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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
------------ ------------------------
Total $384,045,726 7.54 $28,943,660 100.0%
- --------------------------------------------------------------------------------
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
------------ ------------------------
Total $315,899,229 6.64 $20,987,689 100.0%
================================================================================
The Company will continue to seek SBA funding to the extent it offers
attractive rates. SBA financing subjects its recipients to limits on the amount
of secured bank debt they may incur. The Company uses SBA funding to fund loans
that qualify under the SBIA and SBA regulations. Further, the Company believes
that its transition to financing operations primarily with short-term
LIBOR-based secured bank debt has generally decreased its interest expense, but
has also increased the Company's exposure to the risk of increases in market
interest rates, which the Company mitigates with certain hedging strategies. At
December 31, 2001 and 2000, short-term LIBOR-based debt including commercial
paper constituted 72%, and 82% of total debt, respectively.
Taxicab Advertising
In addition to its finance business, the Company also conducts a taxicab
rooftop advertising business through Media, which began operations in November
1994. Media's revenue is affected by: the number of taxicab rooftop advertising
displays, currently showing advertisements, and the rate charged customers for
those displays. At December 31, 2001, Media had approximately 10,000 installed
displays in the US. The Company expects that Media will continue to expand its
operations by entering new markets on its own or through acquisition of existing
taxicab rooftop advertising companies. Although Media is a wholly-owned
subsidiary of the Company, its results of operations are not consolidated with
the Company's operations because the Securities and Exchange Commission
regulations prohibit the consolidation of non-investment companies with
investment companies.
During 2001, Media's operations were constrained by a very difficult
advertising environment compounded by the rapid expansions of tops inventory
that occurred during 1999 and 2000. Media began to recognize losses as growth in
operating expenses exceeded growth in revenue. Also, a substantial portion of
Media's revenues in 2001 arose from the realization of amounts that had been
paid for and deferred from prior periods. Media is actively pursuing new sales
opportunities, including expansion and upgrading of the sales force, and has
taken steps to reduce operating expenses, including renegotiation of fleet
payments for advertising rights, to better align ongoing revenues and expenses,
and to maximize cash flow from operations. Media's growth prospects are
currently constrained by the operating environment and distressed advertising
market that resulted from September 11th and the economic downturn, which has
resulted in operating losses and a drain on cash flow, as well as the limitation
on funding that can be provided by the Company in accordance with the terms of
the bank agreements. Media has developed an operating plan to fund only
necessary operations out of available cash flow and to escalate its sales
activities to generate new revenues. Although there can be no assurances, Media
and the Company believe that this plan will enable Media to weather this
downturn in the advertising cycle and maintain operations at existing levels
until such times as business returns to historical levels.
In July 2001, Media acquired certain assets and assumed certain liabilities
of MMJ, a taxi advertising operation similar to those operated by Media in the
US, which has advertising rights on approximately 7,000 cabs (1,000 rooftop
displays and 6,000 interior racks) servicing various cities in Japan. The terms
of the agreement provide for an earn-out payment to the sellers based on average
net income over the next three years.
Factors Affecting Net Assets
Factors that affect the Company's net assets include, net realized gain or
loss on investments and change in net unrealized appreciation or depreciation of
investments. Net realized gain or loss on investments is the difference between
the proceeds derived
24
upon sale or foreclosure of a loan or an equity investment and the cost basis of
such loan or equity investment. Change in net unrealized appreciation or
depreciation of investments is the amount, if any, by which the Company's
estimate of the fair value of its investment portfolio is above or below the
previously established fair value or the cost basis of the portfolio. Under the
1940 Act and the SBIA, the Company's loan portfolio and other investments must
be recorded at fair value.
Unlike certain lending institutions, the Company is not permitted to
establish reserves for loan losses, but adjusts quarterly the valuation of our
loan portfolio to reflect the Company's estimate of the current value of the
total loan portfolio. Since no ready market exists for the Company's loans, fair
value is subject to the good faith determination of the Company. In determining
such fair value, the Company and its Board of Directors takes into consideration
factors such as the financial condition of its borrowers and the adequacy of its
collateral. Any change in the fair value of portfolio loans or other investments
as determined by the Company is reflected in net unrealized depreciation or
appreciation of investments and affects net increase in net assets resulting
from operations but has no impact on net investment income or distributable
income.
Consolidated Results of Operations
For the Years Ended December 31, 2001 and 2000
----------------------------------------------
Net assets resulting from operations of ($4,058,000) or ($0.24) per common
share, decreased $11,599,000 from $7,541,000 or $0.52 per share in 2000,
reflecting decreased net interest and non interest income, and higher levels of
net realized/unrealized losses on the investment portfolios, partially offset by
reduced operating expenses.
Included in the results for 2001 were charges of $11,500,000 primarily
relating to valuation assessments the Company made in regards to the future
realizability of asset values in light of the September 11, 2001 terrorist
attacks and their impact on New York City and the Company's operations,
compounded by the recessionary forces battering the economy, including the sharp
reduction in interest rates and their effect on prepayment levels. The charges
included $3,300,000 to increase unrealized depreciation to reflect the impact of
the economic forces on delinquency trends, reduced payment levels, and
collateral values; $3,100,000 to writedown the value of collateral appreciation
participation loans to reflect recent transaction activity in Chicago
medallions; $2,050,000 to reflect acceleration in the deterioration in the
prepayment speeds on the Company's servicing asset receivable; $1,350,000 to
reserve against the risks of future realization of previously recorded deferred
tax benefits related to Media's operations; $1,150,000 related to additional
bank charges for new amendments to our borrowing agreements and higher pricing;
and $550,000 related to the write-off of previously capitalized transaction
costs that are no longer expected to close. Likewise, 2000 results included
one-time charges of $3,140,000 related to acquisition-related matters
($1,804,000), the termination of certain capital markets activities ($801,000),
and the costs of amending our borrowing agreements with our bank group
($535,000), fully offset by income of $3,100,000 reflecting the write-up in the
value of collateral appreciation participation loans. Excluding the impact of
these charges, 2001 net increase in net assets resulting from operations was
$7,442,000 or $0.45 per share, a decrease of $139,000 or 2% compared to 2000.
Investment income was $42,077,000, down $13,279,000 or 24% from $55,356,000
in 2000. The decrease compared to 2000 primarily reflected the $6,200,000 swing
in values of the collateral appreciation participation loans from early 2000 to
late 2001, as well as lower yields on the portfolio primarily due to the lower
interest rate environment in 2001, a decreased level of loans, and a higher
level of nonaccrual loans. Total net investments at year end were $462,253,000,
down $53,757,000 or 10% from 2000.
The yield on the total portfolio during 2001 was 9.04%, compared to 10.82%
for 2000, a decline of 178 basis points. The 2001 decrease primarily reflected
the reduction in additional interest income related to the collateral
appreciation loans and the series of rate drops initiated by the Federal Reserve
bank during late 2000 and continuing through 2001, which reduced the prime
lending rate by 475 basis points. Adjusted for the effects of the additional
income recorded on the collateral appreciation participation loans, the yields
were 9.35% and 10.21% for 2001 and 2000, respectively, a decline of 86 basis
points. Partially offsetting the decreased yield was the continuing movement of
portfolio composition towards higher-yielding commercial loans from
lower-yielding medallion loans. Commercial loans represented 44% of the
investment portfolio at December 31, 2001, compared to 41% at December 31, 2000.
Yields on medallion loans were 8.88% at yearend, compared to 9.22% at yearend
2000, and yields on commercial loans were 9.22% compared to 12.41% for 2000.
Medallion loans were $252,675,000 at yearend, down $46,628,000 or 16% from
$299,303,000 at the end of 2000, reflecting reductions in most markets. The
commercial loan portfolio was $199,329,000 at yearend, compared to $212,721,000,
for 2000 a decrease of $13,392,000 or 6%, reflecting reductions in all
commercial lending categories except asset-based receivable lending which
increased $10,835,000 or 25%. In general, the decrease in the loan portfolios
was a result of the bank lenders requiring the Company to reduce the level of
outstandings in the revolving lines of credit.
During the 2000 first half, the Company originated collateral appreciation
participation loans collateralized by Chicago taxi medallions of $29,800,000, of
which $20,850,000 was syndicated to other financial institutions. In
consideration for modifications from its normal taxi medallion lending terms,
the Company offered loans at higher loan-to-value ratios and is entitled to earn
additional interest income based upon any increase in the value of all
$29,800,000 of the collateral. During 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
25
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 $3,100,000 for 2001, compared
to an increase of $3,100,000 for 2000, and is reflected in investment income on
the consolidated statements of operations and in accrued interest receivable on
the consolidated balance sheets.
Interest expense was $25,485,000 in 2001, down $3,459,000 or 12% from
$28,944,000 in 2000, primarily reflecting a switch from lower cost commercial
paper to higher cost bank debt and SBA debentures, and higher bank fees and
charges related to the renewals and amendments of the bank loans, partially
offset by lower rates and lower average balances outstanding. The Company's
borrowings from its bank lenders generally were repriced during the year as a
result of the negotiations and amendments to the bank facilities. The impact of
all of this was to increase the Company's cost of funds by $3,592,000 or 109
basis points. Outstanding balances under all financing arrangements decreased
$74,281,000 or 19% during 2001 to $321,845,000 from $396,126,000 in 2000. The
Company's debt is primarily tied to floating rate indexes, which rose during
most of 2000, and began declining thereafter. The Company's average cost of
funds was 7.03% in 2001, compared to 7.54% a year ago, a decrease of 51 basis
points. Approximately 72% of the Company's debt is short-term and floating rate,
compared to 82% a year ago. See page 23 for a table which shows average balances
and cost of funds for the Company's funding sources.
Net interest income was $16,592,000, and net interest margin was 3.43% in
2001, down $9,820,000 or 37% from $26,412,000 or 5.16% in 2000, primarily
reflecting the $6,200,000 difference in additional interest income on the
collateral appreciation participation loans and the decreases in yields and
balances in the loan portfolio, partially offset by lower borrowing costs
associated with reduced levels of borrowings at lower rates of interest. The net
interest margin was 4.08% in 2001, compared to 4.56% in 2000, adjusted for the
impact of the additional interest on the collateral appreciation participation
loans.
Noninterest income was $241,000 in 2001, down $5,880,000 or 96% from
$6,121,000 in 2000. The Company had gains on the sale of the guaranteed portion
of SBA 7(a) loans of $1,511,000 in 2001, down $1,303,000 or 46% from $2,814,000
in 2000. During 2001, $25,644,000 of loans were sold under the SBA program
compared to $51,100,000 during 2000. The decline in gains on sale reflected a
decrease in loans sold of $25,456,000 or 50%, partially offset by an increase in
the level of market-determined premiums received on the sales. Negative goodwill
was fully accreted during 2000, and accordingly, accretion was $0 in 2001,
compared to $351,000 in 2000. Other income of $2,105,000 in 2001 was down
$1,273,000 or 38% from $3,378,000 in 2000, primarily reflecting charges to
revalue the servicing fee receivable by $2,171,000 in 2001, compared to $205,000
in 2000. The charges were primarily a result of substantial increases in
prepayments on the serviced portfolio during 2001, resulting from the sharp
decrease in interest rates, among other factors. Excluding the charges, other
income which is comprised of servicing fee income, prepayment fees, late
charges, and other miscellaneous income was up $1,004,000 or 28%.
Also included in noninterest income was equity in earnings (losses) of
unconsolidated subsidiary, which reflects the operations of the Media division
of the Company in 2001. Media generated a net loss of $3,375,000 in 2001, an
increase of $2,954,000 compared to a net loss of $421,000 for 2000. The decline
in profits in 2001 reflected the charge of $1,500,000 to establish a reserve
against the realizability of deferred tax benefits previously recorded due to
changes in Media's tax situation and the greater costs associated with the rapid
increase in tops under contract and cities serviced, which outpaced the increase
in revenue. Advertising revenues were $13,250,000 in 2001, up $2,106,000 or 19%
from $11,144,000 in 2000. Revenue in 2001 was reduced by approximately $934,000
related to contract cancellations resulting from the terrorist attacks in New
York City. During 2001, Media exerted a greater effort to reduce the amount of
deferred revenue by increasing capacity utilization, resulting in a drop of
$4,699,000 in deferred revenue to $755,000 at year end 2001, compared to a
year-ago. To the extent that Media cannot generate additional advertising
revenue to replace the deferred revenue recorded in 2001, Media's results of
operations may be negatively impacted. Also included in advertising revenue was
$567,000 related to contracts that were cancelled in prior periods due to
legislative changes and other factors. This revenue was recognized upon
determination that Media had no further continued obligations under the
contract. During 2001, vehicles under contract increased 300 or 3% to 10,200
from 9,900 a year ago. As a result of the substantial growth in tops inventory
during the later part of 2000, Media's fleet payment costs and related operating
expenses to service those tops increased in 2001 at a greater rate than the
growth in revenue, resulting in lower profits in the 2001 periods compared to
2000. Media's results for 2001 also included losses of $294,000 related to
foreign operations.
Noninterest expenses were $17,752,000 in 2001, down $5,697,000 or 24% from
$23,449,000 in 2000. Adjusting for the charges described above, the improvement
in noninterest expense was $4,627,000 or 20%. Salaries and benefits expense of
$9,421,000 was down $1,091,000 or 10% from $10,512,000 in 2000, primarily
reflecting a 12% reduction in headcount. Professional fees of $2,260,000 were
down $344,000 or 13% from $2,604,000 in 2000, and included the write-off in both
periods of capitalized costs associated with certain financing transactions that
are no longer being pursued. These write-offs equaled $396,000 in 2001 and
$801,000 in 2000. Merger-related expense of $1,804,000 in 2000 reflected costs
associated with the FSVC merger and the write-off of costs capitalized in
connection with two acquisitions that were contracted in 2000, but which were
subsequently terminated. Amortization of goodwill was $653,000 in 2001 compared
to $540,000 a year-ago, and included the $116,000 write-off of all remaining
goodwill related to the 1997 acquisition of BLL. Other operating expenses of
$5,414,000 in 2001 were down $2,822,000 or 34% from $8,236,000 in 2000,
primarily reflecting the continued cleanups of financial records and operations,
and a general effort to control expenses.
26
Net investment income after taxes was a loss of $903,000 in 2001, down
$10,169,000 from net investment income of $9,266,000 in 2000, reflecting the
results of operations described above. Excluding the impact of the unusual items
previously mentioned, net investment income after taxes was $7,297,000, down
$2,009,000 or 22% from 2000.
Net unrealized depreciation on investments was $140,000 in 2001, compared
to net unrealized appreciation of $2,159,000 for 2000, a decrease of $2,299,000.
Unrealized appreciation/(depreciation) arises when the Company makes valuation
adjustments to the investment portfolio. When investments are sold or
written-off, any resulting realized gain/(loss) is grossed up to reflect
previously recorded unrealized components. As a result, movement between periods
can appear distorted. The 2001 activity resulted from unrealized depreciation of
$7,411,000 reflecting the recessionary impact on borrower operations and
collateral values, and by the reversals of unrealized appreciation associated
with sold investments, primarily equities, of $121,000, partially offset by the
reversals of unrealized depreciation associated with investments fully written
off, primarily fully depreciated loans which were charged off, of $4,455,000 and
the increase in valuation of investments of $2,937,000, primarily in equity
securities. The 2000 activity reflected the reversals of unrealized depreciation
associated with fully depreciated loans which were charged off of $2,221,000 and
the increase in valuation of loans and equity portfolio securities of $613,000,
partially offset by unrealized depreciation of $657,000 and by the reversals of
unrealized appreciation associated primarily with sold equity investments of
$18,000.
Net realized loss on investments was $3,015,000 in 2001 compared to losses
of $3,884,000 in 2000, primarily reflecting the charge-off of fully reserved
commercial loans.
The Company's net realized/unrealized loss on investments was $3,155,000 in
2001 compared to $1,725,000 for 2000, reflecting the above.
For the Years ended December 31, 2000 and 1999
----------------------------------------------
The 2000 year was a year of maturity for the Company as cumulative growing
pains from prior years were addressed and the Company began a new commitment to
operational and financial excellence. Steps taken included the resolution of the
material weaknesses identified from the 1999 financial audit, the hiring of a
strong new cadre of senior management, the initiating of a dialogue with the
Company's lending syndicates as to borrowing conditions, and the reassessment of
strategic initiatives both underway and anticipated in the future. As a result
of this process, the Company recorded adjustments against net investment income
of $3,100,000 reflecting a number of one-time adjustments relating to
acquisition-related matters ($1,800,000), the termination of certain capital
markets activities ($800,000), and the costs of amending our borrowing
agreements with our bank group ($500,000).
As reported, net increase in net assets resulting from operations was
$7,500,000 or $0.52 per share in 2000, a decrease of $13,600,000 or 64% from
$21,100,000 or $1.44 per share in 1999, primarily reflecting the one-time
adjustments described above and the impact of the Radio One, Inc. investment
gain of $17,800,000 recorded in 1999 as a result of Radio One's initial public
offering completed during the three months ended June 30, 1999. Adjusting for
the effects of these unusual items, net increase in net assets resulting from
operations was $10,700,000 or $0.73 per share in 2000, compared to $3,300,000 or
$0.23 per share in 1999, an increase of $7,400,000 or 224%, reflecting increased
net interest and non-interest income, complemented by a sharp reduction in net
unrealized depreciation on investments, partially offset by an increase in
operating expenses. Return on average assets and return on average equity for
2000 were 1.38% and 4.94% (1.95% and 7.00% adjusted for the unusual items),
respectively, compared to 4.30% and 13.53% (0.68% and 2.14% adjusted for the
Radio One investment gain) for 1999.
Investment income was $55,400,000 in the year, up $11,300,000 or 26% from
$44.1 million in 1999. The increase compared to 1999 reflected both the higher
level of interest rates in the economy during 2000 and the increased level of
loans, coupled with additional interest income recorded on the collateral
appreciation participation loans. Net investments grew $24,600,000 or 5% to
$514,200,000 in 2000 from $489,600,000 in 1999.
The yield on the total portfolio at December 31, 2000 was 10.56%, an
increase of 65 basis points compared with a yield of 9.91% a year-ago. The
increase primarily reflects the series of rate hikes initiated by the Federal
Reserve bank during late 1999 and continuing through most of 2000. The impact of
the higher yield increased investment income by approximately $3.3 million in
2000. Also impacting the improvement in investment income was the continuing
movement of portfolio composition towards higher-yielding commercial loans from
lower-yielding medallion loans. Yields on medallion loans at year-end were 9.22%
(up from 8.91% in 1999), and the yields on commercial loans were 12.41% at
year-end (up from 11.69% in 1999). As rates began to rise, management made a
conscious effort to sell or not renew these typically fixed, lower-rate
medallion loans and replace them with floating, higher-rate commercial loans.
Medallion loans were $299,300,000 at December 31, 2000, down $22,600,000 or
7% from $321,900,000 in 1999, primarily reflecting a reduction in New York City
medallion loans, partly offset by increased medallion loans in other markets,
especially in Chicago and Boston. The commercial loan portfolio was $212,700,000
at year-end, compared to $165,700,000 a year earlier, an increase of $47,100,000
or 28%. The increases were in most commercial lending categories, including
$13,600,000 in the asset-based lending business and $8,600,000 in the SBA 7(a)
lending program. The balance of the commercial loan increase was spread amongst
many generic commercial lending categories, including restaurants, real estate,
mezzanine financing, and other small business pursuits.
27
During the 2000 first half, we originated collateral appreciation
participation loans collateralized by Chicago taxi medallions of $29,800,000, of
which $20,850,000 was syndicated to other financial institutions. In
consideration for modifications from our normal taxi medallion lending terms, we
offered loans at higher loan-to-value ratios, and we are entitled to earn
additional interest income based upon any increase in the value of the taxi
medallion collateral on the entire $29,800,000. The value of Chicago taxi
medallions increased during 2000, and accordingly, additional interest of
$3,100,000 was recorded as investment income for 2000.
Interest expense was $28,900,000 in 2000, up $8,000,000 or 38% compared to
1999, primarily reflecting increased borrowing levels, coupled with the impact
of an increased interest rate environment. During 2000, Medallion completed the
leveraging of its equity base by essentially fully drawing down the existing
bank lines of credit, resulting in an increase in debt outstanding of
$39,000,000 or 11% to $396,100,000. The increase in average debt outstanding was
$67,800,000, a 21% increase compared to 1999. In addition to the higher
borrowing levels, Medallion's debt is primarily tied to floating rate indexes,
which rose during most of 2000. As a result, the average cost of funds was 7.54%
in 2000, compared to 6.64% in 1999, a 14% increase of 90 basis points.
Approximately 83% of Medallion's debt is short-term and floating rate, up
slightly from 81% in 1999.
Net interest income was $26,400,000 for 2000, up $3.3 million or 14% from
1999, primarily reflecting the additional interest recorded on the collateral
appreciation participation loans. Excluding those amounts, net interest income
was up $200,000 or 1%, reflecting the relatively greater increase in the level
of debt outstanding compared to the growth in the loan portfolio, coupled with a
reduction in the net interest spread from the increase in borrowing costs which
outpaced the increase in yield on the loan portfolio.
