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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27812
MEDALLION FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3291176
(State of Incorporation) (IRS Employer Identification No.)
437 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 328-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K YES |_| NO |X|.
The approximate aggregate market value of common equity held by non-affiliates
of the Registrant as of March 30, 2001 was approximately $148 million based on
the average bid and ask prices of the Registrant's Common Stock on the Nasdaq
National Market as of the close of business on March 30, 2001. There were
14,602,846 shares of the Registrant's Common Stock outstanding as of March 30,
2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders, which Definitive Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year-end of December 31, 2000, are incorporated by
reference into Part III of this Form 10-K.
MEDALLION FINANCIAL CORP.
2000 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
PART I .................................................................. 2
ITEM 1. BUSINESS OF THE COMPANY ........................................ 2
ITEM 2. PROPERTIES ..................................................... 13
ITEM 3. LEGAL PROCEEDINGS .............................................. 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............ 13
PART II ................................................................. 13
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS ............................................ 13
ITEM 6. SELECTED FINANCIAL DATA ........................................ 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................ 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK ........................................................... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................... 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES ........................... 30
PART III................................................................. 30
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............. 30
ITEM 11. EXECUTIVE COMPENSATION ......................................... 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ..................................................... 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................. 31
PART IV ................................................................. 31
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K .................................................... 31
1
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT MEDALLION AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
MEDALLION'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. MEDALLION UNDERTAKES NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW
INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
PART I
ITEM 1. BUSINESS OF THE COMPANY
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 19% and our
commercial loan portfolio at a compound annual growth rate of 38%. Our total
assets under our management was approximately $720 million and has grown from
$215 million at the end of 1996, a compound annual growth rate of 35%.
As an adjunct to our medallion loan business, we also operate one of the
largest taxicab rooftop advertising businesses in the nation. Currently, we
provide advertising space in 34 metropolitan areas across the United States.
Since 1996, we have increased the number of our taxicab rooftop displays from
1,550 to approximately 10,000 at December 31, 2000, at a compound annual growth
rate of 59%.
Our goal is to provide our stockholders with a stock that pays a high
dividend yield and has strong growth potential. During 2000, we declared
dividends totaling $1.19 per share, which equates to a dividend yield of
approximately 11.7% based upon our stock price of $10.13 as of March 30, 2001.
Alvin Murstein, our Chairman and Chief Executive Officer, has over 40
years of experience in the ownership, management and financing of taxicab
medallions. Andrew Murstein, our President, is the third generation in his
family to be active in the business.
We are a closed-end, non-diversified management investment company under
the Investment Company Act of 1940, as amended (1940 Act). Our investment
objectives are to provide a high level of distributable income, consistent with
the preservation of capital, as well as long-term growth of net asset value.
We have elected to be treated as a business development company registered
under the 1940 Act. In addition, we have elected to be treated for tax purposes
as a regulated investment company, or RIC, under the Internal Revenue Code of
1986, as amended (the Code). As a RIC, we will not be subject to U.S. federal
income tax on any investment company taxable income (which includes, among
other things, dividends and interest reduced by deductible expenses) that we
distribute to our stockholders if at least 90% of our investment company
taxable income for that taxable year is distributed. We intend to pay quarterly
cash dividends to comply with this requirement. Stockholders can elect to
reinvest distributions.
OUR MEDALLION LOANS
Medallion loans of $299 million comprised 58% of our $512 million total
loan portfolio as of December 31, 2000. Since 1979, we have originated, on a
combined basis, approximately $800 million in medallion loans in New York City,
Chicago, Boston, Newark, Cambridge and other cities within the United States.
Our medallion loan portfolio consists of mostly fixed-rate loans, collateralized
by first security interests in taxicab medallions and related assets. As of
December 31, 2000, approximately 77%, in principal amount, of our medallion
loans were in New York City. Although some of our medallion loans have from time
to time been in arrears or in default, to date we have never experienced a loss
of principal on any of our medallion loans. We estimate that the average
loan-to-value ratio of all of our medallion loans is approximately 75%. In
addition, we have recourse against a vast majority of the owners of the taxicab
medallions and related assets through personal guarantees.
The New York City Taxi and Limousine Commission, or TLC, estimates that
the total value of all of New York City taxicab medallions and related assets
exceeds $3 billion. We estimate that the total value of all taxicab medallions
and related assets in the United States exceeds $5 billion. We believe that we
will continue to develop growth opportunities by further penetrating the highly
fragmented medallion financing markets. Additionally, in the future, the Company
may enhance its portfolio growth rate with selective acquisitions of medallion
financing businesses and their related portfolios. Since our initial public
offering, we have acquired several additional medallion loan portfolios.
On October 2, 2000, we completed a merger with Freshstart Venture Capital
Corporation, or Freshstart, a specialty finance company. Freshstart operates as
a Specialized Small Business Investment Company (SSBIC), and is regulated and
financed in part by the Small Business Administration (SBA). Freshstart is
regulated as a business development company under the 1940 Act and has elected
to be treated as a RIC for federal income tax purposes. As an SSBIC,
Freshstart's business is to provide loan financing to
2
small and medium-sized businesses that qualify under Small Business
Administration (SBA) regulations as socially or economically disadvantaged.
Freshstart makes a substantial portion of its loans to finance taxicab
medallions, taxicabs, and related assets, with the balance of the loans being
made to other small business concerns.
Portfolio Characteristics
Medallion loans generally require equal monthly payments covering accrued
interest and amortization of principal over a ten to fifteen year schedule
subject to a balloon payment of all outstanding principal after four or five
years. More recently, we have begun to originate loans with one to four year
maturities where interest rates are adjusted and a new maturity period set.
Borrowers may prepay medallion loans upon payment of a fee ranging from 30 to 90
days interest. We believe that the likelihood of prepayment is a function of
changes in interest rates. Borrowers are more likely to exercise prepayment
rights in a decreasing interest rate environment when the interest rate payable
on their loan is high relative to prevailing interest rates. We believe they are
less likely to prepay in a rising interest rate environment. We generally retain
the medallion loans we originate.
At December 31, 2000, all of our medallion loans were secured by first
security interests in taxicab medallions and related assets. We originate
medallion loans at an approximate average loan-to-value ratio of 75%. In
addition, we have recourse against the vast majority of direct and indirect
owners of the medallions who personally guarantee the loans. Although personal
guarantees increase the commitment of borrowers to repay their loans, there can
be no assurance that the assets available under personal guarantees would, if
required, be sufficient to satisfy the obligations secured by such guarantees.
We believe that our medallion loan portfolio is of high credit quality,
because medallions have generally increased in value and are easy to repossess
and resell in an active market. In instances where a borrower has defaulted on a
loan, we have seized the medallion collateralizing that loan. If the loan was
not brought current, we were able to sell the medallion in the active market at
prices at or in excess of the amounts due. Although some of our medallion loans
have from time to time been in arrears or in default, to date we have never
experienced a loss of principal on any of our medallion loans.
Market Position
We have originated and serviced medallion loans since 1979 and have
established a leading position in the industry. Management has a long history of
owning, managing, and financing taxicab fleets, taxicab medallions and corporate
car services, dating back to 1956. Medallion loans collateralized by New York
City taxicab medallions and related assets comprised 77% of the value of our
medallion loan portfolio at December 31, 2000. The balance consisted of
medallion loans collateralized by taxicab medallions in Chicago, Boston, Newark,
Cambridge, Philadelphia, Baltimore, and Hartford. We believe that there are
significant growth opportunities in these and other metropolitan markets
nationwide.
The following table displays information regarding medallion loans
outstanding in each of our major markets at December 31, 2000:
==================================================================================================
% of
% of Total Medallion
Loan Loan Average
# Of Portfolio Portfolio Interest Principal
Loans (1) (1) Rate Balance
- --------------------------------------------------------------------------------------------------
Medallion Loans
New York 1,899 44.1% 76.5% 8.69% $228,457,313
Chicago 362 6.3 10.9 10.47 32,620,950
Boston 150 3.3 5.8 11.21 17,279,259
Newark 110 2.1 3.7 11.59 11,091,809
Cambridge 20 0.2 0.3 10.58 927,484
Other 68 1.6 2.8 11.16 8,230,256
---------------------------------- ----------------
Gross Medallion Loans 2,609 57.6% 100.0% 9.22 298,607,071
=============================================
Deferred loan acquisition costs 695,477
----------------
Total Medallion Loans $299,302,548
==================================================================================================
(1) Based on principal balance outstanding.
The New York City Market. A New York City taxicab medallion represents the
only permitted license to operate a taxicab and accept street hails in New York
City. As reported by the TLC, individual (owner-driver) medallions sold for
approximately $202,000 and corporate medallions sold for approximately $223,000
at December 31, 2000. The number of taxicab medallions is limited by law, and as
a result of the limited supply of medallions, an active market for medallions
has developed. The law limiting the number of medallions also stipulates that
the ownership for the 12,053 medallions outstanding at December 31, 2000 shall
remain divided into 5,086 individual medallions and 6,967 fleet or corporate
medallions. Corporate medallions are more valuable because they can be
aggregated by businesses and leased to drivers and operated for more than one
shift.
3
A prospective medallion owner must qualify under the medallion ownership
standards set and enforced by the TLC. These standards prohibit individuals with
criminal records from owning medallions, require that the funds used to purchase
medallions be derived from legitimate sources and mandate that taxicab vehicles
and meters meet TLC specifications. In addition, before the TLC will approve a
medallion transfer, the TLC requires a letter from the seller's insurer stating
that there are no outstanding claims for personal injuries in excess of
insurance coverage. After the transfer is approved, the owner's taxicab is
subject to quarterly TLC inspections.
Most New York City medallion transfers are handled through approximately
32 medallion brokers who are licensed by the TLC. In addition to brokering
medallions, these brokers also arrange TLC documentation insurance, vehicles and
meters, as well as financing. The Company has excellent relations with many of
the most active of these brokers and regularly receives referrals from them.
