be expensed in the 2002 second quarter, with the balance
expensed over the remaining lives of the related debt outstanding.
Fees
The Company paid amendment fees of $255,000, and MFC paid amendment
fees of $478,000 and is obligated to pay an additional amendment fee on June 28,
2002 equal to 0.20% of the amount committed under the MFC Bank Loan and of the
amount outstanding under MFC Note Agreements. Additionally, under the MFC Note
Agreements and MFC Bank Loan, MFC is obligated to pay the lenders and note
holders an aggregate monthly fee of $25,000 commencing on June 30, 2002 and
increasing by $25,000 each month.
Interest and Principal Payments
Interest and principal payments are paid monthly. Interest on the bank
loans are calculated monthly at either the bank's prime rate or a rate based on
the adjusted LIBOR rate at the option of the Company. Substantially all
promissory notes evidencing the Company's investments are held by a bank as
collateral agent under the Loan Agreement. The Company is required to pay an
annual facility fee of 20 basis points on the amount of the aggregate
commitment. Commitment fee expense for the three months ended March 31, 2002 and
2001 was $45,000 and $0. Outstanding borrowings under the Loan Agreement were
$71,289,000 and $85,000,000 at a weighted average interest rate of 5.45% and
6.25% at March 31, 2002 and December 31, 2001. The Company is required under the
MFC Bank Loan Agreements to maintain certain levels of medallion loans and
certain financial ratios, as defined therein. The MFC and the Company Bank Loan
Agreements contain other restrictive covenants, including a limitation of
$500,000 and $1,000,000, respectively, for capital expenditures per annum.
34
The weighted average interest rate for the Company's consolidated
outstanding revolver borrowings at March 31, 2002 and December 31, 2001 was
5.02% and 5.80%. During the three months ended March 31, 2002 and 2001, the
Company's weighted average borrowings were $225,217,000 and $316,828,000 with a
weighted average interest rate of 6.90% and 7.41%, respectively.
The Company values its portfolio at fair value as determined in good
faith by the Company's Board of Directors in accordance with the Company's
valuation policy. Unlike banks, the Company is not permitted to provide a
general reserve for anticipated loan losses. Instead, the Company must value
each individual investment and portfolio loan on a quarterly basis. The Company
will record unrealized depreciation on investments and loans when it believes
that an asset has been impaired and full collection of the loan is unlikely. The
Company will record unrealized appreciation on equities if it has a clear
indication that the underlying portfolio company has appreciated in value and,
therefore, the Company's security has also appreciated in value. Without a
readily ascertainable market value, the estimated value of the Company's
portfolio of investments and loans may differ significantly from the values that
would be placed on the portfolio if there existed a ready market for the
investments. The Company adjusts quarterly the valuation of the portfolio to
reflect the Board of Directors' estimate of the current fair value of each
investment in the portfolio. Any changes in estimated fair value are recorded in
the Company's statement of operations as "Net unrealized gains (losses)." The
Company's investment in Media, as a wholly-owned portfolio investment company,
is also subject to quarterly assessments of its fair value. The Company uses
Media's actual results of operations as the best estimate of changes in fair
value and records the result as a component of unrealized appreciation
(depreciation) on investments.
In addition, the illiquidity of our loan portfolio and investments may
adversely affect our ability to dispose of loans at times when it may be
advantageous for us to liquidate such portfolio or investments. In addition, if
we were required to liquidate some or all of the investments in the portfolio,
the proceeds of such liquidation may be significantly less than the current
value of such investments. Because we borrow money to make loans and
investments, our net operating income is dependent upon the difference between
the rate at which we borrow funds and the rate at which we invest these funds.
As a result, there can be no assurance that a significant change in market
interest rates will not have a material adverse effect on our interest income.
