<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________.
COMMISSION FILE NUMBER: 000-26489
MCM CAPITAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 48-1090909
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5775 ROSCOE COURT
SAN DIEGO, CALIFORNIA 92123
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(877) 445 - 4581
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 last 90 days.
Yes [X] No [ ]
There were 7,591,131 shares of common stock outstanding as of October 31,
2000.
<PAGE> 2
MCM CAPITAL GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets -- December 31, 1999 and
September 30, 2000 ........................................................... 2
Condensed Consolidated Statements of
Operations -- Three months ended September 30,
1999 and 2000 and nine months ended September 30, 1999 and 2000 ............ 3
Condensed Consolidated Statements of Cash Flows -- Nine months ended September 30,
1999 and 2000 .............................................................. 4
Notes to Condensed Consolidated Financial Statements ............................. 6
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results
of Operations .............................................................. 14
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk ................... 21
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings ............................................................ 23
Item 3 -- Defaults Upon Senior Securities .............................................. 23
Item 6 -- Exhibits and Reports on Form 8-K ............................................. 23
Signatures ............................................................................. 24
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCM CAPITAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 (A) 2000
---------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash ...................................................................... $ 352 $ 2,714
Restricted cash ........................................................... 2,939 3,389
Investment in receivable portfolios, net (Note 4) ......................... 57,473 30,545
Retained interest in securitized receivables (Note 5) ..................... 30,555 34,973
Property and equipment, net (Note 6) ...................................... 7,943 7,940
Other assets .............................................................. 2,278 3,011
-------- --------
$101,540 $ 82,572
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities .................................. $ 10,631 $ 6,189
Servicing liability (Note 5) .............................................. 1,430 --
Notes payable and other borrowings (Notes 5 and 7) ........................ 47,418 58,417
Capital lease obligations ................................................. 1,262 2,451
Deferred income tax liability ............................................. 7,771 --
-------- --------
Total liabilities ......................................................... 68,512 67,057
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized, 7,191,131
shares issued and outstanding at December 31, 1999 and
7,591,131 shares issued and outstanding at September 30, 2000 ........ 72 76
Common stock warrants (Note 7) ....................................... -- 1,610
Additional paid in capital ........................................... 19,777 20,448
Accumulated other comprehensive income ............................... 4,321 3,343
Retained earnings (accumulated deficit) .............................. 8,858 (9,962)
-------- --------
Total stockholders' equity ................................................ 33,028 15,515
-------- --------
Total liabilities and stockholders' equity ................................ $101,540 $ 82,572
======== ========
</TABLE>
(A) Derived from the audited consolidated financial statements as of December
31, 1999
See accompanying notes to condensed consolidated financial statements
2
<PAGE> 4
MCM CAPITAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 2000 1999 2000
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Income from receivable portfolios .......... $ 4,401 $ 4,035 $ 6,646 $ 11,672
Income from retained interest .............. 2,051 3,133 5,556 8,486
Gain on sales of receivable portfolios ..... -- -- 17 --
Servicing fees and related income .......... 1,753 2,993 5,727 7,944
-------- -------- -------- --------
Total revenues: ................................. 8,205 10,161 17,946 28,102
Operating expenses:
Salaries and employee benefits ............. 4,989 6,628 13,181 17,913
Other operating expenses ................... 916 1,574 2,571 4,337
General and administrative expenses ........ 641 1,217 1,712 3,593
Depreciation and amortization .............. 264 563 697 1,567
Provision for portfolio losses ............. -- (1,144) -- 19,500
Restructuring charges (Note 3) ............. -- -- -- 1,335
-------- -------- -------- --------
Total operating expenses ........................ 6,810 8,838 18,161 48,245
-------- -------- -------- --------
Income (Loss) before other income and expense and
income taxes ......................... 1,395 1,323 (215) (20,143)
Other income and expense:
Interest expense ........................... (572) (2,164) (1,213) (6,040)
Other income (expense) (Note 4) ............ 22 46 170 (102)
-------- -------- -------- --------
Total expense ................................... (550) (2,118) (1,043) (6,142)
-------- -------- -------- --------
Income (Loss) before income taxes ............... 845 (795) (1,258) (26,285)
(Provision for) Benefit from Income Tax ......... (338) 166 503 7,464
-------- -------- -------- --------
Net Income (Loss) ............................... $ 507 $ (629) $ (755) $(18,821)
======== ======== ======== ========
Basic and diluted loss per share:
Net Income (Loss) .......................... $ 0.07 $ (0.08) $ (0.14) $ (2.55)
======== ======== ======== ========
Shares used for computation (in thousands):
Basic ...................................... 6,849 7,591 5,584 7,383
Diluted .................................... 6,893 7,591 5,584 7,383
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 5
MCM CAPITAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
--------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (755) $(18,821)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................................... 697 1,567
Amortization of loan costs and debt discount ............................ 94 996
Gain on sales of receivable portfolios .................................. (17) --
Loss on sales of property and equipment ................................. -- 477
Deferred income tax benefit ............................................. (503) (7,464)
Income accrued on retained interest ..................................... (5,556) (8,486)
Amortization of servicing liability ..................................... (1,707) (1,430)
Settlement of amount payable under receivable portfolio purchase contract -- (2,322)
Writeoff of basis of settled portfolios ................................. -- 427
Increase in restricted cash ............................................. (2,455) (450)
(Increase) decrease in service fee receivable ........................... (331) 379
Provision for portfolio losses .......................................... -- 19,500
Decrease (increase) in other assets ..................................... (112) (163)
Note payable issued in lieu of interest payment ......................... -- 613
Increase (decrease) in accounts payable and accrued liabilities ......... (63) (3,833)
-------- --------
Net cash used in operating activities ................................... (10,708) (19,010)
-------- --------
Cash flows from investing activities:
Net (accretion) collections applied to principal
of receivable portfolios ................................................ (2,397) 12,522
Purchases of receivable portfolios, net ....................................... (35,837) (3,538)
Collections of retained interest and cash reserves ............................ -- 2,791
Proceeds from sales of receivable portfolios .................................. 108 17
Cash acquired in acquisition of assets from West Capital Financial Svcs. Corp. -- 9
Proceeds from the sale-leaseback of property and equipment .................... -- 607
Proceeds from sale of property and equipment .................................. -- 400
Purchases of property and equipment ........................................... (1,609) (980)
-------- --------
Net cash (used in) provided by investing activities ..................... (39,735) 11,828
-------- --------
</TABLE>
4
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MCM CAPITAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
-------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable and other borrowings ......................... 61,003 67,117
Repayments of notes payable and other borrowings ......................... (32,830) (55,282)
Capitalized loan costs relating to financing arrangements ................ (1,370) (1,743)
Proceeds from issuance of common stock in Initial Public Offering ........ 22,500 --
Payment of capitalized costs relating to public offering of common stock . (2,781) --
Net repayment of capital lease obligation ................................ (83) (548)
-------- --------
Net cash provided by financing activities .......................... 46,439 9,544
-------- --------
Net increase (decrease) in cash ............................................... (4,004) 2,362
Cash at beginning of period ................................................... 4,658 352
-------- --------
Cash at end of period ......................................................... $ 654 $ 2,714
======== ========
Supplemental schedule of noncash investing and financing activities:
Assets acquired under capital leases ..................................... -- $ 1,130
Discount applied to Senior Notes for issuance of warrants, net ........... -- 1,449
Acquisition of assets and assumption of certain liabilities under purchase
agreement with West Capital Financial Services Corp. (Note 2) ...... -- --
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 7
MCM CAPITAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
MCM Capital Group, Inc. ("MCM") is a holding company whose principal asset
is its investment in Midland Credit Management, Inc. ("Midland Credit") and its
subsidiaries (collectively referred to herein as the "Company"). The Company is
a financial services company specializing in the recovery, 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
to the extent available and borrowings from third parties.