Medallion had gains on the sale of the guaranteed portion of SBA 7(a) loans
of $2,800,000 in 2000, down $200,000 or 7% from $3,000,000 in 1999. During 2000,
$51,100,000 of loans were sold under the SBA program compared to $53,800,000
million during 1999. The decline in gains on sale reflected a decrease in loans
sold of $2,700,000 or 5%, along with a decrease in the level of
market-determined premiums received on the sales. Equity in earnings (losses) of
unconsolidated subsidiary reflects the operations of the Media division of
Medallion. The losses of $400,000 in 2000 increased $200,000 from losses of
$200,000 in 1999, and reflected the greater costs associated with the rapid
increase in tops under contract and cities serviced, which outpaced the
$1,300,000 or 13% increase in revenue. During 2000, vehicles under contract
increased 3,500 or 55% to 9,900 from 6,400 in 1999. Negative goodwill was fully
accreted during 2000, and accordingly, accretion of $400,000 in 2000 declined
from $700,000 in 1999. Other income of $3,400,000 increased $1,200,000 from
$2,200,000 in 1999, primarily reflecting an increase of $600,000 in servicing
fee income, as well as increases in prepayment fees, late charges, and other
miscellaneous income.
Non-interest expense was $23,400,000, up $5,400,000 or 30%, from
$18,000,000 in 1999. Included in the amounts for 2000 were $1,100,000 of costs
related to the FSVC acquisition, and write-offs of $900,000 for costs related to
acquisitions that were terminated during the year, $500,000 of other costs
associated with capital markets activities, $300,000 related to a spin-off of an
operating division that was terminated, and $300,000 related to a postponed
asset securitization. Excluding these amounts, non-interest expense was
$20,300,000, up $2,300,000 or 13% from 1999. Salaries and benefits expense of
$10,500,000 was up $900,000 or 9%, reflecting normal salary increases and the
impact of new senior management hires. Professional fees of $2,600,000 were up
$700,000 or 40% from $1,900,000 in 1999 (up $200,000 or 13% excluding the
write-offs of certain of the costs described above), reflecting higher audit
costs in 2000, and consultation on systems development and a variety of business
development initiatives. Merger-related expense of $1,800,000 in 2000 reflects
the costs associated with the FSVC merger and the write-off of costs capitalized
in connection with two acquisitions that were contracted in 2000, but which were
subsequently terminated. Amortization of goodwill was $500,000 in 2000,
essentially unchanged from 1999. Administration and advisory fees were $100,000
in 2000, down $100,000 or 54% from $200,000 in 1999, reflecting the completion
of the advisory services contract. Other operating expenses of $7,900,000 were
up $2,200,000 or 38% (up $1,300,000 or 23% excluding the write-offs of certain
of the costs described above) from $5,700,000 in 1999. The increase was
generally spread among many operating areas of the Company, and included
write-offs related to a general cleanup of operations, increased rent, and
higher depreciation, advertising, bank charges, and miscellaneous other
operating expenses.
As reported, net investment income after taxes in 2000 was $9,300,000, down
$1,500,000 or 14% from net investment income of $10,800,000 in 1999, reflecting
the results of operations described above. Excluding the impact of the unusual
items previously mentioned, net investment income after taxes was $12,400,000,
up $1,600,000 or 15% from 1999.
Net unrealized appreciation on investments was $2,200,000 in 2000, compared
to net unrealized depreciation of $12,300,000 in 1999, an increase of
$14,400,000. Unrealized appreciation/(depreciation) arises when Medallion makes
valuation adjustments to the investment portfolio. When investments are sold or
written-off, any resulting realized gain/(loss) is grossed up to reflect
previously recorded unrealized components. As a result, movement between periods
can appear distorted. The increase in 2000 activity primarily resulted from the
reversal of unrealized depreciation related to realized losses of $2,300,000
compared to 1999 activity which included the reversal of unrealized appreciation
related to the Radio One gain in 2000 of $5,400,000, along with a net increase
in unrealized depreciation of $6,900,000 in 1999.
Net realized loss on investments in 2000 was $3,900,000, compared to a net
gain of $22,500,000 in 1999, a decrease of $26,400,000. Most of the decrease
related to the 1999 sale of Medallion's Radio One equity investment, which
resulted in a realized gain of $23,100,000. Aside from Radio One, Medallion sold
another equity investment in 2000, which resulted in a loss of
28
$1,300,000. The balance of the increase in 2000 of $2,000,000 represented the
write-off of various commercial loans that had previously been fully written
down through the quarterly valuation adjustment process
Medallion's net realized/unrealized loss on investments in 2000 was
$1,700,000, which primarily reflected losses on commercial loans, compared to a
net realized/unrealized loss in 1999 of $7,500,000 (excluding the Radio One
transaction) which primarily represented increased valuation allowances for
commercial loans.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
The Company, like other financial institutions, is subject to interest rate
risk to the extent its interest-earning assets (consisting of medallion loans
and commercial loans) reprice on a different basis over time in comparison to
its interest-bearing liabilities (consisting primarily of credit facilities with
bank syndicates, senior secured notes, and subordinated SBA debentures).
A relative measure of interest rate risk can be derived from the Company's
interest rate sensitivity gap. The interest rate sensitivity gap represents the
difference between interest-earning assets and interest-bearing liabilities,
which mature and/or reprice within specified intervals of time. The gap is
considered to be positive when repriceable assets exceed repriceable liabilities
and negative when repriceable liabilities exceed repriceable assets. A relative
measure of interest rate sensitivity is provided by the cumulative difference
between interest sensitive assets and interest sensitive liabilities for a given
time interval expressed as a percentage of total assets.
The Company's interest rate sensitive assets were $443,704,000 and interest
rate sensitive liabilities were $487,285,000 at December 31, 2001. The one-year
cumulative interest rate gap was negative $68,073,000 or 14% of interest rate
sensitive assets.
Having interest-bearing liabilities that mature or reprice more frequently
on average than assets may be beneficial in times of declining interest rates,
although such an asset/liability structure may result in declining net earnings
during periods of rising interest rates. Abrupt increases in market rates of
interest may have an adverse impact on our earnings until we are able to
originate new loans at the higher prevailing interest rates. Conversely, having
interest-earning assets that mature or reprice more frequently on average than
liabilities may be beneficial in times of rising interest rates, although this
asset/liability structure may result in declining net earnings during periods of
falling interest rates. This mismatch between maturities and interest rate
sensitivities of our interest-earning assets and interest-bearing liabilities
results in interest rate risk.
The effect of changes in interest rates is mitigated by regular turnover of
the portfolio. Based on past experience, the Company anticipates that
approximately 40% of the portfolio will mature or be prepaid each year. The
Company believes that the average life of its loan portfolio varies to some
extent as a function of changes in interest rates. Borrowers are more likely to
exercise prepayment rights in a decreasing interest rate environment because the
interest rate payable on the borrower's loan is high relative to prevailing
interest rates. Conversely, borrowers are less likely to prepay in a rising
interest rate environment.
The following schedule of principal payments sets forth at December 31,
2001 the amount of interest-earning assets and interest-bearing liabilities
maturing or repricing within the time periods indicated. The principal amount of
medallion loans and commercial loans are assigned to the time frames in which
such principal amounts are contractually obligated to be paid. The Company has
not reflected an assumed annual prepayment rate for medallion loans or
commercial loans in this table.
29
- ----------------------------------------------------------------------------------------------------------------------------
More Than More Than More Than More Than More Than
Less 1 and 2 and 3 and 4 and 5 and
Than Less Than Less Than Less Than Less Than Less Than
(Dollars in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years 6 Years Thereafter Total
- ----------------------------------------------------------------------------------------------------------------------------
Earnings Assets
Medallion and commercial $ 57,990 $54,545 $84,300 $ 56,423 $ 20,274 $ 1,887 $ 17,193 $292,612
fixed-rate loans
Variable-rate loans 82,847 10,509 12,011 4,947 1,569 1,773 55,627 169,283
Cash 25,390 -- -- -- -- -- 25,390
--------------------------------------------------------------------------------------------
Total earning assets 166,227 65,054 96,311 61,370 21,843 3,660 72,820 487,285
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities
Bank loans 233,000 -- -- -- -- -- 233,000
SBA debentures 1,300 -- -- 3,040 5,750 11,270 22,485 43,845
Senior secured notes /(1)/ 21,857 23,143 -- -- -- -- 45,000
--------------------------------------------------------------------------------------------
Total liabilities 256,157 23,143 -- 3,040 5,750 11,270 22,485 321,845
--------------------------------------------------------------------------------------------
Interest rate gap (89,930) 41,911 96,311 58,330 16,093 (7,610) 50,335 $165,440
--------------------------------------------------------------------------------------------
Cumulative interest rate gap ($89,930) ($48,019) $48,292 $106,622 $122,715 $115,105 $165,440 $ --
============================================================================================================================
/(1)/ On March 29, 2002, the Company amended its agreements with the senior
noteholders which, among other provisions, accelerated the maturity of the
notes to June 30, 2003 from June 30, 2004 and September 30, 2004.
- --------------------------------------------------------------------------------
Interest Rate Cap Agreements
The Company seeks to manage the exposure of the portfolio to increases in
market interest rates by entering into interest rate cap agreements to hedge a
portion of its variable-rate debt against increases in interest rates and by
incurring fixed-rate debt consisting primarily of subordinated SBA debentures
and private term notes.
We entered into an interest rate cap agreement on a notional amount of
$10,000,000 limiting our maximum LIBOR exposure on our revolving credit facility
until June 24, 2002 to 7.25%.
Total premiums paid under the interest rate cap agreements have been
expensed. The Company will seek to manage interest rate risk by originating
adjustable-rate loans, by incurring fixed-rate indebtedness, by evaluating
appropriate derivatives, pursuing securitization opportunities, and by other
options consistent with managing interest rate risk.
In addition, the Company manages its exposure to increases in market rates
of interest by incurring fixed-rate indebtedness, such as five year senior
secured notes and ten year subordinated SBA debentures. The Company had
outstanding $45,000,000 of senior secured notes at December 31, 2001, half of
which were to mature June 1, 2004, with the balance maturing on September 1,
2004 at a fixed interest rate of 7.35% and SBA debentures in the principal
amount of $43,845,000 with a weighted average interest rate of 6.96%. At
December 31, 2001, these notes and debentures each constituted 14% of the
Company's total indebtedness. On March 29, 2002, the Company amended its
agreements with the senior noteholders which, among other provisions,
accelerated the maturity of the notes to June 30, 2003 from June 30, 2004 and
September 30, 2004.
Liquidity and Capital Resources
Our sources of liquidity are credit facilities with bank syndicates, senior
secured notes, long-term SBA debentures that are issued to or guaranteed by the
SBA, loan amortization and prepayments, and participations of loan's with third
parties. As a RIC, we distribute at least 90% of our investment company taxable
income; consequently, we primarily rely upon external sources of funds to
finance growth. At December 31, 2001, our $321,845,000 of outstanding debt was
comprised as follows: 72% bank debt, at variable effective interest rates with
an weighted average interest rate of 5.30%, 14% long-term senior secured notes
fixed at an interest rate of 7.35%, and 14% subordinated SBA debentures with
fixed-rates of interest with an annual weighted average rate of 7.54%. In May
2001, the Company applied for and received $72.0 million of additional funding
with the SBA ($111,700,000 to be committed by the SBA in total for the Company,
subject to the infusion of additional equity capital into the respective
subsidiaries.) Since SBA financing subjects its recipients to certain
regulations, the Company will seek funding at the subsidiary level to maximize
its benefits.
30
Financing Arrangements
The Company's bank loan matured on November 5, 2001. In addition, MFC
was in default under its bank loan and its senior secured notes. In April,
2002, the Company and MFC obtained amendments to their bank loans and senior
secured notes. The amendments, in general, changed the maturity dates of the
loans and notes, modified the interest rates borne on the secured notes,
required certain immediate, scheduled or other prepayments of the loans and
notes and reductions in the commitments under the bank loans, required the
Company or MFC to engage or seek to engage in certain asset sales, instituted
additional operating restrictions and reporting requirements. As modified by the
amendments, the scheduled amortization on the lines of credit and secured notes
are as follows:
Maturity
---------------------------------------------------------------------
Principal Payments Monthly Principal
outstanding from from outstanding
at December 31, January 1, 2002 July 2002 at and after
2001 - March 31, 2002 April, 2002 May, 2002 - May 2003 June, 2003 June 30, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Medallion Financial loans $ 85,000,000 $13,711,270 $ 5,000,000 $66,288,730 $ -- $ -- $--
MFC loans 148,000,000 -- -- -- 6,166,667 80,166,663 --
MFC loans senior secured notes 45,000,000 1,000,000 13,143,125 -- 1,285,703 16,714,142 --
--------------------------------------------------------------------------------------------------
Total $278,000,000 $14,711,270 $18,143,125 $66,288,730 $7,452,370 $96,880,805 $--
===================================================================================================================================
In addition to the changes in maturity (acceleration of maturity dates
in the case of MFC), the interest rates on the Company's bank loan and MFC's
secured notes were increased, and additional fees were charged to renew and
maintain the facilities and notes. The recent amendments contain substantial
limitations on our ability to operate and in some cases require modifications to
our previous normal course of operations. Covenants restricting investment in
the Media and BLL subsidiaries, elimination of various intercompany balances
between affiliates, limits on the amount and timing of dividends, and
continuation of the prior financial and operating covenants were all tightened
as a condition of renewal.
While we have experienced difficulty complying with the restrictive
covenants under our existing agreements, the Company believes it will be able to
comply with all provisions of the amended agreements, including the accelerated
maturity schedule. As of March 29, 2002, the Company had $29,000,000 of cash on
hand. We may need to sell assets to meet the amortization requirements under
these amendments. While we fully intend to comply with the covenants in recent
amendments, we have failed to comply with similar covenants in our existing
agreements. We are currently exploring refinancing options which would replace
our obligations under the Company and MFC loans and the senior secured notes. We
have signed a non-binding preliminary term sheet and we are currently engaged in
discussions, and have received a proposal from, a nationally known asset-based
lender to provide a refinancing for the obligations owed under our secured notes
and bank loans. The proposed financing would enable the Company to refinance its
existing indebtedness and provide additional capital with longer maturities, but
there can be no assurance that such financing will be obtained, the date that it
will be obtained or whether such financing would provide more operating
flexibility than is provided under our current credit agreements. The failure to
obtain such financing or alternative financing on a timely basis could have a
material adverse effect on the Company. In addition, the Company is actively
pursuing other financing options for individual subsidiaries with alternate
financing sources, and is continuing the ongoing program of loan participations
and sales to provide additional sources of funds for both external expansion and
continuation of internal growth. The Company has also received non-binding
preliminary offers from other nationally recognized lenders to refinance certain
subsidiaries of the Company. Furthermore, the Company is considering the
possibility of submitting an application to receive a bank charter, which if
granted, would permit the Company to receive deposits insured by the Federal
Deposit Insurance Corporation. The Company has held meetings with the relevant
regulatory bodies in connection with such an application. There can be no
assurances that such financings will be obtained or that any application related
to a bank charter would be approved. The Company believes that its credit
facilities with the SBA and cash flow from operations (after distributions to
stockholders) will be adequate to fund the continuing operation of the Company.
As a result of the recent amendments to the bank loans and senior
secured notes, the Company's cost of funds will increase in 2002 until the debts
mature and are paid off. As noted above, the amendments entered into during 2002
to the Company's bank loans and senior secured notes involved changes, and in
some cases increases, to the interest rates payable thereunder. In addition,
during events of default, the interest rate borne by 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 for
attorneys and other professional advisors, most working on behalf of the
lenders, which generally will be expensed over the remaining lives of the
related debt outstanding.
We are a party to three financing agreements: 1) the Second Amended and
Second Amended and Restated Loan Agreement, dated as of September 22, 2000,
among the Company, Medallion Business Credit, LLC and the parties thereto (the
Company Bank Loan); 2) the Amended and Restated Loan Agreement, dated as of
December 24, 1997, as amended, among MFC and the parties thereto (the MFC Bank
Loan); and 3) the Note Purchase Agreements, each dated as of June 1, 1999, as
amended, between the Company and the note purchasers thereto (the MFC Note
Agreements).
In the fourth quarter of 2001, the Company Bank Loan matured, and MFC
was in default under both the MFC Bank Loan and the MFC Note Agreements. In
2002, the Company and MFC entered into amendments to such agreements. In
addition to imposing maturities and scheduled amortization requirements, the
amendments also instituted various other prepayment requirements: (a) the
Company is required to repay to MFC an intercompany receivable in excess of $8
million by May 15, 2002, and (b) MFC is required to use its best efforts to sell
a portion its laundromat and dry cleaning loans in its commercial loan portfolio
by May 31, 2002, and its Chicago Yellow Cab loan portfolio before November 1,
2002. The proceeds from these repayments and sales must be used to repay the
Company's or MFC's indebtedness, as applicable. In addition, the amendments
require MFC to further amend the MFC Note Agreements and the MFC Bank Loan to
provide for periodic prepayments of the indebtedness thereunder out of excess
cash flow.
31
The Company Bank Loan, MFC Bank Loan, and the MFC Note Agreements
contain substantial limitations on our ability to operate and in some cases
require modifications to our previous normal course of operations. Under all of
the agreements, if our outstanding debt exceeds the borrowing base, as defined
in each agreement, then we must repay the outstanding indebtedness that exceeds
the borrowing base within five business days. The agreements, collectively, also
contain financial covenants, including a maximum consolidated leverage ratio,
maximum combined leverage ratio, minimum EBIT to interest expense ratio, minimum
asset quality ratio, minimum tangible net worth and maximum losses of Media. The
agreements also impose limitations on ability to incur liens and indebtedness,
merge, consolidate, sell or transfer asset, loan and invest in third parties and
our subsidiaries, repurchase or redeem stock, purchase portfolios, acquire other
entities, amend certain material agreements, make capital expenditures, have
outstanding intercompany receivables and securitize our assets. They prohibit
(a) the Company and MFC from paying dividends prior to July 1, 2002, (b) MFC
from paying more than $2 million of dividends between July 1, 2002 and September
12, 2002 and (c) the Company from paying dividends after September 12, 2002
unless it certifies that it will be in pro forma compliance with amortization
requirements for the remainder of 2002 after paying the dividend. Lastly, the
agreements limit the amount of investments we can make in our subsidiaries and
the creation of new subsidiaries.
The Company paid amendment fees of $255,000, and MFC paid amendment
fees of $478,000 and is obligated to pay an additional amendment fee on June 28,
2002 equal to 0.20% of the amount outstanding under the MFC Bank Loan and the
MFC Note Agreements. Additionally, under the MFC Note Agreements and MFC Bank
Loan, MFC is obligated to pay the lenders and note holders an aggregate monthly
fee of $25,000 commencing on June 30, 2002 and increasing by $25,000 each month.
We are currently engaged in discussions, and have received a proposal
from, a nationally known asset based lender to provide a refinancing for the
obligations owed under our term loan and revolving credit agreement, but there
can be no assurance that such financing will be obtained, the date that it will
obtained or whether such financing would provide more operating flexibility than
is provided under our current credit agreements.
The Company values its portfolio at fair value as determined in good
faith by the Company's Board of Directors in accordance with the Company's
valuation policy. Unlike banks, the Company is not permitted to provide a
general reserve for anticipated loan losses. Instead, the Company must value
each individual investment and portfolio loan on a quarterly basis. The Company
will record unrealized depreciation on investments and loans when it believes
that an asset has been impaired and full collection of the loan is unlikely. The
Company will record unrealized appreciation on equities if it has a clear
indication that the underlying portfolio company has appreciated in value and,
therefore, the Company's security has also appreciated in value. Without a
readily ascertainable market value, the estimated value of the Company's
portfolio of investments and loans may differ significantly from the values that
would be placed on the portfolio if there existed a ready market for the
investments. The Company adjusts quarterly the valuation of the portfolio to
reflect the Board of Directors' estimate of the current fair value of each
investment in the portfolio. Any changes in estimated fair value are recorded in
the Company's statement of operations as "Net unrealized gains (losses)."
In addition, the illiquidity of our loan portfolio and investments may
adversely affect our ability to dispose of loans at times when it may be
advantageous for us to liquidate such portfolio or investments. In addition, if
we were required to liquidate some or all of the investments in the portfolio,
the proceeds of such liquidation may be significantly less than the current
value of such investments. Because we borrow money to make loans and
investments, our net operating income is dependent upon the difference between
the rate at which we borrow funds and the rate at which we invest these funds.
As a result, there can be no assurance that a significant change in market
interest rates will not have a material adverse effect on our interest income.
In periods of sharply rising interest rates, our cost of funds would increase,
which would reduce our net operating income before net realized and unrealized
gains. We use a combination of long-term and short-term borrowings and equity
capital to finance our investing activities. Our long-term fixed-rate
investments are financed primarily with short term floating rate debt, and to a
lesser extent with long-term fixed-rate debt. We may use interest rate risk
management techniques in an effort to limit our exposure to interest rate
fluctuations. Such techniques may include various interest rate hedging
activities to the extent permitted by the 1940 Act. The Company has analyzed the
potential impact of changes in interest rates on interest income net of interest
expense. Assuming that the balance sheet were to remain constant and no actions
were taken to alter the existing interest rate sensitivity, a hypothetical
immediate 1% change in interest rates would have affected net increase
(decrease) in assets by less than 1% over a six month horizon. Although
management believes that this measure is indicative of the Company's sensitivity
to interest rate changes, it does not adjust for potential changes in credit
quality, size and composition of the assets on the balance sheet and other
business developments that could affect net increase (decrease) in assets.
Accordingly, no assurances can be given that actual results would not differ
materially from the potential outcome simulated by this estimate.
On November 22, 2000, Fitch IBCA placed Medallion's "BBB" senior
secured debt rating and "F2" secured commercial paper rating on negative watch.