In periods of sharply rising interest rates, our cost of funds would increase,
which would reduce our net operating income before net realized and unrealized
gains. We use a combination of long-term and short-term borrowings and equity
capital to finance our investing activities. Our long-term fixed-rate
investments are financed primarily with short term floating rate debt, and to a
lesser extent with long-term fixed-rate debt. We may use interest rate risk
management techniques in an effort to limit our exposure to interest rate
fluctuations. Such techniques may include various interest rate hedging
activities to the extent permitted by the 1940 Act. The Company has analyzed the
potential impact of changes in interest rates on interest income net of interest
expense. Assuming that the balance sheet were to remain constant and no actions
were taken to alter the existing interest rate sensitivity, a hypothetical
immediate 1% change in interest rates would have affected net increase
(decrease) in assets by less than 1% over a six month horizon. Although
management believes that this measure is indicative of the Company's sensitivity
to interest rate changes, it does not adjust for potential changes in credit
quality, size and composition of the assets on the balance sheet and other
business developments that could affect net increase (decrease) in assets.
Accordingly, no assurances can be given that actual results would not differ
materially from the potential outcome simulated by this estimate.
During the second and third quarters of 2001, the Company completed an
equity offering of 3,660,000 common shares at $11 per share raising over
$40,000,000 of additional capital. The Company continues to work with investment
banking firms to investigate the viability of a number of other financing
options which include, among others, the sale or spin off 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.
35
The following table illustrates sources of available funds for the
Company and each of the subsidiaries, and amounts outstanding under credit
facilities and their respective end of period weighted average interest rate at
March 31, 2002:
=================================================================================================================================
Medallion Total
(Dollars in thousands) Financial MFC BLL MCI MBC FSVC 3/31/02 12/31/01
- ---------------------------------------------------------------------------------------------------------------------------------
Cash $ 7,188 $ 17,170 $1,041 $ 3,769 $1,532 $ 1,364 $ 32,064 $ 25,409
Bank loans /(1)/ 100,000 190,000 290,000 318,000
Amounts outstanding 71,289 148,000 219,289 233,000
Average interest rate 5.45% 4.81% 5.02% 5.30%
Maturity 5/02 6/02 5/02-6/02 11/01-06/02
SBA debentures /(2)/ $ 46,500 $ 46,860 $ 93,360 $ 93,360
Amounts available 21,000 22,515 43,515 49,515
Amounts outstanding 25,500 24,345 49,845 49,845
Average interest rate 6.63% 6.37% 6.50% 6.96%
Maturity 3/06-6/11 12/02-9/11 12/02-9/11 12/02-12/11
Senior secured notes /(3)/ $ 44,000 $44,000 $ 45,000
Average interest rate 8.35% 8.35% 7.35%
Maturity 6/03 6/02 6/04-9/04
- ---------------------------------------------------------------------------------------------------------------------------------
Total cash and $ 7,188 $ 17,170 $1,041 $ 24,769 $1,532 $ 23,879 $ 75,579 $74,924
amounts undisbursed
under credit facilities
=================================================================================================================================
Total debt outstanding $ 71,289 $192,000 $ $ 25,500 $ - $ 24,345 $ 313,134 $ 321,845
=================================================================================================================================
/(1)/ Subsequent to March 31, 2002, the agreements providing bank loans for
the Company and MFC were amended to (a) provide, with respect to the
Company bank loan, for a May 15, 2002 maturity date, with commitment
reductions to approximately $71,000,000 and $61,000,000 on April 1, 2002
and May 1, 2002; and (b) provide, with respect to the bank loan, for a
June 28, 2002 maturity date (subject to conversion of amounts
outstanding on June 28, 2002 into a one year term loan) with a
commitment reduction to $150,000,000 on April 1, 2002.
/(2)/ The remaining amounts under the approved commitment from the SBA may be
drawn down over a five year period ending May, 2006, upon submission of
a request for funding by the Company and its subsequent acceptance by
the SBA. In April 2002, FSVC drew down an additional $3,000,000 under
this commitment.
/(3)/ In connection with the maturity of the revolving line described in (1)
above, the terms of the senior secured notes were renegotiated on March
29, 2002, generally providing for $13,000,000 of principal payments,
higher levels of interest, and accelerated final maturities of June 30,
2003 from June and September 2004 (as well as required scheduled
amortization and asset sales).