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of the Company,
however, the accompanying condensed consolidated financial statements contain
all adjustments consisting only of normal recurring adjustments, except for the
provision recorded for portfolio losses, necessary to present fairly the
Company's financial position as of December 31, 1999 and September 30, 2000, its
results of operations for the three-month and nine-month periods ended September
30, 1999 and 2000 and its cash flows for the nine-month periods ended September
30, 1999 and 2000 (see Note 4). This information should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 filed
with the Securities and Exchange Commission. Certain statements in these notes
to the condensed consolidated financial statements constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve risks, uncertainties and other factors which
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
express or implied by such forward-looking statements. See "Part II-Other
Information."
NOTE 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 MCM, completed the acquisition of
certain operating assets of WCFSC, Inc., formerly known as West Capital
Financial Services Corp., a California corporation ("West Capital"), and the
assumption of certain operating liabilities of West Capital, pursuant to an
Asset Purchase Agreement, dated May 11, 2000, between MAC and West Capital (the
"Purchase Agreement") (collectively the "West Capital Transaction"). In
connection with the transaction, MCM entered into a Guaranty for the benefit of
West Capital to guarantee certain obligations of MAC with regard to the
transaction. West Capital is a majority owned subsidiary of Sun America, Inc.
The consideration for the acquisition consisted of 375,000 shares of
MCM's common stock and the assumption of approximately $1.75 million of certain
liabilities. The 375,000 shares had a value of approximately $632,812 based on a
closing price of $1.6875 per share on May 22, 2000, as reported by NASDAQ
National Market.
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 has continued to use those assets in similar
operations. As part of the
6
<PAGE> 8
transaction, all of the previous employees of West Capital were offered
employment by Midland Credit.
In a separate but related transaction, MCM 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, 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's common stock, 10,000 shares of
Redeemable Preferred Stock of WCFSC Special Purpose Corporation II (the
"Preferred Stock"), and a WCFSC Consumer Receivables Recovery Trust 1995-1 Note
(the "Note"), with a remaining principal balance of approximately $228,000. The
25,000 shares of MCM common stock had a value of approximately $42,187 based on
a closing price of $1.6875 per share on May 22, 2000 as reported by NASDAQ
National Market. The 10,000 shares of Preferred Stock and the Note were both
previously acquired by MCM in a separate transaction with SunAmerica Inc., for a
nominal fee.
Following are the assets acquired stated at their allocated cost
basis, based upon their relative values for accounting purposes at the time of
acquisition together with the liabilities assumed (amounts in thousands):
<TABLE>
<CAPTION>
WCFSC WEST
SPC CAPITAL
------ ------
<S> <C> <C>
Cash ................................... $ -- $ 9
Investment in receivable portfolios, net 42 1,958
Property and equipment, net ............ -- 323
Other assets ........................... -- 87
------ ------
Total assets acquired ............. $ 42 $2,377
====== ======
Accounts payable ....................... $ -- $ 568
Accrued salaries & wages ............... -- 1,066
Other accrued expenses ................. -- 110
------ ------
Total liabilities assumed ......... $ -- $1,744
====== ======
</TABLE>
In a separate but related transaction, Midland Credit became the successor
servicer to a pool of charged-off consumer accounts that are 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 earned a servicing fee for collections of these
receivables during the period from May 22, 2000 (date of acquisition) through
September 30, 2000 of $2,853,000 for the collections during that period.
NOTE 3 - RESTRUCTURING CHARGES
In conjunction with the West Capital Transaction, certain former officers
of West Capital were hired as officers of the Company, replacing certain
officers of the Company, which resulted in severance charges of approximately
$839,000 for the nine months ended September 30, 2000.
Effective June 29, 2000, the Company closed its operations center in
Hutchinson, KS. In conjunction with this closing, the Company recorded severance
charges of approximately $210,000 for the approximately 93 employees terminated.
In addition, the Company recorded a charge of approximately $286,000 for the
nine months ended September 30, 2000 to write-down the Hutchinson, KS building
to its fair market value as determined by the sale of the property which closed
on July 20, 2000 for $400,000.
7
<PAGE> 9
NOTE 4 - INVESTMENT IN RECEIVABLE PORTFOLIOS
The Company accounts for its investment in receivable portfolios, including
those acquired from West Capital as described in Note 2, 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, each static pool is initially recorded at cost.
Historically, the Company has accounted 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 has been accrued based on the effective interest rate determined for
each pool applied to each pool's original cost basis, adjusted for unpaid
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 when
the anticipated future cash flow projections were determined to be reasonably
estimable.
The Company monitors impairment of receivable portfolios based on projected
future cash flows of each portfolio compared to each portfolio's carrying amount
in those cases where the projected future cash flows are determined to be
reasonably estimable. The discount rate in these instances 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 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
present value of expected future cash flows. No provision for losses was
recorded in 1999.
During the first quarter of 2000, the Company determined that twenty-two 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 appeared to be
the result of non-compliance of the receivable portfolios with covenants and
representations contained in the related purchasing contracts. At that time, the
Company was unable to determine the fair value of these portfolios, as it was
unable to reasonably estimate the amount and timing of anticipated collections.
Therefore, the Company ceased accrual of income on these portfolios effective
January 1, 2000 and provided an estimated provision for portfolio losses of
$2,059,000 in the first quarter of 2000. 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.
