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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission file number 0-27812
MEDALLION FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 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 [ ].
The approximate aggregate market value of common equity held by
non-affiliates of the Registrant as of April 1, 2002 was approximately $131
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 April 1, 2002.
There were 18,242,035 shares of the Registrant's Common Stock outstanding as of
April 1, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2002 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, 2001, are incorporated by reference
into Part III of this Form 10-K.
MEDALLION FINANCIAL CORP.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I...............................................................................................3
ITEM 1. BUSINESS OF THE COMPANY.....................................................................3
ITEM 2. PROPERTIES.................................................................................16
ITEM 3. LEGAL PROCEEDINGS..........................................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................16
PART II.............................................................................................17
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...................17
ITEM 6. SELECTED FINANCIAL DATA....................................................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......19
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...............................................39
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES ......39
PART III............................................................................................39
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................39
ITEM 11. EXECUTIVE COMPENSATION....................................................................39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................39
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................39
PART IV.............................................................................................39
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...........................39
2
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT MEDALLION FINANCIAL
CORP. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'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. THE COMPANY 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
Medallion Financial Corp. (the Company) is 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 13% and our commercial loan portfolio at a compound annual growth
rate of 37%. Our total assets under management were approximately $737,000,000
as of December 31, 2001.
The Company conducts its business through various wholly owned subsidiaries
including its primary operating company, Medallion Funding Corp. (MFC). The
Company also conducts its business through Business Lenders LLC (BLL), licensed
under the Small Business Administration (SBA) section 7(a) program, Medallion
Business Credit (MBC), an originator of loans to small businesses for the
purpose of financing inventory and receivables, Medallion Capital Inc. (MCI),
which conducts a mezzanine financing business, and Freshstart Venture Capital
Corp. (FSVC), a Small Business Investment Company (SBIC) which also originates
and services medallion and commercial loans. FSVC operates as an SBIC, and is
regulated and financed in part by the SBA. FSVC 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 SBIC, FSVC's business is to provide loan
financing to small and medium-sized businesses that qualify under SBA
regulations as socially or economically disadvantaged. FSVC 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.
As an adjunct to the Company's taxicab medallion finance business, the
Company operates a taxicab rooftop advertising business, Medallion Taxi Media,
Inc. (Media), one of the largest taxicab rooftop advertising businesses in the
nation, providing advertising space in 38 metropolitan areas across the United
States and 19 cities in Japan. Since 1996, we have increased the number of our
taxicab rooftop displays from 1,550 to approximately 11,000 at December 31,
2001, at a compound annual growth rate of 40%.
Our goal is to provide stockholders with a stock that pays a high dividend
yield and has strong growth potential. During 2001, we declared dividends
totaling $0.38 per share, which equates to a dividend yield of approximately
5.3% based upon our stock price of $7.20 as of April 1, 2002.
Alvin Murstein, Chairman and Chief Executive Officer, has over 40 years of
experience in the ownership, management, and financing of taxicab medallions.
Andrew Murstein, 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 US 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. To the extent permitted under our
bank agreements, we intend to pay cash dividends to comply with this
requirement. Stockholders can elect to reinvest distributions.
MEDALLION LOANS
Medallion loans of $252,675,000 comprised 56% of our $452,003,000 total
loan portfolio as of December 31, 2001. Since 1979, we have originated, on a
combined basis, approximately $800,000,000 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, 2001, approximately 81% of the principal amount of our medallion
loans were in New York City. Although some of the medallion loans have from time
to time been in arrears or in default, our loss experience on medallion loans
has been negligible. We estimate that the average loan-to-value ratio of
3
all of the 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 $3.8 billion. We estimate that the total value of all taxicab medallions
and related assets in the United States exceeds $4.2 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.
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 of approximately 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, and that they are
less likely to prepay in a rising interest rate environment. We generally retain
the medallion loans we originate; however, we do participate or sell shares of
some loans or portfolios to other interested financial institutions. In these
cases, we retain the borrower relationships and service the assets. The total
amounts of medallion loans under management was $346,458,000 at December 31,
2001, compared to $381,215,000 at December 31, 2000.
At December 31, 2001, substantially all medallion loans were secured by
first security interests in taxicab medallions and related assets, and were
originated 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, the medallion was sold in the active market at prices at or
in excess of the amounts due. Although some of medallion loans have from time to
time been in arrears or in default, our loss experience on medallion loans has
been negligible.
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 81% of the value of the
medallion loan portfolio at December 31, 2001. 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.
4
The following table displays information on medallion loans outstanding in
each of our major markets at December 31, 2001:
- ------------------------------------------------------------------------------------------------
% of
% of Total Medallion
Loan Loan Average
# Of Portfolio Portfolio Interest Principal
Loans /(1)/ /(1)/ Rate /(2)/ Balance
- ------------------------------------------------------------------------------------------------
Medallion loans
New York 1,769 44.5% 80.9% 8.48% $205,597,977
Chicago 253 4.5 8.2 9.86 20,910,056
Boston 122 2.9 5.2 11.41 13,170,000
Newark 68 1.3 2.4 10.33 6,208,222
Cambridge 21 0.4 .7 11.66 1,718,123
Other 66 1.4 2.6 11.30 6,547,972
------------------------------ ------------
Gross medallion loans 2,299 55.0% 100% 8.88 254,152,350
------------------------------
Deferred loan acquisition costs 541,439
Unrealized depreciation on loans (2,019,155)
------------
Total medallion loans $252,674,634
================================================================================================
/(1)/ Based on principal balance outstanding.
/(2)/ Based on the contractual rates of the portfolios at December 31,
2001.
- --------------------------------------------------------------------------------
The New York City Market. A New York City taxicab medallion is 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 $190,000 and corporate medallions sold for approximately $216,000
at December 31, 2001. 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, 2001 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.
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 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 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 $60,000. 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 $536,000,000.
The Boston Market. We estimate that Boston medallions currently sell for
-----------------
approximately $175,000. The number of Boston medallions had been limited by law
since 1930 to 1,525 medallions. However, in 1993, 300 additional medallions were
authorized in January 1999, 75 additional medallions were auctioned and put into
service, and in June 2000 an additional 57 medallions were auctioned. We
estimate that the total value of all Boston medallions and related assets is
over $382,000,000.