However, the Company receives most of its referrals from a small number of
brokers.
The Chicago Market. We estimate that Chicago medallions currently sell for
approximately $68,000. Pursuant to a municipal ordinance, the number of
outstanding medallions is currently capped at 6,700, which includes an
additional 150 and 200 medallions that were auctioned and placed into service in
July 1999 and December 2000, respectively. We estimate that the total value of
all Chicago medallions and related assets is over $450 million.
The Boston Market. We estimate that Boston medallions currently sell for
approximately $185,000. The number of Boston medallions had been limited by law
since 1930 to 1,525 medallions. In 1993, however, the Massachusetts legislature
authorized the Boston Hackney Carriage Bureau, which regulates the issuance of
new medallions, to issue 300 additional medallions, including 40 additional
medallions which are restricted to "wheelchair accessible" taxicabs. In January
1999, 75 additional medallions were auctioned and put into service. An
additional 57 medallions were auctioned in June 2000. We estimate that the total
value of all Boston medallions and related assets is over $300 million.
The Newark Market. We estimate that Newark medallions currently sell for
approximately $220,000. The number of Newark medallions currently has been
limited to 600 since 1950 by local law. We estimate that the total value of all
Newark medallions and related assets is over $130 million.
The Cambridge Market. We estimate that Cambridge medallions currently sell
for approximately $175,000. The number of Cambridge medallions has been limited
to 248 since 1945 by a Cambridge city ordinance. We estimate that the total
value of all Cambridge medallions and related assets is over $40 million.
Our Commercial Loans
Commercial loans of $213 million comprised 42% of our $512 million total
loan portfolio as of December 31, 2000. From the inception of our commercial
loan business in 1987 through December 31, 2000, we have originated more than
10,000 commercial loans in an aggregate principal amount of more than $425
million. We estimate that the average loan-to-value ratio of our commercial
loans was approximately 70% on December 31, 2000. Our commercial loan portfolio
consists of floating-rate, adjustable, and fixed-rate loans. We have increased
our commercial loan activity in recent years primarily because of the attractive
higher yielding, floating rate nature of most of this business. The outstanding
balances of commercial loans grew 28% in 2000 compared to 1999, and in 1999 grew
49% compared to 1998. This increase has been primarily driven by internal growth
through the origination of additional commercial loans. We plan to continue to
expand our commercial loan activities to develop a more diverse borrower base, a
wider geographic area of coverage, and to expand our targeted industries.
Our commercial loans generally are secured by equipment, accounts
receivable, real estate, and other assets, and have interest rates averaging 200
basis points over the prevailing prime rate. As with medallion loans, we require
the vast majority of the principals of borrowers to personally guarantee
commercial loans. Our aggregate realized loss of principal on commercial loans
has averaged less than 1/2 of 1% per annum for each of the last five years.
SBA Section 7 (a) loans
The Company originates loans under the Section 7(a) program of the SBA
through its Business Lenders LLC (BLL) subsidiary. Up to 75% of the amount of
these loans (up to $750,000) are guaranteed by the U.S. government. These loans
are secured by fixed assets and or real estate throughout the New England and
the New York areas, and comprise approximately 30% of our commercial loan
portfolio. BLL has achieved "preferred lender" status from the SBA in 25
districts in which it originates loans, enabling us to obtain expedited loan
approval and closing from the SBA. These loans are typically secured by assets
or real estate, and have floating interest rates tied to a spread over the prime
rate. Additionally, a liquid market exists for the sale of the guaranteed
portion of these loans. We regularly sell the guaranteed portion of our Section
7(a) loans in the secondary market and recognize a gain on these sales. This
gain is accounted for 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." We
believe that the floating-rate nature of these loans is beneficial for our
interest rate exposure management.
4
Asset Based Loans
The Company originates asset-based loans to small businesses for working
capital through its Medallion Business Credit, (MBC) subsidiary. These loans are
primarily secured by accounts receivable of small businesses that require credit
facilities ranging from $250,000 to $3,500,000, a market which we believe is
underserved, and which represent approximately 20% of our commercial loan
portfolio. We had successfully established 45 credit lines at December 31, 2000.
Security on these facilities is principally the borrower's accounts receivable,
but may also include inventory, machinery, or equipment. Currently, our customer
base is concentrated in the New York metropolitan area and includes
manufacturers, distributors and service organizations. These loans are generally
priced at approximately 300 basis points over the prevailing prime rate on our
credit facilities.
Other Commercial Secured Loans
The Company originates other commercial loans that are not concentrated in
any particular industry. These loans, which are generally fixed-rate loans,
represent approximately 50% of our commercial loan portfolio. Our customer base
includes food service, real estate, dry cleaners, laundromats, laser eyes
surgery clinics, and radio and television broadcast industries. We often accept
equity warrants as partial consideration in its lending transactions, thus,
enabling us to share in future growth of our borrowers.
The following table displays the different types of loans in our
commercial loan portfolio at December 31, 2000.
================================================================================================
% of
% of Total Commercial
Loan Loan Average
# of Portfolio Portfolio Interest Principal
Loans (1) (1) Rate Balance
- ------------------------------------------------------------------------------------------------
Commercial Loans
SBA Section 7(a) loans 765 12.8% 30.2% 11.50% $66,057,818
Asset-based loans 45 8.3 19.7 12.98 43,120,496
Other commercial secured loans 603 21.2 50.1 12.74 109,424,624
-------------------------------------------------------------
Gross Commercial Loans 1,413 42.3% 100.0% 12.41 218,602,938
=============================================
Deferred loan acquisition
costs 1,107,225
Unrealized depreciation on
loans (6,988,790)
--------------
Total Commercial Loans $212,721,373
- ------------------------------------------------------------------------------------------------
(1) Based on principal balance outstanding.
Portfolio Characteristics
Commercial loans finance either the purchase of the equipment and related
assets necessary to open a new business or the purchase or improvement of an
existing business. We have originated commercial loans in principal amounts
ranging from $5,000 to approximately $5,300,000. These loans are generally
retained and typically have maturities ranging from one to ten years and require
equal monthly payments covering accrued interest and amortization of principal
over a four to five year term. Substantially all loans generally may be prepaid
with a fee ranging from 30 to 120 days' interest. The term of, and interest rate
charged on, our outstanding loans are subject to SBA regulations. Under SBA
regulations, the maximum rate of interest permitted on loans originated by the
Company is 19.0%. Unlike medallion loans, for which competition precludes us
from charging the maximum rate of interest permitted under SBA regulations, we
are able to charge the maximum rate on certain commercial loans. We believe that
the increased yield on commercial loans compensates for their higher risk
relative to medallion loans and further illustrates the benefits of
diversification.
We generally originate commercial loans at an average loan-to-value ratio
of 70 to 75%. Substantially all of our commercial loans are collateralized by
security interests in the assets being financed by the borrower. In addition, we
have recourse against the vast majority of the principals of borrowers who
personally guarantee the loans. Although personal guarantees increase the
commitment of borrowers to repay their loans, there can be no assurance that the
assets available under personal guarantees would, if required, be sufficient to
satisfy the obligations secured by such guarantees. In certain cases, equipment
vendors may provide full and partial recourse guarantees on loans.
Delinquency And Loan Loss Experience
We generally follow a practice of discontinuing the accrual of interest
income on our commercial loans that are in arrears as to interest payments for a
period of 90 days or more. We deliver a default notice and begin foreclosure and
liquidation proceedings when management determines that pursuit of these
remedies is the most appropriate course of action under the circumstances.
At December 31, 2000, we had an aggregate principal balance of $28.9
million or 5.6% of the portfolio which was delinquent for 90 days or more,
compared to an aggregate principal balance of $30.4 million or 6.1% and $28.4
million or 5.8% of the portfolio at September 30, 2000 and December 31, 1999. We
consider a loan to be delinquent if the borrower fails to make payments for 90
days or more; however, we may agree to modify the payment terms of the loan with
a borrower that cannot make payments in accordance with the original loan
agreement. In such case, the loan will only be returned to accrual status if all
past due payments are brought fully current. Based upon our assessment of our
collateral position, we anticipate that a substantial portion of the principal
amount of
5
our delinquent loans would be collected upon foreclosure of such loans, if
necessary. There can be no assurance, however, that the collateral securing
these loans will be adequate in the event of foreclosure.
We monitor delinquent loans for possible exposure to loss. In our
analysis, we review various factors, including the value of the collateral
securing the loan and the borrower's prior payment history. 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 the valuation of our portfolio quarterly to reflect
our estimate of the current realizable value of our loan portfolio. Since no
ready market exists for this portfolio, fair value is subject to the good faith
determination of our management and the approval of our Board of Directors.
Because of the subjectivity of these estimates, there can be no assurance that
in the event of a foreclosure or the sale of portfolio loans we would be able to
recover the amounts reflected on our balance sheet.
In determining the value of our portfolio, management and the board of
directors may take into consideration various factors such as the financial
condition of the borrower and the adequacy of the collateral. For example, in a
period of sustained increases in market rates of interest, management and the
Board of Directors could decrease its valuation of the portfolio if the
portfolio consists primarily of fixed-rate loans. Our valuation procedures are
designed to generate values which approximate the value that would have been
established by market forces and are therefore subject to uncertainties and
variations from reported results. Based upon these factors, we determine net
unrealized depreciation of investments or the amount by which our estimate of
the current realizable value of our portfolio is below our cost basis.
