ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS
MCM CAPITAL GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
CONTENTS
Report of Independent Auditors............................................ 94
Audited Financial Statements
Consolidated Statements of Financial Condition............................ 95
Consolidated Statements of Operations..................................... 96
Consolidated Statements of Stockholders' Equity........................... 97
Consolidated Statements of Cash Flows..................................... 98
Notes to Consolidated Financial Statements................................ 100
93
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MCM Capital Group, Inc.
We have audited the accompanying consolidated statements of financial
condition of MCM Capital Group, Inc. and its subsidiaries (the Company) as of
December 31, 1999 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of MCM
Capital Group, Inc. and its subsidiaries at December 31, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young, L.L.P.
Kansas City, Missouri
February 2, 2001
94
MCM Capital Group, Inc.
Consolidated Statements of Financial Condition
DECEMBER 31
1999 2000
-------- --------
(In Thousands)
ASSETS
Cash $ 352 $ 888
Restricted cash (Note 1) 2,939 2,468
Investment in receivable portfolios, net (Notes 2, 3 and 4) 57,473 25,969
Retained interest in securitized receivables (Note 4) 30,555 31,616
Property and equipment, net (Note 5) 7,943 7,424
Other assets 2,278 2,736
-------- --------
Total assets $101,540 $ 71,101
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 10,631 $ 5,519
Servicing liability (Note 4) 1,430 --
Notes payable and other borrowings (Note 6) 47,418 53,270
Capital lease obligations (Note 8) 1,262 2,233
Deferred income tax liability (Note 7) 7,771 --
-------- --------
Total liabilities 68,512 61,022
Commitments and contingencies (Notes 8 and 14)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized
-- --
Common stock, $.01 par value, 50,000,000 shares authorized,
7,191,131 and 7,591,131 shares issued in 1999 and 2000, 72 76
respectively (Note 13)
Treasury stock, at cost: 430,000 shares -- (128)
Additional paid-in capital 19,777 22,082
Accumulated other comprehensive income (Note 4) 4,321 2,921
Retained earnings (accumulated deficit) 8,858 (14,872)
-------- --------
Total stockholders' equity 33,028 10,079
-------- --------
Total liabilities and stockholders' equity $101,540 $ 71,101
======== ========
See accompanying notes to consolidated financial statements
95
MCM Capital Group, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1998 1999 2000
-------- -------- --------
(In Thousands Except Earnings Per Share)
Revenues:
Income from receivable portfolios $ 15,952 $ 12,860 $ 15,434
Income from retained interest -- 7,836 11,679
Gain on sales of receivable portfolios (Note 4) 10,818 57 --
Servicing fees and related income 105 7,405 9,447
-------- -------- --------
26,875 28,158 36,560
Operating expenses:
Salaries and employee benefits 7,472 18,821 23,423
Other operating expenses 2,200 3,479 6,340
General and administrative expenses 1,290 3,019 5,458
Restructuring charges -- -- 1,388
Provision for portfolio losses -- -- 20,886
Depreciation and amortization 427 964 2,154
-------- -------- --------
Total operating expenses 11,389 26,283 59,649
-------- -------- --------
15,486 1,875 (23,089)
Other income (expense):
Interest expense (2,982) (2,166) (7,829)
Other income (expense) 96 206 (69)
-------- -------- --------
Total other expense (2,886) (1,960) (7,898)
-------- -------- --------
Income (loss) before income taxes and
extraordinary charge 12,600 (85) (30,987)
(Provision for) benefit from income taxes
(Note 7) (5,065) 34 7,257
-------- -------- --------
Income (loss) before extraordinary charge 7,535 (51) (23,730)
Extraordinary charge, net of income tax
benefit of $115 (Note 9) (180) -- --
-------- -------- --------
Net income (loss) $ 7,355 $ (51) $(23,730)
======== ======== ========
Basic earnings per share (Note 12):
Income (loss) before extraordinary charge $ 1.52 $ (0.01) $ (3.20)
Extraordinary charge (.03) -- --
-------- -------- --------
Net income (loss) $ 1.49 $ (0.01) $ (3.20)
======== ======== ========
Diluted earnings per share (Note 12):
Income (loss) before extraordinary charge $ 1.51 $ (0.01) $ (3.20)
Extraordinary charge (.04) -- --
-------- -------- --------
Net income (loss) $ 1.47 $ (0.01) $ (3.20)
======== ======== ========
Shares used for computation (in thousands) (Note 13):
Basic 4,941 5,989 7,421
======== ======== ========
Diluted 4,996 5,989 7,421
======== ======== ========
See accompanying notes to consolidated financial statements.
96
MCM Capital Group, Inc.
Consolidated Statements of Stockholders' Equity
ACCUMULATED
RETAINED OTHER
ADDITIONAL EARNINGS COMPRE-
COMMON STOCK TREASURY STOCK PAID-IN (ACCUMULATED HENSIVE
SHARES PAR SHARES COST CAPITAL DEFICIT) INCOME TOTAL
-------------------------------------------------------------------------------------
(In Thousands)
Balance at December 31, 1997 -- $-- -- $ -- $ 200 $ 1,354 $ -- $ 1,554
Net income -- -- -- -- -- 7,355 -- 7,355
Other comprehensive income - unrealized gain -- --
(Note 4) -- -- -- -- 4,883 4,883
---------
Comprehensive income 12,238
Issuance of put options on redeemable common
stock -- -- -- -- (200) (3,649) -- (3,849)
Issuance of common stock warrants (Note 10) -- -- -- -- 130 -- -- 130
Repricing of put options on redeemable
common stock -- -- -- -- -- 3,849 -- 3,849
Recapitalization of Company's common stock
(Note 13) 4,941 49 -- -- (49) -- -- --
-------------------------------------------------------------------------------------
Balance at December 31, 1998 4,941 49 -- -- 81 8,909 4,883 13,922
Net loss -- -- -- -- -- (51) -- (51)
Other comprehensive loss - unrealized loss
(Note 4) -- -- -- -- -- -- (562) (562)
---------
Comprehensive loss (613)
Issuance of common stock (Note 13) 2,250 23 -- -- 19,696 -- -- 19,719
-------------------------------------------------------------------------------------
Balance at December 31, 1999 7,191 72 -- -- 19,777 8,858 4,321 33,028
Net loss -- -- -- -- -- (23,730) -- (23,730)
Other comprehensive loss - unrealized loss
(Note 4) -- -- -- -- -- -- (1,400) (1,400)
---------
Comprehensive loss (25,130)
Issuance of common stock warrants -- -- -- -- 1,634 -- -- 1,634
Treasury stock -- -- 430 (128) -- -- -- (128)
Issuance of common stock (Note 2) 400 4 -- -- 671 -- -- 675
-------------------------------------------------------------------------------------
Balance at December 31, 2000 7,591 $ 76 430 $ (128) $ 22,082 $(14,872) $ 2,921 $ 10,079
====================================================================================================================================
See accompanying notes to consolidated financial statements.