The Newark Market. We estimate that Newark medallions currently sell for
-----------------
approximately $210,000. 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 $138,000,000.
The Cambridge Market. We estimate that Cambridge medallions currently sell
--------------------
for approximately $172,000. 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 $47,000,000.
5
COMMERCIAL LOANS
Commercial loans of $199,329,000 comprised 44% of the $452,003,000 total
loan portfolio as of December 31, 2001. From the inception of the commercial
loan business in 1987 through December 31, 2001, we have originated more than
10,000 commercial loans for an aggregate principal amount of more than
$545,700,000. We estimate that the average loan-to-value ratio of commercial
loans was approximately 70% on December 31, 2001. The 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 at a compound annual rate of 37% since 1996,
although balances dropped 6% during 2001, as the Company sought to increase
liquidity by selling and not renewing certain loans. Since 1996, 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 targeted industries.
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, the vast
majority of the principals of borrowers personally guarantee commercial loans.
The aggregate realized loss of principal on commercial loans has averaged less
than 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 BLL subsidiary. Up to 75% of the amount of these loans (up to
$1,000,000) 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 27.2% of the commercial loan portfolio. BLL
has achieved "preferred lender" status from the SBA in 27 districts in which it
originates loans, enabling them 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.
BLL regularly sells the guaranteed portion of the Section 7(a) loans in the
secondary market and recognizes 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. Due to limitations imposed by the Company's lenders, sources of
liquidity were reduced for BLL, which resulted in BLL maintaining a business
status quo as opposed to its previous rapid expansion. Since late 2000, no
additional funding has been provided to BLL for new business growth, and as a
result, BLL has reduced the scope of its operations by reducing personnel and
closing offices, and has funded all new loan activity and operations from its
own internally generated cash flow. The Company and BLL are currently in
negotiations with several lending syndicates about financing the existing SBA
Section 7(a) business as well as providing an ongoing warehouse line for future
loan volumes. Pending the outcome of these discussions, the Company may embark
upon a strategy of selling this division to existing management or another
interested acquirer in accordance with a Board directive. Although there can be
no assurances, the Company anticipates finalizing a financing arrangement on
comparable terms to existing borrowings during the 2002 second quarter.
Asset Based Loans
-----------------
The Company originates asset-based loans to small businesses for working
capital through its 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 we believe is underserved, and which
represents approximately 26% of the commercial loan portfolio. We had
successfully established 51 credit lines at December 31, 2001. 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.
Secured Mezzanine Loans
-----------------------
Through our MCI subsidiary we originate both senior and subordinated loans
to businesses in a variety of industries, including radio and television
stations, airport food service, telephone companies, manufacturing companies,
and laser eye surgery clinics. These loans are primarily secured by a second
position on all assets of the companies and range from $1,000,000 to $5,000,000,
and represent approximately 18% of the commercial loan portfolio. Frequently we
receive warrants to purchase an equity interest in the companies in which we
provide secured mezzanine loans.
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 29% of our commercial loan portfolio. Historically this
portfolio had been made up of fixed rate loans, but substantially all business
originated over the last three years has been of an adjustable nature, generally
repricing on its anniversary date. The customer base includes food service, real
estate, dry cleaners, and laundromats.
6
The following table displays the different types of loans in our commercial
loan portfolio at December 31, 2001.
- ------------------------------------------------------------------------------------------------------
% of Total % of
Loan Commercial Average
# of Portfolio Loan Interest Principal
Loans /(1)/ Portfolio /(1)/ Rate /(2)/ Balance
- ------------------------------------------------------------------------------------------------------
Commercial loans
SBA Section 7(a) loans 725 12.3% 27.2% 5.73% $ 56,702,117
Asset-based loans 51 11.7 26.0 9.20 53,955,523
Secured mezzanine loans 35 7.9 17.5 12.77 36,313,329
Other commercial secured loans 419 13.1 29.3 10.37 60,772,148
------------------------------------ ------------
Gross commercial loans 1,230 45.0 100.0% 9.22 207,743,117
------------------------------------
Deferred loan acquisition costs 1,608,278
Discount on SBA section 7(a)
loans (2,415,459)
Unrealized depreciation on loans (7,607,149)
------------
Total commercial loans $199,328,787
======================================================================================================
/(1)/ Based on principal balance outstanding.
/(2)/ Based on the contractual rates of the portfolios at December 31,
2001.
- --------------------------------------------------------------------------------
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 $50,000 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.
Commercial loans are generally originated at an average loan-to-value ratio
of 70 to 75%. Substantially all of the 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, 2001, an aggregate principal balance of $43,400,000 or 9.4%
of the portfolio was delinquent for 90 days or more, compared to an aggregate
principal balance of $28,900,000 or 5.6% and $28,400,000 or 5.8% of the
portfolio at December 31, 2000 and 1999. A loan in considered to be delinquent
if the borrower fails to make a payment on time, however, during the course of
discussion on delinquent status 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. For loan modifications, the loan will only be returned to
accrual status if all past due payments are brought fully current. Based upon
the assessment of our collateral position, we evaluate most of these
relationships on an "enterprise value" basis and expect to locate and install a
new operator to run the business and reduce the debt. For credit that are
collateral based, we anticipate that a substantial portion of the principal
amount of 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, by analyzing
various factors, including the value of the collateral securing the loan and the
borrower's prior payment history. Under the 1940 Act, the 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, the
valuation of our portfolio is adjusted quarterly to reflect estimates of the
current realizable value of the loan portfolio. Since no ready
7
market exists for this portfolio, fair value is subject to the good faith
determination of management and the approval of the 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 the balance sheet.