The following table sets forth the changes in Medallion's unrealized
appreciation (depreciation) of investments for the periods indicated:
=========================================================================================================================
Equity
Loans Investments Total
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ (2,824,218) $ 3,132,650 $ 308,432
Increase in unrealized:
Appreciation on investments 409,943 3,347,178 3,757,121
Depreciation on investments (675,883) (458,489) (1,134,372)
Unrealized depreciation of acquired subsidiary (200,000) -- (200,000)
Reversals of unrealized appreciation (depreciation) related to
realized:
Gains on investments -- (1,167,363) (1,167,363)
Losses on investments 1,125,866 -- 1,125,866
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 (2,164,292) 4,853,976 2,689,684
Increase in unrealized:
Appreciation on investments -- 12,966,343 12,966,343
Depreciation on investments (7,208,586) (208,853) (7,417,439)
Reversals of unrealized appreciation (depreciation) related to realized:
Gains on investments -- (18,197,295) (18,197,295)
Losses on investments 388,825 -- 388,825
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 (8,984,053) (585,829) (9,569,882)
Increase in unrealized:
Appreciation on investments 412,807 200,000 612,807
Depreciation on investments (636,367) (20,767) (657,134)
Reversals of unrealized appreciation (depreciation) related to realized:
Gains on investments (2,573) (15,981) (18,554)
Losses on investments 2,221,396 -- 2,221,396
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ (6,988,790) $ (422,577) $ (7,411,367)
=========================================================================================================================
6
The following table presents credit-related information for the investment
portfolios as of December 31:
===========================================================================================
2000 1999 1998
- -------------------------------------------------------------------------------------------
Total loans
Medallion loans $ 299,302,548 $ 321,900,869 $ 286,231,532
Commercial loans 212,721,373 165,653,933 110,837,114
-----------------------------------------------------
Total loans 512,023,921 487,554,802 397,068,646
Equity investments (1) 2,129,685 2,012,394 11,579,329
-----------------------------------------------------
Total loans and equity investments $ 514,153,606 $ 489,567,196 $ 408,647,975
- -------------------------------------------------------------------------------------------
Realized losses on loans (2) $ 2,221,396 $ 394,268 $ 1,125,866
- -------------------------------------------------------------------------------------------
Net unrealized depreciation
(appreciation) on investments
Loans $ 6,988,790 $ 8,984,053 $ (2,164,292)
Equity investments 422,577 585,829 4,853,980
-----------------------------------------------------
Total $ 7,411,367 $ 9,569,882 $ 2,689,688
- -------------------------------------------------------------------------------------------
Realized losses as a % of total
loans 0.43% 0.08% 0.28%
Realized losses as a % of total
loans and equity investments (2) 0.43% 0.08% 0.28%
Realized losses as a % of
commercial loans 1.04% 0.24% 1.06%
Realized losses as a % of
commercial loans and equity
investments (2) 1.03% 0.24% 0.96%
- -------------------------------------------------------------------------------------------
Net unrealized depreciation
(loans only) as a % of total
loans 1.36% 1.84% (0.55%)
Total unrealized depreciation
(appreciation) as a % of
total loans and equity
investments 1.44% 1.95% 0.66%
Net unrealized depreciation
(appreciation) (loans only)
as a % of commercial loans 3.29% 5.42% (1.95%)
Net unrealized depreciation
(appreciation) as a % of
commercial loans and equity
investments 3.45% 5.71% 2.20%
===========================================================================================
(1) Represents common stock and warrants held as investments.
(2) Includes $178,199 of realized losses on equity investments for the year
2000, and $0 for 1999 and 1998.
(3) All realized losses relate to the commercial loan portfolio. There were no
realized losses on medallion loans for the years ending December 31, 2000,
1999, and 1998.
- --------------------------------------------------------------------------------
Investment Activity
The following table sets forth the components of investment activity in the
investment portfolios in the periods indicated:
================================================================================
Year Ended December 31,
- --------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Net investments at beginning of period $489,567 $408,208 $334,141
Investments originated 197,512 303,335 257,737
Repayments of investments (170,084) (231,290) (202,934)
Increase in unrealized appreciation
(depreciation), net 2,159 (12,260) 2,581
Realized gains (losses), net (3,884) 22,545 1,291
Amortization of origination costs (1,116) (971) (1,353)
Acquisitions -- -- 16,745
----------------------------------------
Net increase in investments 24,587 81,359 74,067
----------------------------------------
Net investments at end of period $514,154 $489,567 $408,208
================================================================================
Investment Strategy
Our core philosophy has been "In niches there are riches." We try to
identify markets that are profitable and where we can be the industry leader.
Our core lending areas include medallion lending, automobile lending (taxicabs
and limousines only), SBA 7(a) guaranteed loans through an extensive network of
preferred lending offices, and asset-based financing. Additionally, we lend to
small
7
businesses that meet our overall credit criteria of strong collateral values and
personal ability to repay the debt. In all of our lending divisions, we look to
focus on making secured loans to achieve favorable yield to risk profiles and
below average losses. In addition to increasing market share in existing lending
markets and identifying new niches, we have sought to acquire specialty finance
companies that make secured loans to small businesses which have experienced
historically low loan losses similar to our own. Since our initial public
offering in May 1996, we have acquired eight specialty finance companies, three
loan portfolios, and three taxicab roof top advertising companies.
Marketing, Origination and Loan Approval Process
We employ 32 loan originators that originate medallion loans and
commercial loans. Each loan application is individually reviewed through
analysis of a number of factors, including loan-to-value ratios, a review of the
borrower's credit history, public records, personal interviews, trade
references, personal inspection of the premises, and approval from the TLC, SBA,
or other regulatory body, if applicable. We also require each applicant to
provide personal and corporate tax returns, premises leases, and/or property
deeds. Our senior management establishes loan origination criteria. Loans that
conform to such criteria may be processed by a loan officer with the proper
credit authority, and non-conforming loans must be approved by the Chief
Executive Officer or the Chief Credit Officer. Additionally, both medallion and
commercial loans are sourced from brokers with extensive networks of applicants,
and commercial loans are also referred by our contacts with banks, attorneys,
and accounting firms.
TAXICAB ROOFTOP ADVERTISING
Medallion Taxi Media, Inc (Media) provides taxicab rooftop advertising,
which is a relatively undeveloped segment of the out-of-home advertising
industry. Out-of-home advertising includes:
o traditional outdoor advertising, such as billboards and posters;
o Transit advertising, such as taxicabs, buses, bus shelters, subway,
commuter train and airport advertising; and
o In-store point of sale advertising.
We currently provide taxicab rooftop advertising in over 30 major cities
and have the leading market share in New York, Los Angeles, Philadelphia, Dallas
and Baltimore/Washington D.C. Our goal is to become the leading national
provider of taxicab rooftop advertising by establishing a presence in additional
major U.S. metropolitan markets. As of December 31, 2000, we had approximately
10,000 installed displays.
We entered this business in November 1994 with the organization of Media,
and since that time the business has grown rapidly. Generally, we enter into
agreements with taxicab associations, fleets or individuals to lease taxicab
rooftop space for five-year terms. We have added an additional 1,700 displays to
the number under contract in New York City. On September 1, 1998, we acquired
the assets of Taxi Ads, LLC which had 855 displays in service in New Orleans,
Philadelphia, and San Diego. On February 2, 1999, Media purchased all of the
common stock of Transit Advertising Displays, Inc., which operates installed
displays in the Baltimore and Washington, D.C. areas. On September 30, 1999,
Media entered into an agreement with Yellow Cab Service Corp. to sell
advertising space on a commission basis on its 3,000 taxicab trunk signs located
throughout the Southeast. On August 7, 2000, we entered into an agreement with
Yellow Cab Service Corp., the taxi division of Coach U.S.A., to place
advertising on more than 2,300 taxis in ten additional cities. On August 30,
2000, Media purchased all the assets of Out There Media L.L.C. ("Out There"), a
privately held company headquartered in Cleveland. Out There has the right to
place an advertisement on top of more than 250 taxis in Cleveland, Columbus and
Toledo and has contracts with some of the largest taxi fleets in each of their
respective cities.
We attach each display to the rooftop of a taxicab and perform all ongoing
display maintenance and repair. The display remains our property. The display
serves as a platform or frame for advertising copy, which is preprinted on vinyl
sheets with adhesive backing and provided by the advertiser. The advertising
copy adheres to the display and is illuminated whenever the taxicab is in
operation. The vinyl sheet is durable and is generally left on the display for
up to 90 days. The advertising copy is replaced at the advertiser's discretion
and cost when advertising campaigns change. The standard size of the vinyl
advertising copy, 14 inches high and 48 inches long, was designed to be
proportionally similar to "bulletins" or "billboards" to permit advertisers to
conveniently translate billboard copy to display copy.
8
We market the displays to advertising agencies and outdoor advertising
buying agencies. Advertising contracts generally vary from 30 days to one year
and provide for monthly payments by the advertiser. The following is a sample of
Media's advertising accounts in 2000:
o Armani Exchange
o Versace
o Fleet Bank N.A.
o Continental Airlines
o M&M Mars
o Kellogg's
o Old Navy
o Banana Republic
o Disney's The Lion King on Broadway
o Hot Jobs.com
o Alta Vista
o Hard Rock Cafe
o California Pizza Kitchen
o Fox Family Channel
o Sony
o Fossil
o Kate Spade
We believe that there are growth opportunities within our existing markets
because only approximately 40% of New York City taxicabs, and less than 10% of
taxicabs nationwide, have rooftop advertising. In addition, we believe that our
growth will be facilitated by our reputation and relationship within the taxicab
industry and because our arrangement with the taxicab owners provides them with
incremental income.
On September 14, 2000, through a joint venture with Yahoo!, Inc., we
introduced 10 Internet enabled taxicabs in New York. These taxicabs are equipped
with Palm Inc.'s Palm Pilot VII handheld computers, allowing passengers to
access the Internet while in transit. On February 8, 2001, we announced that
Media entered into an agreement to acquire Taxi Media Network, the largest
taxicab advertising company in Japan, which holds the rights to provide
advertising on 7,000 taxis in Japan. The transaction is subject to due diligence
reviews and other customary closing conditions.