97
MCM Capital Group, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1998 1999 2000
-----------------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income (loss) $ 7,355 $ (51) $(23,730)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 427 964 2,154
Amortization of loan costs -- 128 1,145
Amortization of debt discount 268 -- 94
Gain on sales of receivable portfolios (10,818) (57) --
Loss on sales of property and equipment 17 -- 227
Extraordinary loss on early extinguishment of debt 180 -- --
Deferred income tax expense (benefit) 5,107 (34) (6,839)
Amortization of servicing liability -- (2,177) (1,430)
Settlement of amount payable under receivable
purchase contract -- -- (2,323)
Write-off of basis of settled portfolios -- -- 427
(Increase) decrease in service fee receivable -- (273) 379
(Increase) decrease in restricted cash -- (2,939) 471
Provision for portfolio losses -- -- 20,886
(Increase) decrease in other assets (280) (153) 24
Note payable issued in lieu of interest payment -- -- 613
Increase (decrease) in accounts payable and accrued
liabilities 1,178 9,023 (4,535)
-----------------------------------
Net cash provided by (used in) operating activities 3,434 4,431 (12,437)
INVESTING ACTIVITIES
Proceeds from sales of receivable portfolios 37,202 317 706
Net (accretion) collections applied to principal of
receivable portfolios (503) (3,712) 15,918
Net collections of retained interest and cash reserves -- (7,836) (3,394)
Purchases of receivable portfolios (24,762) (51,969) (4,433)
Cash acquired in acquisition of assets from West Capital -- -- 10
Proceeds from the sale of property and equipment 32 -- 984
Purchases of property and equipment (2,814) (4,127) (786)
-----------------------------------
Net cash provided by (used in) investing activities 9,155 (67,327) 9,005
98
MCM Capital Group, Inc.
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1998 1999 2000
-----------------------------------
(In Thousands)
FINANCING ACTIVITIES
Proceeds from notes payable and other borrowings $ 23,574 $ 78,519 $ 66,361
Repayment of notes payable and other borrowings (31,481) (38,106) (59,607)
Payment on termination of put warrants (206) -- --
Capitalized loan costs relating to financing arrangement -- (1,370) (1,893)
Issuance of common stock through initial public offering -- 22,500 --
Capitalized costs relating to initial public offering of
common stock -- (2,781) --
Purchase of treasury stock -- -- (128)
Repayment of capital lease obligations -- (172) (765)
Prepayment fees and penalties on early extinguishment of
debt (295) -- --
-----------------------------------
Net cash provided by (used in) financing activities (8,408) 58,590 3,968
-----------------------------------
Net increase (decrease) in cash 4,181 (4,306) 536
Cash, beginning of year 477 4,658 352
-----------------------------------
Cash, end of year $ 4,658 $ 352 $ 888
===================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,670 $ 2,014 $ 5,952
===================================
Income taxes $ 50 $ -- $ --
===================================
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING ACTIVITIES
Property and equipment acquired under capital leases $ 523 $ 928 $ 1,737
===================================
Recognition of servicing liability $ 3,607 $ -- $ --
===================================
Recognition of retained interest in securitized receivables $ 14,858 $ -- $ --
===================================
SUPPLEMENTAL SCHEDULES OF NONCASH FINANCING ACTIVITIES
Issuance of common stock warrants in connection with debt
agreements $ 130 $ -- $ 1,634
===================================
Issuance of put options on redeemable common stock $ 3,849 $ -- $ --
===================================
Issuance of common stock in connection with acquisition of
certain assets of West Capital:
Fair value of assets acquired $ -- $ -- $ 2,419
Fair value of liabilities assumed -- -- (1,744)
-----------------------------------
Common stock issued $ -- $ -- $ 675
===================================
See accompanying notes to consolidated financial statements.
99
1. SIGNIFICANT ACCOUNTING POLICIES
OWNERSHIP AND DESCRIPTION OF BUSINESS
MCM Capital Group, Inc. (MCM Capital) is a holding company whose
principal assets are its investments in its wholly owned subsidiaries
(collectively referred to herein as the Company). The Company is a financial
services company specializing in the collection, restructuring, resale and
securitization of receivable portfolios acquired at deep discounts. The
Company's receivable portfolios consist primarily of charged-off domestic credit
card receivables purchased from national financial institutions and major retail
corporations. Acquisitions of receivable portfolios are financed by operations
and borrowings from third parties.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include MCM Capital and its
wholly-owned subsidiaries, Midland Credit Management, Inc. (Midland Credit),
Midland Funding 98-A Corporation, Midland Receivables 99-1 Corporation, Midland
Acquisition Corporation and MRC Receivables Corporation. All material
intercompany transactions and balances have been eliminated.
RESTRICTED CASH
Restricted cash represents cash reserve accounts pledged to the
Warehouse Securitization and Securitization 99-1 and undistributed collections
held on behalf of the trustees.
INVESTMENT IN RECEIVABLE PORTFOLIOS
The Company accounts for its investment in receivable portfolios on the
accrual basis of accounting in accordance with the provisions of the AICPA's
Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans. Static
pools are established with accounts having similar attributes, based on specific
seller and timing of acquisition. Once a static pool is established, the
receivables are permanently assigned to the pool. The discount (i.e., the
difference between the cost of each static pool and the related aggregate
contractual receivable balance) is not recorded because the Company expects to
collect a relatively small percentage of each static pool's contractual
receivable balance. As a result, receivable portfolios are recorded at cost at
the time of acquisition.
The Company accounts for each static pool as a unit for the economic
life of the pool (similar to one loan) for recognition of income from receivable
portfolios, for collections applied to principal of receivable portfolios and
for provision for loss or impairment. Income from receivable portfolios is
accrued based on the effective interest rate determined for each pool applied to
each pool's original cost basis, adjusted for accrued income and principal
paydowns. The effective interest rate is the internal rate of return determined
based on the timing and amounts of actual cash received and anticipated future
cash flow projections for each pool.