In determining the value of the 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. 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, net unrealized
depreciation on investments is determined, 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 the Company's unrealized
appreciation (depreciation) on investments for the periods indicated:
- ----------------------------------------------------------------------------------------------------------------------
Equity
Loans Investments Total
- ----------------------------------------------------------------------------------------------------------------------
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)
Increase in unrealized:
Appreciation on investments -- 2,937,051 2,937,051
Depreciation on investments (6,495,139) (915,492) (7,410,631)
Reversals of unrealized appreciation (depreciation) related to realized:
Gains on investments (3,155) -- (3,155)
Losses on investments 3,862,449 450,014 4,312,463
Other (1,669) 76,256 74,587
-------------------------------------------
Balance, December 31, 2001 ($9,626,304) $ 2,125,252 ($ 7,501,052)
======================================================================================================================
8
The following table presents credit-related information for the investment
portfolios as of December 31:
- ---------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Total loans
Medallion loans $252,674,634 $299,302,548 $ 321,900,869
Commercial loans 199,328,787 212,721,373 165,653,933
---------------------------------------------
Total loans 452,003,421 512,023,921 487,554,802
Equity investments /(1)/ 3,591,962 2,129,685 2,012,394
---------------------------------------------
Total loans and equity investments $455,595,383 $514,153,606 $ 489,567,196
=====================================================================================================================
Realized losses (gains) on loans and equity investments
Medallion loans $ 24,869 $ -- $ --
Commercial loans 3,489,075 2,663,082 540,698
---------------------------------------------
Total loans 3,513,944 2,663,082 540,698
Equity investments (498,798) 1,220,758 (23,085,715)
---------------------------------------------
Total realized losses (gains) on loans and equity investments: $ 3,015,146 $ 3,883,840 ($ 22,545,017)
=====================================================================================================================
Net unrealized depreciation (appreciation) on Investments
Medallion loans $ 2,019,155 $ -- $ --
Commercial loans 7,607,149 6,988,790 8,984,053
---------------------------------------------
Total loans 9,626,304 6,988,790 8,984,053
Equity investments (2,125,252) 422,577 585,829
---------------------------------------------
Total net unrealized depreciation (appreciation) on investments $ 7,501,052 $ 7,411,367 $ 9,569,882
=====================================================================================================================
Realized losses (gains) as a % of average balance outstanding
Medallion loans 0.01% 0.00% 0.00%
Commercial loans 1.72 1.39 0.40
Total loans 0.74 0.54 0.13
Equity investments (21.55) 49.57 (200.20)
Net investments 0.63 0.79 (5.27)
- ---------------------------------------------------------------------------------------------------------------------
Unrealized depreciation (appreciation) as a % of balance outstanding
Medallion loans 0.80% 0.00% 0.00%
Commercial loans 3.82 3.29 5.42
Total loans 2.02 1.42 2.16
Equity investments (59.17) 19.84 29.11
Net investments 1.65 1.44 1.95
=====================================================================================================================
/(1)/ Represents common stock and warrants held as investments.
- --------------------------------------------------------------------------------
Investment Activity
The following table sets forth the components of investment activity in the
investment portfolio for the periods indicated:
- -------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------
(Dollars in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------
Net investments at beginning of period $ 514,154 $ 489,567 $ 408,208
Investments originated 134,753 197,512 303,335
Repayments of investments (188,562) (170,084) (231,290)
Net increase in unrealized appreciation
(depreciation) (140) 2,159 (12,260)
Net realized gains (losses) (3,015) (3,884) 22,545
Amortization of origination costs (1,595) (1,116) (971)
-----------------------------------
Net (decrease) increase in investments (58,559) 24,587 81,359
-----------------------------------
Net investments at end of period $ 455,595 $ 514,154 $ 489,567
===============================================================================
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 an industry leader.
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 businesses that meet our overall credit criteria of strong collateral
values and personal ability to repay the debt. In all 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 seek to acquire specialty finance
companies that
9
make secured loans to small businesses which have experienced historically low
loan losses similar to our own. Since the initial public offering in May 1996,
eight specialty finance companies, three loan portfolios, and three taxicab roof
top advertising companies have been acquired.
Marketing, Origination and Loan Approval Process
We employ 32 loan originators to originate medallion 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. Each applicant is required to provide personal and
corporate tax returns, premises leases, and/or property deeds. 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 and/or the
Chief Credit Officer. Both medallion and commercial loans are sourced from
brokers with extensive networks of applicants, and commercial loans are also
referred by 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:
. Traditional outdoor advertising, such as billboards and posters;
. Transit advertising, such as taxicabs, buses, bus shelters, subway,
commuter train and airport advertising; and
. In-store point-of-sale advertising.
Media currently provides taxicab rooftop advertising in over 30 major
cities and has the leading market share in New York, Los Angeles, Philadelphia,
Dallas and Baltimore/Washington DC. Media's goal is to become the leading
national provider of taxicab rooftop advertising by establishing a presence in
additional major US metropolitan markets. As of December 31, 2001, we had
approximately 10,000 installed displays in the United States, 1,000 installed
displays in Japan and 6,000 installed racks inside of taxicabs in Japan.
Media was organized in November 1994 and since that time the business has
grown rapidly. Generally, Media enters into agreements with taxicab
associations, fleets, or individuals to lease taxicab rooftop space for
five-year terms. Media has added an additional 1,700 displays to the original
number under contract in New York City for a total of over 3,200. In July 2001,
Media acquired certain assets and assumed certain liabilities of Medallion Media
Japan Ltd. (MMJ), a taxi advertising operation similar to those operated by
Media in the US, which has advertising rights on approximately 7,000 cabs (1,000
rooftop displays and 6,000 interior racks) serving various cities in Japan. The
terms of the agreement provide for an earn-out payment to the sellers based on
average net income over the next three years. MMJ accounted for approximately 8%
of Media's consolidated revenue during 2001.