- --------------------------------------------------------------------------------
Loan amortization, prepayments, and sales also provide a source of
funding for the Company. Prepayments on loans are influenced significantly by
general interest rates, medallion loan market rates, economic conditions, and
competition. Medallion loan prepayments have slowed since early 1994, initially
because of increases, and then stabilization, in the level of interest rates,
and more recently because of an increase in the percentage of medallion loans,
which are refinanced with the Company 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 7.35% 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. Media's growth prospects are currently constrained by the operating
environment and distressed advertising market that resulted from September 11th
and the economic downturn, which has resulted in operating losses and reduced
cash flow, as well as restrictions on funding that can be provided by the
Company in accordance with the terms of the bank loans. Media has developed an
operating plan to fund only necessary operations out of available cash flow and
to escalate its sales activities to generate new revenues. Although there can be
no assurances, Media and the Company believe that this plan will enable Media to
weather this downturn in the advertising cycle and maintain operations at
existing levels until such times as business returns to historical levels.
historical levels.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 142, Goodwill and Other Intangible Assets, requiring that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually, effective for fiscal years
beginning after December 15, 2001.
36
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which establishes an accounting
model to be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal
transactions, effective for fiscal years beginning after December 15, 2001.
The Company adopted these standards effective January 1, 2002, and is
evaluating the impact of adoption of these accounting standards. At March 31,
2002, the Company had $5,008,000 of goodwill on its consolidated balance sheet
and $2,087,000 recorded on the balance sheet of Media, its wholly-owned
subsidiary that will be subject to the asset impairment review required by SFAS
142.
Common Stock
Our common stock is quoted on the Nasdaq National Market under the
symbol "TAXI." Our common stock commenced trading on May 23, 1996. As of May 13,
2002, there were approximately 18,242,035 holders of record of the Company's
common stock.
On May 13, 2002, the last reported sale price of our common stock was
$5.55 per share. The following table sets forth the range of high and low
closing prices of the common stock as reported on the Nasdaq National Market for
the periods indicated. Our common stock has historically traded at a premium to
net asset value per share. There can be no assurance, however, that such premium
will be maintained.
The following table sets forth for the periods indicated the range of
high and low closing prices for the Company's common stock on the Nasdaq
National Market:
==============================================================================================================
2002 HIGH LOW
- --------------------------------------------------------------------------------------------------------------
First Quarter $9.20 $7.77
2001
- --------------------------------------------------------------------------------------------------------------
First Quarter $15.09 $8.52
Second Quarter 13.54 8.46
Third Quarter 10.98 7.67
Fourth Quarter 9.52 6.90
==============================================================================================================
We have distributed and currently intend to continue to distribute at
least 90% of our investment company taxable income to our stockholders.
Distributions of our income are generally required to be made within the
calendar year the income was earned to maintain our RIC status; however, in
certain circumstances distributions can be made up to a full calendar year after
the income has been earned. Our investment company taxable income includes,
among other things, dividends and interest reduced by deductible expenses. Our
ability to make dividend payments is restricted by certain asset coverage
requirements under the 1940 Act and is dependent upon maintenance of our status
as a RIC under the Code. Our ability to make dividend payments is further
restricted by certain financial covenants contained in our credit agreements,
which require paydowns on amounts outstanding if dividends exceed certain
amounts, and generally disallow any dividend until July 1, 2002, by SBA
regulations and under the terms of the SBA debentures. We have adopted a
dividend reinvestment plan pursuant to which stockholders may elect to have
distributions reinvested in additional shares of common stock. When we declare a
dividend or distribution, all participants will have credited to their plan
accounts the number of full and fractional shares (computed to three decimal
places) that could be obtained with the cash, net of any applicable withholding
taxes, that would have been paid to them if they were not participants. The
number of full and fractional shares is computed at the weighted average price
of all shares of common stock purchased for plan participants within the 30 days
after the dividend or distribution is declared plus brokerage commissions. The
automatic reinvestment of dividends and capital gains distributions will not
relieve plan participants of any income tax that may be payable on the dividends
or capital gains distributions. Stockholders may terminate their participation
in the dividend reinvestment plan by providing written notice to the Plan Agent
at least 10 days before any given dividend payment date. Upon termination, we
will issue to a stockholder both a certificate for the number of full shares of
common stock owned and a check for any fractional shares, valued at the then
current market price, less any applicable brokerage commissions and any other
costs of sale. There are no additional fees or expenses for participation in the
dividend reinvestment plan. Stockholders may obtain additional information about
the dividend reinvestment plan by contacting the Plan Agent at 59 Maiden Lane,
New York, NY, 10038. There can be no assurances; however, that we will have
sufficient earnings to pay such dividends in the future.