100
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company monitors impairment of receivable portfolios based on total
projected future cash flows of each portfolio compared to each portfolio's
carrying amount in those cases where the amounts and timing of projected future
cash flows are determined to be reasonably estimable. The receivable portfolios
are evaluated for impairment periodically by management based on current market
and cash flow assumptions. Provisions for losses are charged to earnings when it
is determined that the investment in a receivable portfolio is greater than the
estimate of total probable future collections. Additionally, if the amount and
timing of future collections are not reasonably estimable, the Company accounts
for those portfolios on the cost recovery method. No provision for losses was
recorded in 1998 or 1999. During 2000, the Company recorded impairment charges
of approximately $20,886,000 against the carrying value of the portfolios.
SECURITIZATION ACCOUNTING
Statement of Financial Accounting Standards (SFAS) No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, requires an entity to recognize the financial and servicing assets
it controls and the liabilities it has incurred and to derecognize financial
assets when, based on specifically defined criteria, control has been
surrendered and the assets transferred have been legally isolated. The basis of
securitized financial assets is allocated to the receivables sold, the servicing
asset or liability and retained interest based on their relative fair values at
the transfer date. The gain or loss on the securitization transaction is
determined by comparing proceeds received to the allocated basis of the
securitized assets.
In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
that replaces, in its entirety, SFAS No. 125. While the accounting treatment
prescribed by this pronouncement is effective for transfers and servicing of
financial assets and extinguishments of liabilities that occur after March 31,
2001, SFAS No. 140 is effective for fiscal years ending after December 15, 2000
for disclosure purposes. Accordingly, the Company has included the appropriate
disclosure established by SFAS No. 140 in its consolidated financial statements.
The adoption of this pronouncement is not expected to have a significant impact
on the Company's consolidated financial statements.
RETAINED INTEREST IN SECURITIZED RECEIVABLES
The retained interest is treated as a debt security similar to an
available-for-sale security and is carried at fair value. At the time of
securitization, the retained interest is initially recorded at the basis
allocated in accordance with SFAS No. 125. This original cost basis is adjusted
to fair value, which is based on the discounted anticipated future cash flows on
a "cash out" basis, with such adjustment (net of related deferred income taxes)
recorded as a component of other comprehensive income. The cash out method
projects cash collections to be received only after all amounts owed to
investors have been remitted.
Income on the retained interest is accrued based on the effective
interest rate applied to its original cost basis, adjusted for accrued interest
and principal paydowns. The effective interest rate is the internal rate of
return determined based on the timing and amounts of actual cash received and
anticipated future cash flow projections for the underlying pool of securitized
receivables.
101
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company monitors impairment of the retained interest based on
discounted anticipated future cash flows of the underlying receivables compared
to the original cost basis of the retained interest, adjusted for unpaid accrued
interest and principal paydowns. The discount rate is based on a rate of return,
adjusted for specific risk factors, that would be expected by an unrelated
investor in a similar stream of cash flows. The retained interest is evaluated
for impairment by management quarterly based on current market and cash flow
assumptions applied to the underlying receivables. Provisions for losses are
charged to earnings when it is determined that the retained interest's original
cost basis, adjusted for unpaid accrued interest and principal paydowns, is
greater than the present value of expected future cash flows. No provision for
losses was recorded in 1998, 1999 or 2000.
The retained interest is secured by assets held in a wholly owned,
bankruptcy remote, special purpose subsidiary of the Company. The value of the
retained interest, and its associated cash flows, would not be available to
satisfy claims of general creditors of the Company.
SERVICING LIABILITY
During 1999, the Company recorded a servicing liability related to its
obligation to service securitized receivables. The servicing liability was
amortized to reduce servicing expense in proportion to and over the estimated
period of servicing provided for third-party acquirers of securitized
receivables. The sufficiency of the servicing liability was assessed based on
the fair value of the servicing contract as compared to the carrying amount of
the servicing liability. Fair value is estimated by discounting anticipated
future net servicing revenues or losses using assumptions the Company believes
market participants would use in their estimates of future servicing income and
expense. The servicing liability was fully amortized in 2000.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. The provision for depreciation and amortization
is computed using the straight-line or an accelerated method over the estimated
useful lives of the assets as follows:
Buildings and equipment 15 to 25 years
Furniture and fixtures 7 years
Computer hardware and software 3 to 5 years
Transportation vehicles 5 years
Maintenance and repairs are charged to expense in the year incurred.
Expenditures for major renewals that extend the useful lives of fixed assets are
capitalized and depreciated over the useful lives of such assets.
INCOME TAXES
Deferred income taxes are provided on temporary differences between the
financial reporting bases and income tax bases of the Company's assets and
liabilities and unused net operating loss carryforwards.
102
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25 (APB 25), Accounting for Stock Issued to Employees, and related
interpretations in accounting for its employee stock options rather than the
alternative fair value accounting provided for under SFAS No. 123, Accounting
and Disclosure for Stock-Based Compensation. In accordance with APB 25,
compensation cost relating to stock options granted by the Company is measured
as the excess, if any, of the market price of the Company's stock at the date of
grant over the exercise price of the stock options.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company to
estimate the fair value of each class of financial instruments:
Investment in receivable portfolios: Investment in receivable
portfolios is initially recorded at cost. The fair value is estimated based
on recent acquisitions of similar receivable portfolios or discounted
expected future cash flows in those cases where the amounts and timing of
projected future cash flows are determined to be reasonably estimable. The
discount rate is based on a rate of return, adjusted for specific risk
factors, that would be expected by an unrelated investor in a similar stream
of cash flows. The fair value of those receivable portfolios not on cost
recovery is estimated to be $26,892,000 versus a carrying value of
$20,135,000.
Retained interest in securitized receivables: Fair value is estimated
by discounting anticipated future cash flows using a discount rate based on
specific risk factors. The anticipated future cash flows were projected to
reflect the restriction of cash flows until the investors were fully paid,
which occurred during 2000. The retained interest in securitized receivables
is recorded at fair value in the accompanying consolidated statements of
financial condition.
Notes payable and other borrowings: The carrying amount reported in
the consolidated statements of financial condition approximates fair value
for notes payable that are of a short-term nature. For other borrowings, fair
value is estimated by discounting anticipated future cash flows using market
rates of debt instruments with similar terms and remaining maturities. The
carrying amount of other borrowings approximates fair value.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Significant estimates have been made by management with respect to the
timing and amount of collection of future cash flows from receivable portfolios
owned and those underlying the Company's retained interest. Actual results are
likely to differ from these estimates, making it reasonably possible that a
change in these estimates could occur within one year. On a quarterly basis,
management reviews the estimate of future collections, and it is reasonably
possible that its assessment of collectibility may change based on actual
results and other factors.