In addition, in December 2000, the Company's other rating agency, Thompson's
Bankwatch, was acquired by Fitch IBCA, leaving it with only one commercial paper
rating. Primarily as a result of these factors, a substantial portion of the
Company's commercial paper did not rollover and has subsequently been replaced
by Company's bank facility. On January 18, 2001, Fitch IBCA lowered our senior
secured debt rating and secured commercial paper rating to "BB+" and "B",
respectively, and removed them from negative watch. During the third quarter
2001 the commercial paper program matured and was terminated.
32
During the second and third quarters, the Company completed an equity
offering of 3,660,000 common shares at $11 per share raising over $40,000,000 of
additional capital. The Company continues to work with investment banking firms
to investigate the viability of a number of other financing options which
include, among others, the sale or spin off certain assets or divisions, and the
development of a securitization conduit program. These financing options would
also provide additional sources of funds for both external expansion and
continuation of internal growth. If none of these financing options occur,
management believes liquidity would still be adequate to fund the continuing
operations of the Company's loan portfolio and advertising businesses.
The following table illustrates sources of available funds for the Company
and each of the subsidiaries, and amounts outstanding under credit facilities
and their respective end of period weighted average interest rate at December
31, 2001:
- ---------------------------------------------------------------------------------------------------------------
Medallion
(Dollars in thousands) Financial MFC BLL MCI MBC FSVC Total
- ---------------------------------------------------------------------------------------------------------------
Cash $ 4,300 $ 6,616 $480 $ 8,209 $2,403 $ 3,401 $ 25,409
Bank loans/(1)/ 110,000 208,000 -- -- -- -- $ 318,000
Amounts outstanding 85,000 148,000 -- -- -- -- $ 233,000
Average interest rate 6.25% 4.75% -- -- -- -- 5.30%
Maturity 11/5/01 6/30/02 -- -- -- -- 11/01-6/02
SBA debentures/(2)/ -- -- -- 46,500 46,860 $ 93,360
Amounts available -- -- -- 21,000 -- 28,515 $ 49,515
Amounts outstanding -- -- -- 25,500 -- 18,345 $ 43,845
Average interest rate -- -- -- 6.63% -- 7.41% 6.96%
Maturity -- -- -- 3/06-12/11 -- 12/02-9/11 12/02-12/11
Senior secured notes/(3)/ -- 45,000 -- -- -- -- $ 45,000
Average interest rate -- 7.35% -- -- -- -- 7.35%
Maturity -- 6/04 - 9/04 -- -- -- -- 6/04-9/04
- ---------------------------------------------------------------------------------------------------------------
Total cash and
amounts undisbursed
under credit facilities $ 4,300 $ 6,616 $480 $ 29,209 $2,403 $ 31,916 $ 74,924
===============================================================================================================
Total debt outstanding $ 85,000 $ 193,000 -- $ 25,500 -- $ 18,345 $ 321,845
===============================================================================================================
/(1)/ Subsequent to December 31, 2001, the agreements providing the lines of
credit for the Company and MFC were amended to (a) provide, with respect
to the Company line of credit, for a May 15, 2002 maturity date, with
commitment reductions to approximately $76 million, $71 million, and $61
million 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 million 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, higher
levels of interest, and accelerated final maturities of June 30, 2003 from
June and September 2004 (as well as required scheduled amortization and
asset sales).
- --------------------------------------------------------------------------------
Loan amortization, prepayments, and sales also provide a source of funding
for the Company. Prepayments on loans are influenced significantly by general
interest rates, medallion loan market rates, economic conditions, and
competition. Medallion loan prepayments have slowed since early 1994, initially
because of increases, and then stabilization, in the level of interest rates,
and more recently because of an increase in the percentage of medallion loans,
which are refinanced with the Company rather than through other sources of
financing. Loan sales are a major focus of the SBA Section 7(a) loan program
conducted by BLL, which is primarily set up to originate and sell loans.
Increases in SBA 7(a) loan balances in any given period generally reflect timing
differences in selling and closing transactions.
On June 1, 1999, MFC issued $22.5 million of Series A senior secured notes
that mature on June 1, 2004, and on September 1, 1999, MFC issued $22.5 million
of Series B senior secured notes that mature on September 1, 2004 (together, the
Notes). The Notes bear a fixed rate of interest of 7.35% and interest is paid
quarterly in arrears. The Notes rank pari passu with the revolvers and
commercial paper through inter-creditor agreements. The proceeds of the Notes
were used to prepay certain of the Company's outstanding SBA debentures. See
also description of amendments referred to above.
Media funds its operations through internal cash flow and inter-company
debt. Media is not a RIC and, therefore, is able to retain earnings to finance
growth. Media's growth prospects are currently constrained by the operating
environment and distressed advertising market that resulted from September 11th
and the economic downturn, which has resulted in operating losses and a reduced
cash flow, as well as restrictions on funding that can be provided by the
Company in accordance with the terms of the bank loans. Media has developed an
operating plan to fund only necessary operations out of available cash flow and
to escalate its sales activities to generate new revenues. Although there can be
no assurances, Media and the Company believe that this plan will enable Media to
weather this downturn in the advertising cycle and maintain operations at
existing levels until such times as business returns to historical levels.
Recently Issued Accounting Standards
33
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 142, Goodwill and Other Intangible Assets, requiring that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually, effective for fiscal years
beginning after December 15, 2001.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which establishes an accounting
model to be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal
transactions, effective for fiscal years beginning after December 15, 2001.
The Company is evaluating the impact from adoption of these accounting
standards. At December 31, 2001, the Company had $5,008,000 of goodwill on its
consolidated balance sheet and $2,100,000 recorded on the balance sheet of
Media, its wholly-owned subsidiary that will be subject to the asset impairment
review required by SFAS 142.
INVESTMENT CONSIDERATIONS
Interest rate fluctuations may adversely affect the interest rate spread we
receive on our taxicab medallion and commercial loans.
Because we borrow money to finance the origination of loans, our income is
dependent upon the difference between the rate at which we borrow funds and the
rate at which we loan funds. While the loans in our portfolio in most cases bear
interest at fixed-rates or adjustable-rates, we finance a substantial portion of
such loans by incurring indebtedness with floating interest rates (which adjust
at various intervals). As a result, our debt may adjust to a change in interest
rates more quickly than the loans in our portfolio. In periods of sharply rising
interest rates, our costs of funds would increase, which would reduce our
portfolio income before net realized and unrealized gains. Accordingly, we, like
most financial services companies, face the risk of interest rate fluctuations.
Although we intend to continue to manage our interest rate risk through asset
and liability management, including the use of interest rate caps, general rises
in interest rates will tend to reduce our interest rate spread in the short
term. In addition, we rely on our counterparties to perform their obligations
under such interest rate caps.
A decrease in prevailing interest rates may lead to more loan prepayments, which
could adversely affect our business.
Our borrowers generally have the right to prepay their loans upon payment
of a fee ranging from 30 to 120 days interest. A borrower is likely to exercise
prepayment rights at a time when the interest rate payable on the borrower's
loan is high relative to prevailing interest rates. In a lower interest rate
environment, we will have difficulty re-lending prepaid funds at comparable
rates, which may reduce the net interest spread we receive.
Because we must distribute our income, we have a continuing need for capital.
We have a continuing need for capital to finance our lending activities.
Our current sources of capital and liquidity are the following:
. bank credit facilities;
. senior secured notes;
. fixed-rate, long-term SBA debentures that are issued to or guaranteed
by the SBA;
. sales of participations in loans; and
. loan amortization and prepayments.
. follow on equity offering
As a Regulated Investment Company (RIC), we are required to distribute at
least 90% of our investment company taxable income. Consequently, we primarily
rely upon external sources of funds to finance growth. At December 31, 2001, we
had $49,515,000 available under outstanding commitments from the SBA.
We may have difficulty raising capital to finance our planned level of lending
operations.
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 loan, 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; and (b) provide, with respect to the bank loan,
for a June 28, 2002 maturity date (subject to conversion of amounts outstanding
on June 28, 2002 into a one year term loan) with a commitment reduction to
$150,000,000 on April 1, 2002. See additional discussion related to the
Company's bank loans and note agreements in the Liquidity and Capital Resources
section on page 29.
34
Lending to small businesses involves a high degree of risk and is highly
speculative.
Our commercial loan activity has increased in recent years. Lending to
small businesses involves a high degree of business and financial risk, which
can result in substantial losses and should be considered speculative. Our
borrower base consists primarily of small business owners that have limited
resources and that are generally unable to achieve financing from traditional
sources. There is generally no publicly available information about these small
business owners, and we must rely on the diligence of our employees and agents
to obtain information in connection with our credit decisions. In addition,
these small businesses often do not have audited financial statements. Some
smaller businesses have narrower product lines and market shares than their
competition. Therefore, they may be more vulnerable to customer preferences,
market conditions or economic downturns, which may adversely affect the return
on, or the recovery of, our investment in these businesses.
Our borrowers may default on their loans.
We primarily invest in and lend to companies that may have limited
financial resources. Numerous factors may affect a borrower's ability to repay
its loan, including:
. the failure to meet its business plan;
. a downturn in its industry or negative economic conditions;
. the death, disability or resignation of one or more of the key members
of management; or
. the inability to obtain additional financing from traditional sources.
Deterioration in a borrower's financial condition and prospects may be
accompanied by deterioration in the collateral for the loan. Expansion of our
portfolio and increases in the proportion of our portfolio consisting of
commercial loans could have an adverse impact on the credit quality of the
portfolio.
35
We borrow money, which may increase the risk of investing in our common stock.
We use financial leverage through bank syndicates, our senior secured
notes, and our long-term, subordinated SBA debentures. Leverage poses certain
risks for our stockholders:
. it may result in higher volatility of both our net asset value and the
market price of our common stock;
. since interest is paid to our creditors before any income is distributed
to our stockholders, fluctuations in the interest payable to our creditors may
decrease the dividends and distributions to our stockholders; and
. in the event of a liquidation of the Company, our creditors would have
claims on our assets superior to the claims of our stockholders.
Our failure to remedy certain internal control deficiencies could have an
adverse affect on our business operations.
Consistent with the Company's on-going focus on improving its operations
and growth, and at the request of BLL's regulatory authority, the Connecticut
Banking Department (the "Department"), the Board of Directors of BLL is
currently adopting plans to improve its financial operations. The Company feels
these plans will be viewed favorably by the Department.
If we are unable to continue to diversify geographically, our business may be
adversely affected if the New York taxicab industry continues to experience an
economic downturn.
Although we are diversifying from the New York City area, a significant
portion of our taxicab advertising and loan revenue is derived from New York
City taxicabs and medallion loans collateralized by New York City taxicab
medallions. An economic downturn in the New York City taxicab industry could
lead to an increase in defaults on our medallion loans and may also adversely
affect the operation of our taxicab rooftop advertising business. There can be
no assurance that we will be able to sufficiently diversify our operations
geographically. If the current economic downturn continues, our commercial loan
customers may experience difficulty in servicing their debt with us and the
level of our delinquencies and loan losses may increase
The economic downturn has resulted in certain of our commercial loan
customers experiencing declines in business activities, which could lead to
difficulties in their servicing of their loans with us. If the economic downturn
continues, the level of delinquencies, defaults, and loan losses in commercial
loan portfolio could increase. The terrorist attack on New York City on
September 11, 2001 and the economic downturn have affected our revenues by
increasing loan delinquencies and non-performing loans, increasing prepayments,
stressing collateral value and decreasing taxi advertising. Although the Company
believes the estimates and assumptions used in determining the recorded amounts
of net assets and liabilities at December 31, 2002, are reasonable, actual
results could differ materially from the estimated amounts recorded in the
Company's financial statement.
The loss of certain key members of our senior management could adversely affect
us.
Our success is largely dependent upon the efforts of senior management. The
death, incapacity, or loss of the services of certain of these individuals could
have an adverse effect on our operation and financial results. There can be no
assurance that other qualified officers could be hired.
Acquisitions may lead to difficulties that could adversely affect our
operations.
By their nature, corporate acquisitions entail certain risks, including
those relating to undisclosed liabilities, the entry into new markets, and
personnel matters. We may have difficulty integrating the acquired operations or
managing problems due to sudden increases in the size of our loan portfolio. In
such instances, we might be required to modify our operating systems and
procedures, hire additional staff, obtain and integrate new equipment and
complete other tasks appropriate for the assimilation of new business
activities. There can be no assurance that we would be successful, if and when
necessary, in minimizing these inherent risks or in establishing systems and
procedures which will enable us to effectively achieve our desired results in
respect of any of these or any future acquisitions.
Competition from entities with greater resources and less regulatory
restrictions may decrease our profitability.
We compete with banks, credit unions, and other finance companies, some of
which are Small Business Investment Companies, or SBICs, in the origination of
taxicab medallion loans and commercial loans. We also compete with finance
subsidiaries of equipment manufacturers. Many of these competitors have greater
resources than the Company and certain competitors are subject to less
restrictive regulations than the Company. As a result, there can be no assurance
that we will be able to continue to identify and complete financing transactions
that will permit us to continue to compete successfully.
Our taxicab rooftop advertising business competes with other taxicab
rooftop advertisers as well as with all segments of the out-of-home advertising
industry. We also compete with other types of advertising media, including cable
and network television, radio, newspapers, magazines and direct mail marketing.
Certain of these competitors have also entered into the rooftop advertising
business. Many of these competitors have greater financial resources than the
Company and offer several forms of advertising as well as production facilities.
There can be no assurance that we will continue to compete with these businesses
successfully.
36
The valuation of our loan portfolio is subjective and we may not be able to
recover our estimated value in the event of a foreclosure or sale of a
substantial portion of portfolio loans.
Under the 1940 Act, our loan portfolio must be recorded at fair value or
"marked to market." Unlike other lending institutions, we are not permitted to
establish reserves for loan losses. Instead, we adjust quarterly the valuation
of our portfolio to reflect our estimate of the current realizable value of our
loan portfolio. Since no ready market exists for this portfolio, fair value is
subject to the good faith determination of our management and the approval of
our board of directors. Because of the subjectivity of these estimates, there
can be no assurance that in the event of a foreclosure or the sale of portfolio
loans we would be able to recover the amounts reflected on our balance sheet. If
liquidity constraints required the sale of a substantial portion of the
portfolio such an action may require the sale of certain assets at amounts less
than their carrying amounts.
In determining the value of our portfolio, the board of directors may take
into consideration various factors such as the financial condition of the
borrower and the adequacy of the collateral. For example, in a period of
sustained increases in market interest rates, our board of directors could
decrease its valuation of the portfolio if the portfolio consists primarily of
fixed-rate loans. Our valuation procedures are designed to generate values which
approximate the value that would have been established by market forces and are
therefore subject to uncertainties and variations from reported results.
Considering these factors, we have determined that the fair value of our
portfolio is below its cost basis. At December 31, 2001, our net unrealized
depreciation on investments was approximately $7,501,000. Based upon current
market conditions and current loan-to-value ratios, our board of directors
believes that the net unrealized depreciation of investments is adequate to
reflect the fair value of the portfolio.
Changes in taxicab industry regulations that result in the issuance of
additional medallions could lead to a decrease in the value of our medallion
loan collateral.
Every city in which we originate medallion loans, and most other major
cities in the United States, limits the supply of taxicab medallions. This
regulation results in supply restrictions that support the value of medallions.
Actions that loosen these restrictions and result in the issuance of additional
medallions into a market could decrease the value of medallions in that market.
If this were to occur, the value of the collateral securing our then outstanding
medallion loans in that market could be adversely affected. We are unable to
forecast with any degree of certainty whether any potential increases in the
supply of medallions will occur.
In New York City, Chicago, Boston, and in other markets where we originate
medallion loans, taxicab fares are generally set by government agencies.
Expenses associated with operating taxicabs are largely unregulated. As a
result, the ability of taxicab operators to recoup increases in expenses is
limited in the short term. Escalating expenses can render taxicab operations
less profitable, and could cause borrowers to default on loans from the Company,
and could potentially adversely affect the value of the Company's collateral.
A significant portion of our taxicab advertising and loan revenue is
derived from loans collateralized by New York City taxicab medallions. According
to New York City Taxi and Limousine Commission data, over the past 20 years New
York City taxicab medallions have appreciated in value an average of 10.2% each
year. However, for sustained periods during that time, taxicab medallions have
declined in value. During the year, the value of New York City taxicab
medallions has declined by approximately 9%.
Our failure to maintain our Subchapter M status could lead to a substantial
reduction in the amount of income distributed to our shareholders.
We, along with some of our subsidiaries, have qualified as regulated
investment companies under Subchapter M of the Code. Thus, we will not be
subject to federal income tax on investment company taxable income (which
includes, among other things, dividends and interest reduced by deductible
expenses) distributed to our shareholders. If we or those of our subsidiaries
that are also regulated investment companies were to fail to maintain Subchapter
M status for any reason, our respective incomes would become fully taxable and a
substantial reduction in the amount of income available for distribution to us
and to our shareholders would result.
To qualify under Subchapter M, we must meet certain income, distribution,
and diversification requirements. However, because we use leverage, we are
subject to certain asset coverage ratio requirements set forth in the 1940 Act.
These asset coverage requirements could, under certain circumstances, prohibit
us from making distributions that are necessary to maintain our Subchapter M
status or require that we reduce our leverage.
In addition, the asset coverage and distribution requirements impose
significant cash flow management restrictions on us and limit our ability to
retain earnings to cover periods of loss, provide for future growth and pay for
extraordinary items. Certain of our loans, including the medallion collateral
appreciation participation loans, could also be re-characterized in a manner
that would generate non-qualifying income for purposes of Subchapter M. In this
event, if such income exceeds the amount permissible, we could fail to satisfy
the requirement that a regulated investment company derive at least 90% of its
gross income from qualifying sources, with the result that we would not meet the
requirements of Subchapter M for qualification as a regulated investment
company. Qualification as a regulated investment company under Subchapter M is
made on an annual basis and, although we and some of our
37
subsidiaries are qualified as regulated investment companies, no assurance can
be given that we will each continue to qualify for such treatment. Failure to
qualify under Subchapter M would subject us to tax on our income and would have
material adverse effects on our financial condition and results of operations.
Our SBIC subsidiaries may be unable to meet the investment company requirements,
which could result in the imposition of an entity-level tax.
The Small Business Investment Act of 1958 regulates some of our
subsidiaries. The Small Business Investment Act restricts distributions by an
SBIC. Our SBIC subsidiaries that are also regulated investment companies could
be prohibited by SBA regulations from making the distributions necessary to
qualify as a regulated investment company. Each year, in order to comply with
the SBA regulations and the regulated investment company distribution
requirements, we must request and receive a waiver of the SBA's restrictions.
While the current policy of the SBA's Office of SBIC Operations is to grant such
waivers if the SBIC makes certain offsetting adjustments to its paid-in capital
and surplus accounts, there can be no assurance that this will continue to be
the SBA's policy or that our subsidiaries will have adequate capital to make the
required adjustments. If our subsidiaries are unable to obtain a waiver,
compliance with the SBA regulations may result in loss of regulated investment
company status and a consequent imposition of an entity-level tax.
The Internal Revenue Code's diversification requirements may limit our ability
to expand our taxicab rooftop advertising business and our medallion collateral
appreciation participation loan business.
We intend to continue to pursue an expansion strategy in our taxicab
rooftop advertising business. We believe that there are growth opportunities in
this market. However, the asset diversification requirements under Subchapter M
could restrict such expansion. These requirements provide that, as a RIC, not
more than 25% of the value of our total assets may be invested in the securities
(other than U.S. Government securities or securities of other RIC's) of any one
issuer. While our investments in our RIC subsidiaries are not subject to this
diversification test so long as these subsidiaries are RIC's, our investment in
Media is subject to this test.
At the time of our original investment, Media represented approximately 1%
of our total assets, which is in compliance with the diversification test. The
subsequent growth in the value of Media by itself will not re-trigger the test
even if Media represents in excess of 25% of our assets. However, under
Subchapter M, the test must be reapplied in the event that we make a subsequent
investment in Media, lend to it or acquire another taxicab rooftop advertising
business. If we were to fail a subsequent test, we would lose our RIC status. As
a result, our maintenance of RIC status could limit our ability to expand our
taxicab rooftop advertising business. It will be our policy to expand our
advertising business through internally generated growth. We will only consider
an acquisition in this area if we will be able to meet Subchapter M's
diversification requirements.
The fair value of the collateral appreciation participation loan portfolio
at December 31, 2001 was $8,950,000 million, which represented approximately 2%
of the total investment portfolio. We will continue to monitor the levels of
these asset types in conjunction with the diversification tests.
We depend on cash flow from our subsidiaries to make dividend payments and other
distributions to our shareholders.
We are a holding company and we derive most of our operating income and
cash flow from our subsidiaries. As a result, we rely heavily upon distributions
from our subsidiaries to generate the funds necessary to make dividend payments
and other distributions to our shareholders. Funds are provided to us by our
subsidiaries through dividends and payments on intercompany indebtedness, but
there can be no assurance that our subsidiaries will be in a position to
continue to make these dividend or debt payments.
We operate in a highly regulated environment.