During the second quarter of 2000, the Company used proprietary
statistical models that were acquired through the West Capital Transaction to
estimate the recoverable value of its portfolios, and thus reasonably estimate
the fair value of each portfolio. As part of that process, the Company isolated
the portions of those portfolios containing what the Company considers to be
ineligible assets. Other than as discussed in the paragraph that follows, the
Company has not recorded an accrual for any potential recoveries, as such
amounts are not deemed to be reasonably estimated or probable at this time.
Based on the results of the Company's fair value calculations and statistical
analysis during the second quarter, an additional impairment charge of
$18,586,000 was recorded against the carrying value of the portfolios of
$34,400,000 during the three months ended June 30, 2000. These portfolios remain
on non-accrual as of September 30, 2000, and the full amount of collections from
these portfolios has been applied to the receivable portfolio carrying amount
since January 1, 2000. However, any collections in excess of the net book value
of an individual receivable portfolio are recorded as income and for the three
months ended September 30, 2000, approximately $153,000 of collections in excess
of the net book value of certain receivable portfolios were recorded as income.
8
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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 ($2,322,000) for certain
ineligible receivables that were owned by Midland Credit and were unencumbered.
In the second quarter of 2000, the Company recorded a $1,144,000 provision for
uncollectible accounts related to the ineligible receivables. In connection with
the Settlement, Midland Credit (i) reversed the $2,322,000 liability pertaining
to the original purchase price, (ii) recorded a recovery of the $1,144,000
provision for uncollectible accounts previously recorded on such receivables,
(iii) applied $751,000 of collections on these portfolios to income from
receivable portfolios and (iv) reversed the $427,000 remaining balance of the
receivable portfolios. As these receivable portfolios have no cost basis, all
collections are recorded as income. After September 30, 2000, Midland Credit, as
the servicer of Securitization 99-1, received $651,000 from the Issuer in
payment for the return to the Issuer of certain ineligible receivables that were
previously purchased from the Issuer. As a result of the amendment to
Securitization 99-1 discussed in Note 5 below, this recovery is subject to the
lien in Securitization 99-1. In November 2000, $622,000, net of $29,000 in
attorney fees, was paid to the noteholders in Securitization 99-1 in payment of
amounts owing on the non-recourse notes payable. The Company is considering
possible remedies that may be available to it from other entities from which
ineligible receivables were purchased.
The following summarizes the changes in the balance of the investment in
receivable portfolios for the following periods (in thousands):
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
December 31, September 30,
1999 2000
------------ ------------
<S> <C> <C>
Balance at beginning of period ....................................... $ 2,052 $ 57,473
Purchase of receivable portfolios .............................. 51,969 3,538
Receivable portfolios acquired in the West Capital transaction . -- 2,000
Cost of receivable portfolios sold ............................. (260) (17)
Net accretion (collections) applied to
principal of receivable portfolios ....................... 3,712 (12,522)
Writeoff of basis of settled portfolios ........................ -- (427)
Provision for portfolio losses ................................. -- (19,500)
-------- --------
Balance at end of period ............................................. $ 57,473 $ 30,545
======== ========
</TABLE>
NOTE 5 - SECURITIZATION OF RECEIVABLE PORTFOLIOS
On January 18, 2000, Midland Receivables 99-1 Corporation, a bankruptcy
remote, special purpose entity formed by the Company as a subsidiary of Midland
Credit, issued non-recourse notes in the amount of $28,900,000, bearing interest
at 9.63% per annum ("Securitization 99-1"). The notes are collateralized by
certain charged-off receivables with 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 creditors of the Company. At September 30, 2000, the
balance outstanding under these non-recourse notes was $22,487,000. (See Note 7)
As a condition to closing Securitization 99-1, Midland Credit was required
to amend the warehouse facility. At September 30, 2000, Midland Credit was in
default of certain terms of Securitization 99-1 and the warehouse facility.
However, as of October 1, 2000, the terms of Securitization 99-1 and the
warehouse facility were amended and the Company was in compliance with all
amended terms. The amendments include that Midland
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<PAGE> 11
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, paid on a weekly basis. In addition, the amendments
increase the interest rate on notes (i) in Securitization 99-1 to 10% and (ii)
the warehouse facility to one week LIBOR plus 117 basis points. The warehouse
facility was also converted to a term loan with a final payment date of December
15, 2004. Midland Credit is also required to pay to the noteholders any
recoveries after September 22, 2000, net of attorney fees and certain costs,
from certain issuers that previously sold the securitized receivables to Midland
Credit.
On December 30, 1998, Midland Receivables 98-1 Corporation, a
bankruptcy-remote, special-purpose entity formed by the Company, as a subsidiary
of Midland Credit, issued non-recourse notes in the principal amount of
$33,000,000, which had a fixed rate of interest at 8.63% (the "1998
Securitization"). 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. The
1998 Securitization was accounted for as a sale under the provisions of
Statement of Financial Accounting Standards No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" (SFAS No.
125). The Company recorded a retained interest and a servicing liability and
recognized a gain of approximately $9,300,000 in 1998.
In connection with the 1998 Securitization, the Company received a
servicing fee equal to 20% of the gross monthly collections of the securitized
receivables through repayment of the notes on September 11, 2000 at which time
all collections of these receivables are retained by the Company as collections
of the retained interest and thereby reduce the balance of the retained
interest. During the nine months ended September 30, 1999 and September 30, 2000
the Company recorded servicing fees of $4,020,000 and $3,662,000, respectively,
for collections during such periods. The benefits of servicing the securitized
receivables did not adequately compensate the Company for performing the
servicing; therefore, the Company recorded a servicing liability of $3,607,000
in accordance with SFAS No. 125. During the nine months ended September 30, 1999
and September 30, 2000, the Company recorded amortization of this servicing
liability of $1,707,000 and $1,430,000, respectively. In conjunction with the
repayment of the note payable under the 1998 Securitization, the servicing
liability was fully amortized during the third quarter of 2000.
As a result of the 1998 Securitization, the Company recorded a retained
interest of $23,986,000 in securitized receivables. The retained interest was
held by 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 creditors of the Company. The
retained interest was collateralized by the credit card receivables that were
securitized, adjusted for amounts owed to the note holders. The Company
recognized accretion of $5,556,000 and $8,486,000 on the retained interest
during the nine months ended September 30, 1999 and September 30, 2000,
respectively, together with certain other changes as shown in the table below
resulting in a retained interest balance of $34,973,000 at September 30, 2000.