103
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF RISK
The collection industry pertaining to charged-off credit cards is
highly concentrated in the number of participants and sellers of receivables.
Accordingly, the Company's purchases of receivable portfolios are limited to a
few providers. Each of these companies has a significant presence in the retail
credit card industry and processes a substantial volume of transactions.
EARNINGS PER SHARE
In accordance with the provisions of SFAS No. 128, Earnings Per Share,
the dilutive effect of stock options and certain common stock warrants are
excluded from basic earnings per share:
YEAR ENDED DECEMBER 31
1998 1999 2000
-----------------------------------------
(In Thousands)
Denominator for basic earnings per share -
weighted-average shares 4,941 5,989 7,421
Effect of dilutive securities:
Warrants (Note 10) 31 - -
Employee stock options (Note 12) 24 - -
-----------------------------------------
Dilutive potential common shares 55 - -
-----------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 4,996 5,989 7,421
=========================================
For 1999 and 2000, potentially dilutive warrants and employee stock
options have not been included in the calculation of diluted earnings per share,
as the inclusion of such options would have had an antidilutive effect for the
period.
RECLASSIFICATIONS
Certain amounts for 1998 and 1999 were reclassified to conform to the
current year presentation.
2. ACQUISITION OF CERTAIN ASSETS OF WEST CAPITAL FINANCIAL SERVICES CORP.
On May 22, 2000, Midland Acquisition Corporation (MAC), a Delaware
corporation and a wholly-owned subsidiary of the Company, completed the
acquisition of certain operating assets and the assumption of certain operating
liabilities of WCFSC, Inc., formerly known as West Capital Financial Services
Corp. (West Capital), a California corporation, pursuant to an asset purchase
agreement (the Purchase Agreement). West Capital was a majority owned subsidiary
of Sun America, Inc. The aggregate consideration paid by the Company to West
Capital for such net assets acquired was 375,000 shares of MCM common stock
valued at approximately $633,000 as of May 22, 2000 based on a closing price of
$1.6875 per share.
104
2. ACQUISITION OF CERTAIN ASSETS OF WEST CAPITAL FINANCIAL SERVICES
CORP. (CONTINUED)
The assets acquired include three portfolios of charged-off credit card
receivables, all of the fixed assets of West Capital, and certain agreements and
licenses used by West Capital in the operation of its business. Various assets
that were acquired pursuant to the Purchase Agreement were used as part of West
Capital's business of collecting charged-off credit card receivables, including
computer hardware and software, telephone equipment, and other related
equipment. MAC licensed the assets to Midland Credit, which has continued to use
those assets in similar operations. As part of the transaction, all of the
previous employees of West Capital were offered and accepted employment by
Midland Credit.
In a separate but related transaction, the Company acquired certain
charged-off credit card receivables from a trust formed by WCFSC Special Purpose
Corporation, a California corporation and wholly-owned subsidiary of West
Capital (WCFSC SPC), pursuant to a trust receivables purchase agreement, dated
May 22, 2000, by and among MCM Capital, West Capital, WCFSC SPC, WCFSC Special
Purpose Corporation II, and Norwest Bank Minnesota, National Association, as
trustee for WCFSC Consumer Receivables Recovery Trust 1995-1. The consideration
for the acquisition consisted of 25,000 shares of MCM Capital's common stock
with a value of approximately $42,000 based on a closing price of $1.6875 per
share on May 22, 2000.
On the acquisition date, Midland Credit also became the successor
servicer to a pool of charged-off consumer accounts that were owned by West
Capital Receivables Corporation I, a California corporation and wholly owned,
bankruptcy-remote subsidiary of West Capital. Under the terms of the servicing
contract, Midland Credit earns a servicing fee for collections of these
receivables, which amounted to $4,292,000 during 2000.
In conjunction with the West Capital transaction, certain former
officers of West Capital replaced certain officers of the Company, which
resulted in severance charges of approximately $898,000 recorded during 2000.
Additionally, the Company closed its operations center in Hutchinson, Kansas in
June 2000. The closure resulted in additional severance charges of approximately
$210,000 for 93 employees terminated. The Company also recorded an impairment
charge of approximately $280,000 pertaining to the sale of the Hutchinson
facility in July 2000.
3. INVESTMENT IN RECEIVABLE PORTFOLIOS
During the first quarter of 2000, the Company determined that 22 of its
receivable portfolios that had been acquired in 1999 were not performing in a
manner consistent with the Company's expectations and historical results for the
specific type of receivables within those portfolios. This was apparently in
part the result of noncompliance of the receivable portfolios with covenants and
representations contained in the related purchasing contracts. At the time the
impairment was identified, the Company was unable to reasonably estimate the
amount and timing of anticipated collections. Therefore, in accordance with
AICPA Practice Bulletin 6, the Company ceased accrual of income on these
portfolios effective January 1, 2000 and recorded an impairment charge based on
the difference between the total projected future collections and the carrying
amount on a portfolio by portfolio basis.
105
3. INVESTMENT IN RECEIVABLE PORTFOLIOS (CONTINUED)
Using proprietary statistical models acquired through the West Capital
transaction, Company management subsequently estimated the amount and timing of
anticipated collections and therefore, the recoverable value of certain of these
portfolios. As part of that process, the Company isolated the portions of those
portfolios containing what the Company considers to be ineligible assets. Based
on the results of the Company's calculations and statistical analysis, an
impairment charge of $20,886,000 was recorded against the carrying value of
certain portfolios. These portfolios remain on nonaccrual status as of December
31, 2000, and the full amount of collections since January 1, 2000 for these
portfolios has been applied to the principal of these receivable portfolios. In
accordance with AICPA Practice Bulletin 6, the Company is accounting for these
portfolios under the cost recovery method until such time that it can
demonstrate its ability to estimate the amount and timing of anticipated
collections.
Collections in excess of the net book value of the related individual
receivable portfolios are recorded as income. During 2000, the Company
recognized income of approximately $3,683,000 pertaining to collections in
excess of the net related book value.
On August 14, 2000, the Company entered into a settlement agreement
(the Settlement) with an issuer from whom it purchased certain of these
ineligible receivables (the Issuer). In connection with the Settlement, the
Issuer forgave the payment of the original purchase price of $2,322,000 for
certain ineligible receivables that were owned by Midland Credit which were
unencumbered. The Company is considering possible remedies that may be available
to it from other entities from which ineligible receivables were purchased.