37
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
(which adjust at various intervals). As a result, our debt may adjust to a
change in interest rates more quickly than the loans in our portfolio. In
periods of sharply rising interest rates, our costs of funds would increase,
which would reduce our portfolio income before net realized and unrealized
gains. Accordingly, we, like most financial services companies, face the risk of
interest rate fluctuations. 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.
Our borrowers generally have the right to prepay their loans upon
payment of a fee ranging from 30 to 120 days interest. 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.
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 capital and liquidity are the following:
. bank credit facilities;
. senior secured notes;
. fixed-rate, long-term SBA debentures that are issued to or guaranteed
by the SBA;
. sales of participations in loans; and
. loan amortization and prepayments
As a Regulated Investment Company (RIC), we are required to 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,
2002, we had $40,515,000 available under outstanding commitments from the SBA.
We are in default under our credit facilities and we may have difficulty raising
capital to finance our planned level of lending operations.
On May 15, 2002, the Company's $56,289,000 Bank Loan matured. The
Company has not made the required repayment. Additionally, the Company is not in
compliance with various covenants under this and its other credit facilities. As
a result, the Company's lenders have the right to accelerate the payment on
$178,857,000 of its indebtedness. The Company has received a term sheet waiving
all of the non-compliance with its lending group to obtain waivers of default
and amendments to certain terms and covenants, including the extensions with
regard to the maturity date for the Company's facility and other the payment
dates. There can be no assurances that the Company will be able to agree with
its lenders on such waivers and amendments. If the Company is unable to (i)
obtain an extension of the maturity date, waivers of default and amendments to
certain terms and covenants, (ii) enter into a forbearance agreement or (iii)
obtain favorable replacement financing, the Company may be required to sell
assets at amounts significantly below the carrying values of the investments of
the Company.
38
assurances that the Company will be able to agree with its lenders on such
waivers and amendments. If the Company is unable to (i) obtain waivers of
default and amendments to certain terms and covenants, (ii) enter into a
forbearance agreement or (iii) obtain favorable replacement financing, the
Company may be required to sell assets at amounts significantly below the
carrying the values of the investments of the Company.
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:
. the failure to meet its business plan;
. a downturn in its industry or negative economic conditions;
. the death, disability or resignation of one or more of the key
members of management; or
. 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.
We borrow money, which may increase the risk of investing in our common stock.
We use financial leverage through bank syndicates, our senior secured
notes, and our long-term, subordinated SBA debentures. Leverage poses certain
risks for our stockholders:
. it may result in higher volatility of both our net asset value and
the market price of our common stock;
. since interest is paid to our creditors before any income is
distributed to our stockholders, fluctuations in the interest payable
to our creditors may decrease the dividends and distributions to our
stockholders; and
. in the event of a liquidation of the Company, our creditors would
have claims on our assets superior to the claims of our stockholders.
Our failure to remedy certain internal control deficiencies could have an
adverse affect on our business operations.
Consistent with the Company's on-going focus on improving its
operations and growth, and at the request of BLL's regulatory authority, the
Connecticut Banking Department (the "Department"), the Board of Directors of BLL
is currently adopting plans to improve its financial operations. The Company
feels these plans will be viewed favorably by the Department.