In addition, the Company reported other comprehensive income in 1998 with
respect to the retained interest recorded as a separate component of
stockholders' equity with an accumulated balance of $3,343,000, net of related
income taxes, at September 30, 2000.
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<PAGE> 12
The following summarizes the changes in the balance of the retained
interest in the 1998 Securitization for the nine months ended September 30, 2000
(in thousands):
<TABLE>
<CAPTION>
Fair
Cash Amortized Unrealized Market
Reserves Cost Gain Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period .... $ 660 $ 22,694 $ 7,201 $ 30,555
Interest accrued ............ -- 8,486 -- 8,486
Cash reserves refund ........ (660) -- -- (660)
Retained interest collections -- (2,132) -- (2,132)
Decrease in unrealized gain . -- -- (1,276) (1,276)
-------- -------- -------- --------
Balance at end of period .......... $ -- $ 29,048 $ 5,925 $ 34,973
======== ======== ======== ========
</TABLE>
NOTE 6 - PROPERTY AND EQUIPMENT
The following is a summary of the components of property and equipment (in
thousands) (see Note 3):
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
----------- ------------
<S> <C> <C>
Property and equipment, at cost .............. $10,041 $10,628
Less accumulated depreciation and amortization 2,098 2,688
------- -------
$ 7,943 $ 7,940
======= =======
</TABLE>
NOTE 7 - NOTES PAYABLE AND OTHER BORROWINGS
The Company is obligated under borrowings as follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
----------- ------------
<S> <C> <C>
Revolving line of credit, 8.50%, unsecured,
Due April 15, 2001 ....................................... $13,615 $14,616
Warehouse facility, 0.8% over LIBOR, 7.45% at
September 30, 2000 ....................................... 33,779 12,140
Notes payable, Securitization 99-1, 9.63% (Note 5) ............. -- 22,487
12% Senior Notes due January 12, 2007 (net of unamortized debt
discount of $1,449,000 for value of common stock warrants) -- 8,551
12% Senior Notes due July 1, 2005 .............................. -- 613
Various installment obligations, 7.7% .......................... 24 10
------- -------
$47,418 $58,417
======= =======
</TABLE>
On January 12, 2000, the Company issued $10,000,000 in principal amount of
12% Series No. 1 Senior Notes (the "Notes") to an institutional investor. The
Notes are unsecured obligations of the Company but are guaranteed by Midland
Credit, MAC and Triarc Companies, Inc., a shareholder of the Company ("Triarc").
Triarc beneficially owns approximately 9.6% of the outstanding common stock of
the Company. In connection with the issuance of the Notes, the Company issued
warrants to the institutional investor and 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 results
of the valuation valued the warrants at approximately $3.05 per share. This
valuation of $3.05 per share results in the warrants being included
11
<PAGE> 13
as a component of stockholders' equity in the amount of $1,611,000 with the same
amount recorded as a reduction of the $10,000,000 note payable. This $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
$1,449,000 at September 30, 2000. In addition, the Notes require semi-annual
interest payments each January 15 and July 15 except that during the first two
years the Notes are outstanding the interest may be repaid 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 $613,333.
The Company entered into the Fourth Amended and Restated Promissory Note
effective June 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, 2001. Under this revolving credit facility, there was $1,385,000 and
$384,000 available as of December 31, 1999 and September 30, 2000, respectively.
Borrowings under this unsecured revolving line of credit are guaranteed by
certain stockholders of the Company, including Triarc. Triarc has purchased a
$15,000,000 certificate of deposit from such 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.
On March 31, 1999, Midland Credit, through a bankruptcy remote subsidiary,
entered into a $35,000,000 securitized receivables acquisition facility or
"warehouse facility" and has a balance outstanding under this facility of
$12,140,000 as of September 30, 2000. The terms of the warehouse facility were
originally such that it had a two-year revolving funding period, which was set
to expire April 15, 2001. During the first quarter of 2000, Midland Credit
determined that twenty-two of its receivable portfolios that were acquired
during the previous twelve months were not performing in a manner consistent
with its expectations and historical results for the specific types of
receivables within those portfolios. As a result of the portfolio performance
issues as measured on September 30, 2000, the Company was in default with
respect to Securitization 99-1 and the warehouse facility. As discussed in Note
5, as of October 1, 2000, Securitization 99-1 and the warehouse facility
were amended such that the Company is currently in compliance with all
provisions of these two facilities.
Although the Company is currently in compliance with all provisions of
Securitization 99-1 and the warehouse facility, if an event of default occurs
and a waiver is not effective at such time, Midland Credit may be removed as
servicer of the receivables in Securitization 99-1 and the warehouse facility.
The note insurer for Securitization 99-1 and the warehouse facility (or note
holders under certain circumstances) can waive the event of default or, if the
event of default is not waived, can elect to have Midland Credit removed as the
servicer. Should such an event of default occur, Midland Credit believes that it
would have sufficient liquidity to fund its operations and working capital
needs, provided the event of default is waived or the event of default is not
waived and the election is made not to remove Midland Credit as the servicer.
If, however, an event of default occurs and the controlling party removes
Midland Credit as servicer, this would cause an event of default under the Notes
and allow the Notes to be accelerated. If the Notes are thereby accelerated,
Midland Credit and MCM may be required to, among other things, (i) reduce the
number of employees and overall scope of operations, (ii) sell certain of its
receivables portfolios for cash, (iii) reduce any future capital expenditures,
(iv) pursue strategic alternatives such as a sale, merger or recapitalization of
MCM or Midland Credit or (v) seek protection under reorganization, insolvency or
similar laws.
12
<PAGE> 14
NOTE 8 - COMPREHENSIVE LOSS
The following is a summary of the comprehensive loss components (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
-------- --------
<S> <C> <C>
Net loss ....................... $ (755) $(18,821)
Decrease in unrealized gain on
"available for sale" investments (333) (978)
-------- --------
Comprehensive loss ............. $ (1,088) $(19,799)
======== ========
</TABLE>
The unrealized gain pertains to the retained interest from the 1998
Securitization. The retained interest is carried at fair value in accordance
with SFAS 115 and any changes in fair value are recorded as a component of other
comprehensive income, net of taxes.
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report on Form 10-K of MCM Capital Group, Inc. ("MCM" or collectively
with Midland Credit Management, Inc. ("Midland Credit") and its subsidiaries,
the "Company") for the year ended December 31, 1999 as filed with the Securities
and Exchange Commission. A general description of the Company's industry and a
discussion of recent trends affecting that industry are contained therein.