We are regulated by the SEC and the SBA. In addition, changes in the laws
or regulations that govern business development companies, RIC's, or SBIC's may
significantly affect our business. Laws and regulations may be changed from time
to time, and the interpretations of the relevant laws and regulations also are
subject to change. Any change in the laws or regulations that govern our
business could have a material impact on our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business activities contain elements of risk. The Company
considers the principal types of risk to be fluctuations in interest rates and
portfolio valuations. The Company considers the management of risk essential to
conducting its businesses. Accordingly, the Company's risk management systems
and procedures are designed to identify and analyze the Company's risks, to set
appropriate policies and limits and to continually monitor these risks and
limits by means of reliable administrative and information systems and other
policies and programs.
The Company values its portfolio at fair value as determined in good faith
by the Company's Board of Directors in accordance with the Company's valuation
policy. Unlike banks, the Company is not permitted to provide a general reserve
for anticipated loan losses. Instead, the Company must value each individual
investment and portfolio loan on a quarterly basis. The
38
Company will record unrealized depreciation on investments and loans when it
believes that an asset has been impaired and full collection of the loan is
unlikely. The Company will record unrealized appreciation on equities if it has
a clear indication that the underlying portfolio company has appreciated in
value and, therefore, the Company's security has also appreciated in value.
Without a readily ascertainable market value, the estimated value of the
Company's portfolio of investments and loans may differ significantly from the
values that would be placed on the portfolio if there existed a ready market for
the investments. The Company adjusts quarterly the valuation of the portfolio to
reflect the Board of Directors' estimate of the current fair value of each
investment in the portfolio. Any changes in estimated fair value are recorded in
the Company's statement of operations as "Net unrealized gains (losses)."
In addition, the illiquidity of our loan portfolio and investments may
adversely affect our ability to dispose of loans at times when it may be
advantageous for us to liquidate such portfolio or investments. In addition, if
we were required to liquidate some or all of the investments in the portfolio,
the proceeds of such liquidation may be significantly less than the current
value of such investments. Because we borrow money to make loans and
investments, our net operating income is dependent upon the difference between
the rate at which we borrow funds and the rate at which we invest these funds.
As a result, there can be no assurance that a significant change in market
interest rates will not have a material adverse effect on our interest income.
In periods of sharply rising interest rates, our cost of funds would increase,
which would reduce our net operating income before net realized and unrealized
gains. We use a combination of long-term and short-term borrowings and equity
capital to finance our investing activities. Our long-term fixed-rate
investments are financed primarily with short term floating rate debt, and to a
lesser extent with long-term fixed-rate debt. We may use interest rate risk
management techniques in an effort to limit our exposure to interest rate
fluctuations. Such techniques may include various interest rate hedging
activities to the extent permitted by the 1940 Act. The Company has analyzed the
potential impact of changes in interest rates on interest income net of interest
expense. Assuming that the balance sheet were to remain constant and no actions
were taken to alter the existing interest rate sensitivity, a hypothetical
immediate 1% change in interest rates would have affected net increase
(decrease) in assets by less than 1% over a six month horizon. Although
management believes that this measure is indicative of the Company's sensitivity
to interest rate changes, it does not adjust for potential changes in credit
quality, size and composition of the assets on the balance sheet and other
business developments that could affect net increase (decrease) in assets.
Accordingly, no assurances can be given that actual results would not differ
materially from the potential outcome simulated by this estimate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements set forth under Item 14(A)(1)
in this Annual Report on Form 10-K, which financial statements are incorporated
herein by reference in response to this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by April 30, 2002 for its fiscal year 2001 Annual Meeting of
Shareholders under the caption `Directors and Officers of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by April 30, 2002 for its fiscal year 2001 Annual Meeting of
Shareholders under the caption `Compensation of Directors and Executive
Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by April 30, 2002 for its fiscal year 2001 Annual Meeting of
Shareholders under the caption `Stock Ownership of Certain Beneficial Owners and
Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by April 30, 2002 for its fiscal year 2001 Annual Meeting of
Shareholders under the caption `Certain Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements of Medallion Financial Corp. and the
Report of the Independent Public Accountants thereon are included as set forth
on the Index to Financial Statements on F-1.
39
2. FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements on F-1.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
Number Description
3.1a Medallion Financial Corp. Restated Certificate of Incorporation. Filed
as Exhibit 2a to the Registration Statement on Form N-2 (File No.
333-01670) and incorporated by reference herein.
3.1b Certificate of Amendment of Medallion Financial Corp. Restated
Certificate of Incorporation. Filed as Exhibit 3.1.1 to the Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1998 (File
No. 000-27812) and incorporated by reference herein.
3.2 Medallion Financial Corp. Restated By-Laws. Filed as Exhibit b to the
Registration Statement on Form N-2 (File No. 333-01670) and
incorporated by reference herein.
10.1 Agreement of Merger between Medallion Financial Corp. and Tri-Magna
Corporation, dated December 21, 1995, as amended on February 22, 1996.
Filed as Exhibit K3(i) to the Registration Statement on Form N-2 (File
No. 333-01670) and incorporated by reference herein.
10.2 Amendment Number 2 to Agreement of Merger between Medallion Financial
Corp. and Tri-Magna Corporation, dated April 26, 1996. Filed as
Exhibit K3(ii) to the Registration Statement on Form N-2 (File No.
333-01670) and incorporated by reference herein.
10.3 Stock Purchase Agreement among Medallion Financial Corp.,
Transportation Capital Corp., LNC Investments, Inc., Leucadia, Inc.
and Leucadia National Corporation, dated February 12, 1996. Filed as
Exhibit K1 to the Registration Statement on Form N-2 (File No.
333-01670) and incorporated by reference herein.
10.4 Amendment Number 1 to Stock Purchase Agreement among Medallion
Financial Corp., Transportation Capital Corp., LNC Investments, Inc.,
Leucadia, Inc. and Leucadia National Corporation, dated April 30,
1996. Filed as Exhibit K(i) to the Registration Statement on Form N-2
(File No. 333-01670) and incorporated by reference herein.
10.5 Asset Purchase Agreement between Medallion Financial Corp. and Edwards
Capital Company, dated February 21, 1996. Filed as Exhibit K2 to the
Registration Statement on Form N-2 (File No. 333-01670) and
incorporated by reference herein.
10.6 Amendment Number 1 to Asset Purchase Agreement between Medallion
Financial Corp. and Edwards Capital Company, dated April 30, 1996.
Filed as Exhibit K2(i) to the Registration Statement on Form N-2 (File
No. 333-01670) and incorporated by reference herein.
10.7 Agreement between Medallion Taxi Media, Inc. and Glenn Grumman, dated
July 25, 1996. Filed as Exhibit 10.2 to the Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1996 (File No.
814-00188) and incorporated by reference herein.
10.8 Agreement between Medallion Taxi Media, Inc. and Metropolitan Taxicab
Board of Trade, Inc., dated March 6, 1997. Filed as Exhibit 10.37 to
the Annual Report on Form 10-K/A for the fiscal year ended December
31, 1996 (File No. 000-27812) and incorporated by reference herein.
10.9 Medallion Financial Corp. Dividend Reinvestment Plan. Filed as Exhibit
e to the Registration Statement on Form N-2 (File No. 333-01670) and
incorporated by reference herein.
10.10 Medallion Financial Corp. Amended and Restated 1996 Stock Option Plan.
Filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998 (File No. 000-27812) and
incorporated by reference herein.
10.11 Medallion Financial Corp. Amended and Restated 1996 Non-Employee
Directors Stock Option
40
Plan. Filed as Exhibit A to the Application for an Amendment to the
Order by the Commission approving the plan as of April 3, 2000 (File
No. 812-11800) and incorporated by reference herein.
10.12 Medallion Funding Corp. 401k Savings Plan. Filed as Exhibit i.2 to the
Registration Statement on Form N-2/A (File No. 333-01670) and
incorporated by reference herein.
10.13 First Amended and Restated Employment Agreement between Medallion
Financial Corp. and Andrew Murstein, dated May 29, 1998. Filed as
Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (File No. 814-00188) and incorporated by
reference herein.
10.14 First Amended and Restated Employment Agreement between Medallion
Financial Corp. and Alvin Murstein, dated May 29, 1998. Filed as
Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (File No. 814-00188) and incorporated by
reference herein.
10.15 Employment Agreement, dated March 29, 1999, between Medallion
Financial Corp. and Michael Kowalsky. Filed as Exhibit 2i.6 to the
Registration Statement on Form N-2 (File No. 333-60080) and
incorporated by reference herein.
10.16 Employment Agreement, dated May 1, 2001, between Medallion Financial
Corp. and James E. Jack. Filed as Exhibit 2k.52 to the Registration
Statement on Form N-2 (File Nos. 333-60080 and 333-62846) and
incorporated by reference herein.
10.17 Code of Ethics. Filed as Exhibit 2r.1 to the Registration Statement on
Form N-2 (File Nos. 333-60080 and 333-62846) and incorporated by
reference herein.
10.18 Letter Agreement, dated April 18, 1997, between MFC and The Chase
Manhattan Bank relating to an interest rate cap transaction in the
amount of $10,000,000. Filed as Exhibit 10.1 to the Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No.
814-09744) and incorporated by reference herein.
10.19 Letter Agreement, dated May 9, 1997, between MFC and Fleet National
Bank ("Fleet") relating to an interest rate cap transaction in the
amount of $10,000,000. Filed as Exhibit 10.2 to the Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No.
814-09744) and incorporated by reference herein.
10.20 Letter Agreement, dated May 12, 1997, between MFC and Fleet relating
to an interest rate cap transaction in the amount of $10,000,000.
Filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1997 (File No. 814-09744) and
incorporated by reference herein.
10.21 Asset Purchase Agreement, dated as of August 20, 1997, among Medallion
Financial Corp., BLI Acquisition Co., LLC, Business Lenders, Inc.,
Thomas Kellogg, Gary Mullin, Penn Ritter and Triumph Connecticut,
Limited Partnership (including all exhibits thereto - schedules
omitted). Filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997 (File No. 000-27812)
and incorporated by reference herein.
10.22 Note Purchase Agreements, dated as of June 1, 1999, between Medallion
Funding Corp. and the Note Purchasers thereto. Filed as Exhibit 10.2
to the Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1999 (File No. 814-00188) and incorporated by reference herein.
10.23 First Amendment Agreement, dated March 30, 2001, to the Note Purchase
Agreement, dated as of June 1, 1999, between Medallion Funding Corp.
and the Note Purchasers thereto. Filed as Exhibit 10.57 to the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 (File
No. 814-00188) and incorporated by reference herein.
10.24 Second Amendment Agreement, dated as of June 29, 2001, to the Note
Purchase Agreements dated as of June 1, 1999 between Medallion
Financial Corp. and the Note Purchasers thereto. Filed as Exhibit 10.3
to the Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 2001 (File No. 814-00188) and incorporated by reference herein.
10.25 Amended and Restated Loan Agreement, dated as of December 24, 1997,
among Medallion Funding Corp., the Lenders Party thereto, Fleet Bank,
National Association as Swing Line
41
Lender, Administrative Agent and Collateral Agent and The Bank of New
York as Documentation Agent with Fleet Bank, National Association as
Arranger. Filed as Exhibit 10.50 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (File No. 812-09744) and
incorporated by reference herein.
10.26 Amendment No. 1, to the Amended and Restated Loan Agreement, dated as
of February 5, 1998, among Medallion Funding Corp., the Banks thereto,
Fleet National Bank and Swing Line Lender. Filed as Exhibit 10.62 to
the Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (File No. 812-09744) and incorporated by reference herein.
10.27 Amendment No. 2 to the Amended and Restated Loan Agreement, dated as
of December 31, 1998, among Medallion Funding Corp., the Banks
thereto, Fleet National Bank and Swing Line Lender. Filed herewith.
10.28 Amendment No. 3 to the Amended and Restated Loan Agreement, dated as
of June 1, 1999, among Medallion Funding Corp., the Banks thereto,
Fleet National Bank and Swing Line Lender. Filed herewith.
10.29 Amendment No. 4 to the Amended and Restated Loan Agreement and
Consent, dated as of March 30, 2001, among Medallion Funding Corp.,
the Banks thereto, Fleet National Bank and Swing Line Lender. Filed as
Exhibit 10.3 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2001 (File No. 814-00188) and incorporated by
reference herein.
10.30 Amendment No. 5 to the Amended and Restated Loan Agreement, Limited
Waiver and Consent, dated as of June 29, 2001, among Medallion Funding
Corp., the Lenders thereto, Fleet National Bank and Swing Line Lender.
Filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2001 (File No. 814-00188) and
incorporated by reference herein.
10.31 Amendment No. 6 to the Amended and Restated Loan Agreement, Limited
Waiver and Consent, dated as of December 31, 2001, among Medallion
Funding Corp., the Lenders thereto, Fleet National Bank and Swing Line
Lender. Filed herewith.
10.32 Second Amended and Restated Loan Agreement, dated as of September 22,
2000, among Medallion Financial Corp., Medallion Business Credit, LLC,
the Lenders Party thereto, Fleet Bank, National Association as Agent
and Swing Line Lender and Fleet Bank, N.A. as Arranger. Filed
herewith.
10.33 Amendment No. 1 to the Second Amended and Restated Loan Agreement and
Limited Waiver, dated March 30, 2001, among Medallion Financial Corp.,
Medallion Business Credit, LLC, Fleet National Bank and Swing Line
Lenders. Filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 2001 (File No. 814-00188) and
incorporated by reference herein.
10.34 Amendment No. 2 to the Second Amended and Restated Loan Agreement,
Limited Waiver and Consent, dated as of June 29, 2001, among Medallion
Financial Corp., Medallion Business Credit, LLC, Fleet National Bank
and Swing Line Lenders. Filed as Exhibit 10.2 to the Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 2001 (File No.
814-00188) and incorporated by reference herein.
10.35 Amendment No. 3 to Second Amended and Restated Loan Agreement, dated
as of December 31, 2001, among Medallion Financial Corp., Medallion
Business Credit LLC, the Lenders thereto, Fleet National Bank and
Swing Line Lender. Filed herewith.
10.36 Security Agreement, dated June 1, 1999, between Medallion Funding
Corp. and Fleet Bank, N.A.. Filed as Exhibit 10.3 to the Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1999 (File
No. 814-00188) and incorporated by reference herein.
10.37 Amended and Restated Security Agreement, dated as of December 24,
1997, between Medallion Funding Corp. and Fleet Bank, N.A. Filed as
Exhibit 10.61 to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (File No. 812-09744) and incorporated by
reference herein.
10.38 Amendment No. 1, dated as of March 12, 1998, to the Amended and
Restated Security
42
Agreement, dated as of December 24, 1997, between Medallion Funding
Corp., Fleet Bank, N.A.. Filed as Exhibit 10.63 to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 (File No.
812-09744) and incorporated by reference herein.
10.39 Security Agreement, dated as of June 29, 1999, between Medallion
Business Credit, LLC and Fleet Bank, N.A. Filed as Exhibit 10.4 to the
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1999 (File No. 814-00188) and incorporated by reference herein.
10.40 Security Agreement, dated as of February 20, 2002, among Medallion
Funding Chicago Corp., the Lenders thereto, Fleet National Bank and
Swing Line Lender. Filed herewith.
10.41 Intercreditor Agreement, dated June 1, 1999, among Fleet Bank, N.A.,
as Agent for and on behalf of the Banks, the Banks, the Senior
Noteholders, Fleet, acting as Collateral Agent to the Senior
Noteholders and Fleet Bank, N.A. as Intercreditor Collateral Agent for
the Senior Creditors. Filed as Exhibit 10.5 to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1999 (File No.
814-00188) and incorporated by reference herein.
10.42 Amendment No. 1 to the Intercreditor Agreement, dated as of June 29,
2001, among Fleet Bank, N.A., as Agent for and on behalf of the Banks,
the Banks, the Senior Noteholders, Fleet, acting as Collateral Agent
for the Senior Creditors. Filed herewith.
10.43 Stock Pledge Agreement, dated as of April 30, 2001, between Medallion
Financial Corp. and Fleet National Bank. Filed herewith
10.44 Stock Pledge Agreement, dated as of April 30, 2001, between Medallion
Financial Corp. and Fleet National Bank. Filed herewith.
10.45 Stock Pledge Agreement, dated as of February 20, 2002, between
Medallion Funding Corp. and Fleet National Bank. Filed herewith.
10.46 Guaranty, dated as of April 30, 2001, by Medallion Taxi Media in
favor of Fleet National Bank. Filed as Exhibit 10.7 to the Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2001 (File
No. 814-00188) and incorporated by reference herein.
10.47 Guaranty, dated as of April 30, 2001, by Medallion Taxi Media in favor
of the Noteholders thereto. Filed as Exhibit 10.8 to the Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2001 (File
No. 814-00188) and incorporated by reference herein.
10.48 Guaranty, dated April 30, 2001, by Medallion Taxi Media in favor of
Fleet National Bank. Filed as Exhibit 10.9 to the Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2001 (File No.
814-00188) and incorporated by reference herein.
10.49 Guaranty, dated as of February 20, 2002, by Medallion Funding Chicago
Corp. in favor of Fleet National Bank. Filed herewith.
10.50 Revolving Credit Note, dated December 24, 1997, in the amount of
$30,000,000 from Medallion Funding Corp. payable to Fleet Bank,
National Association. Filed as Exhibit 10.51 to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 (File No.
812-09744) and incorporated by reference herein.
10.51 Revolving Credit Note, dated December 24, 1997, in the amount of
$30,000,000 from Medallion Funding Corp. payable to The Bank of New
York. Filed as Exhibit 10.52 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File No. 812-09744) and
incorporated by reference herein.
10.52 Revolving Credit Note, dated December 24, 1997, in the amount of
$30,000,000 from Medallion Funding Corp. payable to Bank Boston, N.A.
Filed as Exhibit 10.53 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File No. 812-09744) and
incorporated by reference herein.
43
10.53 Revolving Credit Note, dated December 24, 1997, in the amount of
$20,000,000 from Medallion Funding Corp. payable to Harris Trust and
Savings Bank. Filed as Exhibit 10.54 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (File No. 812-09744) and
incorporated by reference herein.
10.54 Revolving Credit Note, dated December 24, 1997, in the amount of
$20,000,000 from Medallion Funding Corp. payable to Bank Tokyo -
Mitsubishi Trust Company. Filed as Exhibit 10.55 to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 (File No.
812-09744) and incorporated by reference herein.
10.55 Revolving Credit Note, dated December 24, 1997, in the amount of
$15,000,000 from Medallion Funding Corp. payable to Israel Discount
Bank to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (File No. 812-09744) and incorporated by reference
herein.
10.56 Revolving Credit Note, dated December 24, 1997, in the amount of
$15,000,000 from Medallion Funding Corp. payable to European American
Bank. Filed as Exhibit 10.57 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File No. 812-09744) and
incorporated by reference herein.
10.57 Revolving Credit Note, dated December 24, 1997, in the amount of
$15,000,000 from Medallion Funding Corp. payable to Bank Leumi USA.
Filed as Exhibit 10.58 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File No. 812-09744) and
incorporated by reference herein.
10.58 Revolving Credit Note, dated December 24, 1997, in the amount of
$20,000,000 from Medallion Funding Corp. payable to The Chase
Manhattan Bank. Filed as Exhibit 10.59 to the Annual Report on Form
10-K for the fiscal year ended December 31, 1997 (File No. 812-09744)
and incorporated by reference herein.
10.59 Swing Line Note, dated December 24, 1997, in the amount of $5,000,000
from Medallion Funding Corp. payable to Fleet Bank, National
Association. Filed as Exhibit 10.60 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (File No. 812-09744) and
incorporated by reference herein.
10.60 Indenture of Lease, dated October 31, 1997, by and between Sage Realty
Corporation, as Agent and Landlord, and Medallion Financial Corp., as
Tenant. Filed as Exhibit 10.64 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (File No. 812-09744) and
incorporated by reference herein.
10.61 Third Amendment, dated December 22, 1997, to Letter Agreement, dated
as of December 1, 1996, between Medallion Financial Corp. and Fleet
Bank, N.A. Filed as Exhibit 10.65 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (File No. 812-09744) and
incorporated by reference herein.
10.62 Endorsement No. 3, dated December 22, 1997, to Revolving Credit Note
dated December 1, 1996 in the amount of $6,000,000 from Medallion
Financial Corp., payable to Fleet Bank, N.A. Filed as Exhibit 10.66 to
the Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (File No. 812-09744) and incorporated by reference herein.
10.63 (CE) Commercial Paper Dealer Agreement between Medallion Funding
Corp., as issuer, and Smith Barney Inc., as dealer, dated as of March
13, 1998. Filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1998 (File No. 000-27812) and
incorporated by reference herein.
10.64 Agency Agreement, by and between Medallion Funding Corp. and Bank of
Montreal Trust Company, dated as of March 13, 1998. Filed as Exhibit
10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998 (File No. 000-27812) and incorporated by reference
herein.
10.65 Medallion Funding Corp. $22,500,000 7.20% Senior Secured Notes, Series
A Due June 1, 2004 Note Purchase Agreement, dated as of June 1, 1999.
Filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1999 (File No. 814-00188) and
incorporated by reference herein.
44
10.66 $5,000,000 Swing Line Note, dated June 29, 1999. Filed as Exhibit 10.6
to the Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1999 (File No. 814-00188) and incorporated by reference herein.
10.67 $20,000,000 Revolving Credit Note No. 1, dated June 29, 1999. Filed as
Exhibit 10.7 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (File No. 814-00188) and incorporated by
reference herein.
10.68 $15,000,000 Revolving Credit Note No. 2, dated June 29, 1999. Filed as
Exhibit 10.8 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (File No. 814-00188) and incorporated by
reference herein.