If we are unable to continue to diversify geographically, our business may be
adversely affected if the New York taxicab industry continues to experience 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. There can be
no assurance that we will be able to sufficiently diversify our operations
geographically.
The economic downturn has resulted 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 the economic downturn
continues, the level of delinquencies, defaults, and loan losses in commercial
loan portfolio could increase. The terrorist attack on New York City on
September 11, 2001 and the economic downturn have affected our revenues by
increasing loan delinquencies and non-performing loans, increasing prepayments,
stressing collateral value and decreasing taxi advertising. Although the
39
Company believes the estimates and assumptions used in determining the recorded
amounts of net assets and liabilities at March 31, 2002, are reasonable, actual
results could differ materially from the estimated amounts recorded in the
Company's financial statements.
The loss of certain key members of our senior management could adversely affect
us.
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. We may have difficulty 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 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 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 the Company and certain competitors are subject to less
restrictive regulations than the Company. 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 the
Company 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 or sale of a
substantial portion of portfolio loans.
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. If liquidity constraints required the sale of a substantial
portion of the portfolio, such an action may require the sale of certain assets
at amounts less than their carrying amounts.
In determining the value of our portfolio, 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 interest rates, our 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 net below its cost basis. At March 31, 2002, our net unrealized
depreciation on net investments was approximately $6,938,000. Based upon current
market conditions and current loan-to-value ratios, our board of directors
believes that the net unrealized depreciation on 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.
If this were to occur, the value of the collateral securing our then outstanding
medallion loans in that market
40
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, 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 the Company,
and could potentially adversely affect the value of the Company'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. New York City taxicab medallions have increased 3%-6% during
the 2002 first quarter.
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 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 effects on our financial condition and results of 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.
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 Subchapter M
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 RIC's) of any one
issuer. While our investments in our RIC subsidiaries are not subject to this
diversification test so long as these subsidiaries are RIC's, our investment in
Media is subject to this test.
41
At the time of our original investment, Media represented approximately
1% of our total assets, which is in compliance with the diversification test.
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
Subchapter M, 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 RIC status. As
a result, our maintenance of RIC 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 Subchapter M's
diversification requirements.
The fair value of the collateral appreciation participation loan
portfolio at March 31, 2002 was $8,950,000, which represented approximately 2%
of the total investment 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 SEC 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.
PART II
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OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are currently involved in various
legal proceedings incident to the ordinary course of its business, including
collection matters with respect to certain loans. The Company intends to
vigorously defend any outstanding claims and pursue its legal rights. In the
opinion of the Company's management and based upon the advice of legal counsel,
there is no proceeding pending, or to the knowledge of management threatened,
which in the event of an adverse decision would result in a material adverse
effect on the Company's results of operations or financial condition.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On May 15, 2002, the Company's $56,289,000 Bank Loan matured and payments
representing principal and interest were due. The Company has not made the
required repayment. Additionally, the Company is not in compliance with various
covenants under this and its other credit facilities. As a result, the Company's
lenders have the right to accelerate the payment on $178,857,000 of its
indebtedness. The Company has received a term sheet waiving all of the
non-compliant with its lending group to obtain waivers of default and amendments
to certain terms and covenants, including the extensions with regard to the
maturity date for the Company's facility and other the payment dates. There can
be no assurances that the Company will be able to agree with its lenders on such
waivers and amendments. If the Company is unable to (i) obtain an extension of
the maturity date, waivers of default and amendments to certain terms and
covenants, (ii) enter into a forbearance agreement or (iii) obtain favorable
replacement financing, the Company may be required to sell assets at amounts
significantly below the carrying values of the investments of the Company.
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
None.
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MEDALLION FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDALLION FINANCIAL CORP.
Date: May 15, 2002
By: /s/ James E. Jack By: /s/ Larry D. Hall
----------------- -----------------
James E. Jack Larry D. Hall
Executive Vice President and Chief Financial Senior Vice President and Chief
Officer Signing on behalf of the registrant Accounting Officer Signing on
as principal financial officer. behalf of the registrant as
principal accounting officer.
44