Certain statements under this caption may constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve risks, uncertainties and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance
or achievements express or implied by such forward-looking statements. For those
statements the Company claims the protection of the safe harbor for
forward-looking statements contained in the Reform Act. See "Part II-Other
Information."
On May 22, 2000, Midland Acquisition Corporation, a Delaware corporation
("MAC") and a wholly owned subsidiary of MCM, completed the acquisition of
certain operating assets of WCFSC, Inc. formerly known as West Capital Financial
Services Corp., a California corporation ("West Capital"), and the assumption of
certain operating liabilities of West Capital, pursuant to an Asset Purchase
Agreement dated May 11, 2000 between MAC and West Capital (the "Purchase
Agreement") (collectively the "West Capital Transaction"). In connection with
the transaction, MCM entered into a Guaranty for the benefit of West Capital to
guarantee certain obligations of MAC with regard to the transaction. The
Company's results of operations and liquidity and capital resources as discussed
below include the effects of the West Capital Transaction from the date of
acquisition.
In a transaction that was separate but related to the West Capital
Transaction, Midland Credit became the successor servicer to a pool of
charged-off consumer accounts that are owned by West Capital Receivables
Corporation I, a California corporation and wholly-owned, bankruptcy-remote
subsidiary of West Capital (the "Servicing Transaction"). Midland Credit will
receive a servicing fee for collections of these receivables.
In a separate but related transaction, MCM 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, 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 "Trust Transaction").
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
Revenues. Total revenues for the nine months ended September 30, 2000 were
$28.1 million compared to total revenues of $17.9 million for the nine months
ended September 30, 1999, an increase of $10.2 million or 57%. The increase in
revenues was the result of an increase in income from receivable portfolios of
$5.1 million; an increase in income on retained interest of $2.9 million; and an
increase in servicing fees and related income of $2.2 million.
Income from receivable portfolios increased $5.1 million or 76%, from $6.6
million in the nine months ended September 30, 1999 to $11.7 million for the
nine months ended September 30, 2000. Approximately 55%, or $2.8 million, of
this increase is attributable to the receivable portfolios purchased in the West
Capital Transaction and the Trust Transaction. The remaining increase in income
from receivable portfolios is due to a $30.4 million, or
14
<PAGE> 16
181% increase, in the average outstanding balance of our investment in
receivable portfolios during the period, from an average outstanding balance of
$16.8 million during the nine months ended September 30, 1999 to an average of
$47.2 million during the nine months ended September 30, 2000. However, as
further discussed below, we discontinued the accrual of income on certain of the
Company's receivable portfolios effective January 1, 2000. The increase in the
average outstanding balance of our investment in receivable portfolios is the
result of (i) the purchase of $52.0 million and $3.2 million of receivable
portfolios during the year ended December 31, 1999 and the nine months ended
September 30, 2000, respectively and (ii) the December 30, 1998 securitization
of receivable portfolios with a carrying amount of $33.8 million which
significantly reduced the receivable balance in early 1999. The December 30,
1998 securitization was accounted for as a sale in accordance with Statement of
Financial Accounting Standards No. 125 and, thus, the receivables were sold and
no longer accrue income to the benefit of MCM other than servicing fees and
income from the retained interest.
In connection with the 1998 Securitization and the related servicing
agreement, the Company recorded a retained interest in the securitized
receivables and a servicing liability. For the nine months ended September 30,
2000, we recognized income from retained interest in securitized receivables in
the amount of $8.5 million, servicing income in the amount of $3.7 million and
amortization of the servicing liability in the amount of $1.4 million which
compares to income from retained interest in securitized receivables in the
amount of $5.6 million, servicing income in the amount of $4.0 million and
amortization of the servicing liability in the amount of $1.7 million in the
nine months ended September 30, 1999. The amortization of the servicing
liability is included in servicing fees and related income over the expected
term of the securitization in the condensed consolidated statements of
operations. The notes payable under the 1998 Securitization were repaid in full
in September, 2000 and as a result, the remaining balance of the servicing
liability was amortized during the three months ended September 30, 2000. The
Company will no longer record servicing fee income with respect to these
portfolios since all future collections represent retained interest collections
and will pay down the balance of the retained interest.
Under terms of the Servicing Transaction, Midland Credit receives a
servicing fee for collections of these receivables and during the period from
May 22, 2000 (the date of the West Capital Transaction) through September 30,
2000, the Company recorded $2.9 million in servicing fees for the collections
during that period.
Total Operating Expenses. Total operating expenses were $48.2 million for
the nine months ended September 30, 2000 compared to $18.2 million for the nine
months ended September 30, 1999, an increase of $30.1 million or 166%. Total
operating expenses as a percentage of revenues were 172% for the nine months
ended September 30, 2000, compared to 101% for the nine months ended September
30, 1999. The increase in total operating expenses and increase in operating
expenses as a percentage of revenues is a result of provision for portfolio
losses of $2.1 million recorded in the first quarter of 2000 and $18.6 million
recorded in the second quarter of 2000, offset by the recovery of $1.1 million
of the provision in the third quarter, along with our significant growth,
including the acquisition of assets in the West Capital Transaction and the
hiring of additional employees related thereto. We also recorded restructuring
charges of approximately $1.3 million during the second quarter of 2000 as
further discussed below. Salaries and employee benefits increased $4.7 million,
or 36%, to $17.9 million in the nine months ended September 30, 2000 from $13.2
million in the corresponding 1999 period. Approximately $3.5 million of the
increase in salaries and employee benefits related to the addition of employees
as a result of the West Capital Transaction partially offset by a decrease of
approximately $0.8 million attributable to the closure of the Hutchinson
facility in June 2000. The growth of the Phoenix facility accounted for the
remaining increase in salaries and employee benefits and included the addition
of executive and management personnel during the second half of 1999 when a
majority of our owned receivable portfolios were purchased. In addition, an
increase in personnel was necessary to install and implement a new Davox call
management system and a related computer network in the Phoenix facility.
Further, during the nine months ended September 30, 2000, collections per
collector averaged approximately $130,238, a 67% increase over the average
collections per collector of approximately $77,840 during the nine months ended
September 30, 1999. This resulted in higher compensation for collection
personnel employed in the 2000 period.
Other operating expenses, general and administrative expenses and
depreciation and amortization expenses
15
<PAGE> 17
increased $4.5 million or 91% from $5.0 million to $9.5 million for the nine
months ended September 30, 1999 and 2000, respectively. Approximately $1.6
million of this increase is a result of expenses associated with the operations
acquired in the West Capital Transaction partially offset by a decrease of
approximately $0.5 million attributable to the closure of the Hutchinson
facility with the remaining increase of approximately $3.4 million due primarily
to the expansion of our Phoenix location, the growth in the receivable
portfolios managed by us and the resulting increase in expenses relating to the
collection of such receivable portfolios.