10.69 $10,000,000 Revolving Credit Note No. 3, dated June 29, 1999. Filed as
Exhibit 10.9 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (File No. 814-00188) and incorporated by
reference herein.
10.70 $10,000,000 Revolving Credit Note No. 4, dated June 29, 1999. Filed as
Exhibit 10.10 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (File No. 814-00188) and incorporated by
reference herein.
10.71 $10,000,000 Revolving Credit Note No. 5, dated June 29, 1999. Filed as
Exhibit 10.11 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (File No. 814-00188) and incorporated by
reference herein.
10.72 $5,000,000 Revolving Credit Note No. 6, dated June 29, 1999. Filed as
Exhibit 10.12 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (File No. 814-00188) and incorporated by
reference herein.
10.73 $10,000,000 Revolving Credit Note No. 7, dated June 29, 1999. Filed as
Exhibit 10.13 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (File No. 814-00188) and incorporated by
reference herein.
10.74 $10,000,000 Revolving Credit Note No. 8, dated June 29, 1999. Filed as
Exhibit 10.14 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (File No. 814-00188) and incorporated by
reference herein.
10.75 $10,000,000 Revolving Credit Note No. 9, dated June 29, 1999. Filed as
Exhibit 10.15 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999 (File No. 814-00188) and incorporated by
reference herein.
10.76 Commercial Paper Dealing Agreement, dated as of July 30, 1999 between
Medallion Financial Corp. and U.S. Bancorp Investments, Inc. Filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1999 (File No. 814-00168) and incorporated
by reference herein.
10.77 Amendment No. 4 to Second Amended and Restated Loan Agreement,
Limited Waiver and Consent, dated as of April 1, 2002, by and among
Medallion Financial Corp., Medallion Business Credit, LLC and Fleet
National Bank. Filed herewith.
10.78 Amendment No. 7 to Amended and Restated Loan Agreement, Limited Waiver
and Consent, dated as of April 1, 2002, by and among Medallion Funding
Corp. and Fleet National Bank. Filed herewith.
10.79 Amendment No. 2 to Intercreditor Agreement, dated as of April 1, 2002,
among Fleet National Bank, the Bank and the Senior Noteholders. Filed
herewith.
10.80 Third Amendment Agreement, dated as of April 1, 2001, to the Note
Purchase Agreements between Medallion Funding Corp. and the Note
Purchasers thereto. Filed herewith.
10.81 Form of 8.35% Senior Secured Note, Series A, due June 30, 2003 from
Medallion Funding Corp. Filed herewith.
10.82 Form of 8.35% Senior Secured Note, Series B, due June 30, 2003 from
Medallion Funding Corp. Filed herewith.
10.83 Guaranty, dated as of April 1, 2002 by Medallion Funding Chicago Corp.
in favor of the Note Purchasers. Filed herewith.
10.84 Stock Pledge Agreement, dated as of April 1, 2002, between Medallion
Funding Corp. and Fleet National Bank. Filed herewith.
10.85 Security Agreement, dated as of April 1, 2002, among Medallion
Funding Corp. and Fleet National Bank. Filed herewith.
21.1 List of Subsidiaries of Medallion Financial Corp. Filed herewith.
23.1 Consent of Arthur Andersen LLP relating to its report concerning
Medallion Financial Corp., dated April 8, 2002. Filed herewith.
99.1 Letter to the Securities and Exchange Commission pursuant to Temporary
Note 3T to Article 3 of Regulation S-X. Filed herewith.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Form 10-K and those that
may be made in the future by or on behalf of the Company, the
45
Company notes that there are various factors that could cause actual results to
differ materially from those set forth in any such forward-looking statements.
The forward-looking statements contained in this Form 10-K were prepared by
management and are qualified by, and subject to, significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of which
are difficult or impossible to predict and many of which are beyond the control
of the Company. Accordingly, there can be no assurance that the forward-looking
statements contained in this Form 10-K will be realized or that actual results
will not be significantly higher or lower. The statements have not been audited
by, examined by, compiled by or subjected to agreed-upon procedures by
independent accountants, and no third-party has independently verified or
reviewed such statements. Readers of this Form 10-K should consider these facts
in evaluating the information contained herein. In addition, the business and
operations of the Company are subject to substantial risks which increase the
uncertainty inherent in the forward-looking statements contained in this Form
10-K. The inclusion of the forward-looking statements contained in this Form
10-K should not be regarded as a representation by the Company or any other
person that the forward-looking statements contained in this form 10-K will be
achieved. In light of the foregoing, readers of this Form 10-K are cautioned not
to place undue reliance on the forward-looking statements contained herein.
These risks and others that are detailed in this Form 10-K and other documents
that the Company files from time to time with the Securities and Exchange
Commission, including quarterly reports on Form 10-Q and any current reports on
Form 8-K must be considered by any investor or potential investor in the
Company.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEDALLION FINANCIAL CORP.
Date: April 8, 2002
By: /s/ James E. Jack By: /s/ Larry D. Hall
----------------- -----------------
James E. Jack Larry D. Hall
Executive Vice President and Senior Vice President and
Chief Financial Officer Chief Accounting Officer
Signing on behalf of the registrant Signing on behalf of the registrant
as principal financial officer. as principal accounting officer.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signatures Title Date
- --------------------------------------------------------------------------------
/s/ Alvin Murstein Chairman of the Board of Directors April 8, 2002
- --------------------------- and Chief Executive Officer
Alvin Murstein
- ---------------------------
/s/ Andrew M. Murstein President and Director April 8, 2002
- ---------------------------
Andrew M. Murstein
- ---------------------------
/s/ Mario M. Cuomo Director April 8, 2002
- ---------------------------
Mario M. Cuomo
- ---------------------------
/s/ Frederick S. Hammer Director April 8, 2002
- ---------------------------
Frederick S. Hammer
- ---------------------------
/s/ Stanley Kreitman Director April 8, 2002
- ---------------------------
Stanley Kreitman
- ---------------------------
/s/ David L. Rudnick Director April 8, 2002
- ---------------------------
David L. Rudnick
- ---------------------------
/s/ Benjamin Ward Director April 8, 2002
- ---------------------------
Benjamin Ward
- ---------------------------
47
MEDALLION FINANCIAL CORP.
INDEX TO FINANCIAL STATEMENTS
Page
==========================================================================================================
Report of Independent Public Accountants........................................................... F-2
Consolidated Statements of Operations for the Years ended December 31, 2001, 2000, and 1999........ F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000....................................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the Years ended December 31, 2001, 2000, and 1999............................................ F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 2001, 2000, and 1999........ F-6
Notes to Consolidated Financial Statements......................................................... F-7
Consolidated Schedules of Investments as of December 31, 2001 and 2000 ............................ F-26
==========================================================================================================
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Medallion Financial Corp.:
We have audited the accompanying consolidated balance sheets of Medallion
Financial Corp. (a Delaware corporation) and its subsidiaries (the "Company") as
of December 31, 2001 and 2000, including the consolidated schedules of
investments as of December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As explained in Note 3, investments consist of loans and investments in
equity securities valued at $462,253,000 (91% of total assets) and $516,010,000
(92% of total assets) as of December 31, 2001 and 2000, respectively, whose
values have been estimated by the Board of Directors in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of
valuation, the Board of Directors' estimate of values may differ significantly
from the values that would have been used had a ready market for the investments
existed, and the differences could be material.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Medallion
Financial Corp. and its subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
New York, New York
April 2, 2002
F-2
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- -----------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Investment income
Interest income on investments $ 41,369,812 $ 55,014,780 $ 43,756,156
Interest income on short-term investments 707,331 341,245 319,972
============================================
Total investment income 42,077,143 55,356,025 44,076,128
============================================
Interest expense
Notes payable to banks 19,626,805 14,034,234 9,143,232
Senior secured notes 3,336,396 3,287,459 1,512,684
SBA debentures 2,322,702 1,794,081 3,160,314
Commercial paper 199,351 9,827,886 7,171,459
--------------------------------------------
Total interest expense 25,485,254 28,943,660 20,987,689
============================================
Net interest income 16,591,889 26,412,365 23,088,439
--------------------------------------------
Non interest income
Gain on sale of loans 1,511,112 2,813,900 3,014,478
Equity in losses of Media (3,374,955) (421,155) (214,314)
Accretion of negative goodwill -- 350,516 722,400
Other income 2,105,158 3,377,829 2,245,766
--------------------------------------------
Total non interest income 241,315 6,121,090 5,768,330
--------------------------------------------
Non interest expense
Salaries and benefits 9,420,716 10,511,506 9,638,679
Professional fees 2,259,901 2,604,456 1,860,734
Amortization of goodwill 652,735 540,380 530,097
Administration and advisory fees 5,017 111,841 245,332
Merger related expense -- 1,444,513 --
Other operating expense 5,413,980 8,236,119 5,724,832
--------------------------------------------
Total non interest expense 17,752,349 23,448,815 17,999,674
============================================
Net investment income (loss) before income taxes (919,145) 9,084,640 10,857,095
Income tax provision (benefit) (16,485) (181,373) 48,839
--------------------------------------------
Net investment income (loss) after income taxes (902,660) 9,266,013 10,808,256
Increase in net unrealized appreciation
(depreciation) on investments (140,477) 2,158,515 (12,259,566)
Net realized gain (loss) on investments (3,015,146) (3,883,840) 22,545,017
--------------------------------------------
Net increase (decrease) in net assets
resulting from operations ($4,058,283) $ 7,540,688 $ 21,093,707
===============================================================================================
Net increase (decrease) in net assets resulting
from operations per common share
Basic ($0.24) $ 0.52 $ 1.45
Diluted (0.24) 0.52 1.44
===============================================================================================
Dividends declared per share $ 0.38 $ 1.19 $ 1.27
===============================================================================================
Weighted average common shares outstanding
Basic 16,582,179 14,536,942 14,515,660
Diluted 16,582,179 14,576,183 14,620,437
===============================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
MEDALLION FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------------
Assets
Investments:
Medallion loans $252,674,634 $299,302,548
Commercial loans 199,328,787 212,721,373
Equity investments 3,591,962 2,129,685
----------------------------
Net investments 455,595,383 514,153,606
Investment in and loans to Media 6,658,052 1,856,421
----------------------------
Total investments 462,253,435 516,010,027
Cash 25,409,058 15,652,878
Accrued interest receivable 3,989,989 8,701,981
Servicing fee receivable 3,575,079 6,632,516
Fixed assets, net 1,933,918 2,050,808
Goodwill, net 5,007,583 5,650,045
Other assets, net 5,586,720 6,016,747
----------------------------
Total assets $507,755,782 $560,715,002
======================================================================================
Liabilities
Accounts payable and accrued expenses $ 7,105,309 $ 7,723,812
Dividends payable 1,643,656 5,244,281
Accrued interest payable 2,138,240 3,887,589
Commercial paper -- 24,066,269
Notes payable to banks 233,000,000 305,700,000
Senior secured notes 45,000,000 45,000,000
SBA debentures payable 43,845,000 21,360,000
----------------------------
Total liabilities 332,732,205 412,981,951
Shareholders' Equity
Preferred Stock (1,000,000 shares of $0.01 par value
stock authorized - none outstanding) -- --
Common stock (50,000,000 shares of $0.01 par value
stock authorized) 182,421 145,467
Capital in excess of par value 184,486,259 146,379,377
Accumulated undistributed net investment (loss) income (9,645,103) 1,208,207
----------------------------
Total shareholders' equity 175,023,577 147,733,051
----------------------------
Total liabilities and shareholders' equity $507,755,782 $560,715,002
======================================================================================
Number of common shares outstanding 18,242,035 14,546,637
Net asset value per share $ 9.59 $ 10.16
======================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Capital in Undistributed
---------------------- Excess Net Investment
# of Shares Amount Of Par Value Income
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 14,511,379 $145,114 $145,996,289 $ 8,332,557
Exercise of stock options 10,665 107 110,518
Net increase in net assets resulting from operations -- -- -- 21,093,707
Dividends declared on common stock ($1.27 per share) -- -- -- (18,368,455)
SOP 93-2 reclassification -- -- 529,289 (529,289)
==============================================================================================================
Balance at December 31, 1999 14,522,044 145,221 146,636,096 10,528,520
Exercise of stock options 19,001 190 185,805 --
Issuance of common stock 5,592 56 91,944 --
Net increase in net assets resulting from operations -- -- -- 7,540,688
Dividends declared on common stock ($1.19 per share) -- -- -- (17,395,469)
SOP 93-2 reclassification -- -- (534,468) 534,468
==============================================================================================================
Balance at December 31, 2000 14,546,637 145,467 146,379,377 1,208,207
Exercise of stock options 34,000 340 373,660 --
Issuance of common stock, net 3,661,398 36,614 37,364,863 --
Net decrease in net assets resulting from operations -- -- -- (4,058,283)
Dividends declared on common stock ($0.38 per share) -- -- -- (6,426,668)
SOP 93-2 reclassification -- -- 368,359 (368,359)
==============================================================================================================
Balance at December 31, 2001 18,242,035 $182,421 $184,486,259 ($9,645,103)
==============================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
MEDALLION FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase (decrease) in net assets resulting from operations ($4,058,283) $ 7,540,688 $ 21,093,707
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating activities:
Depreciation and amortization 610,447 973,010 721,160
Amortization of goodwill 652,735 540,380 530,097
Amortization of origination costs 1,595,237 1,116,223 971,091
Accretion of negative goodwill -- (350,516) (722,400)
Increase in net unrealized (appreciation) depreciation 140,477 (2,158,515) 12,259,566
Net realized (gain) loss on investments 3,015,146 3,883,840 (22,545,017)
Net realized gain on sales of loans (1,511,112) (2,813,900) (3,014,478)
Equity in losses of Media 3,374,955 421,155 214,314
(Increase) decrease in valuation of collateral
appreciation participation loans and servicing fee receivable 5,157,750 (3,100,000) --
Decrease (increase) in accrued interest receivable 1,611,992 (330,616) (1,307,617)
Decrease (increase) in receivable from sale of loans -- 10,563,503 (993,514)
Decrease (increase) in servicing fee receivable 999,687 (1,753,733) (2,588,480)
Decrease (increase) in other assets, net 419,754 (2,770,788) (39,381)
(Decrease) increase in accounts payable and accrued expenses (618,504) (1,744,426) 3,301,974
(Decrease) increase in accrued interest payable (1,749,349) (94,069) 1,374,721
-----------------------------------------------
Net cash provided by operating activities 9,640,932 9,922,236 9,255,743
==========================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Originations of investments (134,753,029) (197,512,295) (303,335,260)
Proceeds from sales and maturities of investments 190,071,504 172,898,238 234,305,172
Investments in and loans to Media, net (8,176,586) 2,072,075 559,696
Capital expenditures (493,556) (626,169) (1,117,474)
-----------------------------------------------
Net cash provided by (used for) investing activities 46,648,333 (23,168,151) (69,587,866)
==========================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of (repayment of) notes payable to banks (72,700,000) 110,250,000 74,850,000
Proceeds from issuance of senior secured notes -- -- 45,000,000
Net repayment of commercial paper (24,066,269) (69,917,523) (9,097,993)
Proceeds from the issuance of (repayment of) notes payable to SBA 22,485,000 (1,410,000) (32,590,000)
Proceeds from exercise of stock options 374,000 185,995 110,625
Payment of declared dividends to current shareholders (10,027,293) (17,760,963) (17,523,363)
Proceeds from issuance of common stock 37,401,477 92,000 --
-----------------------------------------------
Net cash provided by (used for) financing activities (46,533,085) 21,439,509 60,749,269
==========================================================================================================================
NET INCREASE IN CASH 9,756,180 8,193,594 417,146
CASH, beginning of year 15,652,878 7,459,284 7,042,138
-----------------------------------------------
CASH, end of year $ 25,409,058 $ 15,652,878 $ 7,459,284
==========================================================================================================================
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 26,996,009 $ 29,037,729 $ 19,609,865
Cash paid during the year for income taxes -- -- 43,877
==========================================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
MEDALLION FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(1) ORGANIZATION OF MEDALLION FINANCIAL CORP. AND ITS SUBSIDIARIES
Medallion Financial Corp. (the Company) is a closed-end management
investment company organized as a Delaware corporation. The Company has elected
to be regulated as a business development company under the Investment Company
Act of 1940, as amended (the 1940 Act). The Company conducts its business
through various wholly owned subsidiaries including its primary operating
company, Medallion Funding Corp. (MFC). As an adjunct to the Company's taxicab
medallion finance business, the Company operates a taxicab rooftop advertising
business, Medallion Taxi Media, Inc. (Media). (See Note 5)
The Company also conducts its business through Business Lenders, LLC (BLL),
licensed under the Small Business Administration (SBA) section 7(a) program,
Medallion Business Credit LLC (MBC), an originator of loans to small businesses
for the purpose of financing inventory and receivables, Medallion Capital, Inc.
(MCI) which conducts a mezzanine financing business, and Freshstart Venture
Capital Corp. (FSVC), a Small Business Investment Company (SBIC) which also
originates and services medallion and commercial loans.
(2) EFFECT OF NEW YORK CITY TERRORIST ATTACKS AND ECONOMIC RECESSION ON COMPANY
OPERATIONS
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. Thankfully, the Company and
its employees were not directly impacted in a material way; however, indirectly
there were repercussions on certain customers. The slowdown in traffic, tourism,
and other personal concerns resulted in initial operating problems for certain
of our medallion individual and fleet customers. We have worked with the
borrowers to modify payment terms and establish a plan to enable these customers
to again become current. There have been no reductions in New York City
medallion values as a result of this event during 2001. The commercial lending
side of the business also has several borrowers who were affected by this event.
The taxi top advertising business, many of whose ads are from Broadway shows,
suffered short term contract cancellations from these and other customers which
reduced gross revenue by 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. These charges included $4,050,000 related to the
reversal of additional interest income related to collateral appreciation
participation loans whose underlying collateral value dropped significantly
during the quarter, $3,300,000 for additional unrealized depreciation on the
investment portfolio, $2,050,000 to writedown the value of the servicing asset,
primarily related to increased levels of prepayment activity, $1,350,000 related
to the establishment of a reserve against a deferred tax asset in Media
resulting from increased tax losses and tax loss carry back limitations, and
$550,000 for the write-off of previously capitalized transaction costs for
transactions which were no longer expected to close.
The Company's bank loan matured on November 5, 2001. In addition, MFC was
in default under its bank loan and its senior secured notes. By April 1, 2002,
the Company and MFC obtained amendments to their bank loans and the senior
secured notes. The amendments, in general, changed the maturity dates of the
loans and notes, modified the interest rates borne on the loans and the secured
notes, required certain immediate, scheduled or other prepayments of the loans
and notes and reductions in the commitments under the loans, required the
Company or MFC to engage or seek to engage in certain asset sales, instituted
additional operating restrictions and reporting requirements. As modified by the
amendments, the scheduled amortization on the loans and secured notes are as
follows:
F-7
The terms and maturities were changed from the prior agreement and are as
follows:
Maturity
-------------------------------------------------------------------
Principal Payments Monthly Principal
outstanding from from July outstanding
at December 31, January 1, 2002 2002 - May at and after
2001 - March 31, 2002 April, 2002 May, 2002 2003 June, 2003 June 30, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Medallion Financial loans $ 85,000,000 $13,711,270 $ 5,000,000 $66,288,730 $ -- $ -- $--
MFC loans 148,000,000 -- -- -- 6,166,667 80,166,663 --
MFC loans senior secured notes 45,000,000 1,000,000 13,143,125 -- 1,285,703 16,714,142 --
-------------- ------------------------------------------------------------------------------------
Total $278,000,000 $14,711,270 $18,143,125 $66,288,730 $7,452,370 $96,880,805 $--
===================================================================================================================================
In addition to the changes in maturity (acceleration of maturity dates in
the case of MFC), the interest rates on the Company's bank loan and MFC's
secured notes were increased, and additional fees were charged to renew and
maintain the facilities and notes. The recent amendments contain substantial
limitations on our ability to operate and in some cases require modifications to
our previous normal course of operations. Covenants restricting investment in
the Media and BLL subsidiaries, elimination of various intercompany balances
between affiliates, limits on the amount and timing of dividends, and
continuation of the prior financial and operating covenants were all tightened
as a condition of renewal.
While we have experienced difficulty complying with the restrictive
covenants under our existing agreements, the Company believes it will be able to
comply with all provisions of the amended agreements, including the accelerated
maturity schedule. As of March 29, 2002, the Company had $29,000,000 of cash on
hand. We may need to sell assets to meet the amortization requirements under
these amendments. While we fully intend to comply with the covenants in recent
amendments, we have failed to comply with similar covenants in our existing
agreements. We are currently exploring refinancing options which would replace
our obligations under the Company and MFC loans and the senior secured notes. We
have signed a non-binding preliminary term sheet and we are currently engaged in
discussions, and have received a proposal from, a nationally known asset-based
lender to provide a refinancing for the obligations owed under our secured notes
and bank loans. The proposed financing would enable the Company to refinance its
existing indebtedness and provide additional capital with longer maturities, but
there can be no assurance that such financing will be obtained, the date that it
will be obtained or whether such financing would provide more operating
flexibility than is provided under our current credit agreements. The failure to
obtain such financing or alternative financing on a timely basis could have a
material adverse effect on the Company. In addition, the Company is actively
pursuing other financing options for individual subsidiaries with alternate
financing sources, and is continuing the ongoing program of loan participations
and sales to provide additional sources of funds for both external expansion and
continuation of internal growth. The Company has also received preliminary
offers from other nationally recognized lenders to refinance certain
subsidiaries of the Company. Furthermore, the Company is considering the
possibility of submitting an application to receive a bank charter, which if
granted, would permit the Company to receive deposits insured by the Federal
Deposit Insurance Corporation. The Company has held meetings with the relevant
regulatory bodies in connection with such an application. There can be no
assurances that such financings will be obtained or that any application related
to a bank charter would be approved. The Company believes that its credit
facilities with the SBA and cash flow from operations (after distributions to
stockholders) will be adequate to fund the continuing operation of the Company's
loan portfolio and advertising business.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practices in the investment company
industry. The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reporting and disclosure of assets and liabilities,
including those that are of a contingent nature, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, except for Media. All significant
intercompany transactions, balances, and profits have been eliminated in
consolidation. The consolidated statements give retroactive effect to the merger
with FSVC retroactively combined with the Company's financial statements as if
the merger had occurred at the beginning of the earliest period presented.