During 2001, Media operations were constrained by a very difficult
advertising environment compounded by the rapid expansions of taxi tops
inventory that occurred during 1999 and 2000. Media began to recognize losses as
growth in operating expenses exceeded growth in revenue. A substantial portion
of Media's revenues in 2001 arose from the realization of amounts that had been
paid for and deferred from prior periods. Media is actively pursuing new sales
opportunities including an expansion and upgrading of the sales force, and has
taken steps to reduce operating expenses, including renegotiation of fleet
payments for advertising rights, to better align ongoing revenues and expenses
and to maximize cash flow from operations. In October 2002, Media's contract
with one of its fleets expires and will be up for renewal. If the contract is
not renewed with Media, and is put out to bid, Media has a right of first
refusal to match any bids on this contract, which currently covers approximately
1,500 taxitops. If Media is able to retain this contract, it would likely be for
a greater cost than the current contract which Media anticipates, but cannot
guarantee, would be passed through to the advertising customers through higher
rates. If the contract is not renewed, Media anticipates that the advertising
would be moved to other markets that currently have available tops capacity and
that the physical tops would be inventoried for future use.
Media attaches each display to the rooftop of a taxicab and performs 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. Racks are attached to the
interior of the passenger compartment of the taxicab and are likewise filled
with promotional materials, typically provided by the advertiser.
10
The displays are marketed 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 2001:
. Armani Exchange
. Versace
. Cabaret
. Continental Airlines
. Aldo Shoes
. H & M
. Old Navy
. French Connection
. Disney's The Lion King on Broadway
. The Full Monty
. Rent
. Hard Rock Cafe
. Citibank
. Wall Street Journal
. Macy's.com
. Fossil
. Lexus
. Ann Taylor
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. Media's growth prospects are currently constrained by the
operating environment and distressed advertising market that resulted from
September 11th and the economic downturn, which has resulted in operating losses
and reduced cash flow, as well as restrictions on funding that can be provided
by the Company in accordance with the terms of its bank loans. Media has
developed an operating plan to fund only necessary operations out of available
cash flow and to escalate its sales activities to generate new revenues.
Although there can be no assurances, Media and the Company believe that this
plan will enable Media to weather this downturn in the advertising cycle and
maintain operations at existing levels until such times as business returns to
historical levels.
11
SOURCES OF FUNDS
Overview
We have historically funded our lending operations primarily through credit
facilities with bank syndicates and, to a lesser degree, 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. Our funding strategy and
interest rate risk management strategy is to have the proper structuring of debt
and to minimize both rate and maturity risk, while maximizing returns with the
lowest cost of funding over an intermediate period of time.
The table below summarizes our cash levels and borrowings as of December
31, 2001, and should be read in conjunction with Note 6 of the consolidated
financial statements:
- -------------------------------------------------------------------------
(Dollars in thousands) Total
- -------------------------------------------------------------------------
Cash $ 25,409
Bank loans /(1)/ 318,000
Amounts outstanding 233,000
Average interest rate 5.30%
Maturity 11/01-6/02
SBA debentures /(2)/ $ 93,360
Amounts undisbursed 49,515
Amounts outstanding 43,845
Average interest rate 6.96%
Maturity 12/02-12/11
Senior secured notes /(3)/ $ 45,000
Average interest rate 7.35%
Maturity 6/04-9/04
- -------------------------------------------------------------------------
Total cash and amounts available from the SBA $ 74,924
=========================================================================
Total debt outstanding $321,845
=========================================================================
/(1)/ Subsequent to December 31, 2001, the agreements providing the bank
loans for the Company and MFC were amended to (a) provide, with
respect to the Company bank loans, for a May 15, 2002 maturity date,
with commitment reductions to approximately $76,000,000, $71,000,000,
and $61,000,000 on March 1, 2002, April 1, 2002 and May 1, 2002 (b)
provide, with respect to the MFC line of credit, for a June 28, 2002
maturity date (subject to conversion of amounts outstanding on June 28,
2002 into a one year term loan), with a commitment reduction to
$150,000,000 on April 1, 2002.
/(2)/ The remaining amounts under the approved commitment from the SBA may
be drawn down over a five year period ending May, 2006, upon
submission of a request for funding by the Company and its subsequent
acceptance by the SBA.
/(3)/ In connection with the maturity of the revolving line described in
(1) above, the terms of the senior secured notes were renegotiated on
March 29, 2002, generally providing for $13,000,000 of principal
payments, due in April, 2002 higher levels of interest, and
accelerated final maturities to June 30, 2003 from June and September
2004 (as well as required scheduled amortization and asset sales)
- --------------------------------------------------------------------------------
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:
. Originating adjustable rate loans;
. Incurring fixed-rate debt; and
. 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 28.
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.
12
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.
If we satisfy these requirements, neither the investment company taxable
income we distribute to stockholders nor any net capital gain distributed to our
stockholders would be subject to federal income tax. However, any investment
company taxable income and/or net capital gains retained by us would 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 substantially all of our investment company taxable income
to our stockholders for each taxable year 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 we receive 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.
13
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 the 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 after deducting such
dividend, distribution or purchase price.
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:
(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 member of a national securities exchange broker
or dealer may extend margin credit; or
(ii)The issuer is controlled by a BDC, such BDC exercises a
controlling influence over the issuers management as a
result of such control, 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, regulation; or order; or
(iv) Issuer meets such other criteria as the Commission may
establish from time to time by rule;
(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.
14
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, MCI, and FSVC 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, 2001,
the maximum rate of interest permitted on loans originated by the RIC
Subsidiaries was 19%. At December 31, 2001, our outstanding medallion loans had
a weighted average rate of interest of 8.88% and outstanding commercial loans
had a weighted average rate of interest of 9.22%. 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.
The SBA restricts the ability of SBIC's 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 Regulations, MFC is authorized to
make loans to Disadvantaged Borrowers in amounts not exceeding 30% of their
respective Regulatory Capital.
SBIC's 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.
SBIC's may purchase voting securities of small business concerns in
accordance with SBA Regulations. SBA Regulations prohibit SBIC's from
controlling a small business concern except where necessary to protect an
investment. SBA Regulations presume control when SBIC's 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.
15
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, 2001, the Company employed a total of 151 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 and
leases a facility in Long Island City, New York, with approximately 6,000 square
feet shared by back office operations and the Media division. The Company also
leases office space for loan origination offices in Boston, MA, Chicago, IL,
Hartford, CT, and Somers Point, NJ. Media leases space for sales and maintenance
in New York, NY, New Orleans, LA, Boston, MA, Boca Raton, FL, San Diego, CA,
Beltsville, MD, Dallas, TX , Houston, TX, 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 are currently involved in various legal
proceedings incident to the ordinary course of its business, including
collection matters with respect to certain loans. The Company intends to
vigorously defend any outstanding claims and pursue its legal rights. In the
opinion of the Company's management and based upon the advice of legal counsel,
there is no proceeding pending, or to the knowledge of management threatened,
which in the event of an adverse decision would result in a material adverse
effect on the Company's results of operations or financial condition.