During the first quarter of 2000, we determined that twenty-two of our
receivable portfolios that had been acquired during 1999 were not performing in
a manner consistent with our expectations and historical results for the
specific type of receivables within those portfolios. This appeared to be the
result of non-compliance of the receivable portfolios with covenants and
representations contained in the related purchasing contracts. At that time, we
were unable to determine the fair value of these portfolios as we were unable to
reasonably estimate the amount and timing of anticipated collections. Therefore,
we ceased accrual of income on these portfolios effective January 1, 2000 and
provided an estimated provision for portfolio losses of $2.1 million in the
first quarter of 2000. In accordance with AICPA Practice Bulletin 6, we are
accounting for these portfolios under the cost recovery method until such time
that we can demonstrate our ability to estimate the amount and timing of
anticipated collections.
During the second quarter of 2000, proprietary statistical models that were
acquired through the West Capital Transaction enabled us to estimate the
recoverable value, and thus reasonably estimate the fair value, of each
portfolio. As part of that process, we isolated the portions of those portfolios
containing what we consider to be ineligible assets. Other than the $1.1 million
recovery of uncollectible accounts recorded in the third quarter, the Company
has not recorded an accrual for any potential recoveries, as such amounts are
not deemed to be reasonably estimated or probable at this time. Based on the
results of the Company's fair value calculations and statistical analysis during
the second quarter, an additional impairment charge of $18.6 million was
recorded against the carrying value of the portfolios of $34.4 million for the
three months ended June 30, 2000. These portfolios remain on non-accrual as of
September 30, 2000, and the full amount of collections from these portfolios has
been applied to the receivable portfolio carrying amount since January 1, 2000.
However, any collections in excess of the net book value of an individual
receivable portfolio will be recorded as income and for the three months ended
September 30, 2000, approximately $0.8 million of collections in excess of the
net book value of certain receivable portfolios was recorded as income.
In addition, during the second quarter of 2000, we recorded restructuring
charges of approximately $1.3 million. This related to the closure of our
Hutchinson, KS location ($0.5 million) and severance charges for certain
officers of the Company who were replaced by former West Capital officers ($0.8
million).
Other income and expenses. Total other expenses for the nine months ended
September 30, 2000 were $6.1 million compared to $1.0 million for the nine
months ended September 30, 1999. Interest expense for the nine months ended
September 30, 2000 was $6.0 million compared to $1.2 million for the nine months
ended September 30, 1999, an increase of $4.8 million. This increase is
attributable to higher average outstanding borrowings during the nine months
ended September 30, 2000 as compared to the same period in 1999. The increase in
higher outstanding borrowings reflects the $28.9 million 1999-1 Securitization
in January, 2000, the issuance of $10.0 million of 12% Senior Notes in January,
2000 and the $2.1 million increase in capital lease obligations to $2.5 million
at September 30, 2000 from $0.4 million at September 30, 1999. See "Liquidity
and Capital Resources" below for further discussion of our borrowings.
Income Tax Benefit. For the nine months ended September 30, 2000 and 1999,
we recorded income tax benefits of $7.5 million and $0.5 million, respectively,
reflecting an effective rate of 28% and 40%. The lower effective rate in 2000 is
as a result of the Company recording a valuation reserve for its deferred tax
benefits because of the Company's uncertainty of the recovery of the tax
benefits that have been recorded.
Net Loss. The resulting net loss for the nine months ended September 30,
2000 was $18.8 million compared to net loss of $0.8 million for the nine months
ended September 30, 1999.
16
<PAGE> 18
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues. Total revenues for the three months ended September 30, 2000 were
$10.2 million compared to total revenues of $8.2 million for the three months
ended September 30, 1999, an increase of 24% or $2.0 million. The increase in
revenues results from an increase in income on retained interest of $1.1 million
and an increase in servicing fees and related income of $1.2 million offset by a
decrease in income from receivable portfolios of $0.3 million.
Income from receivable portfolios decreased from $4.4 million in the three
months ended September 30, 1999 to $4.1 million in the quarter ended September
30, 2000. The $4.4 million in the 1999 period is comprised only of income
accrued on receivable portfolios, while in the 2000 period approximately $2.2
million represents the accrual of income on receivable portfolios and the
remaining $1.9 million represents income from certain receivables, which were
accounted for on the cost recovery method and became fully amortized during the
second and third quarters. The $2.2 million of income accrued on the receivable
portfolios in the three months ended September 30, 2000 is comprised of
approximately $0.7 million from the portfolios acquired in the West Capital
Transaction with the balance of $1.5 million accrued on portfolios otherwise
purchased by the Company that continue to accrue income. This $1.5 million of
income in the 2000 period was accrued on portfolios with an average net book
value of $21.7 million during that period, while in the 1999 period the Company
accrued $4.4 million of income on portfolios with an average net book value of
$32.2 million. As discussed above, the Company recorded provisions for portfolio
losses of $19.5 million during the first nine months of 2000 on certain
receivable portfolios other than those purchased in the West Capital Transaction
and the Trust Transaction, ceased the accrual of income on certain of these
portfolios and reduced the rate of income recognition on those portfolios that
did continue to accrue income. These factors together represent the underlying
cause of the decrease in the accrual of income from receivable portfolios.
In connection with the 1998 Securitization and the related servicing
agreement, the Company recorded a retained interest in the securitized
receivables and a servicing liability. For the three months ended September 30,
2000, we recognized income from retained interest in securitized receivables in
the amount of $3.1 million, servicing fees from the 1998 Securitization in the
amount of $0.8 million and amortization of servicing liability in the amount of
$0.3 million compared to income from retained interest in securitized
receivables in the amount of $2.1 million, servicing fees in the amount of $1.3
million and amortization of servicing liability in the amount of $0.5 million in
the three months ended September 30, 1999. The amortization of the servicing
liability is included in servicing fees and related income over the expected
term of the 1998 Securitization in the condensed consolidated statements of
operations. The note payable underlying the 1998 Securitization was repaid in
full on September 11, 2000. All collections associated with these receivables
are now deemed to be collections of the retained interest and will be retained
by the Company. As such, the Company will no longer record servicing fees with
respect to these receivables and the servicing liability was fully amortized
during the quarter ended September 30, 2000.