SOURCES OF FUNDS
Overview
We fund our lending operations primarily through credit facilities with
bank syndicates and, to a lesser degree, secured commercial paper and through
fixed-rate, senior secured notes and long-term subordinated debentures issued to
or guaranteed by the SBA. The determination of funding sources is established by
our management, based upon an analysis of the respective financial and other
costs and burdens associated with funding sources. Currently, Medallion has
fully drawn down its existing bank lines of credit. The table below summarizes
our borrowings as of December 31, 2000:
================================================================================
(Dollars in thousands) Total
- --------------------------------------------------------------------------------
Cash $15,653
Revolving lines of credit (1) 333,500
Amounts available 3,734
Amounts outstanding 305,700
Average interest rate 7.83%
Maturity 6/01 - 9/01
Commercial paper 24,066
Average interest rate 7.10%
Maturity 6/01
SBA debentures 21,360
Average interest rate 7.28%
Maturity 12/02 - 9/07
Senior secured notes 45,000
Average interest rate 7.20%
Maturity 6/04 - 9/04
Total cash and
amounts available
under credit facilities $19,387
================================================================================
Total debt outstanding $396,126
================================================================================
(1) Commercial paper outstanding is deducted from revolving credit lines
available as the line of credit acts as a liquidity facility for the
commercial paper.
- --------------------------------------------------------------------------------
9
We fund our fixed-rate loans with variable-rate bank debt and fixed-rate
senior secured notes and SBA debentures. The mismatch between maturities and
interest-rate sensitivities of these balance sheet items results in interest
rate risk. We seek to manage our exposure to increases in market rates of
interest to an acceptable level by:
o Originating adjustable rate loans;
o Incurring fixed-rate debt; and
o Purchasing interest rate caps to hedge a portion of our
variable-rate debt against increases in interest rate.
Nevertheless, we accept varying degrees of interest rate risk depending on
market conditions. For additional discussions of our funding sources and asset
and liability management strategy, see Asset/Liability Management on page 23.
OUR OPERATION AS A RIC
We have elected to be taxed as a RIC under Sections 851 through 855 of the
Code. Now and in the future, we plan to operate in a manner that satisfies the
requirements for taxation as a RIC under the Code. However, we cannot give
assurances that we will remain qualified. The sections of the Code relating to
qualification and operation as a RIC are highly technical and complex. The
following discussion summarizes material aspects of the sections of the Code
that govern the federal income tax treatment of a RIC and the treatment of
stockholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations developed under the Code and the rules, and
administrative and judicial interpretations of these provisions, rules and
regulations.
In general, if certain detailed conditions of the Code are met, business
development companies, like us, are generally not taxed, at the corporate level,
on "investment company taxable income" that is distributed to stockholders. The
income of a non-RIC corporation is generally subject to corporate tax. In
addition, stockholders who receive income from non-RIC corporations are also
taxed on the income they receive. Thus, the income of a non-RIC corporation is
subject to "double taxation" (i.e., taxation at both the corporate and
stockholder levels). RIC treatment substantially eliminates this "double
taxation." A RIC is, however, generally subject to federal income tax, at
regular corporate rates, on undistributed investment company taxable income.
To avoid a 4% nondeductible federal excise tax on undistributed income and
capital gains, we must distribute (or be deemed to have distributed) by December
31st of each year: 1) at least 98% of our ordinary income for such year; 2) at
least 98% of our capital gain net income (which is the excess of our capital
gain over our capital loss and is generally computed on the basis of the
one-year period ending on October 31st of such year); and 3) any amounts that
were not distributed in the previous calendar year and on which no income tax
has been paid.
If we fail to qualify as a RIC in any year, we will be subject to federal
income tax as if we were a domestic corporation, and our stockholders will be
taxed in the same manner as stockholders of ordinary corporations. If this were
to occur, we could be subject to potentially significant tax liabilities and the
amount of cash available for distribution to our stockholders could be reduced.
The Code's definition of the term "RIC" includes a domestic corporation
that has elected to be treated as a business development company under the 1940
Act and meets certain requirements. These requirements are:
(a) The company derives at least 90% of its gross income for each taxable
year from dividends, interest, interest payments with respect to securities
loans and gains from the sale or other disposition of stocks or securities or
foreign currencies, or other income derived from its business of investing in
such stocks, securities or currencies; and
(b) The company diversifies its holdings so that, at the close of each
quarter of its taxable year,
(i) At least 50% of the value of its total assets is represented by (A)
cash, and cash items (including receivables), U.S. Government securities and
securities of other RICs, and (B) other securities limited in respect of any one
issuer to an amount not greater in value than 5% of the value of the total
assets of the company and to not more than 10% of the outstanding voting
securities of such issuer, and
(ii) Not more than 25% of the value of total assets is invested in the
securities (other than U.S. Government securities or securities of other RICs)
of any one issuer or two or of more issuers controlled by the company and
engaged in the same, similar or related trades or businesses.
These diversification requirements could restrict the expansion of our
taxicab rooftop advertising business and our medallion collateral appreciation
loan business.
In addition, to qualify as a RIC under the Code, in each taxable year, a
company also must distribute to its stockholders at least 90% of (a) its
investment company taxable income and (b) the excess of its tax-exempt interest
income over certain disallowed deductions.
10
If we satisfy these requirements, neither the investment company taxable
income we distribute to stockholders nor any net capital gain distributed to our
stockholders should be subject to federal income tax. Investment company taxable
income and/or net capital gains retained by us should be subject to federal
income tax at regular corporate income tax rates. However, we may designate
retained net long-term capital gains as "deemed distributions" and pay a tax on
this for the benefit of our stockholders. We currently intend to continue
distributing income to our stockholders for each of our taxable years
substantially all of our investment company taxable income and may or may not
distribute any capital gains.
If we acquire debt obligations that were originally issued at a discount,
or bear interest rates that do not call for payments at fixed rates (or certain
"qualified variable rates") at regular intervals over the life of the
obligation, we will be required to include, as interest income, in each year, a
portion of the "original issue discount" that accrues over the life of the
obligation regardless of whether it receives the income, and we will be
obligated to make distributions accordingly. If this were to occur, we may
borrow funds or sell assets to meet the distribution requirements. However, the
1940 Act prohibits us from making distributions to stockholders while senior
securities are outstanding unless we meet certain asset coverage requirements.
If we are unable to make the required distributions, we may be subject to the
nondeductible 4% excise tax or we may fail to qualify as a RIC. In addition, the
SBA restricts the amount of distributions to the amount of undistributed net
realized earnings less the allowance for unrealized loan losses (which in our
case includes unrealized depreciation).
If we qualify as a RIC, distributions made to our taxable domestic
stockholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be considered ordinary income to
them. Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed our actual net
long-term capital gain for the taxable year) without regard to the period for
which the stockholder has held its stock. Corporate stockholders, however, are
subject to tax on capital gain dividends at the same rate as ordinary income.
To the extent that we make distributions in excess of current and
accumulated earnings and profits, these distributions are treated first as a
tax-free return of capital to the stockholder, reducing the tax basis of a
stockholder's common stock by the amount of such distribution (but not below
zero). Distributions in excess of the stockholder's tax basis are taxable as
capital gains (if the common stock is held as a capital asset). In addition, any
dividends declared by us in October, November or December of any year and
payable to a stockholder of record on a specific date in any such month shall be
treated as both paid by us and received by the stockholder on December 31st of
such year, provided that the dividend is actually paid by us during January of
the following calendar year. Stockholders may not include in their individual
income tax returns any net operating losses or capital losses by us.
If we choose to retain and pay tax on any net capital gain rather than
distribute such gain to our stockholders, we will designate such deemed
distribution in a written notice to stockholders within 60 days after the close
of the taxable year. Each stockholder would then be treated, for federal income
tax purposes, as if we had distributed to such stockholder, on the last day of
its taxable year, the stockholder's pro rata share of the net long-term capital
gain retained by us and the stockholder had paid its pro rata share of the taxes
paid by us and reinvested the remainder in us.
In general, any loss upon a sale or exchange of common stock by a
stockholder who has held the stock for six months or less (after applying
certain holding period rules) will be treated as long-term capital loss, to the
extent that distributions from us are required to be treated by the stockholder
as long-term capital gains.
OUR OPERATION AS A BUSINESS DEVELOPMENT COMPANY (BDC)
As a BDC, we are subject to regulation under the 1940 Act. The 1940 Act
contains prohibitions and restrictions relating to transactions between
investment companies and their affiliates, principal underwriters and affiliates
of those affiliates or underwriters. In addition, the 1940 Act provides that we
may not change the nature of our business in a way which would cause us to lose
our status as a BDC or withdraw our election as a BDC, unless we are authorized
by a vote of a "majority of the Company's outstanding voting securities," as
defined under the 1940 Act.
We are permitted, under specified conditions, to issue multiple classes of
indebtedness and one class of stock (collectively, "senior securities," as
defined under the 1940 Act) senior to the shares of common stock if the asset
coverage of the indebtedness and all senior securities is at least 200%
immediately after the issuance. Subordinated SBA debentures guaranteed by or
issued to the SBA by our RIC subsidiaries are not subject to this asset coverage
test. In addition, while senior securities are outstanding, provisions must be
made to prohibit the declaration of any dividend or other distribution to
stockholders (except stock dividends) or the repurchase of securities or shares
unless we meet the applicable asset coverage ratios at the time of the
declaration of the dividend or distribution or repurchase.