All significant intercompany transactions, balances, and profits have been
eliminated in the use of the equity method. As a non-investment company, Media
cannot be consolidated with the Company, which is an investment company under
the 1940 Act. See Note 5 for the presentation of financial information for
Media.
Investment Valuation
The Company's loans, net of participations and any unearned discount, are
considered investments under the 1940 Act and are recorded at fair value. Loans
are valued at cost less unrealized depreciation. Since no ready market exists
for these loans, the fair value is determined in good faith by the Board of
Directors. In determining the fair value, the Company and Board of Directors
F-8
consider factors such as the financial condition of the borrower, the adequacy
of the collateral, individual credit risks, historical loss experience and the
relationships between current and projected market rates and portfolio rates of
interest and maturities.
Investments in equity securities and stock warrants are recorded at fair
value, represented as cost, plus or minus unrealized appreciation or
depreciation, respectively. The fair value of investments that have no ready
market, are determined by the Board of Directors based upon assets and revenues
of the underlying investee company as well as general market trends for
businesses in the same industry. Included in equity investments at December 31,
2001 are marketable and non-marketable securities of approximately $925,000 and
$2,667,000, respectively. At December 31, 2000, the respective balances were
approximately $1,490,000 and $640,000.
Because of the inherent uncertainty of valuations, the Board of Directors'
estimates of the values of the investments may differ significantly from the
values that would have been used had a ready market for the investments existed
and the differences could be material.
The Company's investments consist primarily of long-term loans to persons
defined by Small Business Administration (SBA) regulations as socially or
economically disadvantaged, or to entities that are at least 50% owned by such
persons. Approximately 56% and 58% of the Company's loan portfolio at December
31, 2001 and 2000, respectively, had arisen in connection with the financing of
taxicab medallions, taxicabs, and related assets, of which 81% and 77%,
respectively, are in New York City. These loans are secured by the medallions,
taxicabs and related assets, and are personally guaranteed by the borrowers, or
in the case of corporations, personally guaranteed by the owners. A portion of
the Company's portfolio represents loans to various commercial enterprises,
including finance companies, wholesalers, dry cleaners, restaurants, and real
estate. These loans are secured by various equipment and/or real estate and are
generally guaranteed by the owners, and in certain cases, by the equipment
dealers. These loans are made primarily in the metropolitan New York City area.
The remaining portion of the Company's portfolio is from the origination of
loans guaranteed by the SBA under its Section 7(a) program, less the sale of the
guaranteed portion of those loans. Funding for the Section 7(a) program depends
on annual appropriations by the U.S. Congress.
Collateral Appreciation Participation Loans
During the 2000 first half, the Company originated collateral appreciation
participation loans collateralized by Chicago taxi medallions of $29,800,000, of
which $20,850,000 were syndicated to other financial institutions. In
consideration for modifications from its normal taxi medallion lending terms,
the Company offered loans at higher loan-to-value ratios and is entitled to earn
additional interest income based upon any increase in the value of all
$29,800,000 of the collateral. During 2001, the effect of the economic downturn
began to stress the value of Chicago taxi medallions, which accelerated in the
2001 third quarter. 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 $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 refinance the loans with the existing borrower, including the syndicated
portion, at that time at the rates and terms prevailing at that time.
Investment Transactions and Income Recognition
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment to the yield of the related loans. At December
31, 2001 and 2000, net origination costs totaled approximately $2,149,000 and
$2,460,000. Amortization expense for the years ended December 31, 2001, 2000,
and 1999 was approximately $1,595,000, $1,116,000, and $971,000.
Interest income is recorded on the accrual basis. Loans are placed on
non-accrual status, and all uncollected accrued interest is reversed, when there
is doubt as to the collectibility of interest or principal, or if loans are 90
days or more past due, unless management has determined that they are both
well-secured and in the process of collection. Interest income on non-accrual
loans is recognized when cash is received. At December 31, 2001 and 2000 total
non-accrual loans were approximately $35,782,000 and $19,973,000. For the years
ended December 31, 2001, 2000 and 1999 the amount of interest income on non
accrual loans that would have been recognized if the loans had been paying in
accordance with their original terms was approximately $3,737,000, $1,716,000,
and $1,791,000.
Loan Sales and Servicing Fee Receivable
The Company currently accounts for its sales of loans in accordance with
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities- a
Replacement of FASB Statement No. 125." SFAS 140 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities.
F-9
The principal portion of loans serviced for others by the Company was
approximately $229,349,000 and $223,574,000, at December 31, 2001 and 2000.
Gain or losses on loan sales are primarily attributable to the sale of
commercial loans which have been at least partially guaranteed by the SBA. The
Company recognizes gains or losses from the sale of the SBA-guaranteed portion
of a loan at the date of the sales agreement when control of the future economic
benefits embodied in the loan is surrendered. The gains are calculated in
accordance with SFAS 140, which requires that the gain on the sale of a portion
of a loan be based on the relative fair values of the loan sold and the loan
retained. The gain on loan sales is due to the differential between the carrying
amount of the portion of loans sold and the sum of the cash received and the
servicing fee receivable. The servicing fee receivable represents the present
value of the difference between the servicing fee received by the Company
(generally 100 to 400 basis points) and the Company's servicing costs and normal
profit, after considering the estimated effects of prepayments and defaults over
the life of the servicing agreement. In connection with calculating the
servicing fee receivable, the Company must make certain assumptions including
the cost of servicing a loan including a normal profit, the estimated life of
the underlying loan that will be serviced, and the discount rate used in the
present value calculation. The Company considers 40 basis points to be its cost
plus a normal profit and uses the note rate plus 100 basis points for loans with
an original maturity of ten years as the discount rate. The note rate is
generally the prime rate plus 2.75%.
The servicing fee receivable is amortized as a charge to loan servicing fee
income over the estimated lives of the underlying loans using the effective
interest rate method. The Company reviews the carrying amount of the servicing
fee receivable for possible impairment by stratifying the receivables based on
one or more of the predominant risk characteristics of the underlying financial
assets. The Company has stratified its servicing fee receivable into pools by
period of creation, generally one year, and the term of the loan underlying the
servicing fee receivable. If the estimated present value of the future servicing
income is less than the carrying amount, the Company establishes an impairment
reserve and adjusts future amortization accordingly. If the fair value exceeds
the carrying value, the Company may reduce future amortization. The servicing
fee receivable is carried at the lower of amortized cost or fair value. The
carrying amount of the servicing fee receivable, net of reserves, at December
31, 2001 and 2000 was approximately $3,575,000 and $6,633,000. During the year
ended December 31, 2001, the Company recognized a servicing fee receivable
totaling $472,000 and had $1,300,000 of servicing fee receivable amortization.
The estimated net servicing income is based, in part, on management's
estimate of prepayment speeds, including default rates, and accordingly, there
can be no assurance of the accuracy of these estimates. If the prepayment speeds
occur at a faster rate than anticipated, the amortization of the servicing
assets will be accelerated and it's value will decline; and as a result,
servicing income during that and subsequent periods would decline. If
prepayments occur slower than anticipated, cash flows would exceed estimated
amounts and servicing income would increase. The constant prepayment rates
utilized by the Company in estimating the lives of the loans depend on the
original term of the loan, industry trends, and the Company's historical data.
During 2001, the Company began to experience an increase in prepayment activity
and delinquencies. These trends continued to worsen during 2001, and as a result
the Company revised its prepayment assumptions on certain loan pools from 15% to
between 25% and 35%. This resulted in a $2,171,000 charge to operations,
increasing the reserve for impairment of the servicing fee receivable during
2001. During 2000 and 1999, the Company used an estimated constant prepayment
rate of 15%. The prepayment rate of loans may be affected by a variety of
economic and other factors, including prevailing interest rates and the
availability of alternative financing to borrowers. At December 31, 2001, the
Company determined the fair value of its servicing fee receivable to be
$3,706,000 using a present value of expected cash flows methodology.
The activity in the reserve for servicing fee receivable follows:
- --------------------------------------------------------------------------------
Year Ended December 31,
----------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Beginning Balance $ 205,000 $ -- $--
Additions charged to operations 2,171,000 205,000 --
- --------------------------------------------------------------------------------
Ending Balance $2,376,000 $205,000 $--
================================================================================
The Company also has the option to sell the unguaranteed portions of loans
to third party investors. The gain or loss on such sales will be calculated in
accordance with SFAS No. 140. The discount related to unguaranteed portions sold
would be reversed and the Company would recognize a servicing fee receivable or
liability based on servicing fees retained by the Company. The Company is
required to retain at least 5% of the unguaranteed portion of SBA guaranteed
loans. The Company had sales of unguaranteed portions of loans to third party
investors of $0 and $2,500,000 for the years ended December 31, 2001 and 2000.
Unrealized Appreciation/(Depreciation) and Realized Gains/(Losses) on
Investments
The change in unrealized appreciation/(depreciation) of investments is the
amount by which the fair value estimated by the Company is greater/(less) than
the cost basis of the investment portfolio. Realized gains or losses on
investments are generated through sales of investments, foreclosure on specific
collateral, and write-offs of loans or assets acquired in satisfaction of loans,
net
F-10
of recoveries. An analysis of the unrealized appreciation /(depreciation) and
realized (gains) losses on investments for the years ended December 31, 2001 and
2000 is as follows:
- --------------------------------------------------------------------------------
Equity
Loans Investments Total
- --------------------------------------------------------------------------------
Balance, December 31, 1998 ($2,164,292) $ 4,853,976 $ 2,689,684
Change in unrealized:
Appreciation on investments -- 12,966,343 12,966,343
Depreciation on investments (7,208,586) (208,853) (7,417,439)
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)
Change in unrealized:
Appreciation on investments 412,807 200,000 612,807
Depreciation on investments (636,367) (20,767) (657,134)
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)
Change in unrealized:
Appreciation on investments -- 2,937,051 2,937,051
Depreciation on investments (6,495,139) (915,492) (7,410,631)
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)
================================================================================
For the years ended December 31, 2001, 2000, and 1999, gross unrealized
appreciation/(depreciation) and gross realized gains/(losses) were as follows:
- ---------------------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------
Increase in net unrealized appreciation
(depreciation) on investments
Unrealized appreciation $ 2,937,051 $ 612,807 $ 12,966,343
Unrealized depreciation (7,410,631) (657,134) (7,417,439)
Realized gain (120,545) (18,554) (18,197,295)
Realized loss 4,432,851 2,221,396 388,825
Other 20,797 -- --
- ---------------------------------------------------------------------------------------
Total ($140,477) $ 2,158,515 ($12,259,566)
=======================================================================================
Net realized gain (loss) on investments
Realized gain $ 1,127,593 $ 273,676 $ 23,133,859
Realized loss (4,124,079) (4,157,516) (588,842)
Direct charge-off (18,660) -- --
- ---------------------------------------------------------------------------------------
Total ($3,015,146) ($3,883,840) $ 22,545,017
=======================================================================================
Goodwill
Cost of purchased businesses in excess of the fair value of net assets
acquired (goodwill) is amortized on a straight-line basis over fifteen years.
The excess of fair value of net assets over cost of businesses acquired
(negative goodwill) was accreted on a straight-line basis over approximately
four years. The Company reviews its goodwill for events or changes in
circumstances that may indicate that the carrying amount of the assets may not
be recoverable, and if appropriate, reduces the carrying amount through a charge
to income. See Note 10 for additional information related to a new accounting
pronouncement on goodwill.
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation and
amortization, and are depreciated on a straight-line basis over their estimated
useful lives of 5 to 10 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or the estimated economic
useful life of the improvement. Depreciation and amortization expense for the
years ended December 31, 2001, 2000, and 1999 was approximately $610,000,
$973,000, and $721,000.
F-11
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" which requires computer
software costs associated with internal use software to be expensed as incurred
unless certain capitalization criteria are met. Effective January 1, 1999, the
Company capitalized eligible costs on a prospective basis and is amortizing
these costs on a straight-line basis over the expected useful life of 3 to 5
years.
Deferred Costs
Deferred financing costs, included in other assets, represents costs
associated with obtaining the Company's borrowing facilities, and is amortized
over the lives of the related financing agreements. Amortization expense for the
years ended December 31, 2001, 2000 and 1999 was approximately $555,000,
$333,000, and $176,000. In addition, the Company capitalizes certain costs for
transactions in the process of completion including those for acquisitions, and
the sourcing of other financing alternatives. Upon completion or termination of
the transaction, any amounts will be amortized against income over an
appropriate period or capitalized as goodwill. The amounts on the balance sheet
for all of these purposes as of December 31, 2001 and 2000 was $2,540,000 and
$869,000.
Federal Income Taxes
The Company has elected to be treated for tax purposes as a regulated
investment company (RIC) under the Internal Revenue Code of 1986, as amended
(the Code). As a RIC, the Company will not be subject to U.S. federal income tax
on any investment company taxable income (which includes, among other things,
dividends and interest reduced by deductible expenses) that it distributes to
its stockholders if at least 90% of its investment company taxable income for
that taxable year is distributed. It is the Company's policy to comply with the
provisions of the Code applicable to regulated investment companies.
Media, as a non-investment company, has elected to be taxed as a regular
corporation.
Net Increase in Net Assets Resulting from Operations per Share (EPS)
Basic earnings per share is computed by dividing net increase in net assets
resulting from operations available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if option contracts to
issue common stock were exercised and has been computed after giving
consideration to the weighted average dilutive effect of the Company's common
stock and stock options. Basic and diluted EPS for the years ended December 31,
2001, 2000, and 1999 are as follows:
- ---------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting ($4,058,283) $ 7,540,688 $21,093,707
from operations available to common shareholders
- ---------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding applicable to basic EPS 16,852,179 14,536,942 14,515,660
Effect of dilutive stock options /(1)/ -- 39,241 104,777
------------------------------------------
Adjusted weighted average common shares
outstanding applicable to diluted EPS 16,852,179 14,576,183 14,620,437
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share ($0.24) $ 0.52 $ 1.45
Diluted earnings per share (0.24) 0.52 1.44
===============================================================================================================
/(1)/Because there is a net loss in 2001, the effect of stock options is a
antidilutive, and therefore is not presented.
- --------------------------------------------------------------------------------
F-12
Dividends to Shareholders
On December 31, 2001, a dividend of $0.09 per share was declared. The
dividend was paid on January 14, 2002, to shareholders of record on December 31,
2001. The tax character of distributions for 2001 and 2000 tax reporting
purposes was as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------
Dividends paid from:
Ordinary income $6,426,668 $ 6,651,720 $ 8,505,156
Long-term capital gain -- 10,743,749 9,863,299
------------------------------------------
Total income dividends 6,426,668 17,395,469 18,368,455
Return of Capital -- -- --
------------------------------------------
Total dividends $6,426,668 $17,395,469 $18,368,455
===============================================================================
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, and by SBA regulations and under the
terms of the SBA debentures. As of December 31, 2001, all required dividends for
tax purposes had been made or declared to be paid.
Stock-Based Compensation
The Company has adopted the provisions of SFAS No.123 " Accounting for
Stock Based Compensation (SFAS No.123), which established a fair value-based
method of accounting for stock options. The Company measures compensation cost
for stock options using the current intrinsic value-based method as prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Under SFAS No.123, the use of intrinsic value-based method
requires pro forma disclosure of net income and earnings per share as if the
fair value-based method had been adopted.
Derivatives
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards
regarding accounting and reporting requirements for derivative instruments and
hedging activities. In June 1999, the Board issued SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." The new standard deferred the effective date of SFAS
133 to fiscal years beginning after June 15, 2000. The Company adopted SFAS 133
beginning January 1, 2001. The cumulative effect of adoption was not material.
The Company is party to certain interest rate cap agreements. These
contracts were entered into as part of the Company's management of interest rate
exposure and effectively limit the amount of interest rate risk that may be
taken on a portion of the Company's outstanding debt. All interest rate caps are
designated as hedges of certain liabilities, however, any hedge ineffectiveness
is charged to earnings in the period incurred. Premiums paid on the interest
rate caps were previously amortized over the lives of the cap agreements and
amortization of these costs was recorded as an adjustment to interest expense.
Upon adoption of SFAS 133, the interest rate caps are recorded at fair value,
which is determined based on information provided by the Company's
counterparties. Interest settlements, if any, are recorded as a reduction of
interest expense over the life of the agreements. The fair value of the
Company's interest rate cap agreement as of December 31, 2001 was $0.
Reclassifications
Certain reclassifications have been made to prior year balances to conform
with the current year presentation.
F-13
(4) BUSINESS COMBINATIONS
FSVC
On October 2, 2000, the Company completed the merger with FSVC. The Company
issued 0.23865 shares of its common stock for each outstanding share of FSVC,
for a total of 518,449 shares of the Company's common stock. The transaction was
accounted for as a tax-free reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended, and was treated under the pooling-of-interests
method of accounting for financial reporting purposes. The following table sets
forth the results of operations of FSVC and the Company for the nine months
ended September 30, 2000 and the year ended December 31, 1999.
- ----------------------------------------------------------------------------------------
(Dollars in thousands) The Company/(1)/ Freshstart Combined
- ----------------------------------------------------------------------------------------
For the nine months ended September 30, 2000
Total investment income $40,758 $1,864 $42,622
Net increase in net assets from operations 11,173 361 11,534
For the year ended December 31, 1999
Total investment income 41,380 2,696 44,076
Net increase in net assets from operations 20,880/(1)/ 214 21,094
========================================================================================
/(1)/ "The Company" column includes elimination entries for the intercompany
transactions.
- --------------------------------------------------------------------------------
(5) INVESTMENT IN AND LOANS TO MEDIA
The statements of operations of Media for the years ended December 31,
2001, 2000, and 1999 were as follows:
- -----------------------------------------------------------------------------
December 31,
------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------
Advertising revenue $ 13,249,993 $ 11,144,349 $9,878,117
Cost of fleet services 7,592,173 5,750,203 4,261,673
------------------------------------------
Gross profit 5,657,820 5,394,146 5,616,444
Other operating expenses 7,907,994 6,056,576 5,223,833
------------------------------------------
Income (loss) before taxes (2,250,174) (662,430) 392,611
Income tax provision (benefit) 1,124,781 (241,275) 134,125
------------------------------------------
Net income (loss) ($3,374,955) ($421,155) $ 258,486
=============================================================================
As a result of the events in New York City on September 11, 2001, certain
advertisers reduced the levels of advertisements for a period, which included
late September and a portion of the fourth quarter. Media took steps to reduce
the costs associated with this reduced level of advertising. The decline in
revenue from these reductions was approximately $934,000 in 2001 before
considering the benefits of cost reduction initiatives.
Also included in 2001 was a $1,500,000 tax provision to establish a
valuation allowance against the future realization of a deferred tax asset that
was recorded in prior periods relating to actual tax payments made for taxable
revenue that had not been recorded for financial reporting purposes. During
2001, primarily as a result of expansion into numerous cities and the lag
associated with selling those taxi tops, Media began to incur losses for both
financial reporting and tax purposes, indicating that this deferred tax asset
now represents a receivable or refund from the tax authorities for those taxes
previously paid. However, due to statutory limitations on Media's ability to
carry these tax losses back more than two years, and the uncertainties
concerning the level of Media's taxable income in the future, Media determined
to reserve against the receivable. In March 2002 Congress passed and the
President signed, an economic stimulus bill that among its provisions included a
carryback provision for five years. As a result, Media will be able to carryback
an additional $724,000 in 2002 and retain a tax carryforward of $1,123,000 for
the balance of taxes paid.
F-14
The balance sheets at December 31, 2001 and 2000 for Media were as follows:
- -------------------------------------------------------------------------------
December 31,
----------------------------
2001 2000
- -------------------------------------------------------------------------------
Cash $ 270,350 $ 5,259
Accounts receivable 1,531,183 2,652,055
Equipment, net 3,068,854 3,281,011
Goodwill 2,086,760 1,659,624
Prepaid signing bonuses 2,890,613 1,521,253
Federal income tax receivable 1,106,778 --
Other 342,118 2,882,750
Due from parent -- 321,723
----------------------------
Total assets $11,296,656 $12,323,675
===============================================================================
Accounts payable and accrued expenses $ 1,822,386 $ 683,369
Note payable-bank 2,117,462 3,900,000
Deferred revenue 755,358 5,453,550
Intercompany payables 7,697,309 --
Federal income tax payable 9,168 --
----------------------------
Total liabilities 12,401,683 10,036,919
----------------------------
Equity 1,001,000 1,001,000
Retained earnings (deficit) (2,106,027) 1,285,756
----------------------------
Total equity (deficit) (1,105,027) 2,286,756
----------------------------
Total liabilities and equity $11,296,656 $12,323,675
===============================================================================
During 2001, Media's operations were constrained by a very difficult
advertising environment compounded by the rapid expansions of tops inventory
that occurred during 1999 and 2000. Media began to recognize losses as growth in
operating expenses exceeded growth in revenue. Also, a substantial portion of
Media's revenues in 2001 arose from the realization of amounts that had been
paid for and deferred from prior periods. Media is actively pursuing new sales
opportunities, including expansion and upgrading of the sales force, and has
taken steps to reduce operating expenses, including renegotiation of fleet
payments for advertising rights, to better align ongoing revenues and expenses,
and to maximize cash flow from operations. Media's growth prospects are
currently constrained by the operating environment and distressed advertising
market that resulted from September 11th and the economic downturn, which has
resulted in operating losses and a drain on cash flow, as well as the limitation
on funding that can be provided by the Company in accordance with the terms of
the bank agreements. Media has developed an operating plan to fund only
necessary operations out of available cash flow and to escalate its sales
activities to generate new revenues. Although there can be no assurances, Media
and the Company believe that this plan will enable Media to weather this
downturn in the advertising cycle and maintain operations at existing levels
until such times as business returns to historical levels.