Other than as previously discussed, the Company has not recorded an accrual for
any potential recoveries, as such amounts are not deemed to be reasonably
estimated or probable of recovery at this time.
The following summarizes the changes in the balance of the investment
in receivable portfolios for the years ended December 31:
1998 1999 2000
-------------------------------------------
(In Thousands)
Balance, beginning of year $15,411 $ 2,052 $57,473
Purchase of receivable portfolios 24,762 51,969 4,433
Receivable portfolios acquired in the
West Capital transaction - - 2,000
Sale of receivable portfolios (38,624) (260) (706)
Write-off of basis of settled portfolios - - (427)
Provision for portfolio losses - - (20,886)
Net accretion (collections) applied to
the principal of receivable portfolios 503 3,712 (15,918)
-------------------------------------------
Balance, end of year $ 2,052 $57,473 $25,969
===========================================
106
4. SECURITIZATION OF RECEIVABLE PORTFOLIOS
On December 30, 1998, Midland Receivables 98-1 Corporation, a
bankruptcy-remote, special-purpose entity formed as a wholly-owned subsidiary of
the Company, issued non-recourse notes in the principal amount of $33,000,000,
which had a fixed rate of interest of 8.63%. These notes were repaid in full on
September 11, 2000. The notes were collateralized by credit card receivables
securitized by the Company with a carrying amount of approximately $33,800,000
at the time of transfer and a cash collateral account. The transaction was
accounted for as a sale under the provisions of SFAS No. 125. As a result, the
Company recorded a retained interest and servicing liability and recognized a
pretax gain of $9,300,000 in 1998.
In connection with the securitization, the Company received a servicing
fee equal to 20% of the gross monthly collections of the securitized receivables
through September 11, 2000, the date of repayment of the notes. During 1999 and
2000, the Company recorded servicing fees of $5,228,000 and $3,662,000,
respectively. At the time of the transaction, the benefits of servicing the
securitized receivables were not expected to adequately compensate the Company
for the servicing arrangement; therefore, the Company recorded a servicing
liability of $3,607,000 in accordance with SFAS No. 125. The Company recorded
amortization of $2,177,000 and $1,430,000 related to the servicing liability
during 1999 and 2000, respectively. The Company recorded no amortization during
1998 as the transaction closed on December 30, 1998. In conjunction with the
repayment of the note payable, the servicing liability was fully amortized in
September 2000.
As a result of the securitization transaction, the Company recorded a
retained interest in securitized receivables. The retained interest is
collateralized by the credit card receivables that were securitized, adjusted
for amounts owed to the noteholders. At the time of the transaction, the Company
recorded the retained interest at an allocated basis in the amount of
$15,848,000 based on its relative fair value, as discussed in Note 1. The
allocated basis was then adjusted to its fair market value with the difference
resulting in an unrealized gain, net of deferred income taxes, recorded as other
comprehensive income within the accompanying consolidated statements of
stockholders' equity. The deferred income taxes associated with the unrealized
gain were $2,880,000 and $1,948,000 as of December 31, 1999 and 2000,
respectively. The unrealized gain is recalculated on a monthly basis with the
change recorded within the consolidated statements of stockholders' equity.
In estimating the fair value of the retained interest, the Company
estimated net cash flows, after repayment of notes, related interest and other
fees, based on the Company's historical collection results for similar
receivables. The estimated cash flows have been discounted at 30% with
collections expected to extend through September 2004. Based on these
assumptions, the transaction is anticipated to yield a monthly return of
approximately 3.9%. The Company accrued income of $7,836,000 and $11,679,000 on
the retained interest during 1999 and 2000, respectively. Upon repayment of the
note payable in September 2000, all collections of the underlying securitized
receivables are retained by the Company and reduce the retained interest
balance.
In accordance with the terms of securitization, the Company maintained
a deposit with the securitization trustee to be used as a reserve for the
benefit of securitization investors. This amount was included on an undiscounted
basis in the carrying value of the retained interest receivables less any
portion required to satisfy obligations of the securitization. It was returned
to the Company in September 2000 upon payment of amounts due to the
securitization investors.
107
4. SECURITIZATION OF RECEIVABLE PORTFOLIOS (CONTINUED)
The following summarizes the changes in the balance of the retained interest for
2000 (in thousands):
ESTIMATED
FAIR
CASH AMORTIZED UNREALIZED MARKET
RESERVES COST GAIN VALUE
----------------------------------------------------------
Balance at December 31, 1999 $ 660 $22,694 $ 7,201 $30,555
Interest accrued - 11,679 - 11,679
Refund of reserve account (660) - - (660)
Payments received - (7,625) - (7,625)
Decrease in unrealized gain - - (2,333) (2,333)
----------------------------------------------------------
Balance at December 31, 2000 $ - $26,748 $ 4,868 $31,616
==========================================================
The following summarizes the changes in the balance of the retained interest for
1999 (in thousands):
ESTIMATED
FAIR
CASH AMORTIZED UNREALIZED MARKET
RESERVES COST GAIN VALUE
---------------------------------------------------------
Balance at December 31, 1998 $ 990 $14,858 $8,138 $23,986
Refunds of reserve account (330) - - (330)
Income accrued - 7,836 - 7,836
Decrease in unrealized gain - - (937) (937)
--------------------------------------------------------
Balance at December 31, 1999 $ 660 $22,694 $7,201 $30,555
========================================================
At December 31, 2000, collection assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10% and 20% adverse
changes in those assumptions related to the retained interest are as follows (in
thousands):
Fair value of retained interest $31,616
RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL)
Impact on fair value of 10% adverse change (703)
Impact on fair value of 20% adverse change (1,365)
PROJECTED CASH COLLECTION ASSUMPTION
Impact on fair value of 10% adverse change (3,162)
Impact on fair value of 20% adverse change (6,323)
These sensitivities are hypothetical and should be used with caution.