The acquisition of BLL in 1997 included an earnout provision to be paid to
the sellers after three years. The Company provided a calculation of the earnout
in 2001 to the sellers which they responded to in January 2002 claiming
approximately $2,600,000 from the Company. The Company believes that this claim
is without merit and intends to contest this vigorously, and expects to prevail
in any arbitration settlement, although there can be no assurances, such that
any settlement would not have a material, adverse impact on the Company's
financial position and results of operations.
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 2001 fiscal year.
16
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 April 1,
2002, there were approximately 18,242,035 holders of record of the Company's
common stock.
On April 1, 2002, the last reported sale price of our common stock was
$7.20 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:
- ---------------------------------------------------------
2001 HIGH LOW
- ---------------------------------------------------------
First Quarter $15.09 $ 8.52
Second Quarter 13.54 8.46
Third Quarter 10.98 7.67
Fourth Quarter 9.52 6.90
2000
- ---------------------------------------------------------
First Quarter $19.00 $15.75
Second Quarter 17.94 14.17
Third Quarter 17.75 15.25
Fourth Quarter 17.13 11.50
=========================================================
We have distributed and currently intend to continue to distribute at least
90% of our investment company taxable income to our stockholders. Distributions
of our income are generally required to be made within the calendar year the
income was earned to maintain our RIC status; however, in certain circumstances
distributions can be made up to a full calendar year after the income has been
earned. Our Investment Company taxable income includes, among other things,
dividends and interest reduced by deductible expenses. Our ability to make
dividend payments is restricted by certain asset coverage requirements under the
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, which requires
paydowns on amounts outstanding if dividends exceed certain amounts, and
generally disallow any dividend until July 1, 2002, by SBA regulations and under
the terms of the SBA debentures. We have adopted a dividend reinvestment plan
pursuant to which stockholders may elect to have distributions reinvested in
additional shares of common stock. When we declare a dividend or distribution,
all participants will have credited to their plan accounts the number of full
and fractional shares (computed to three decimal places) that could be obtained
with the cash, net of any applicable withholding taxes, that would have been
paid to them if they were not participants. The number of full and fractional
shares is computed at the weighted average price of all shares of common stock
purchased for plan participants within the 30 days after the dividend or
distribution is declared plus brokerage commissions. The automatic reinvestment
of dividends and capital gains distributions will not relieve plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Stockholders may terminate their participation in the dividend
reinvestment plan by providing written notice to the Plan Agent at least 10 days
before any given dividend payment date. Upon termination, we will issue to a
stockholder both a certificate for the number of full shares of common stock
owned and a check for any fractional shares, valued at the then current market
price, less any applicable brokerage commissions and any other costs of sale.
There are no additional fees or expenses for participation in the dividend
reinvestment plan. Stockholders may obtain additional information about the
dividend reinvestment plan by contacting the Plan Agent at 59 Maiden Lane, New
York, NY 10038. There can be no assurances; however, that we will have
sufficient earnings to pay such dividends in the future.
17
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, 2001, 2000, and 1999. Financial information for the years ended December 31,
1998 and 1997, has been derived from audited financial statements. Prior year
amounts have been restated to reflect the pooling of interests with FSVC.
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands, except per share data) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Statement of Operations Data
Investment income $ 42,077 $ 55,356 $ 44,076 $ 37,854 $ 27,658
Interest expense 25,485 28,944 20,988 16,967 10,864
--------------------------------------------------------------------------
Net interest income 16,592 26,412 23,088 20,887 16,794
Equity in earnings (losses) of
Media /(1)/ (3,375) (421) (214) 1,200 203
Other income 2,105 3,378 2,247 1,663 1,087
Gain on sale of loans 1,511 2,814 3,014 2,316 336
Accretion of negative goodwill -- 351 722 722 722
Operating expenses 17,099 22,909 17,470 13,696 6,590
Amortization of goodwill 653 540 530 506 368
Income tax provision (benefit) (16) (181) 49 (152) 930
--------------------------------------------------------------------------
Net investment income (loss) (903) 9,266 10,808 12,738 11,254
Net realized gain (loss) on investments (3,015) (3,884) 22,545 1,291 78
Net change in unrealized appreciation
(depreciation) of investments /(2)/ (140) 2,159 (12,259) 2,581 1,929
Net increase (decrease) in net assets
resulting from operations /(3)/ ($4,058) $ 7,541 $ 21,094 $ 16,610 $ 13,261
=======================================================================================================================
Per Share Data
Net investment income (loss) ($0.05) $ 0.64 $ 0.74 $ 0.87 $ 0.88
Net investment income (loss)
adjusted for acquisition and
other non-recurring charges /(4)/ (0.03) 0.84 0.74 0.98 0.88
Net increase (decrease) in net assets
resulting from operations (0.24) 0.52 1.44 1.14 1.04
Dividends declared per share /(5)/ 0.38 1.19 1.27 1.16 0.88
=======================================================================================================================
Weighted average common shares outstanding
Basic 16,582,179 14,536,942 14,515,660 14,461,276 12,621,301
Diluted 16,582,179 14,576,183 14,620,437 14,591,045 12,769,394
=======================================================================================================================
Balance Sheet Data
Investments, net of unrealized
depreciation on investments $ 455,595 $ 514,154 $ 489,567 $ 408,208 $ 334,141
Total assets 507,756 560,715 533,924 448,037 362,168
Notes payable 233,000 305,700 195,450 120,600 138,750
Senior secured notes 45,000 45,000 45,000 -- --
Subordinated SBA debentures 43,845 21,360 22,770 55,360 53,540
Commercial paper -- 24,066 93,984 103,082 --
Total liabilities 332,732 412,982 376,263 292,490 206,306
Negative goodwill -- -- 351 1,073 1,795
Total shareholders' equity 175,024 147,733 157,310 154,474 154,067
=======================================================================================================================
18