Under terms of the Servicing Transaction, Midland Credit receives a
servicing fee for collections of receivables owned by West Capital Receivables
Corporation I and during the three months ended September 30, 2000, the Company
recorded $1.8 million in servicing fees for the collections during that period.
Total Operating Expenses. Total operating expenses were $8.8 million for
the three months ended September 30, 2000 compared to $6.8 million for the three
months ended September 30, 1999, an increase of $2.0 million or 30%. Total
operating expenses as a percentage of revenues were 87% for the three months
ended September 30, 2000, compared to 83% for the three months ended September
30, 1999. The increase in total operating expenses and increase in operating
expenses as a percentage of revenues is a result of our significant growth
including the acquisition of assets in the West Capital Transaction and the
hiring of additional employees related thereto, offset by the $1.1 million
recovery related to the settled receivables. Salaries and employee benefits
increased $1.6 million, or 33%, to $6.6 million in the three months ended
September 30, 2000 from $5.0 million in the 1999 period. Approximately $2.5
million of the increase in salaries and employee benefits is a result of the
17
<PAGE> 19
addition of employees as a result of the West Capital Transaction. Offsetting
this increase was a $0.8 million decrease in salaries and employee benefits
attributable to the closure of the Hutchinson facility in June 2000 and a $0.1
million decrease attributable to lesser salaries and employee benefits at the
Phoenix location as a result of the termination of certain executive officers in
conjunction with the West Capital Transaction and fewer collectors employed in
Phoenix. During the three months ended September 30, 2000 we employed an average
of 191 collectors at our Phoenix location versus 299 in Phoenix during the third
quarter of 1999. Collections per collector, however, increased 49% to an average
of approximately $42,615 in the three months ended September 30, 2000 from
$28,630 in the three months ended September 30, 1999, resulting in higher
compensation for collection personnel employed in the 2000 period.
Other operating expenses, general and administrative expenses and
depreciation and amortization expenses increased $1.5 million or 84% from $1.8
million to $3.3 million for the three months ended September 30, 1999 and 2000,
respectively. Approximately $0.6 million of this increase is a result of the
expenses associated with the operation of the assets acquired in the West
Capital Transaction partially offset by a decrease of $0.5 million attributable
to the closure of the Hutchinson facility. The remaining increase of
approximately $1.4 million was due primarily to the expansion of our Phoenix
location, the growth in the receivable portfolios managed by us and the
resulting increase in expenses relating to the collection of such receivable
portfolios. During the third quarter, we recorded a $1.1 million recovery
related to the Settlement.
Other income and expenses. Total other expenses for the three months ended
September 30, 2000 were $2.1 million compared to total other expenses of $0.6
million for the three months ended September 30, 1999. Interest expense
increased from $0.6 million for the three months ended September 30, 1999 to
$2.2 million for the three months ended September 30, 2000. The increase
reflects higher average outstanding borrowings during the three months ended
September 30, 2000 as compared to the same period in 1999.
Income Tax Benefit. For the three months ended September 30, 2000 we
recorded an income tax benefit of $0.2 million while during the 1999 period we
recorded an income tax provision of $0.3 million reflecting an effective rate of
21% in the third quarter of 2000 and 40% in the same period in 1999. The lower
effective rate in 2000 is as a result of the Company recording a valuation
reserve for its deferred tax benefits
Net Income. Net loss for the three months ended September 30, 2000 was $0.6
million compared to net income of $0.5 million for the three months ended
September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have engaged in the business of acquiring and servicing
charged-off loan portfolios originated by national financial institutions and
major retail corporations. We made the final payment of the debt outstanding
under Securitization 98-1 on September 11, 2000 and thus, all collections
associated with those receivables now represent collections of the retained
interest.
At September 30, 2000 we had cash of $2.7 million compared to $0.4 million
at December 31, 1999. We use our $15.0 million unsecured, revolving line of
credit for working capital needs and draw and repay the revolving line of credit
on a regular basis. Our borrowing availability under this credit line was $0.4
million at September 30, 2000 ($1.3 million at October 31, 2000). In addition,
effective October 31, 2000, the Company executed an agreement with certain
affiliates of the Company as further discussed below for a $2.0 million stand-by
line of credit secured by substantially all of the assets of the Company and its
subsidiaries to be used, if necessary, for working capital purposes.
We had total recoveries on managed receivable portfolios of $49.9 million
for the nine months ended September 30, 2000, a 105% increase over the $24.3
million collected in the same period in the prior year.
On January 18, 2000, Midland Receivables 99-1 Corporation, a bankruptcy
remote special purpose entity formed by us as a subsidiary of Midland Credit,
issued non-recourse notes in the amount of $28.9 million, bearing
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<PAGE> 20
interest at 9.63% per annum ("Securitization 99-1"). The notes are
collateralized by certain charged-off receivables securitized by us with a
carrying amount of approximately $43.0 million at the time of transfer and an
initial cash reserve account of $1.4 million 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 our warehouse facility. Income from these receivable
portfolios will be recognized over the estimated life of the securitized
receivables and the receivables and corresponding debt will remain on our
balance sheet as long as Midland Credit is the servicer. The assets pledged in
the securitization transaction, together with their associated cash flows, would
not be available to satisfy claims of our creditors. At September 30, 2000, the
balance outstanding under these nonrecourse notes was $22.5 million.
In addition, as a condition to closing Securitization 99-1, Midland Credit
was required to amend the warehouse facility. At September 30, 2000, Midland
Credit was in default of certain terms of Securitization 99-1 and the warehouse
facility. However, as of October 1, 2000, the terms of Securitization 99-1 and
the warehouse facility were amended and the Company was in compliance with all
amended terms. The amendments include that Midland Credit (i) must maintain $2.0
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 $13.6
million to $7.3 million, over the period from September 30, 2000 through and
subsequent to September 30, 2001, (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,paid on a weekly
basis. In addition, the amendments increase the interest rate on the notes (i)
in Securitization 99-1 to 10% and (ii) in the warehouse facility to one week
LIBOR plus 117 basis points. The warehouse facility was also converted to a term
loan with a final payment date of December 15, 2004. Midland Credit is also
required to pay to the noteholders recoveries after September 22, 2000, net of
attorney fees and certain costs, from certain issuers that previously sold the
securitized receivables to Midland Credit. Midland Credit has been reappointed
as servicer for the fourth quarter of 2000 under Securitization 99-1 and the
warehouse facility.
Although Midland Credit is currently in compliance with all provisions of
Securitization 99-1 and the warehouse facility, if an event of default occurs
and a waiver is not effective at such time, Midland Credit may be removed as
servicer of the receivables in Securitization 99-1 and the warehouse facility.