Under the 1940 Act, a BDC may not acquire any asset other than assets of
the type listed in Section 55(a) of the 1940 Act ("Qualifying Assets") unless,
at the time the acquisition is made, certain Qualifying Assets represent at
least 70% of the value of the company's total assets. The principal categories
of Qualifying Assets relevant to our business are the following:
(1) Securities purchased in transactions not involving a public offering
from the issuer of such securities, which issuer is an eligible portfolio
company. An "eligible portfolio company" is defined in the 1940 Act as any
issuer which:
11
(a) Is organized under the laws of, and has its principal place of
business in, the United States;
(b) Is not an investment company other than an SBIC wholly-owned
by the BDC; and
(c) Satisfies one or more of the following requirements:
(i) The issuer does not have a class of securities with
respect to which a broker or dealer may extend margin
credit; or
(ii) The issuer is controlled by a BDC and the BDC has an
affiliated person serving as a director of issuer;
(iii) The issuer has total assets of not more than $4 million
and capital and surplus (shareholders' equity less
retained earnings) of not less than $2 million, or such
other amounts as the Securities and Exchange Commission
may establish by rule or regulation; or
(iv) Issuer meets such other requirements as the Commission
may establish from time to time by rule or regulation;
(2) Securities for which there is no public market and which are purchased
in transactions not involving a public offering from the issuer of such
securities where the issuer is an eligible portfolio company which is controlled
by the BDC;
(3) Securities received in exchange for or distributed on or with respect
to securities described in (1) or (2) above, or pursuant to the exercise of
options, warrants or rights relating to such securities; and
(4) Cash.
In addition, a BDC's cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment must have
been organized (and have its principal place of business) in the United States
for the purpose of making investments in the types of securities described in
(1) or (2) above.
To count securities as Qualifying Assets for the purpose of the 70% test,
a BDC must either control the issuer of the securities or must make available to
the issuer of the securities significant managerial assistance; except that,
where a business development company purchases such securities in conjunction
with one or more other persons acting together, one of the other persons in the
group may make available the required managerial assistance. We believe that the
common stock of MFC and Media are Qualifying Assets.
REGULATION BY THE SBA
MFC, Medallion Capital, and Freshstart each operate as a Small Business
Investment Company (SBIC). The Small Business Investment Act of 1958 (SBIA)
authorizes the organization of SBICs as vehicles for providing equity capital,
long term financing and management assistance to small business concerns. The
SBIA and the SBA Regulations define a "small business concern" as a business
that is independently owned and operated, which does not dominate its field of
operation and which (i) has a net worth, together with any affiliates, of $18.0
million or less and average annual net income after U.S. federal income taxes
for the preceding two years of $6.0 million or less (average annual net income
is computed without the benefit of any carryover loss), or (ii) satisfies
alternative criteria under SBA Regulations that focus on the industry in which
the business is engaged and the number of persons employed by the business or
its gross revenues. In addition, at the end of each year, at least 20% of the
total amount of loans made after April 25, 1994 must be made in "smaller
businesses" which have a net worth of $6.0 million or less and average net
income after federal income taxes for the preceding two years of $2.0 million or
less. SBA Regulations also prohibit an SBIC from providing funds to a small
business concern for certain purposes, such as relending and reinvestment.
MFC is authorized to make loans to borrowers other than Disadvantaged
Businesses (that is, businesses that are at least 50% owned, and controlled and
managed, on a day to day basis, by a person or persons whose participation in
the free enterprise system is hampered because of social or economic
disadvantage) if, at the time of the loan, MFC has in its portfolio, outstanding
loans to Disadvantaged Businesses with an aggregate cost basis equal to or
exceeding the value of the unamortized repurchase discount under the preferred
stock repurchase agreement between MFC and the SBA.
Under current SBA Regulations, the maximum rate of interest that MFC may
charge may not exceed the higher of (i) 19% and (ii) the sum of (a) the higher
of (I) that company's weighted average cost of qualified borrowings, as
determined under SBA Regulations, or (II) the current SBA debenture rate, plus
(b) 11%, rounded to the next lower eighth of one percent. At December 31, 2000,
the maximum rate of interest permitted on loans originated by the RIC
Subsidiaries was 19%. At December 31, 2000, our outstanding medallion loans had
a weighted average rate of interest of 9.22% and outstanding commercial loans
had a weighted average rate of interest of 12.41%. Current SBA Regulations also
require that each loan originated by an SBIC have a term of between 5 years and
20 years; loans to Disadvantaged Businesses may be for a minimum of four years.
However, recent legislation enacted by the U.S. Congress and signed into law by
the President on December 21, 2000, Public Law 106-554, amended the SBIA to
define "long term" financing as "any period of time not less than one year." The
effect of this statutory change is to eviscerate SBA's regulatory authority to
require a minimum period of financing for a period of time longer than one year.
12
The SBA restricts the ability of SBICs to repurchase their capital stock,
to retire their SBA debentures and to lend money to their officers, directors
and employees or invest in affiliates thereof. The SBA also prohibits, without
prior SBA approval, a "change of control" or transfers which would result in any
person (or group of persons acting in concert) owning 10% or more of any class
of capital stock of an SBIC. A "change of control" is any event which would
result in the transfer of the power, direct or indirect, to direct the
management and policies of an SBIC, whether through ownership, contractual
arrangements or otherwise.
Under SBA Regulations, without prior SBA approval, loans by licensees with
outstanding SBA leverage to any single small business concern may not exceed 20%
of an SBIC's Regulatory Capital, as defined, however, under the terms of the
respective conversion agreements with the SBA, MFC is authorized to make loans
to Disadvantaged Borrowers in amounts not exceeding 30% of their respective
Regulatory Capital.
SBICs must invest funds that are not being used to make loans in
investments permitted under SBA Regulations. These permitted investments include
direct obligations of, or obligations guaranteed as to principal and interest
by, the government of the United States with a term of 15 months or less and
deposits maturing in one year or less issued by an institution insured by the
FDIC. The percentage of an SBIC's assets invested in this manner depends on,
among other things, loan demand, timing of equity infusions and SBA funding and
availability of funds under credit facilities.
SBICs may purchase voting securities of small business concerns in
accordance with SBA Regulations. SBA Regulations prohibit SBICs from controlling
a small business concern except where necessary to protect an investment. SBA
Regulations presume control when SBICs purchase (i) 50% or more of the voting
securities of a small business concern if the small business concern has less
than 50 stockholders or (ii) more than 20% (and in certain situations up to 25%)
of the voting securities of a small business concern if the small business
concern has 50 or more stockholders.
COMPETITION
Banks, credit unions and finance companies, some of which are SBICs,
compete with the Company in originating medallion loans and commercial loans.
Finance subsidiaries of equipment manufacturers also compete with the Company in
originating commercial loans. 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 the
Company will be able to identify and complete the financing transactions that
will permit it to compete successfully. The Company's taxicab rooftop
advertising business competes with other taxicab rooftop advertisers, as well as
all segments of the out-of-home advertising industry and other types of
advertising media, including cable and network television, radio, newspapers,
magazines and direct mail marketing. 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 the Company will
continue to compete with these businesses successfully.
EMPLOYEES
As of December 31, 2000, the Company employed a total of 172 persons. The
Company believes that its relations with all of its employees are good.
ITEM 2. PROPERTIES
The Company leases approximately 17,000 square feet of office space in New
York City for its corporate headquarters under a lease expiring in June 2006.
The Company also leases office space for loan origination offices in Boston, MA,
Chicago, IL, Hartford, CT, Southbury, CT, Clifton, NJ, Providence, RI,
Rochester, NY, Phoenix, AZ, Wellesley, MA, Somers Point, NJ, Towson, MD, and
Minneapolis, MN. Media leases space for sales and maintenance in New York, NY,
New Orleans, LA, Washington, DC, Boston, MA and Los Angeles, CA. The Company
does not own any real property. The Company believes that its leased properties,
taken as a whole, are in good operating condition and are suitable for the
Company's current business operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries have been named as defendants in various
legal proceedings incident to the ordinary course of its business. The Company
intends to vigorously defend these outstanding claims. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 2000 fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 March 30,
2001, there were approximately 198 holders of record of Medallion's common
stock.
13
On March 30, 2001, the last reported sale price of our common stock was
$10.13 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 Medallion's common stock on the Nasdaq National
Market:
================================================================================
2000 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $ 19 $15-3/4
Second Quarter 17-15/16 14-1/6
Third Quarter 17-3/4 15-1/4
Fourth Quarter 17-1/8 11-1/2
1999 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $ 21-1/4 $ 14
Second Quarter 19-5/8 15-1/8
Third Quarter 21-3/4 18-1/8
Fourth Quarter 21-9/16 17-1/4
================================================================================
We have distributed and currently intend to continue to distribute 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
Investment Company 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, by SBA
regulations and under the terms of the SBA debentures. We have adopted a
dividend reinvestment plan pursuant to which stockholders can have distributions
reinvested in additional shares of common stock. There can be no assurances;
however, that we will have sufficient earnings to pay such dividends in the
future.
14
ITEM 6. 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 years ended December
31, 2000, 1999, and 1998. Financial information for the years ended December 31,
1997 and 1996, has been derived from audited financial statements. Prior year
amounts have been restated to reflect the pooling of interests with FreshStart.