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios And Other Data
Return on average assets /(6)/
Net investment income (loss) (0.17%) 1.69% 2.20% 3.14% 3.81%
Net increase (decrease) in net assets resulting from
operations (0.76) 1.38 4.30 4.10 4.49
Net increase (decrease) in net assets resulting from
operations adjusted for acquisition and other
non-recurring charges /(4)/ (0.76) 1.95 4.30 4.47 4.49
Return on average equity /(7)/
Net investment income (loss) (0.56) 6.27 6.87 8.25 7.30
Net increase (decrease) in net assets resulting from
operations (2.51) 4.94 13.53 10.77 11.28
Net increase (decrease) in net assets resulting from
operations adjusted for acquisition and other
non-recurring charges /(4)/ (2.51) 7.00 13.53 11.74 11.28
=======================================================================================================================
Weighted average yield /(8)/ 8.71% 10.82% 9.91% 9.92% 10.20%/(13)/
Weighted average cost of funds /(9)/ 5.27 5.66 7.12 6.49 7.15/(13)/
Net interest margin, /(10)/ 3.44 5.16 2.79 3.43 3.05/(13)/
Other income ratio /(11)/ 0.43 0.66 0.46 0.41 0.33
Operating expense ratio /(12)/ 3.20 4.09 3.27 3.06 1.82
As a percentage of total investment portfolio
Medallion loans 55.46% 58.21% 65.75% 70.10%/(13)/ 72.13%/(13)/
Commercial loans 43.75 41.37 33.84 27.10/(13)/ 25.48/(13)/
Equity investments 0.79 0.41 0.41 2.80 2.24
=======================================================================================================================
Investments to assets /(14)/ 89.73% 91.70% 91.69% 91.11% 92.26%
Equity to assets /(15)/ 34.47 26.35 29.46 34.48 42.54
Debt to equity /(16)/ 183.89 268.14 227.07 180.64 124.81
=======================================================================================================================
/(1)/ Equity in earnings (losses) of unconsolidated subsidiary represents
the net income (loss) for the period indicated from the Company's
investment in Media.
/(2)/ Change in unrealized appreciation (depreciation) of investments
represents the increase (decrease) for the period in the fair value of
the Company'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 $396,000 in 2001, $3,140,000 in 2000, and $1,494,000 in
1998, divided by weighted average diluted common shares outstanding.
/(5)/ Includes $0.09 per share dividend declared on December 21, 2001 and
paid on January 14, 2002 to shareholders of record as of December 31,
2001 and $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 (loss)
or net increase (decrease) 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 (loss)
or net increase (decrease) in net assets resulting from operations,
for the period indicated, divided by average shareholders' equity.
/(8)/ Weighted average yield on the investment portfolios for 2001 and 2000,
and end of period yield representing the end of the year weighted
average interest rate on investments for 1999, 1998, and 1997.
/(9)/ Weighted average cost of funds on the investment portfolios for 2001
and 2000, and end of period cost of funds representing the end of the
year weighted average interest rate on debt for 1999, 1998, and 1997.
/(10)/ Net interest margin represents weighted average yield less weighted
average cost of funds.
/(11)/ Other income ratio represents other income for the year indicated,
divided by average interest earning assets.
/(12)/ Operating expense ratio represents operating expenses for the year
indicated, divided by average interest earning assets.
/(13)/ Does not include financial information for FSVC.
/(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, 2001, 2000, and 1999. 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.
19
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") has recently issued
cautionary advice regarding disclosure about critical accounting policies. The
SEC defines critical accounting policies as those that are both most important
to the portrayal of a company's financial condition and results and that require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about matters that are inherently uncertain and
may change materially in subsequent periods. The preparation of the Company's
consolidated financial statements requires estimates and assumption that affect
amounts reported and disclosed in the financial statements and related notes.
Significant estimates made by the Company include valuation of loans, evaluation
of the recoverability of accounts receivable and income tax assets, and the
assessment of litigation and other contingencies. The Company's ability to
collect accounts receivable and recover the value of its loans depends on a
number of factors, including the financial conditions and its ability to enforce
provisions of its contracts in the event of disputes, through litigation if
necessary, in accordance with generally accepted accounting principles, to
record net assets and liabilities at estimated realizable values. The matters
that give rise to such provisions are inherently uncertain and may require
complex and subjective judgments. Although the Company believes that estimates
and assumptions used in determining the recorded amounts of net assets and
liabilities at December 31, 2001, are reasonable, actual results could differ
materially from the estimated amounts recorded in the Company's financial
statements.
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 13% and our
commercial loan portfolio at a compound annual growth rate of 37%. Our total
assets under our management were approximately $737 million and have grown from
$215 million at the end of 1996, a compound annual growth rate of 25%.
The Company's loan related earnings depend primarily on its level of net
interest income. Net interest income is the difference between the total yield
on the Company's loan portfolio and the average cost of funds. The Company funds
its operations through a wide variety of interest-bearing sources, such as
revolving bank facilities, senior secured notes, and debentures issued to and
guaranteed by the SBA. Net interest income fluctuates with changes in the yield
on the Company's loan portfolio and changes in the cost of funds, as well as
changes in the amount of interest-bearing assets and interest-bearing
liabilities held by the Company. Net interest income is also affected by
economic, regulatory, and competitive factors that influence interest rates,
loan demand, and the availability of funding to finance the Company's lending
activities. The Company, like other financial institutions, is subject to
interest rate risk to the degree that its interest-earning assets reprice on a
different basis than its interest-bearing liabilities.
The Company also invests in small businesses in selected industries through
its subsidiary MCI. MCI's investments are typically in the form of secured debt
instruments with fixed interest rates accompanied by warrants to purchase an
equity interest for a nominal exercise price (such warrants are included in
"Equity Investments"). Interest income is earned on the debt investments.