108
4. SECURITIZATION OF RECEIVABLE PORTFOLIOS (CONTINUED)
On January 18, 2000, Midland Receivables 99-1 Corporation
(Securitization 99-1), a wholly-owned, bankruptcy-remote, special-purpose entity
formed by the Company as a subsidiary of Midland Credit, issued nonrecourse
notes in the amount of $28,900,000, bearing interest at 9.63% per annum. The
notes are collateralized by certain charged-off receivables that had a carrying
amount of approximately $43,000,000 at the time of transfer and an initial cash
reserve account of $1,445,000 and are insured through a financial guaranty
insurance policy. The securitization has been accounted for as a financing
transaction, and the proceeds were used to reduce the level of outstanding
borrowings of the Company's warehouse facility. Income will be recognized over
the estimated life of the receivables securitized, and the receivables and
corresponding debt will remain on the Company's balance sheet. The assets
pledged in the securitization transaction, together with their associated cash
flows, would not be available to satisfy claims of other creditors of the
Company.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
1999 2000
--------------------------
(In Thousands)
Land and buildings $ 850 $ -
Furniture, fixtures and equipment 1,622 1,105
Computer equipment and software 3,870 7,700
Telephone equipment 1,089 1,677
Leasehold improvements - 205
Work in progress 2,610 -
--------------------------
10,041 10,687
Accumulated depreciation and amortization (2,098) (3,263)
--------------------------
$ 7,943 $ 7,424
==========================
109
6. NOTES PAYABLE AND OTHER BORROWINGS
The Company is obligated under the following borrowings:
1999 2000
--------------------------
(In Thousands)
Warehouse facility, 1.17% over LIBOR, 7.45% at December 31,
2000, due December 15, 2004 $33,779 $11,201
Revolving line of credit, 8.5% at December 31, 2000,
unsecured, due April 15, 2002 13,615 12,947
Notes payable, Securitization 99-1, 10% - 19,619
Senior notes, 12%, due January 12, 2007 (net of unamortized
debt discount of $1,516,000 for value of common stock
warrants) - 8,484
Senior notes, 12%, due July 1, 2005 - 613
Notes payable, 12%, due March 28, 2003 - 401
Various installment obligations, 7.7% 24 5
--------------------------
$47,418 $53,270
==========================
On March 31, 1999, Midland Credit, through a wholly owned,
bankruptcy-remote subsidiary, entered into a securitized receivables acquisition
facility, or "warehouse facility," allowing for a current maximum funding of
$35,000,000. In January and November 2000, certain terms and conditions of the
warehouse facility were amended. The amendments include that Midland Credit (i)
must maintain $2 million of liquidity, (ii) must collect certain minimum amounts
on the receivable portfolios within the warehouse facility and Securitization
99-1 based on current projections, (iii) must maintain on a consolidated basis a
minimum net worth of an amount that decreases on a quarterly basis from
$13,600,000 to $7,300,000, over the period from September 30, 2000 through
September 30, 2001, and remains at $7,300,000 thereafter, (iv) must be
reappointed as servicer by the note insurer on a monthly basis subsequent to
December 31, 2000, (v) was granted greater flexibility in the sale of certain
accounts and the use of third-party collectors, and (vi) will receive increased
servicing fees that are equal to the Company's servicing costs and paid on a
weekly basis. In addition, the amendments increase the interest rate on notes in
Securitization 99-1 to 10% and the warehouse facility to one-week LIBOR plus
1.17%.
The warehouse facility was also converted to a term loan with monthly
payments based on collections associated with the receivable portfolios with a
final payment date of December 15, 2004. Midland Credit is also required to pay
to the noteholders any recoveries through legal settlement after September 22,
2000, net of attorney fees and certain costs, from certain issuers that
previously sold the securitized receivables to Midland Credit. In November 2000,
$622,000, net of $29,000 in attorney fees, was paid to the noteholders of
Securitization 99-1 related to recoveries received after September 30, 2000. At
December 31, 2000, Midland Credit was in default of certain covenants of
Securitization 99-1 and the warehouse facility, and on January 24, 2001, the
controlling party waived the default.
110
6. NOTES PAYABLE AND OTHER BORROWINGS (CONTINUED)
The Company entered into the Fifth Amended and Restated Promissory Note
effective December 30, 2000 to renew its revolving line of credit. The
$15,000,000 revolving line of credit accrues interest at the prime rate and
matures on April 15, 2002. Borrowings under this unsecured revolving line of
credit are guaranteed by certain stockholders of the Company, including Triarc
Companies, Inc. (Triarc). Triarc indirectly owns approximately 8.4% of the
outstanding common stock of the Company. Triarc has purchased a $15,000,000
certificate of deposit from the lending bank which is subject to set off under
certain circumstances if the parties to the bank guaranties and related
obligations fail to perform their obligations thereunder. At December 31, 1999
and 2000, the Company had available unused lines of credit in the amount of
$1,385,000 and $2,053,000, respectively.
In January 2000, Midland Credit, through a wholly-owned,
bankruptcy-remote subsidiary, issued nonrecourse notes in the amount of
$28,900,000, bearing interest at 9.63% per annum and subsequently amended in
late 2000 to bear interest at 10% per annum (Note 4). The notes are
collateralized by certain charged-off receivables and are insured through a
financial guaranty insurance policy.
In January 2000, the Company obtained additional financing through the
issuance of $10,000,000 principal amount senior notes to an institutional
investor. The notes are unsecured obligations of the Company but are guaranteed
by Midland Credit and Triarc. In connection with the issuance of the notes, the
Company issued warrants to the noteholders to acquire up to an aggregate of
528,571 shares of common stock of the Company at an exercise price of $0.01 per
share. In addition, the notes require semiannual interest payments on January 15
and July 15; however, during the first two years the notes are outstanding,
interest may be paid in kind at the Company's option through issuance of
additional 12% senior notes due July 1, 2005. For the interest payment that was
due in July 2000, the Company issued a 12% senior note in the amount of
$613,000.
On December 20, 2000, MRC Receivables Corporation, a wholly owned
bankruptcy-remote, special-purpose entity, entered into a $75,000,000 secured
financing facility. Notes to be issued under the facility will be collateralized
by the charged-off receivables that are purchased with the proceeds from this
financing arrangement. Each note has a maturity date not to exceed 27 months
after the borrowing date. Once the notes are repaid, the Company and the lender
equally share remaining cash flows from the receivable portfolios. The first
funding under this financing facility occurred in December 2000 in connection
with the purchase of receivable portfolios in the amount of approximately
$401,000. The assets pledged under this financing facility, together with their
associated cash flows, would not be available to satisfy claims of general
creditors of the Company.
On October 31, 2000, the Company entered into an agreement with a
related party for a standby line of credit in the amount of $2,000,000 at 12%
and a funding expiration date of December 31, 2000. The facility is secured by
the Company's assets. At December 31, 2000, the Company had not drawn any funds
against this line of credit.