==========================================================================================================================
Year Ended December 31,
------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2000 1999 1998 1997 1996 (13)
- --------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data
Investment income $55,356 $44,076 $37,854 $27,658 $12,292
Interest expense 28,944 20,988 16,967 10,864 5,328
------------------------------------------------------------------------
Net interest income 26,412 23,088 20,887 16,794 6,964
Equity in earnings (losses) of
unconsolidated subsidiary (1) (421) (214) 1,200 203 (63)
Other income 3,378 2,247 1,663 1,087 411
Gain on sale of loans 2,814 3,014 2,316 336 --
Accretion of negative goodwill 351 722 722 722 421
Operating expenses 22,909 17,470 13,696 6,590 3,042
Amortization of goodwill 540 530 506 368 259
Dividends on minority interest -- -- -- -- (116)
Income tax provision (benefit) (181) 49 (152) (930) 436
------------------------------------------------------------------------
Net investment income 9,266 10,808 12,738 11,254 3,880
Realized gain (loss) on investments, net (3,884) 22,545 1,291 78 558
Change in unrealized appreciation
(depreciation) of investments (2) 2,159 (12,259) 2,581 1,929 758
------------------------------------------------------------------------
Net increase in net assets $7,541 $21,094 $16,610 $13,261 $5,196
resulting from operations (3)
- --------------------------------------------------------------------------------------------------------------------------
Net investment income per diluted share $0.64 $0.74 $0.87 $0.88 $0.65
Net investment income per diluted share
adjusted for acquisition and other
non-recurring charges (4) 0.84 0.74 0.98 0.88 0.65
Net increase in net assets resulting from
operations per diluted share 0.52 1.44 1.14 1.04 0.87
Dividends declared per share (5) 1.19 1.27 1.16 0.88 0.34
- --------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
Basic 14,536,942 14,515,660 14,461,276 12,621,301 5,839,094
Diluted 14,576,183 14,620,437 14,591,045 12,769,394 5,983,352
==========================================================================================================================
Balance Sheet Data
Investments, net of unrealized
depreciation on investments $514,154 $489,567 $408,208 $334,141 $197,104
Total assets 560,715 533,924 448,037 362,168 215,277
Notes payable 305,700 195,450 120,600 138,750 96,450
Commercial paper 24,066 93,984 103,082 -- --
Senior secured notes 45,000 45,000 -- -- --
Subordinated SBA debentures 21,360 22,770 55,360 53,540 38,806
Total liabilities 412,982 376,263 292,490 206,306 140,205
Negative goodwill -- 351 1,073 1,795 258
Total shareholders' equity 147,733 157,310 154,474 154,067 74,814
==========================================================================================================================
15
============================================================================================================================
Year Ended December 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996(13)
============================================================================================================================
Selected Financial Ratios And Other Data
- ----------------------------------------------------------------------------------------------------------------------------
Return on average assets (6)
Net investment income 1.69% 2.20% 3.14% 3.81% 3.32%
Net increase in net assets resulting from operations 1.38 4.30 4.10 4.49 4.39
Net increase in net assets resulting from operations 1.95 4.30 4.47 4.49 4.39
adjusted for acquisition and other non-recurring
charges (4)
Return on average equity (7)
Net investment income 6.27 6.87 8.25 7.30 5.45
Net increase in net assets resulting from operations 4.94 13.53 10.77 11.28 7.16
Net increase in net assets resulting from operations 7.00 13.53 11.74 11.28 7.16
adjusted for acquisition and other non-recurring
charges (4)
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average yield, end of period (8) 10.56 9.91 9.92 10.20(13) 10.98
Weighted average cost of funds, end of period (9) 7.69 7.12 6.49 7.15(13) 7.15
Net interest spread, end of period (10) 2.87 2.79 3.43 3.05(13) 3.83
Other income ratio (11) 0.66 0.46 0.41 0.33 0.21
Operating expense ratio (12) 4.09 3.27 3.06 1.82 1.41
- ----------------------------------------------------------------------------------------------------------------------------
Medallion loans as a percentage of total investment 58.21 65.75 70.1 (13) 72.13(13) 68.30
portfolio
Commercial loans as a percentage of total investment
portfolio 41.37 33.84 27.10(13) 25.48(13) 30.52
Equity investments as a percentage of total investment
portfolio 0.41 0.41 2.80 2.24 1.20
- ----------------------------------------------------------------------------------------------------------------------------
Investments to assets (14) 91.70 91.69 91.11 92.26 91.56
Equity to assets (15) 26.35 29.46 34.48 42.54 33.70
Debt to equity (16) 268.14 227.07 180.64 124.81 186.42
============================================================================================================================
(1) Equity in earnings (losses) of unconsolidated subsidiary
represents the net income (loss) for the period indicated from
Medallion's investment in Media.
(2) Change in unrealized appreciation (depreciation) of investments
represents the increase (decrease) for the period in the fair value
of Medallion's investments.
(3) 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.
(4) The Company considers net investment income before acquisition and
other non-recurring charges to be a more appropriate measure of
operating performance; consequently, this calculation represents net
investment income plus acquisition-related and other non-recurring
charges of $3,140,000 in 2000, and $1,494,000 in 1998, divided by
weighted average diluted common shares outstanding.
(5) Includes $0.36 per share declared on November 17, 2000 and paid on
January 12, 2001 to shareholders of record as of December 8, 2000.
(6) Return on average assets represents the net investment income or net
increase in net assets resulting from operations, for the period
indicated, divided by average total assets.
(7) Return on average equity represents the net investment income or net
increase in net assets resulting from operations, for the period
indicated, divided by shareholders' equity.
(8) Weighted average yield, end of period represents the end of the year
weighted average interest rate on investments at the date indicated.
(9) Weighted average cost of funds, end of period represents the end of
the year weighted average interest rate on debt at the date
indicated.
(10) Net interest spread, end of period represents weighted average
yield, end of period less weighted average cost of funds, end of
period.
(11) Other income ratio represents other income, for the year indicated,
divided by investments.
(12) Operating expense ratio represents operating expenses, for the year
indicated, divided by total assets.
(13) Does not include financial information for Freshstart.
(14) Represents total investments divided by total assets as of December
31.
(15) Represents total shareholders equity divided by total assets as of
December 31.
(16) Represents total debt (commercial paper, notes payable to banks,
senior secured notes, and SBA debentures payable) divided by total
shareholders equity as of December 31.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section should be read in conjunction
with Consolidated Financial Statements and Notes thereto for the years ended
December 31, 2000, 1999, and 1998. In addition, this section contains
forward-looking statements. These forward-looking statements are subject to the
inherent uncertainties in predicting future results and conditions. Certain
factors that could cause actual results and conditions to differ materially from
those projected in these forward-looking statements are set forth below in the
Investment Considerations section.
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 19% and our
commercial loan portfolio at a compound annual growth rate of 38%. Our
16
total assets under our management was approximately $745 million and has grown
from $215 million at the end of 1996, a compound annual growth rate of 35%.
Medallion's loan related earnings depend primarily on its level of net
interest income. Net interest income is the difference between the total yield
on Medallion's loan portfolio and the average cost of funds. Medallion funds its
operations through a wide variety of interest-bearing sources, such as revolving
bank facilities, secured commercial paper, senior secured notes and debentures
issued to and guaranteed by the SBA.
Net interest income fluctuates with changes in the yield on Medallion's
loan portfolio and changes in the cost of funds, as well as changes in the
amount of interest-bearing assets and interest-bearing liabilities held by
Medallion. Net interest income is also affected by economic, regulatory and
competitive factors that influence interest rates, loan demand and the
availability of funding to finance Medallion's lending activities. Medallion,
like other financial institutions, is subject to interest rate risk to the
degree that its interest-earning assets reprice on a different basis than its
interest-bearing liabilities.
Medallion originates loans under the Section 7(a) loan program of the SBA
through its wholly owned subsidiary BLL. Up to 75% of the amount of these loans
(up to $750,000) are guaranteed by the SBA. Medallion regularly sells the
guaranteed portion of these loans in the secondary market and holds the
non-guaranteed portion until maturity.
Medallion also invests in small businesses in selected industries through
its subsidiary Medallion Capital. Medallion Capital's investments are typically
in the form of secured debt instruments with fixed interest rates accompanied by
warrants to purchase an equity interest for a nominal exercise price (such
warrants are included in "Equity Investments"). Interest income is earned on the
debt investments.
Realized gains or losses on investments are recognized when the
investments are sold or written-off. The realized gains or losses represent the
difference between the proceeds received from the disposition of portfolio
assets, if any, and the cost of such portfolio assets. In addition, changes in
unrealized appreciation or depreciation of investments are recorded and
represent the net change in the estimated fair values of the portfolio assets at
the end of the period as compared with their estimated fair values at the
beginning of the period. Generally, "realized gains (losses) on investments" and
"changes in unrealized appreciation (depreciation) of investments" are inversely
related. When an appreciated asset is sold to realize a gain, a decrease in the
previously recorded unrealized appreciation occurs. Conversely, when a loss
previously recorded as an unrealized loss is realized by the sale or other
disposition of a depreciated portfolio asset, the reclassification of the loss
from "unrealized" to "realized" causes an increase in net unrealized
appreciation and an increase in realized loss.
Medallion's income from the taxicab rooftop advertising business, operated
by Media, is reflected on Medallion's books as earnings from an unconsolidated
subsidiary. Medallion continues to explore other opportunities in the taxicab
and lending industries, including possible strategies to participate directly
and/or indirectly in the appreciation of taxicab medallions.
Trend in Loan Portfolio
Medallion's investment income is driven by the principal amount of and
yields on its loan portfolio. To identify trends in the yields, the portfolio is
grouped by medallion loans, commercial loans, and equity investments. Since
December 31, 1998, medallion loans, while still making up a significant portion
of the total portfolio, have decreased in relation to the total portfolio
composition and commercial loans have increased.
The following table illustrates Medallion's investments at fair value and
the weighted average portfolio yields calculated using the contractual interest
rates of the loans at the dates indicated:
====================================================================================================================================
December 31, 1998 December 31, 1999 December 31, 2000
====================================================================================================================================
Contractual Contractual Contractual
Weighted Percentage Weighted Percentage Weighted Percentage
Average Principal of Total Average Principal of Total Average Principal of Total
(In thousands) Yield Amount Portfolio Yield Amount Portfolio Yield Amount Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Medallion loan portfolio 9.03% $286,232 70.1% 8.91% $321,901 65.8% 9.22% $299,303 58.2%
Commercial loan portfolio 12.16 110,837 27.1 11.69 165,654 33.8 12.41 212,721 41.4
Equity investments -- 11,579 2.8 -- 2,012 0.4 -- 2,130 0.4
-------------------- --------------------- ------------------------
Total portfolio 9.92 $408,648 100.0% 9.91 $489,567 100.0% 10.56 $514,154 100.0%
====================================================================================================================================
Portfolio Summary
Total Portfolio Yield
The weighted average yield of the total portfolio at December 31, 2000 was
10.56%, which is an increase of 65 basis points from 9.91% at December 31, 1999.