In July 2001, Media acquired certain assets and assumed certain liabilities
of MMJ, a taxi advertising operation similar to those operated by Media in the
U.S., which has advertising rights on approximately 7,000 cabs (1,000 rooftop
displays and 6,000 interior racks) servicing various cities in Japan. The
transaction has been accounted for as a purchase for financial reporting
purposes and is included in Media's financial statements above. The terms of the
agreement provide for an earn-out payment to the sellers based on average net
income over the next three years.
(6) COMMERCIAL PAPER, NOTES PAYABLE TO BANKS AND SENIOR SECURED NOTES
Borrowings under the commercial paper, revolving credit, and senior note
agreements are secured by the assets of the Company. The outstanding balances
were as follows as of December 31, 2001 and 2000.
- --------------------------------------------------------------------------------
Description 2001 2000
- --------------------------------------------------------------------------------
Commercial paper $ -- $ 24,066,269
Bank loans 233,000,000 305,700,000
Senior secured notes 45,000,000 45,000,000
- --------------------------------------------------------------------------------
Total $278,000,000 $374,766,269
================================================================================
(a) Commercial Paper
On January 18, 2001, Fitch IBCA lowered our senior secured debt rating and
secured commercial paper rating to "BB+" and "B", respectively, and removed them
from negative watch. At December 31, 2001 and 2000, MFC had approximately $0 and
$24,066,000 outstanding at a weighted average interest rate of 0% and 7.10%. For
the year ended December 31, 2001 and 2000, MFC's weighted average borrowings
related to commercial paper were $2,027,000 and $135,568,000 with a weighted
average interest
F-15
rate of 7.31% and 7.25%. Commercial paper outstandings are deducted from the
bank loans which acted as a liquidity facility for the commercial paper. During
the 2001 third quarter, the commercial paper program matured and was terminated.
(b) Bank Loans
On March 27, 1992 (and as subsequently amended), MFC entered into a line of
credit with a group of banks. Effective on February 10, 2000, MFC extended the
Revolver until June 30, 2001 at an aggregate credit commitment amount of
$220,000,000, an increase from $195,000,000 previously, pursuant to the Loan
Agreement dated December 24, 1997. Amounts available under the Revolver were
reduced by amounts outstanding under the commercial paper program as the
Revolver acted as a liquidity facility for the commercial paper program. As of
December 31, 2001 and 2000, amounts available under the Revolver were $0 and
$234,000. On June 29, 2001 MFC renewed the Revolver until June 30, 2002, which
was further amended on February 20, 2002. The Revolver matures June 30, 2002,
and if not renewed, the Revolver agreement provides that each bank shall extend
a term loan equal to its share of the principal amount outstanding of the
revolving credit agreement. Maturity of the term note shall be the earlier of
one year with a two year amortization schedule or any other date on which it
becomes payable in accordance with the Revolver agreement. Interest and
principal payments are paid monthly. Interest is calculated monthly at either
the bank's prime rate or a rate based on the adjusted London Interbank Offered
Rate of interest (LIBOR) at the option of MFC. Substantially, all promissory
notes evidencing MFC's investments are held by a bank as collateral agent under
the agreement. MFC is required to pay an annual facility fee of 20 basis points
on the unused portion of the Revolver's aggregate commitment. Commitment fee
expense for the years ended December 31, 2001, 2000, and 1999 was approximately
$51,000, $386,000 and $388,000. Outstanding borrowings under the Revolver were
$148,000,000 and $195,700,000 at weighted average interest rates of 4.75% and
7.68% at December 31, 2001 and 2000. Average borrowings outstanding under the
Revolver were $188,775,000 and $76,812,000 for 2001 and 2000. MFC is required
under the Revolver to maintain minimum tangible net assets of $65,000,000 and
certain financial ratios, as defined therein. The Revolver agreement contains
other restrictive covenants, including a limitation of $500,000 for capital
expenditures.
On July 31, 1998, (and as subsequently amended) the Company and MBC entered
into a committed revolving credit agreement (the Loan Agreement) with a group of
banks. On September 21, 2001, the Loan Agreement was extended to November 5,
2001 to allow for continuation of renewal discussions which were completed and
an amendment signed on February 20, 2002. As of December 31, 2001 and 2000,
amounts available under the loan agreement were $25,000,000 and $3,500,000.
The Company's bank loan matured on November 5, 2001. In addition, MFC was
in default under its bank loan and its senior secured notes. In April, 2002,
the Company and MFC obtained amendments to their bank loans and senior secured
notes. The amendments, in general, changed the maturity dates of the loans and
notes, modified the interest rates borne on the bank loans and the secured
notes, required certain immediate, scheduled or other prepayments of the loans
and notes and reductions in the commitments under the bank loans, required the
Company or MFC to engage or seek to engage in certain asset sales, instituted
additional operating restrictions and reporting requirements. As modified by the
amendments, the scheduled amortization on the bank loans and secured notes are
as follows:
Maturity
----------------------------------------------------------------
Principal
Principal Monthly outstanding
outstanding Payments from from July at and after
at December January 1, 2002- 2002 - May June 30,
31, 2001 March 31, 2002 April, 2002 May, 2002 2003 June, 2003 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Medallion Financial loans $ 85,000,000 $13,711,270 $ 5,000,000 $66,288,730 $ -- $ -- $ --
MFC loans 148,000,000 -- -- -- 6,166,667 80,166,663 --
MFC loans senior secured notes 45,000,000 1,000,000 13,143,125 -- 1,285,703 16,714,142 --
-----------------------------------------------------------------------------------------------
Total $278,000,000 $14,711,270 $ 18,143,125 $66,288,730 $7,452,370 $ 96,880,805 $ --
================================================================================================================================
In addition to the change in maturity (acceleration of maturity dates in
case of MFC), the interest rates on the Company's bank loan and MFC's secured
notes were increased, and additional fees were charged to renew, and maintain
the facilities and notes. The recent amendments contain substantial limitations
on our ability to operate and in some cases require modifications to our
previous normal course of operation. Covenants restricting investment in the
Media and BLL subsidiaries, elimination of various intercompany balances between
affiliates, limits on the amount and timing of dividends, and continuation of
the prior financial and operating covenants were all tightened as a condition of
renewal.
While we have experienced difficulty complying with the restrictive
covenants under our existing agreements, the Company believes it will be able to
comply with all provisions of the amended agreements, including the accelerated
maturity schedule. As of March 29, 2002, the Company had $29,000,000 of cash on
hand. We may need to sell assets to meet the amortization requirements under
these amendments. While we fully intend to comply with the covenants in recent
amendments, we have failed to comply with similar covenants in our existing
agreements. We are currently exploring refinancing options which would replace
our obligations under the Company and MFC loans and the senior secured notes. We
have signed a non-binding preliminary term sheet and we are currently engaged in
discussions, and have received a proposal from, a nationally known asset-based
lender to provide a refinancing for the obligations owed under our secured notes
and bank loans. The proposed financing would enable the Company to refinance its
existing indebtedness and provide additional capital with longer maturities,
F-16
but there can be no assurance that such financing will be obtained, the date
that it will be obtained or whether such financing would provide more operating
flexibility than is provided under our current credit agreements. The failure to
obtain such financing or alternative financing on a timely basis could have a
material adverse effect on the Company. In addition, the Company is actively
pursuing other financing options for individual subsidiaries with alternate
financing sources, and is continuing the ongoing program of loan participations
and sales to provide additional sources of funds for both external expansion and
continuation of internal growth. The Company has also received non-binding
preliminary proposals from other nationally recognized lenders to refinance
certain subsidiaries of the Company. Furthermore, the Company is considering the
possibility of submitting an application to receive a bank charter, which if
granted, would permit the Company to receive deposits insured by the Federal
Deposit Insurance Corporation. The Company has held meetings with the relevant
regulatory bodies in connection with such an application. There can be no
assurances that such financings will be obtained or that any application related
to a bank charter would be approved. The Company believes that is credit
facilities with the SBA and cash flow from operations (after distributions to
stockholders) will be adequate to fund the continuing operation of the Company.
As a result of the recent amendments to the bank loans and senior secured notes,
the Company's cost of funds will increase in 2002 until the debts mature and are
paid off. As noted above, the amendments entered into during 2002 to the
Company's bank loans and senior secured notes involved changes, and in some
cases increases, to the interest rates payable thereunder. In addition, during
events of default, the interest rate borne on the lines of credit is based upon
a margin over the prime rate rather than LIBOR. The bank lines of credit are
priced on a grid depending on leverage 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.
We are a party to three financing agreements: 1) the Second Amended and
Second Amended and Restated Loan Agreement, dated as of September 22, 2000,
among the Company, Medallion Business Credit, LLC and the parties thereto (the
Company Bank Loan); 2) the Amended and Restated Loan Agreement, dated as of
December 24, 1997, as amended, among MFC and the parties thereto (the MFC Bank
Loan); and 3) the Note Purchase Agreements, each dated as of June 1, 1999, as
amended, between the Company and the note purchasers thereto (the MFC Note
Agreements).
In the fourth quarter of 2001, the Company Bank Loan matured, and MFC was
in default under both the MFC Bank Loan and the MFC Note Agreements. In 2002,
the Company and MFC entered into amendments to such agreements. In addition to
imposing maturities and scheduled amortization requirements, the amendments also
instituted various other prepayment requirements: (a) the Company is required to
repay to MFC an intercompany receivable in excess of $8 million by May 15, 2002,
and (b) MFC is required to use its best efforts to sell a portion its laundromat
and dry cleaning loans in its commercial loan portfolio by May 31, 2002, and its
Chicago Yellow Cab loan portfolio before November 1, 2002. The proceeds from
these repayments and sales must be used to repay the Company's or MFC's
indebtedness, as applicable. In addition, the amendments require MFC to further
amend the MFC Note Agreements and the MFC Bank Loan to provide for periodic
prepayments of the indebtedness thereunder out of excess cash flow.
The Company Bank Loan, MFC Bank Loan, and the MFC Note Agreements contain
substantial limitations on our ability to operate and in some cases require
modifications to our previous normal course of operations. Under all of the
agreements, if our outstanding debt exceeds the borrowing base, as defined in
each agreement, then we must repay the outstanding indebtedness that exceeds the
borrowing base within five business days. The agreements, collectively, also
contain financial covenants, including a maximum consolidated leverage ratio,
maximum combined leverage ratio, minimum EBIT to interest expense ratio, minimum
asset quality ratio, minimum tangible net worth and maximum losses of Media. The
agreements also impose limitations on our ability to incur liens and
indebtedness, merge, consolidate, sell or transfer assets, loan and invest in
third parties and our subsidiaries, repurchase or redeem stock, purchase
portfolios, acquire other entities, amend certain material agreements, make
capital expenditures, have outstanding intercompany receivables and securitize
our assets. They prohibit (a) the Company and MFC from paying dividends prior to
July 1, 2002, (b) MFC from paying more than $2 million of dividends between July
1, 2002 and September 12, 2002 and (c) the Company from paying dividends after
September 12, 2002 unless it certifies that it will be in pro forma compliance
with amortization requirements for the remainder of 2002 after paying the
dividend. Lastly, the agreements limit the amount of investments we can make in
our subsidiaries and the creation of new subsidiaries.
The Company paid amendment fees of $255,000, and MFC paid amendment fees of
$478,000 and is obligated to pay an additional amendment fee on June 28, 2002
equal to 0.20% of the amount outstanding under the MFC Bank Loan and the MFC
Note Agreements. Additionally, under the MFC Note Agreements and MFC Bank Loan,
MFC is obligated to pay the lenders and note holders an aggregate monthly fee of
$25,000 commencing on June 30, 2002 and increasing by $25,000 each month.
We are currently engaged in discussions, and have received a proposal from,
a nationally known asset based lender to provide a refinancing for the
obligations owed under our term loan and revolving credit agreement, but there
can be no assurance that such financing will be obtained, the date that it will
be obtained or whether such financing would provide more operating flexibility
than is provided under our current credit agreements.
Interest and principal payments are paid monthly. Interest is calculated
monthly at either the bank's prime rate or a rate based on the adjusted LIBOR
rate at the option of the Company. Substantially all promissory notes evidencing
the Company's investments are held by a bank as collateral agent under the Loan
Agreement. The Company is required to pay an annual facility fee of 15 basis
points on the amount of the aggregate commitment. Commitment fee expenses for
the years ended December 31, 2001, 2000 and 1999 were approximately $165,000,
$257,000, and $108,000. Outstanding borrowings under the Loan Agreement were
$85,000,000 and $106,500,000 at a weighted average interest rate of 6.25% and
8.09% at December 31, 2001 and 2000. The Company is required under the Revolver
to maintain certain levels of medallion loans and certain financial ratios, as
defined therein. The Loan Agreement contains other restrictive covenants,
including a limitation of $1,000,000 for capital expenditures per annum.
On March 6, 1997, FSVC established a $5,000,000 line of credit with a bank
at a rate of LIBOR plus 1.75%. Pursuant to the terms of the line of credit, the
Company is required to comply with certain terms, covenants, and conditions,
including maintaining minimum balances with the bank. The line of credit was
unsecured. In connection with the FSVC's merger, the line was reduced to
$3,500,000, and was subsequently paid off in July 2001.
F-17
The weighted average interest rate for the Company's consolidated
outstanding revolver borrowings at December 31, 2001 and 2000 was 5.80% and
7.83%. During the years ended December 31, 2001 and 2000, the Company's weighted
average borrowings were $283,963,000 and $180,712,000 with a weighted average
interest rate of 6.91% and 7.77%, respectively.
(c) Senior Secured Notes
On June 1, 1999, MFC issued $22.5 million of Series A senior secured notes
that mature on June 30, 2003 and on September 1, 1999, MFC issued $22.5 million
of Series B senior secured notes that mature on June 30, 2003 (together, the
Notes). The Notes bear a fixed rate of interest of 7.35% and interest is paid
monthly in arrears effective with the amendments described above. The notes
reprice quarterly beginning April 1, 2002 to 8.15% and further adjust to 8.75%
on July 1, 2002 and increase an additional 50 basis points every quarter to
maturity. The Notes rank pari passu with the bank agreements through
inter-creditor agreements and generally are subject to the same terms,
conditions, and covenants as the bank agreements. See also the discussion of
recent amendment in the Bank Loans section above.
(d) Interest Rate Cap Agreements
On June 22, 2000, MFC entered into an interest cap agreement limiting the
Company's maximum LIBOR exposure on $10,000,000 of MFC's revolving credit
facility to 7.25% until June 24, 2002. Premiums paid under interest rate cap
agreements of $91,000, $84,000, and $73,000 were expensed in 2001, 2000, and
1999. There are no unamortized premiums on the balance sheet as of December 31,
2001.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties on the interest rate cap agreements. The Company does not
anticipate nonperformance by the counterparty.
(7) SBA DEBENTURES PAYABLE
Outstanding SBA debentures are as follows at December 31, 2001 and 2000:
- ------------------------------------------------------------------------------
Due Date 2001 2000 Interest Rate
- ------------------------------------------------------------------------------
September 1, 2011 $17,985,000 $ -- 6.77%
December 1, 2006 5,500,000 5,500,000 7.08
December 1, 2011 4,500,000 -- 3.38
March 1, 2007 4,210,000 4,210,000 7.38
September 1, 2007 4,060,000 4,060,000 7.76
June 1, 2007 3,000,000 3,000,000 7.07
March 1, 2006 2,000,000 2,000,000 7.08
December 16, 2002 1,300,000 1,300,000 4.51
June 1, 2005 520,000 520,000 6.69
December 1, 2005 520,000 520,000 6.54
June 1, 2006 250,000 250,000 7.71
-----------------------------------------
$43,845,000 $21,360,000
==============================================================================
During 2001, FSVC and MCI were approved by the SBA to receive $36 million
each in funding over a period of 5 years. MCI drew down $10,500,000 during June
2001 and $4,500,000 during December, 2001. In July, 2001 FSVC drew down
$7,485,000 and in January 2002 drew down an additional $6,000,000.
On September 30, 2000, the Company redeemed the 4% cumulative 15 year
redeemable preferred stock at par value. On June 1, 1999 and September 1, 1999,
the Company prepaid outstanding debentures totaling $31,090,000. The Company
also paid approximately $165,000 in prepayment penalties as a one-time charge
that was included in interest expense. The SBA imposes certain restrictions on
the Company, which include, among others, transfers of stock and payments of
dividends by its licensees.
(8) STOCK OPTIONS
The Company has a stock option plan (1996 Stock Option Plan) available to
grant both incentive and nonqualified stock options to employees. The 1996 Stock
Option Plan, which was approved by the Board of Directors and shareholders on
May 22, 1996, provides for the issuance of a maximum of 750,000 shares of common
stock of the Company. On June 11, 1998, the Board of Directors and shareholders
approved certain amendments to the Company's 1996 Stock Option Plan, including
increasing the number of shares reserved for issuance from 750,000 to 1,500,000.
At December 31, 2001, 267,279 shares of the Company's common stock remained
available for future grants. The 1996 Stock Option Plan is administered by the
Compensation Committee of the Board of Directors. The option price per share may
not be less than the current market value of the Company's common stock on the
date the option is granted. The term and vesting periods of the options are
determined by the Compensation Committee, provided that the maximum term of an
option may not exceed a period of ten years.
F-18
A Non-Employee Director Stock Option Plan (the Director Plan) was also
approved by the Board of Directors and shareholders on May 22, 1996. On February
24, 1999, the Board of Directors amended and restated the Director Plan in order
to adjust the calculation of the number of shares of the Company's common stock
issuable under options (Options) to be granted to a Non-employee Director upon
his or her re-election. Under the prior plan the number of options granted was
obtained by dividing $100,000 into the current market price for the common
stock. The Director Plan calls for the grant of options to acquire 9,000 shares
of common stock upon election of a non-employee director. It provides for an
automatic grant of options to purchase 9,000 shares of the Company's common
stock to an Eligible Director upon election to the Board, with an adjustment for
directors who are elected to serve less than a full term. A total of 100,000
shares of the Company's common stock are issuable under the Director Plan. At
December 31, 2001, 32,635 shares of the Company's common stock remained
available for future grants. The grants of stock options under the Director Plan
are automatic as provided in the Director Plan. The option price per share may
not be less than the current market value of the Company's common stock on the
date the option is granted. Options granted under the Director Plan are
exercisable annually, as defined in the Director Plan. The term of the options
may not exceed five years.
The Company records stock compensation in accordance with APB Opinion No.
25. Had compensation cost for stock options been determined based on the fair
value at the date of grant, consistent with the provisions of SFAS 123, the
Company's net increase in net assets resulting from operations would have been
increased/(reduced) to the pro forma amounts indicated below:
- ---------------------------------------------------------------------------------------------
December 31,
--------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting
from operations
As reported $(4,058,283) $7,540,688 $21,093,707
Pro forma(1) (3,618,507) 6,552,531 20,710,412
Per share diluted
As reported $ (0.24) $ 0.52 $ 1.44
Pro forma(1) (0.22) 0.45 1.42
=============================================================================================
(1) During 2001, the impact of employee forfeitures exceeded the pro forma
compensation expense related to grants and, accordingly, the pro forma
impact reduced the Company's net decrease in net assets resulting from
operations.