Realized gains or losses on investments are recognized when the investments
are sold or written-off. The realized gains or losses represent the difference
between the proceeds received from the disposition of portfolio assets, if any,
and the cost of such portfolio assets. In addition, changes in unrealized
appreciation or depreciation of investments are recorded and represent the net
change in the estimated fair values of the portfolio assets at the end of the
period as compared with their estimated fair values at the beginning of the
period. Generally, "realized gains (losses) on investments" and "changes in
unrealized appreciation (depreciation) of investments" are inversely related.
When an appreciated asset is sold to realize a gain, a decrease in the
previously recorded unrealized appreciation occurs. Conversely, when a loss
previously recorded as an unrealized loss is realized by the sale or other
disposition of a depreciated portfolio asset, the reclassification of the loss
from "unrealized" to "realized" causes an increase in net unrealized
appreciation and an increase in realized loss.
The Company's income from the taxicab rooftop advertising business,
operated by Media is reflected on the Company's books as earnings from an
unconsolidated subsidiary. The Company 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.
20
Economic Conditions in New York City
The terrorist attacks on New York City on September 11, 2001, created a
tremendous amount of actual and collateral damage to the City, and to the people
and businesses who live, work, and operate there. The slowdown in traffic,
tourism, and other personal concerns resulted in initial operating problems for
certain of our medallion individual and fleet customers. It also effected some
of our commercial borrowers. The taxi top advertising business, many of whose
ads are from Broadway shows, suffered short term contract cancellations from
these and other customers which had a gross revenue impact of approximately
$934,000 during 2001.
The attacks also further exacerbated the recessionary trends which had
become more apparent as 2001 unfolded. The effects of a general economic
slowdown has impacted the Company as evidenced by an increase in delinquencies
and nonperforming loans, increased prepayment activity as borrowers sought lower
rate financing with the Company or other lenders, and stresses on medallion and
other collateral values, primarily in Chicago, and by reduced levels of
advertising in Media.
As a result of the above, the Company reassessed the loss potential on the
loan portfolio, servicing asset, and other receivables which resulted in charges
of $11,300,000 in the 2001 third quarter to provide reserves against or
writedown the values of these assets which were impacted by the attacks and the
recession in the economy.
Trend in Loan Portfolio
The Company's investment income is driven by the principal amount of and
yields on its loan portfolio. To identify trends in the yields, the portfolio is
grouped by medallion loans, commercial loans, and equity investments. Since
December 31, 1998,
21
medallion loans, while still making up a significant portion of the total
portfolio, have decreased in relation to the total portfolio composition and
commercial loans have increased.
The following table illustrates the Company's investments at fair value and
the weighted average portfolio yields calculated using the contractual interest
rates of the loans at the dates indicated:
- -------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000
---------------------------------------------------------------------------
Contractual Contractual
Weighted Percentage Weighted Percentage
Average Principal of Total Average Principal of Total
(Dollars In thousands) Yield Amount Portfolio Yield Amount Portfolio
- -------------------------------------------------------------------------------------------------------
Medallion loan portfolio 8.88% $252,675 55.4% 9.22% $299,303 58.2%
Commercial loan portfolio 9.22 199,328 43.8 12.41 212,721 41.4
Equity investments -- 3,592 0.8 -- 2,130 0.4
---------------------- ----------------------
Total portfolio 9.04 $455,595 100.0% 10.56 $514,154 100.0%
=======================================================================================================
- ----------------------------------------------------------------
December 31, 1999
------------------------------------
Contractual
Weighted Percentage
Average Principal of Total
(Dollars In thousands) Yield Amount Portfolio
- ----------------------------------------------------------------
Medallion loan portfolio 8.91% $321,901 65.8%
Commercial loan portfolio 11.69 165,654 33.8
Equity investments -- 2,012 0.4
----------------------
Total portfolio 9.91 $489,567 100.0%
================================================================
Portfolio Summary
Total Portfolio Yield
The weighted average yield of the total portfolio at December 31, 2001 was
9.04%, which is a decrease of 188 basis points from 10.56% at December 31, 2000.
The decrease primarily reflects the reductions in the general level of interest
rates in the economy, demonstrated by the reduction in the prime rate from 9.5%
to 4.75% during the course of 2001. The total weighted average portfolio yield
increased 65 basis points to 10.56% at December 31, 2000 from 9.91% at December
31, 1999. The increase in the total portfolio yield was due to the increased
yield on the commercial loan portfolio and the shift in the composition of the
portfolio to an increased percentage of commercial loans. The Company 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
The Company's loans comprised 55% of the total portfolio of $455,595,000 at
December 31, 2001, compared to 58% of the total portfolio of $514,154,000 at
December 31, 2000 and 66% of the total portfolio of $489,567,000 at December 31,
1999. The medallion loan portfolio decreased by $46,628,000 or 16% in 2001,
reflecting a decrease in medallion loan originations, principally in New York
City, Chicago, and Boston, and the Company's execution of participation
agreements with third parties for $93,784,000 of low yielding New York medallion
loans. The Company retains a portion of these participating loans and earns a
fee for servicing the loans for the third parties.
The weighted average yield of the medallion loan portfolio at December 31,
2001 was 8.88%, a decrease of 34 basis points from 9.22% at December 31, 2000,
which was up 31 basis points from 8.91% at December 31, 1999. The decrease in
yields at December 31, 2001 reflects the generally lower level of rates in the
economy. The increased yield at December 31, 2000, primarily reflected the
Company'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, 2001, 19% of the medallion loan portfolio
represented loans outside New York compared to 24% and 16% at year-end 2000 and
1999, 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, the Company originated collateral appreciation
participation loans collateralized by Chicago taxi medallions of $29,800,000, of
which $20,850,000 were syndicated to other financial institutions. In
consideration for modifications from its normal taxi medallion lending terms,
the Company offered loans at higher loan-to-value ratios and is entitled to earn
additional interest income based upon any increase in the value of all
$29,800,000 of the collateral. During 2001, the effect of the economic downturn
began to stress the value of Chicago taxi medallions, which accelerated as the
year progressed. As a result, the Company determined that the previously
recorded appreciation was no longer supported by current Chicago medallion
prices, and therefore adjusted the carrying values down to their original face
value of $8,950,000, which represented approximately 2% of its total investment
portfolio. Additional interest income was reduced by $3,100,000 for 2001,
compared to increases of $3,100,000 and $0 for 2000 and 1999, and is reflected
in investment income on the consolidated statements of operations and in accrued
interest receivable on the consolidated balance sheets. As a regulated
investment company, the Company is required to mark-to-market these investments
on a quarterly basis, just as it does on all of its other investments. The
Company feels that it has adequately calculated the fair market value on these
investments in each accounting period, by relying upon information such as
recent and historical medallion sale prices. The loans are due in March 2005,
but may be prepaid at the borrowers option. If that occurs, the Company expects
to
22
refinance the loans with the existing borrower, including the syndicated
portion, at that time at the rates and terms prevailing at that time.