111
7. INCOME TAXES
The provision for income taxes on income before extraordinary charge
consists of the following for the years ended December 31:
1998 1999 2000
----------------------------------------------
(In Thousands)
Current expense (benefit):
Federal $ - $ - $ (418)
State (42) - -
----------------------------------------------
(42) - (418)
Deferred expense (benefit):
Federal 4,036 (27) (9,491)
State 1,071 (7) (2,480)
Valuation allowance - - 5,132
----------------------------------------------
5,107 (34) (6,839)
----------------------------------------------
$5,065 $(34) $(7,257)
==============================================
The Company has recorded a deferred income tax benefit in 1998 in the
amount of $115,000 pertaining to an extraordinary loss on the early
extinguishment of debt, which has been reported in the net operating losses
component of deferred tax assets in the following table.
The Company has net operating loss carryforwards of approximately
$10,881,000 as of December 31, 2000. The Company is a loss corporation as
defined in Section 382 of the Internal Revenue Code. Therefore, if certain
changes in the Company's ownership should occur, there could be a significant
annual limitation on the amount of loss carryforwards and future recognized
losses that can be utilized and ultimately some amount of loss carryforwards may
not be available. Such changes could result in additional tax provision beyond
the valuation allowance. The net operating losses generated in 1998, 1999 and
2000 of $2,105,000, $6,800,000 and $1,800,000, respectively, expire in 2018,
2019 and 2020, respectively. The remaining balance expires in the year 2006.
112
7. INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities consist of the
following as of December 31:
1999 2000
------------------------
(In Thousands)
Deferred tax assets:
Net operating losses $ 4,071 $4,378
Accrued expenses 178 700
Differences in income recognition related to receivable
portfolios and retained interest - 2,456
------------------------
4,249 7,534
Less valuation allowance - 5,132
------------------------
4,249 2,402
Deferred tax liabilities:
Unrealized gain on retained interest in securitized
receivables 2,880 1,948
Differences in income recognition related to receivable
portfolios and retained interest 8,800 -
Difference in basis of depreciable assets 340 454
------------------------
12,020 2,402
------------------------
Net deferred tax liability $(7,771) $ -
========================
SFAS No. 109 requires a valuation allowance against deferred tax assets
if, based on available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized. The Company believes that some
uncertainty exists with respect to the future utilization of net operating
losses and other deferred tax assets; therefore, the Company has provided a
valuation allowance relating to such items of $5,132,000 as of December 31,
2000. The Company has not recorded any valuation allowance as of December 31,
1999.
The 1998 securitization transaction qualified as a financing for income
tax purposes; therefore, the Company recorded a deferred tax liability
pertaining to the unrealized gain on the retained interest in the amount of
$3,255,000, as no gain was recorded for income tax purposes. The decrease during
1999 and 2000 in the deferred tax liability of $375,000 and $932,000,
respectively, relates to the decrease in the unrealized gain on retained
interest in securitized receivables which is recorded as a component of other
comprehensive loss in the accompanying consolidated statements of stockholders'
equity.
113
7. INCOME TAXES (CONTINUED)
The differences between the total income tax expense and the income tax
expense computed using the applicable federal income tax rate were as follows
for the years ended December 31:
1998 1999 2000
------------------------------------------
(In Thousands)
Computed "expected" federal income tax
provision (benefit) $4,410 $(30) $(10,845)
Increase (decrease) in income taxes
resulting from:
State income taxes, net 669 (4) (1,612)
Other adjustments, net (14) - 68
Increase in valuation allowance - - 5,132
------------------------------------------
$5,065 $(34) $ (7,257)
==========================================
8. LEASES
The Company leases office facilities and equipment in Phoenix, Arizona
and in San Diego, California. The leases are structured as operating leases, and
the Company incurred related rent expense in the amounts of $198,000, $617,000
and $1,122,000 during 1998, 1999 and 2000, respectively. Commitments for future
minimum rentals are presented below for the years ending December 31 (in
thousands):
2001 $1,334
2002 1,195
2003 1,005
2004 541
-------
$4,075
=======
The Company leases certain property and equipment through capital
leases. These long-term leases are noncancelable and expire on varying dates
through 2003. At December 31, 1999 and 2000, the cost of assets under capital
leases is $1,605,000 and $2,440,000, respectively. The related accumulated
amortization for the years ended December 31, 1999 and 2000 was $171,000 and
$454,000, respectively. Amortization of assets under capital leases is included
in depreciation and amortization expense. Future minimum lease payments under
capital lease obligations consist of the following for the years ending December
31 (in thousands):
2001 $1,171
2002 993
2003 352
2004 79
------
2,595
Less amount representing interest (362)
------
$2,233
======
114
9. EXTRAORDINARY CHARGE
In connection with the early extinguishment of debt under one of the
Company's previous bank credit agreements, the Company recognized an
extraordinary loss in 1998 of $180,000, net of income tax benefit of $115,000,
resulting from payment of prepayment fees and penalties.
10. COMMON STOCK WARRANTS
In September 1998, MCM Capital issued common stock warrants in
connection with a three-month line-of-credit agreement entered into by the
Company. The warrants were valued at $130,000 on the date of issuance, which was
recorded as debt discount, and amortized to interest expense during 1998. In
connection with the expiration of the line-of-credit agreement in December 1998,
the warrants were returned to the Company at no cost.
In connection with the issuance of $10,000,000 of 12% senior notes to
an institutional investor in January 2000, the Company issued warrants to the
investor and to Triarc to acquire up to 428,571 and 100,000 shares,
respectively, of common stock of the Company at an exercise price of $0.01 per
share. In addition, the Company paid a fee to Triarc in the amount of $200,000
in consideration of Triarc's guarantee of this indebtedness. The Company engaged
an independent valuation firm to determine the allocation of the $10,000,000
principal amount between the notes and the warrants. The warrants were valued at
$3.05 per share and, thus, recorded as a component of stockholders' equity in
the amount of $1,611,000 with the same amount recorded as debt discount relating
to the $10,000,000 note payable. The $1,611,000 debt discount is being amortized
as interest expense over the five-year exercise period of the warrants resulting
in a remaining debt discount balance of $1,516,000 at December 31, 2000.
In connection with the execution of the $75,000,000 financing facility
that closed on December 20, 2000 (see Note 6), MCM Capital issued warrants to
purchase up to 621,576 shares of common stock of the Company at $1.00 per share,
of which 155,394 were exercisable at December 31, 2000. The remaining warrants
become exercisable in three equal tranches, each triggered at the time MRC
Receivables Corp. has drawn an aggregate of $22.5 million, $45.0 million and
$67.5 million against the facility.