The weighted average fair value of options granted during the years ended
December 31, 2001, 2000, and 1999 was $2.79, $3.98, and $4.32 per share,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. However, management believes
that such a model may or may not be applicable to a company regulated under the
1940 Act. The following weighted average assumptions were used for grants in
2001, 2000 and 1999:
- --------------------------------------------------------------------------------
Year ended December 31,
-----------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Risk free interest rate 5.4% 6.3% 5.7%
Expected dividend yield 8% 8.0% 7.1%
Expected life of option in years 7.0 7.0 7.0
Expected volatility 44% 44% 44%
================================================================================
F-19
The following table presents the activity for the stock option program
under the 1996 Stock Option Plan and the Director Plan for the years ended
December 31, 2001, 2000, and 1999:
- -------------------------------------------------------------------------------
Exercise Weighted
Number of Price Per Average
Options Share Exercise Price
- -------------------------------------------------------------------------------
Outstanding at December 31, 1998 696,344 $ 6.71-29.25 $19.72
Granted 397,884 14.25-20.06 17.52
Cancelled (42,700) 14.25-28.87 21.84
Exercised (10,665) 6.71-14.38 10.37
- -------------------------------------------------------------------------------
Outstanding at December 31, 1999 1,040,863 6.71-29.25 18.88
Granted 93,164 14.50-20.63 17.36
Cancelled (25,750) 14.25-29.25 19.85
Exercised (19,001) 6.71-11.00 9.79
- -------------------------------------------------------------------------------
Outstanding at December 31, 2000 1,089,276 6.71-29.25 18.88
Granted 213,750 11.50-16.00 12.37
Cancelled (284,613) 13.75-29.50 18.05
Exercised (34,000) 15.13-15.13 15.13
- -------------------------------------------------------------------------------
Outstanding at December 31, 2001 984,413 $ 6.71-29.25 $17.97
- -------------------------------------------------------------------------------
Options exercisable at
December 31, 1999 254,751 $ 6.71-29.25 $16.37
December 31, 2000 494,712 6.71-29.25 17.68
December 31, 2001 492,654 6.71-29.25 19.37
===============================================================================
The following table summarizes information regarding options outstanding
and options exercisable at December 31, 2001 under the 1996 Stock Option Plan
and the Director Plan:
- ---------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------
Weighted average Weighted average
- ---------------------------------------------------------------------------------------------------------------------
Remaining Remaining
contractual contractual
Range of Shares At life in Shares At life in
Exercise Prices December 31, 2001 years Exercise price December 31, 2001 years Exercise price
- ---------------------------------------------------------------------------------------------------------------------
$ 6.71-$14.38 277,077 7.47 $11.94 100,356 5.10 $11.86
14.50- 17.38 382,780 5.42 16.98 168,521 5.26 17.04
18.75- 22.38 116,427 6.45 19.47 83,562 6.10 19.52
26.06- 29.25 208,129 6.31 27.40 140,215 6.21 27.46
- ---------------------------------------------------------------------------------------------------------------------
$ 6.71-$29.25 984,413 6.31 $17.97 492,654 5.64 19.37
- ---------------------------------------------------------------------------------------------------------------------
F-20
(9) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) /(1)/
The following table presents the Company's quarterly result of operations
for the years ended December 31, 2001, 2000, and 1999.
- -------------------------------------------------------------------------------------------------
(In thousands except per share amounts) March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------------
2001 Quarter Ended
Investment income $13,374 $11,618 $ 7,035 $ 10,050
Net investment income (loss) before taxes 2,331 2,599 (5,863) 14
Net increase (decrease) in net assets
resulting from operations 2,289 2,364 (8,986) 275
Net increase (decrease) in net assets resulting
from operations per common share
Basic $ 0.16 $ 0.16 ($0.49) ($0.07)
Diluted $ 0.16 0.16 (0.49) (0.07)
- -------------------------------------------------------------------------------------------------
2000 Quarter Ended
Investment income $14,531 $13,787 $14,304 $ 12,734
Net investment income (loss) before taxes 4,366 4,250 3,245 (2,776)
Net increase (decrease) in net assets
resulting from operations 4,500 4,260 2,774 (3,993)
Net increase (decrease) in net assets
resulting from operations per common share
Basic 0.31 0.29 0.19 (0.27)
Diluted 0.31 0.29 0.19 (0.27)
- -------------------------------------------------------------------------------------------------
1999 Quarter Ended
Investment income /(2)/ $10,097 $11,505 $11,466 $ 11,008
Net investment income before taxes /(2)/ 3,451 3,304 3,349 753
Net increase in net assets resulting
from operations 4,757 5,236 6,208 4,893
Net increase in net assets resulting
from operations per common share
Basic 0.33 0.36 0.43 0.33
Diluted 0.33 0.36 0.42 0.33
=================================================================================================
/(1)/ The 2000 March, June, and September quarters, as well as all the quarters
of 1999 have been restated to reflect the merger with FSVC.
/(2)/ Subsequent to the 1999 year-end, the Company identified clerical errors
resulting from the Company's system conversion that began in the third
quarter of 1999. The effect of these items has been reflected in the
results for the fourth quarter ended December 31, 1999. Certain of these
errors resulted in a decrease to Investment Income and Net Investment
Income of approximately $1,200,000 in the third quarter and an increase
of approximately $1,200,000 in the fourth quarter. The clerical errors,
in total, did not have an overall material impact on net increase in net
assets resulting from operations for either quarter.
- --------------------------------------------------------------------------------
(10) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has adopted SFAS No.141,
"Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets" which
the Company intends to adopt January 1, 2002 as required. The new standards
prohibit pooling accounting for mergers and requires the use of the purchase
method of accounting for all prospective acquisitions, which requires that all
assets acquired and liabilities assumed in a business combination be recorded at
fair value with any excess amounts recorded as goodwill. The standards further
require that amortization of all goodwill cease, and in lieu of amortization,
goodwill must be evaluated for impairment in each reporting period. Management
has not yet determined the impact, if any, upon adoption of the new
pronouncement. Management intends to evaluate its goodwill for impairment
quarterly beginning in 2002, and has engaged a consulting firm to determine the
valuation for 2002 first quarter financial reporting. At December 31, 2001, the
Company had $5,008,000 of goodwill on its consolidated balance sheet and
$2,100,000 recorded on the balance sheet of Media, its wholly-owned subsidiary
that will be subject to the asset impairment review required by SFAS 142.
(11) SEGMENT REPORTING
The Company has two reportable business segments, lending and taxicab
rooftop advertising. The lending segment originates and services secured
commercial loans. The taxicab roof top advertising segment sells advertising
space to advertising agencies and companies in several major markets across the
United States. The segment is reported as an unconsolidated subsidiary,
Medallion Taxi Media, Inc. The accounting policies of the operating segments are
the same as those described in the summary of significant accounting policies.
The lending segment is presented in the consolidated financial statements of the
Company. Financial information relating to the taxicab rooftop-advertising
segment is presented in Note 5.
For taxicab advertising, the increase in net assets resulting from
operations represents the Company's equity in net income from Media. Segment
assets for taxicab advertising represent the Company's investment in and loans
to Media.
F-21
(12) COMMITMENTS AND CONTINGENCIES
(a) Sub-Advisory Agreement
In May 1996, the Company entered into a sub-advisory agreement (Agreement)
with FMC Advisers, Inc. (FMC) in which FMC provided advisory services to the
Company. Under the Agreement, the Company paid FMC a monthly fee for services
rendered of $18,750. On February 24, 1999, the Agreement was extended until May
2000 at which point it was allowed to expire. Advisory fees incurred during the
years ended December 31, 2001, 2000, and 1999 were $-0-, $93,750, and $225,000.
(b) Employment Agreements
The Company has employment agreements with certain key officers for either
a three or five-year term. Annually, the contracts with a five-year term will
renew for a new five-year term unless prior to the end of the first year, either
the Company or the executive provides notice to the other party of its intention
not to extend the employment period beyond the current five-year term. In the
event of a change in control, as defined, during the employment period, the
agreements provide for severance compensation to the executive in an amount
equal to the balance of the salary, bonus and value of fringe benefits which the
executive would be entitled to receive for the remainder of the employment
period.
(c) Other Commitments
The Company had loan commitments outstanding at December 31, 2001 that are
generally on the same terms as those to existing borrowers. Commitments
generally have fixed expiration dates. Of these commitments, approximately 45%
will be sold pursuant to SBA guaranteed sales. Since some commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. In addition, the Company had
approximately $14,111,000 of undisbursed funds relating to revolving credit
facilities with borrowers. These amounts may be drawn upon at the customer's
request if they meet certain credit requirements.
Commitments for leased premises expire at various dates through June 30,
2006. At December 31, 2001, minimum rental commitments for non-cancelable leases
are as follows:
- ----------------------------------------------------------
2002 $ 985,254
2003 814,971
2004 738,341
2005 730,181
2006 and thereafter 450,306
- ----------------------------------------------------------
Total $3,719,053
==========================================================
Rent expense for the years ended December 31, 2001, 2000, and 1999 was
approximately $945,000, 1,029,000, and $853,000.
(d) Litigation
The Company and its subsidiaries become defendants to various legal
proceedings arising from the normal course of business. In the opinion of
management, based on 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 impact in the financial
condition or results of operations of the Company.
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 although there can
be no assurances, expects to prevail in any arbitration settlement.
(13) RELATED PARTY TRANSACTIONS
Certain directors, officers and shareholders of the Company are also
directors of its wholly owned subsidiaries, MFC, BLL, MCI, MBC, FSVC, and Media.
Officer salaries are set by the Board of Directors of the Company.
Media engaged in transactions to sell roof top advertising space to a
company represented by a relative of a Media officer. All transactions were made
under market conditions and pricing.
During 2001, 2000, and 1999, a member of the Board of Directors of the
Company was also a partner in the Company's primary law firm.
F-22
(14) SHAREHOLDERS' EQUITY
In accordance with Statement of Position 93-2, "Determination, Disclosure
and Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies," ($368,359) was reclassified from
capital in excess of par value to accumulated undistributed net investment
income at December 31, 2001 in the accompanying consolidated balance sheets.
Further $534,468 was reclassified from capital in excess of par value to
accumulated undistributed net investment income at December 31, 2000 in the
accompanying consolidated balance sheets. These reclassifications had no impact
on the Company's total shareholders' equity and were designed to present the
Company's capital accounts on a tax basis.
(15) OTHER INCOME AND OTHER OPERATING EXPENSES
The major components of other income for the years ended December 31, 2001,
2000, and 1999 were as follows:
- --------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------------
Servicing fee income ($1,013,739)/(1)/ $1,004,331 $ 583,034
Accretion of discount 861,813 290,049 163,945
Late charges 831,904 492,378 293,008
Prepayment penalties 690,090 330,909 105,330
Other 735,090 1,260,162 1,100,449
--------------------------------------------
Total other income $ 2,105,158 $3,337,829 $2,245,766
================================================================================
/(1)/ Included in servicing fee income was $2,171,000, $205,000, and $0 for
2001, 2000, and 1999 for writedowns against the value of the servicing
fee receivable.
- --------------------------------------------------------------------------------
The major components of other operating expenses for the years ended
December 31, 2001, 2000, and 1999 were as follows:
- --------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------
Rent expense $ 944,695 $1,028,695 $ 852,884
Bank charges 517,093 550,517 207,250
Depreciation and amortization 610,447 973,010 721,160
Travel meals and entertainment 560,568 611,406 509,797
Computer expense 440,640 319,532 206,875
Insurance 358,834 285,689 273,036
Temporary help 334,996 607,666 341,531
Office expense 321,968 254,373 371,654
Telephone 222,295 327,621 267,435
Advertising, marketing, public relations 158,563 606,982 969,263
Other expenses 943,881 2,670,628 1,003,947
-------------------------------------
Total operating expenses $5,413,980 $8,236,119 $5,724,832
================================================================================
F-23
(16) SELECTED FINANCIAL RATIOS AND OTHER DATA
The following table provides selected financial ratios and other data for
the years ended December 31, 2001 and 2000.
- ------------------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------------------
Net Share Data:
Net asset value at the beginning of the period $ 10.16 $ 10.83 $ 10.65
Net investment income (loss) (0.05) 0.63 0.73
Realized gain (loss) on investments (0.17) (0.27) 1.55
Net unrealized appreciation (depreciation) on investments (0.01) 0.15 (0.84)
----------------------------------------------
Increase (decrease) in shareholders' equity from operations (0.23) 0.52 1.44
Issuance of common stock 0.01 0.01 0.00
Distribution of net investment income 0.35) (1.20) (1.26)
----------------------------------------------
Net asset value at the end of the period $ 9.59 $ 10.16 $ 10.83
----------------------------------------------
Per share market value at beginning of period $ 14.63 $ 17.94 $ 14.31
Per share market value at end of period 7.90 14.63 17.94
Total Return /(1)/ (43.89%) (10.97%) 36.43%
- ------------------------------------------------------------------------------------------------------------
Ratio/Supplemental Data
Average net assets at the end of the period $175,023,923 $147,733,051 $157,309,837
Ratio of operating expenses to average net assets 11.00% 15.37% 11.55%
Ratio of net investment income (loss) to average net assets (0.57%) 5.96% 6.96%
============================================================================================================
-----------------------------
1998 1997/(2)/
-----------------------------
Net Share Data:
Net asset value at the beginning of the period $ 10.69 $ 6.85
Net investment income (loss) 0.85 0.88
Realized gain (loss) on investments 0.09 0.15
Net unrealized appreciation (depreciation) on investments 0.18 0.01
-----------------------------
Increase (decrease) in shareholders' equity from operations 1.11 1.02
Issuance of common stock 0.00 3.46
Distribution of net investment income (1.16) (0.87)
-----------------------------
Net asset value at the end of the period $ 10.65 $ 10.46
- -------------------------------------------------------------------------------------------
Per share market value at beginning of period $ 17.01 $ 11.23
Per share market value at end of period 14.31 17.01
Total Return (1) (30.19%) 49.33%
- -------------------------------------------------------------------------------------------
Ratio/Supplemental Data
Average net assets at the end of the period $154,473,960 131,391,510
Ratio of operating expenses to average net assets 9.21% 5.50%
Ratio of net investment income (loss) to average net assets 8.16% 12.04%
===========================================================================================
/(1)/ Total return is calculated by comparing the change in value of a share of
common stock assuming the reinvestment of dividends on the payment date.
/(2)/ Excludes results of Freshstart Venture Capital Corporation.
- --------------------------------------------------------------------------------
(17) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Investment Plan (the 401(k) Plan) which covers all
full-time and part-time employees of the Company who have attained the age of 21
and have a minimum of one-half year of service. Under the 401(k) Plan, an
employee may elect to defer not less than 1% and no more than 15% of the total
annual compensation that would otherwise be paid to the employee, provided,
however, that employees' contributions may not exceed certain maximum amounts
determined under the Code. Employee contributions are invested in various mutual
funds according to the directions of the employee. Beginning September 1, 1998,
the Company elected to match employee contributions to the 401(k) Plan in an
amount per employee up to one-third of such employee's contribution but in no
event greater than 2% of the portion of such employee's annual salary eligible
for 401(k) Plan benefits. For the years ended December 31, 2001, 2000, and 1999,
the Company committed and expensed approximately $57,000, $58,000, and $67,000
to the 401(k) Plan.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS 107) requires disclosure of fair value
information about certain financial instruments, whether assets, liabilities, or
off-balance-sheet commitments, if practicable. The following methods and
assumptions were used to estimate the fair value of each class of financial
instrument. Fair value estimates that were derived from broker quotes cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument.
(a) Investments-The Company's investments are recorded at the estimated
fair value of such investments.
(b) Servicing fee receivable-The fair value of the servicing fee receivable
is estimated based upon expected future service fee income cash flows discounted
at a rate that approximates that currently offered for instruments with similar
prepayment and risk characteristics.
(c) Commercial paper, notes payable to banks, and senior secured notes-Due
to the short-term nature of these instruments, the carrying amount approximates
fair value.
(d) Commitments to extend credit-The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
present creditworthiness of the counter parties. For fixed rate loan
commitments, fair value also includes a consideration of the difference between
the current levels of interest rates and the committed rates. At December 31,
2001 and 2000, the estimated fair value of these off-balance-sheet instruments
was not material.
(e) Interest rate cap agreements-The fair value is estimated based on
market prices or dealer quotes. At December 31, 2001 and December 31, 2000, the
estimated fair value of these off-balance-sheet instruments was not material.
F-24
(f) SBA debentures payable-The fair value of the debentures payable to the
SBA is estimated based on current market interest rates for similar debt.
- --------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000
-----------------------------------------------------------
(Dollars in thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- --------------------------------------------------------------------------------------------------------
Financial Assets
Investments $462,253 $462,253 $516,010 $516,010
Cash 25,409 25,409 15,653 15,653
Servicing fee receivable 3,575 3,575 6,633 6,633
Financial Liabilities
Notes payable to banks 233,000 233,000 305,700 305,700
Commercial Paper -- -- 24,066 24,066
Senior secured notes 45,000 45,000 45,000 45,000
SBA debentures payable 43,845 43,845 21,360 21,360
- --------------------------------------------------------------------------------------------------------
F-25
MEDALLION FINANCIAL CORP.
Consolidated Schedule of Investments
December 31, 2001
=====================================================================================
# of Loans Balance Outstanding Interest Rate
--------------------------------------------------
5 $ 2,833,767 0.00-4.24
2 1,051,652 4.25-4.74
5 1,771,329 4.75-4.99
1 177,278 5.00-5.24
1 146,617 5.25-5.49
1 1,040,000 5.50-5.74
1 71,155 5.75-5.99
8 3,970,113 6.00-6.24
12 13,027,356 6.25-6.49
7 1,772,575 6.50-6.74
12 12,594,251 6.75-6.99
46 7,903,014 7.00-7.24
79 17,817,536 7.25-7.49
167 23,465,573 7.50-7.74
591 60,942,903 7.75-7.99
147 28,454,804 8.00-8.24
141 27,993,474 8.25-8.49
286 34,134,942 8.50-8.74
161 25,004,520 8.75-8.99
208 36,632,870 9.00-9.24
42 6,004,051 9.25-9.49
117 22,462,602 9.50-9.74
51 5,449,378 9.75-9.99
251 6,932,025 10.00-10.24
16 1,075,011 10.25-10.49
200 9,633,239 10.50-10.74
51 7,917,316 10.75-10.99
78 5,139,848 11.00-11.24
47 5,842,980 11.25-11.49
66 4,783,443 11.50-11.74
51 4,199,399 11.75-11.99
210 24,914,789 12.00-12.24
24 2,339,941 12.25-12.49
38 3,031,577 12.50-12.74
12 1,092,645 12.75-12.99
87 26,248,506 13.00-13.24
35 6,888,525 13.25-13.49
33 1,974,744 13.50-13.74
12 435,368 13.75-13.99
42 1,444,166 14.00-14.24
5 308,022 14.25-14.49
37 1,400,329 14.50-14.74
9 425,620 14.75-14.99
77 2,242,229 15.00-15.24
10 252,136 15.50-15.74
6 847,681 15.75-15.99
16 646,204 16.00-16.24
9 170,225 16.25-17.49
3 126,858 17.50-17.74
2 5,138,811 17.75-17.99
11 1,722,070 18.00-19.99
- -------------------------------------------------------------------------------------
Total Loans 3,529 461,895,467
- -------------------------------------------------------------------------------------
Equities
PMC 1,177,024
Kleener King Satellites 108,696
ARCA 50,000
Micromedics 58,828
Other 72,161
- -------------------------------------------------------------------------------------
Total Equities 1,466,709
=====================================================================================
Total Investments 463,362,176
Plus: Origination costs , net 2,149,718
Less: Discounts on 7(a) loans (2,415,459)
- -------------------------------------------------------------------------------------
Investments, at cost 463,096,435
Less: Unrealized depreciation on investments (7,501,052)
- -------------------------------------------------------------------------------------
Total investments $455,595,383
=====================================================================================
The accompanying notes are an integral part of this consolidated schedule.
F-26
MEDALLION FINANCIAL CORP.
Consolidated Schedule of Investments
December 31, 2000
- -----------------------------------------------------------------------------------
# Of Loans Balance Outstanding Interest Rate
-------------------------------------------------
45 $ 11,767,129 7.50-7.74
85 27,217,587 7.75-7.99
152 34,278,418 8.00-8.24
174 33,977,262 8.25-8.49
319 37,774,811 8.50-8.74
174 29,215,803 8.75-8.99
251 35,527,944 9.00-9.24
48 7,981,436 9.25-9.49
127 12,986,862 9.50-9.74
57 5,891,982 9.75-9.99
246 11,562,678 10.00-10.24
20 1,051,415 10.25-10.49
145 5,851,637 10.50-10.74
39 11,206,375 10.75-10.99
118 20,814,299 11.00-11.24
74 11,050,517 11.25-11.49
135 32,623,997 11.50-11.74
148 18,435,203 11.75-11.99
466 52,907,902 12.00-12.24
504 34,696,214 12.25-12.49
79 14,793,634 12.50-12.74
13 3,329,520 12.75-12.99
142 28,893,963 13.00-13.24
35 5,815,090 13.25-13.49
31 3,433,838 13.50-13.74
16 1,074,968 13.75-13.99
62 2,249,164 14.00-14.24
4 257,190 14.25-14.49
57 1,999,389 14.50-14.74
9 4,787,792 14.75-14.99
124 4,097,995 15.00-15.24
10 262,907 15.50-15.74
7 1,047,411 15.75-15.99
25 1,349,751 16.00-16.24
6 141,099 16.50-16.74
3 82,971 16.75-16.99
8 2,444,134 17.00-17.24
5 247,535 17.50-17.74
3 4,771,982 17.75-17.99
9 1,663,429 18.00-18.24
10 139,011 19.00-19.24
1 81,704 19.25-19.49
1 64,641 20.50-23.99
1 10,208 24.00-24.24
- -----------------------------------------------------------------------------------
Total Loans 3,988 519,858,797
- -----------------------------------------------------------------------------------
Equities
PMC 1,932,952
Cardinal Health 329,625
Kleener King Satellites 108,696
Micromedics 58,828
Arca 50,000
Other 72,161
-------------------
Total Equities 9 2,552,262
------------------------------
Total Investments 3,997 522,411,059
--------
Plus: Origination costs, net 1,802,702
Less: Discounts on 7(a) loans (2,648,788)
-------------------
Investments, at cost 521,564,973
Less: Unrealized depreciation
on investments (7,411,367)
- -----------------------------------------------------------------------------------
$514,153,606
===================================================================================
The accompanying notes are an integral part of this consolidated schedule.
F-27