The increase in the total portfolio yield was due to the increased yield of the
commercial loan
17
portfolio and the shift in the composition of the portfolio to an increased
percentage of commercial loans. The total weighted average portfolio yield
decreased 1 basis point to 9.91% at December 31, 1999 from 9.92% at December 31,
1998. This slight decline resulted from the decrease in the yields of the
medallion and commercial loan portfolios, but was offset by an increased
percentage of commercial loans in Medallion's portfolio. Medallion expects to
try to continue increasing both the percentage of commercial loans in the total
portfolio and the origination of floating and adjustable-rate loans and non-New
York medallion loans.
Medallion Loan Portfolio
Medallion loans comprised 58% of the total portfolio of $514 million at
December 31, 2000, compared to 66% of the total portfolio of $490 million at
December 31, 1999 and 70% of the total portfolio of $409 million at December 31,
1998. The medallion loan portfolio decreased by $22.6 million or 7% in 2000,
reflecting a decrease in medallion loan originations, principally in New York
City, and Medallion's execution of participation agreements with third parties
for $26.1 million of low yielding New York medallion loans. Medallion retains a
portion of these participating loans and earns a fee for servicing the loans for
the third parties. The decrease was partially offset by increased originations
of Chicago and Boston medallion loans.
The weighted average yield of the medallion loan portfolio at December 31,
2000 was 9.22%, an increase of 31 basis points from 8.91% at December 31, 1999,
which was down 12 basis points from 9.03% at December 31, 1998. The increased
yield in 2000 primarily reflects Medallion's expansion into markets outside of
New York, which produce yields 100 to 300 basis points higher than loans
originated in the New York medallion market, offset by the effects of continuing
competition in the New York medallion market. At December 31, 2000, 23% of the
medallion loan portfolio represented loans outside New York compared to 16% and
11% at year-end 1999 and 1998, respectively. Medallion continues to focus its
efforts on originating higher yielding medallion loans outside the New York
market.
Collateral Appreciation Participation Loans
During the 2000 first half, we originated collateral appreciation
participation loans collateralized by Chicago taxi medallions of $30 million, of
which $21 million was syndicated to other financial institutions. In
consideration for modifications from our normal taxi medallion lending terms, we
offered loans at higher loan-to-value ratios and we are entitled to earn
additional interest income based upon any increase in the value of all $30
million of the collateral. The fair value of the collateral appreciation
participation loan portfolio at December 31, 2000 was $12.1 million, which
represented 2% of the total loan portfolio. Additional interest income totaled
approximately $3.1 million for 2000, and is included in investment income on the
consolidated statements of operations and in accrued interest receivable on the
consolidated balance sheets. We believe that the additional interest income
recorded is fully realizable through operation of the collateral or orderly
sales in the market. As a regulated investment company, Medallion is required to
mark-to-market these investments on a quarterly basis, just as it does on all of
its other investments. Medallion feels that it has adequately calculated the
fair market value on these investments and relies upon information such as
recent and historical medallion sale prices. If there is a decrease in the value
of taxicab medallions, the reduction in the value of the investments will be
reversed against investment income. The additional interest income is not
reflected in the yield calculations shown in the table above.
Commercial Loan Portfolio
Since 1997, Medallion has continued to shift the total portfolio mix
toward a higher percentage of commercial loans, which historically have had
higher yields than its medallion loans. Commercial loans were 41% of the total
portfolio at December 31, 2000 compared to 34% and 27% at December 31, 1999 and
1998, respectively. The increase in the commercial loan portfolio was due to
strong growth in the SBA Section 7(a) loan program and in the asset-based
lending portfolio.
The weighted average yield of the commercial loan portfolio at December 31, 2000
was 12.41%, an increase of 72 basis points from 11.69% at December 31,
1999,which was down 47 basis points from 12.16% at December 31, 1998. The
increase in 2000 and the decrease in 1999 primarily reflected a shift in the mix
within the commercial portfolio from fixed-rate loans to floating-rate or
adjustable-rate loans tied to the prime rate, and the corresponding sensitivity
of the yield to movements in the prime rate. Medallion continues to originate
adjustable-rate and floating-rate loans tied to the prime rate to help mitigate
its interest rate risk in a rising interest rate environment. At December 31,
2000, floating-rate loans represented approximately 69% of the commercial
portfolio compared to 52% and 28% at December 31, 1999 and 1998. Although this
strategy initially produces a lower yield, we believe that this strategy
mitigates interest rate risk by better matching our earning assets to their
adjustable-rate funding sources.
Equity Investments
Equity Investments were 0.4%, 0.4%, and 2.8% of Medallion's total
portfolio at December 31, 2000, 1999, and 1998. Equity investments are comprised
of common stock and warrants.
Trend in Interest Expense
Medallion's interest expense is driven by the interest rate payable on its
LIBOR-based short-term credit facilities with bank syndicates, long-term notes
payable and, to a lesser degree, secured commercial paper and fixed-rate,
long-term debentures issued to or guaranteed by the SBA.
18
The following table provides the interest rates and interest expense of
Medallion's major credit facilities for the years ended December 31, 2000, 1999,
and1998:
================================================================================
Percentage
Actual of Total
Interest Interest
Average Cost of Funds Expense Expense
- --------------------------------------------------------------------------------
December 31, 2000
Notes payable to banks 7.77% $14,034,234 48.5%
Commercial paper 7.25 9,827,886 34.0
Senior secured notes 7.31 3,287,459 11.4
SBA debentures 7.99 1,794,081 6.1
======================================================
Total 7.54 $28,943,660 100.0%
- --------------------------------------------------------------------------------
December 31, 1999
Notes payable to banks 6.97% $ 9,143,232 43.6%
Commercial paper 5.82 7,171,459 34.2
Senior secured notes 7.95 1,512,684 7.2
SBA debentures 7.44 3,160,314 15.0
======================================================
Total 6.64 $20,987,689 100.0%
- --------------------------------------------------------------------------------
December 31, 1998
Notes payable to banks 7.15% $ 9,297,673 54.8%
Commercial paper 6.21 3,555,769 21.0
SBA debentures 8.14 4,113,515 24.2
======================================================
Total 7.13 $16,966,957 100.0%
================================================================================
In recent years, Medallion has reduced its reliance on SBA financing in
favor of bank debt and other funding sources. Medallion will continue to seek
SBA funding, however to the extent it offers attractive rates. SBA financing
subjects its recipients to limits on the amount of secured bank debt they may
incur. Accordingly, Medallion plans to limit its use of SBA funding to the
subsidiary level to fund loans that qualify under the SBIA and SBA regulations.
Further, Medallion believes that its transition to financing operations
primarily with short-term LIBOR-based secured bank debt and secured commercial
paper has generally decreased its interest expense, but has also increased
Medallion's exposure to the risk of increases in market interest rates, which
Medallion attempts to mitigate with certain hedging strategies. At December 31,
2000 and December 31, 1999, short-term LIBOR-based debt including commercial
paper constituted 83.2% and 81.0% of total debt, respectively.
Medallion's cost of funds is primarily driven by the rates paid on its
various debt instruments and their relative mix and changes in the levels of
average borrowings outstanding. Medallion incurs LIBOR-based debt for terms
generally ranging from 1 to 180 days. Medallion's debentures issued to or
guaranteed by the SBA typically have initial terms of ten years. Medallion's
cost of funds reflects changes in LIBOR to a greater degree than in the past
because LIBOR-based debt represents a greater proportion of Medallion's debt.
Medallion measures its cost of funds as its aggregate interest expense for all
of its interest-bearing liabilities divided by the face amount of such
liabilities. Medallion analyzes its cost of funds in relation to the average of
the 90- and 180-day LIBOR (the "LIBOR Benchmark"). Medallion's average cost of
funds for 2000 was 7.54%, up from 6.64% in 1999, reflecting the higher rate
environment resulting from the series of rate increases initiated by the Federal
Reserve Board.
During December 2000, Medallion's outstanding commercial paper began to
mature and was replaced by draws on the notes payable to banks at a cost of
approximately 7.83%, as compared to a cost of 7.10% under the commercial paper
program. The commercial paper was not renewed as a result of the loss of a
credit rating due to the merger of the two rating agencies providing credit
ratings to Medallion and due to the remaining rating agency placing Medallion's
rating on negative credit watch.
Taxicab Advertising
In addition to its finance business, Medallion also conducts a taxicab
rooftop advertising business through Media, which began operations in November
1994. Media's revenue is affected by: the number of taxicab rooftop advertising
displays, currently showing advertisements, and the rate charged customers for
those displays. At December 31, 2000, Media had approximately 10,000 installed
displays. Medallion expects that Media will continue to expand its operations by
entering new markets on its own or through acquisition of existing taxicab
rooftop advertising companies. Although Media is a wholly-owned subsidiary of
Medallion, its results of operations are not consolidated with Medallion's
operations because the Securities and Exchange Commission regulations prohibit
the consolidation of non-investment companies with investment companies.
On August 7, 2000, Media entered into an agreement for up to ten years
with Yellow Cab Service Corp., the taxi division of Coach USA, the leading taxi
and bus charter company in the U.S., to sell advertising space on the top of
over 2,300 taxicabs
19
throughout the United States. Going forward, as Coach USA acquires taxi
companies around the U.S., Media will have the right to place advertisements on
top of those taxis as well.