In connection with the execution of the $2,000,000 revolving credit
agreement on October 31, 2000 (see Note 6), the Company issued warrants to
purchase 50,000 shares of the Company's common stock at $0.01 per share. The
warrants were valued at $24,000 and are recorded as a component of stockholders'
equity. Additional warrants are issuable at such time that the Company draws
against or renews the line of credit.
11. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Salary Deferral Plan (the "Plan")
whereby eligible employees may voluntarily contribute up to a maximum of 15% of
compensation, subject to Internal Revenue Code limitations. Company management
may match a percentage of employee contributions at its discretion. Employer
matching contributions and administrative costs relating to the Plan totaled
$30,000, $84,000 and $79,000 for 1998, 1999 and 2000, respectively.
115
12. STOCK-BASED COMPENSATION
During 1998, 1999 and 2000, the Company granted stock options to
purchase shares of its common stock in connection with executive employment
agreements. These options become exercisable over the next three to five years
in varying amounts depending on the terms of the individual option agreements
and have a term of 10 years. Since the exercise price of the stock options was
equal to the estimated market value of the underlying common stock at the date
of grant, no compensation expense was recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for these stock options under the fair-value method of SFAS No. 123. The fair
value for options granted during 1998 was estimated at the date of grant using
the minimum-value method with the following assumptions: risk-free interest rate
of 5.1%, dividend yield of 0%, an estimated market value of the Company's common
stock on the date of grant of $3.04 per share and an expected life of the
options of 10 years.
The fair value for options granted was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 1999 and 2000:
1999 2000
----------------------
Risk free interest rate 6% 6%
Dividend yield 0% 0%
Volatility factors of the expected market price of
the Company's common stock 33.6% 64.0%
Weighted-average expected life of options 10 years 10 YEARS
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except per share amounts):
1999 2000
--------------------------
Pro forma net income (loss) $ (150) $(24,122)
Pro forma earnings per share:
Basic (0.03) (3.25)
Diluted (0.03) (3.25)
116
12. STOCK-BASED COMPENSATION (CONTINUED)
A summary of the Company's stock option activity and related
information is as follows:
WEIGHTED-
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE EXERCISABLE
--------------------------------------------------------------
Outstanding at December 31, 1997 -- $ -- $ -- --
Granted 98,823 $ 3.04 $ 3.04
---------
Outstanding at December 31, 1998 98,823 $ 3.04 $ 3.04 --
Granted 175,000 $4.13 - $10.00 $ 7.68
---------
Outstanding at December 31, 1999 273,823 $3.04 - $10.00 $ 6.00 32,941
Granted 1,250,000 $ 1.00 $ 1.00
Expired (273,823) $ 6.00 $ 6.00
---------
Outstanding at December 31, 2000 1,250,000 $ 1.00 $ 1.00 --
=========
The following table summarizes outstanding and exercisable options at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE OUTSTANDING PRICE
- --------------- ----------- --------- ------------ ---------
$ 1.00 1,250,000 $ 1.00 - $ -
13. PUBLIC OFFERING OF COMMON STOCK
MCM Capital filed a registration statement with the Securities and
Exchange Commission for an underwritten initial public offering (the IPO) of its
shares of common stock. On June 25, 1999, prior to the IPO, MCM Capital merged
with Midland Corporation of Kansas in which:
- MCM Capital was the surviving corporation.
- The authorized capital stock of the surviving corporation consists of
50,000,000 shares of $.01 par value common stock and 5,000,000 shares of
$.01 par value preferred stock.
- The stockholders of Midland Corporation of Kansas received 4.941 shares of
MCM Capital common stock for each share of Midland Corporation of Kansas
common stock outstanding, having the effect of a 4.941-to-1 stock split.
All share and per share information was adjusted to give retroactive
effect to the change in the number of shares outstanding as a result of the
merger.
117
13. PUBLIC OFFERING OF COMMON STOCK (CONTINUED)
On July 14, 1999, the Company sold 2,250,000 shares of common stock at
$10 per share in its IPO. The Company received net proceeds of approximately
$19,700,000 million after payment of all fees and expenses.
14. CONTINGENT LIABILITIES
There are a number of lawsuits or claims pending or threatened against
Midland Credit. In general, these lawsuits or claims have arisen in the ordinary
course of our business and involve claims for actual damages arising from the
alleged misconduct of our employees or our alleged improper reporting of credit
information. Although litigation is inherently uncertain, based on past
experience, and the information currently available to us and the possible
availability of insurance and/or indemnification from the originating
institutions in some cases, we do not believe that the pending or threatened
litigation or claims will have a material adverse effect on our operations or
financial condition.
15. SUBSEQUENT EVENTS
In conjunction with the $75,000,000 secured financing facility
discussed in Note 6, the Company purchased three additional receivable
portfolios during February 2001 with an aggregate purchase price of
approximately $4,136,000 resulting in associated additional debt of $3,758,000
with maturities ranging from seven to 14 months. The assets pledged under this
financing facility, together with their associated cash flows, would not be
available to satisfy claims of general creditors of the Company.
In January 2001, the Company converted $633,000 in interest payable on
the senior notes discussed in Note 6 to additional 12% senior notes due January
15, 2006.
In February 2001, the Company filed a lawsuit against one of the
issuers from whom the Company had previously purchased receivable portfolios.
Among other matters, the complaint alleges that some of the receivable
portfolios previously purchased contained ineligible receivables. Pursuant to
the Warehouse Securitization 99-A and Securitization 99-1 transaction documents
all net recoveries will be paid to the noteholders thereunder as principal
payments.
In the first quarter of 2001, the Company extended the $2,000,000
standby line of credit issued by certain affiliates of the Company through March
31, 2001. The Company has not drawn any funds against the line as of the date of
the report.
118
16. QUARTERLY INFORMATION (UNAUDITED)
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------
(In Thousands, Except Per Share Amounts)
1999
Revenues $4,200 $ 5,541 $ 8,205 $10,212
Total operating expenses 5,443 5,908 6,810 8,122
Net income (loss) (824) (437) 507 703
Basic income (loss) per share (0.17) (0.09) 0.07 0.10
Diluted income (loss) per share (0.17) (0.09) 0.07 0.10
2000
Revenues $7,887 $10,054 $10,161 $ 8,458
Total operating expenses 7,669 29,679 8,838 13,463
Net loss (2,191) (16,000) (629) (4,910)
Basic loss per share (0.30) (2.17) (0.08) (0.65)
Diluted loss per share (0.30) (2.17) (0.08) (0.65)
119