Commercial Loan Portfolio
Since 1997, the Company has continued to shift the total portfolio mix
toward a higher percentage of commercial loans, which historically have had
higher yields than its medallion loans. Commercial loans were 44% of the total
portfolio at December 31, 2001 compared to 41% and 34% at December 31, 2000 and
1999, respectively. The commercial loan portfolio continued to experience strong
growth in the asset-based lending portfolio and the mezzanine financing
business, which was more than offset by the decline in the other commercial
lending segments. The overall decline in the commercial lending business
reflects the chargeoff of $3,778,000 of fully-reserved loans during 2001, and
the slowdown in originations due to liquidity constraints during the first part
of 2001.
The weighted average yield of the commercial loan portfolio at December 31,
2001 was 9.22%, a decrease of 319 basis points from 12.41% at December 31, 2000,
which was up 72 basis points from 11.69% at December 31, 1999. The decrease in
2001 and the increase in 2000 primarily reflected a shift in the mix within the
commercial portfolio from fixed-rate loans to floating-rate or adjustable-rate
loans tied to the prime rate, and the corresponding sensitivity of the yield to
movements in the prime rate, which fell 475 basis points during 2001 after
rising for much of 2000. The Company continues to originate adjustable-rate and
floating-rate loans tied to the prime rate to help mitigate its interest rate
risk in a rising interest rate environment. At December 31, 2001, floating-rate
loans represented approximately 68% of the commercial portfolio compared to 69%
and 52% at December 31, 2000 and 1999. 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 0.8%, 0.4%, and 0.4% of Medallion's total portfolio
at December 31, 2001, 2000, and 1999. Equity investments are comprised of common
stock and warrants.
Investment in and loans to Unconsolidated Subsidiaries
The investment in unconsolidated subsidiaries represents the Company's
investment in its taxicab advertising business, Media.
Trend in Interest Expense
The Company's interest expense is driven by the interest rate payable on
its LIBOR-based short-term credit facilities with bank syndicates, long-term
notes payable, fixed-rate, long-term debentures issued to or guaranteed by the
SBA, and, to a lesser degree, secured commercial paper. As a result of the
recent amendments to the bank lines of credit and senior secured notes, the
Company's cost of funds will increase in 2002 until the debts mature and are
paid off. As noted above, the amendments entered into during 2002 to the
Company's bank loans and senior secured notes involved changes, and in some
cases increases, to the interest rates payable thereunder. In addition, during
events of default, the interest rate borne on the bank loans is based upon a
margin over the prime rate rather than LIBOR. The bank loans are priced on a
grid depending on leverage and were at LIBOR plus 325 basis points for the
Company and LIBOR plus 250 basis points for MFC as of April 1, 2002. The senior
secured notes adjusted to 8.35% effective March 29, 2002, and thereafter adjust
upwards an additional 50 basis points on a quarterly basis until maturity. In
addition to the interest rate charges, $1,654,000 has been incurred through
April 1, 2002 for attorneys and other professional advisors, most working on
behalf of the lenders, which will be expensed over the remaining lives of the
related debt outstanding.
The Company's cost of funds is primarily driven by the rates paid on its
various debt instruments and their relative mix and changes in the levels of
average borrowings outstanding. The Company incurs LIBOR-based debt for terms
generally ranging from 30-90 days. The Company's debentures issued to the SBA
typically have initial terms of ten years. The Company measures its cost of
funds as its aggregate interest expense for all of its interest-bearing
liabilities divided by the average amount of such liabilities outstanding during
the period. The following table shows the average borrowings and related costs
of funds for 2001, 2000, and 1999. Average balances have declined during 2001,
primarily reflecting the initial use of the equity proceeds raised during 2001
for debt reductions and the growth in participations sold to other financial
institutions to raise capital for debt reductions and other corporate purposes.
The decline in the costs of funds reflects the trend of declining interest rates
in the economy, partially offset by the switch from lower cost commercial paper
to higher cost bank debt and related renewal expenses, and additional long-term
SBA debt also at higher rates.
23
- --------------------------------------------------------------------------------
Percentage
of Total
Average Average Interest Interest
Balance Cost of Funds Expense Expense
- --------------------------------------------------------------------------------
December 31, 2001
Notes payable to banks $283,963,077 6.91% $19,626,805 77.0%
Senior secured notes 45,000,000 7.41 3,336,398 13.1
SBA debentures 30,814,615 7.54 2,322,702 9.1
Commercial paper 2,550,077 7.82 199,350 0.8
------------ ------------------------
Total $362,327,769 7.03 $25,485,255 100.0%
- --------------------------------------------------------------------------------
December 31, 2000
Notes payable to banks $180,711,538 7.77% $14,034,234 48.5%
Commercial paper 135,564,188 7.25 9,827,886 34.0
Senior secured notes 45,000,000 7.31 3,287,459 11.4
SBA debentures 22,770,000 7.88 1,794,081 6.1
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Total $384,045,726 7.54 $28,943,660 100.0%
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December 31, 1999
Notes payable to banks $131,219,231 6.97% $ 9,143,232 43.6%
Commercial paper 123,143,074 5.82 7,171,459 34.2
SBA debentures 42,498,462 7.44 3,160,314 15.0
Senior secured notes 19,038,462 7.95 1,512,684 7.2
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Total $315,899,229 6.64 $20,987,689