On August 30, 2000, Media purchased all the assets of Out There Media
L.L.C. ("Out There"), a privately held company headquartered in Cleveland. Out
There has the right to place an advertisement on top of more than 250 taxis in
Cleveland, Columbus, and Toledo, and has contracts with some of the largest taxi
fleets in these cities.
On February 8, 2001, we announced that Media entered into an agreement to
acquire Taxi Media Network, the largest taxicab advertising company in Japan,
which holds the rights to provide advertising on 7,000 taxis in Japan. The
transaction is subject to due diligence reviews and other customary closing
conditions.
Factors Affecting Net Assets
Factors that affect Medallion's net assets include, net realized gain or
loss on investments and change in net unrealized appreciation or depreciation of
investments. Net realized gain or loss on investments is the difference between
the proceeds derived upon sale or foreclosure of a loan or an equity investment
and the cost basis of such loan or equity investment. Change in net unrealized
appreciation or depreciation of investments is the amount, if any, by which
Medallion's estimate of the fair value of its investment portfolio is
above/below the previously established fair value or the cost basis of the
portfolio. Under the 1940 Act and the SBIA, Medallion's loan portfolio and other
investments must be recorded at fair value.
Unlike certain lending institutions, Medallion is not permitted to
establish reserves for loan losses, but adjusts quarterly the valuation of our
loan portfolio to reflect Medallion's estimate of the current value of the total
loan portfolio. Since no ready market exists for Medallion's loans, fair value
is subject to the good faith determination of Medallion. In determining such
fair value, Medallion and its Board of Directors takes into consideration
factors such as the financial condition of its borrowers and the adequacy of its
collateral. Any change in the fair value of portfolio loans or other investments
as determined by Medallion is reflected in net unrealized depreciation or
appreciation of investments and affects net increase in net assets resulting
from operations but has no impact on net investment income or distributable
income.
Consolidated Results of Operations
For the Years Ended December 31, 2000 and 1999.
The 2000 year was a year of maturity for the Company as cumulative growing
pains from prior years were addressed and the Company began a new commitment to
operational and financial excellence. Steps taken included the resolution of the
material weaknesses identified from the 1999 financial audit, the hiring of a
strong new cadre of senior management, the initiating of a dialogue with the
Company's lending syndicates as to borrowing conditions, and the reassessment of
strategic initiatives both underway and anticipated in the future. As a result
of this process, the Company recorded adjustments against net investment income
of $3.1 million reflecting a number of one-time adjustments relating to
acquisition-related matters ($1.8 million), the termination of certain capital
markets activities ($0.8 million), and the costs of amending our borrowing
agreements with our bank group ($0.5 million).
As reported, net increase in net assets resulting from operations was $7.5
million or $0.52 per share in 2000, a decrease of $13.6 million or 64% from
$21.1 million or $1.44 per share in 1999, primarily reflecting the one-time
adjustments described above and the impact of the Radio One, Inc. investment
gain of $17.8 million recorded in 1999 as a result of Radio One's initial public
offering completed during the three months ended June 30, 1999. Adjusting for
the effects of these unusual items, net increase in net assets resulting from
operations was $10.7 million or $0.73 per share in 2000, compared to $3.3
million or $0.23 per share in 1999, an increase of $7.4 million or 224%,
reflecting increased net interest and non-interest income, complemented by a
sharp reduction in net unrealized depreciation on investments, partially offset
by an increase in operating expenses. Return on average assets and return on
average equity for 2000 were 1.38% and 4.94% (1.95% and 7.00% adjusted for the
unusual items), respectively, compared to 4.30% and 13.53% (0.68% and 2.14%
adjusted for the Radio One investment gain) for 1999.
Investment income was $55.4 million in the year, up $11.3 million or 26%
from $44.1 million in 1999. The increase compared to 1999 reflected both the
higher level of interest rates in the economy during 2000 and the increased
level of loans, coupled with additional interest income recorded on the
collateral appreciation participation loans. Net investments grew $24.6 or 5% to
$514.2 million in 2000 from $489.6 million in 1999.
The yield on the total portfolio at December 31, 2000 was 10.56%, an
increase of 65 basis points compared with a yield of 9.91% a year-ago. The
increase primarily reflects the series of rate hikes initiated by the Federal
Reserve bank during late 1999 and continuing through most of 2000. The impact of
the higher yield increased investment income by approximately $3.3 million in
2000. Also impacting the improvement in investment income was the continuing
movement of portfolio composition towards higher-yielding commercial loans from
lower-yielding medallion loans. Yields on medallion loans at year-end were 9.22%
(up from 8.91% in 1999), and the yields on commercial loans were 12.41% at
year-end (up from 11.69% in 1999). As rates began to rise, management made a
conscious effort to sell or not renew these typically fixed, lower-rate
medallion loans and replace them with floating, higher-rate commercial loans.
20
Medallion loans were $299.3 million at December 31, 2000, down $22.6
million or 7% from $321.9 million in 1999, primarily reflecting a reduction in
New York City medallion loans, partly offset by increased medallion loans in
other markets, especially in Chicago and Boston. The commercial loan portfolio
was $212.7 million at year-end, compared to $165.7 million a year earlier, an
increase of $47.1 million or 28%. The increases were in most commercial lending
categories, including $13.6 million in the asset-based lending business and $8.6
million in the SBA 7(a) lending program. The balance of the commercial loan
increase was spread amongst many generic commercial lending categories,
including restaurants, real estate, mezzanine financing, and other small
business pursuits.
During the 2000 first half, we originated collateral appreciation
participation loans collateralized by Chicago taxi medallions of $30.0 million,
of which $21.0 million was syndicated to other financial institutions. In
consideration for modifications from our normal taxi medallion lending terms, we
offered loans at higher loan-to-value ratios, and we are entitled to earn
additional interest income based upon any increase in the value of the taxi
medallion collateral on the entire $30.0 million portfolio. The value of Chicago
taxi medallions increased during 2000, and accordingly, additional interest of
$3.1 million was recorded as investment income for 2000.
Interest expense was $28.9 million in 2000, up $8.0 million or 38%
compared to 1999, primarily reflecting increased borrowing levels, coupled with
the impact of an increased interest rate environment. During 2000, Medallion
completed the leveraging of its equity base by essentially fully drawing down
the existing bank lines of credit, resulting in an increase in debt outstanding
of $39.0 million or 11% to $396.1 million. The increase in average debt
outstanding was $67.8 million, a 21% increase compared to 1999. In addition to
the higher borrowing levels, Medallion's debt is primarily tied to floating rate
indexes, which rose during most of 2000. As a result, the average cost of funds
was 7.54% in 2000, compared to 6.64% in 1999, a 14% increase of 90 basis points.
Approximately 83% of Medallion's debt is short-term and floating rate, up
slightly from 81% in 1999.
Net interest income was $26.4 million for 2000, up $3.3 million or 14%
from 1999, primarily reflecting the additional interest recorded on the
collateral appreciation participation loans. Excluding those amounts, net
interest income was up $0.2 million or 1%, reflecting the relatively greater
increase in the level of debt outstanding compared to the growth in the loan
portfolio, coupled with a reduction in the net interest spread from the increase
in borrowing costs which outpaced the increase in yield on the loan portfolio.
Medallion had gains on the sale of the guaranteed portion of SBA 7(a)
loans of $2.8 million in 2000, down $0.2 million or 7% from $3.0 million in
1999. During 2000, $51.1 million of loans were sold under the SBA program
compared to $53.8 million during 1999. The decline in gains on sale reflected a
decrease in loans sold of $2.7 million or 5%, along with a decrease in the level
of market-determined premiums received on the sales. Equity in earnings (losses)
of unconsolidated subsidiary reflects the operations of the Media division of
Medallion. The losses of $0.4 million in 2000 increased $0.2 million from losses
of $0.2 million in 1999, and reflected the greater costs associated with the
rapid increase in tops under contract and cities serviced, which outpaced the
$1.3 million or 13% increase in revenue. During 2000, vehicles under contract
increased 3,500 or 55% to 9,900 from 6,400 in 1999. Negative goodwill was fully
accreted during 2000, and accordingly, accretion of $0.4 million in 2000
declined from $0.7 million in 1999. Other income of $3.4 million increased $1.2
million from $2.2 million in 1999, primarily reflecting an increase of $0.6
million in servicing fee income, as well as increases in prepayment fees, late
charges, and other miscellaneous income.
Non-interest expense was $23.4 million, up $5.4 million or 30%, from $18.0
million in 1999. Included in the amounts for 2000 were $1.1 million of costs
related to the Freshstart acquisition, and write-offs of $0.9 million for costs
related to acquisitions that were terminated during the year, $0.5 million of
other costs associated with capital markets activities, $0.3 million related to
a spin-off of an operating division that was terminated, and $0.3 million
related to a postponed asset securitization. Excluding these amounts,
non-interest expense was $20.3 million, up $2.3 million or 13% from 1999.
Salaries and benefits expense of $10.5 million was up $0.9 million or 9%,
reflecting normal salary increases and the impact of new senior management
hires. Professional fees of $2.6 million were up $0.7 million or 40% from $1.9
million in 1999 (up $0.2 million or 13% excluding the write-offs of certain of
the costs described above), reflecting higher audit costs in 2000, and
consultation on systems development and a variety of business development
initiatives. Merger-related expense of $1.8 million in 2000 reflects the costs
associated with the Freshstart merger and the write-off of costs capitalized in
connection with two acquisitions that were contracted in 2000, but which were
subsequently terminated. Amortization of goodwill was $0.5 million in 2000,
essentially unchanged from 1999. Administration and advisory fees were $0.1
million in 2000, down $0.1 million or 54% from $0.2 million in 1999, reflecting
the completion of the advisory services contract. Other operating expenses of
$7.9 million were up $2.2 million or 38% (up $1.3 million or 23% excluding the
write-offs of certain of the costs described above) from $5.7 million in 1999.
The increase was