The note insurer for Securitization 99-1 and the warehouse facility (or note
holders under certain circumstances) can waive the event of default or, if the
event of default is not waived, can elect to have Midland Credit removed as the
servicer. Should such an event of default occur, Midland Credit believes that it
would have sufficient liquidity to fund its operations and working capital
needs, provided the event of default is waived or the event of default is not
waived and the election is made not to remove Midland Credit as the servicer.
If, however, an event of default occurs and the controlling party removes
Midland Credit as servicer, such removal would cause an event of default under
the Notes more fully described below and allow the Notes to be accelerated. If
the Notes are thereby accelerated, Midland Credit and MCM may be required to,
among other things, (i) reduce the number of employees and overall scope of
operations, (ii) sell certain of its receivables portfolios for cash, (iii)
reduce any future capital expenditures, (iv) pursue strategic alternatives such
as a sale, merger or recapitalization of MCM or Midland Credit or (v) seek
protection under reorganization, insolvency or similar laws.
On January 12, 2000, we issued $10.0 million in principal amount of 12%
Series No. 1 Senior Notes (the "Notes") to an institutional investor. We used
the net proceeds of the Notes for general operating expenses. The Notes are
unsecured obligations of MCM but are guaranteed by Midland Credit and Triarc
Companies, Inc., a shareholder of MCM ("Triarc"). Triarc beneficially owns
approximately 9.6% of the outstanding common stock of MCM. In connection with
the issuance of the Notes, MCM issued warrants to the institutional investor and
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, we
paid Triarc a fee of $0.2 million in consideration of Triarc's guarantee of this
indebtedness. We engaged an independent valuation firm to determine the
allocation of the $10.0 million principal amount between the Notes and the
warrants. The results of the valuation were such that the value of the warrants
was approximately $3.05 per share. This valuation of $3.05 per share results in
the warrants being
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included as a component of stockholders' equity in the amount of $1.6 million
with the same amount recorded as a reduction of the $10.0 million note payable.
This $1.6 million debt discount is being amortized as interest expense over the
five-year exercise period of the warrants and has a remaining balance of $1.4
million at September 30, 2000.
Except for the receivable portfolios that we acquired as part of the West
Capital Transaction and the Trust Transaction discussed above, as of October 31,
2000 we have not purchased any receivables since February 2000.
We entered into the Fourth Amended and Restated Promissory Note effective
June 30, 2000 to renew our revolving line of credit. The $15.0 million revolving
line of credit carries interest at the Prime Rate and matures on April 15, 2001.
Under this revolving credit facility, there was $1.4 million and $0.4 million
available as of December 31, 1999 and September 30, 2000, respectively.
Borrowings under this unsecured revolving line of credit are guaranteed by
certain stockholders of MCM, including Triarc. Triarc purchased a $15.0 million
certificate of deposit from such lending bank, which is subject to set off under
certain circumstances if the parties to the bank guaranties and to related
agreements fail to perform their obligations thereunder. We anticipate that we
will renew this line of credit on terms that are at least as favorable as those
that currently exist.
Capital expenditures for fixed assets and capital leases were $2.1 million
during the nine months ended September 30, 2000 reflecting the installation of a
Davox call management system and other network hardware and software to support
this system. Capital expenditures were funded primarily from bank borrowings,
capital leases and recoveries on receivable portfolios.
On May 22, 2000 through a new wholly owned subsidiary, we acquired certain
operating assets of WCFSC, Inc., formerly known as West Capital Financial
Services Corp., an acquirer and servicer of distressed consumer receivables, in
exchange for 375,000 shares of MCM's common stock and the assumption of certain
operating liabilities of West Capital. MCM guaranteed certain obligations of the
new subsidiary under the agreement. In a separate but related transaction, MCM
acquired certain distressed consumer receivables from a trust formed by a
bankruptcy remote special purpose subsidiary of West Capital in exchange for
25,000 shares of MCM's common stock and certain other non-cash consideration.
The shares of MCM common stock exchanged were valued at the May 22, 2000 market
price of $1.6875.
Effective October 31, 2000, the Company executed an agreement with certain
affiliates of the Company for a $2.0 million stand-by line of credit secured by
substantially all of the assets of the Company and its subsidiaries to use, if
necessary, for working capital purposes. The funding period under the line of
credit expires on December 31, 2000. The line of credit accrues interest at 12%
per annum on any amount drawn on the line of credit and repayment would be due
in 12 equal monthly payments of principal with any unpaid principal due no later
than December 31, 2001. In addition, the lenders received warrants to acquire up
to 50,000 shares of common stock of the Company at $0.01 per share upon
execution of the agreement and may receive warrants to acquire an additional
50,000 shares of common stock of the Company at $0.01 per share if the Company
borrows any amount under the agreement.
CONTINGENCIES
We were involved in litigation involving our sale of certain receivables to
third parties in 1997. This litigation was settled and all amounts due were paid
during the nine months ended September 30, 2000. The costs and expenses relating
to the lawsuit and this settlement were expensed in the fourth quarter of 1999.
On or about July 26, 2000, Midland Credit and MAC were served with a
complaint in which each was informed that it was named as a defendant in a
lawsuit filed by Household Bank (SB), N.A., Household Receivables Acquisition
Company, and Household Card Services, Inc. (collectively, ""Plaintiffs"). West
Capital is also named as a defendant in the lawsuit. The complaint alleges that
West Capital breached a certain forward-flow agreement for the purchase of
receivables from the Plaintiffs. The Company does not believe that the complaint
sets forth a factual basis for either MAC or Midland Credit to be liable for any
alleged breach by West
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Capital of the forward-flow agreement with the Plaintiffs. The Company intends
to vigorously defend the lawsuit.
We do not believe that contingencies for ordinary routine claims,
litigation and administrative proceedings and investigations incidental to our
business will have a material adverse effect on our consolidated financial
position or results of operations.
On May 24, 2000, the Company was notified by the NASDAQ National Market
that its stock had failed to maintain a minimum market value of public float of
$5,000,000 over the preceding thirty trading days. The Company was unable to
demonstrate compliance with this requirement for at least ten consecutive
trading days by August 22, 2000 and the common stock was delisted at the opening
of business on August 24, 2000. The Company was unable to comply with the
initial listing standards for the NASDAQ Small-Cap Market and thus is now
included on the OTC Electronic Bulletin Board.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We accrue income on our retained interest and certain of our receivable
portfolios based on the effective interest rate, i.e., internal rate of return,
applied to the original cost basis, adjusted for accrued income and principal
payments. Effective interest rates are determined based on assumptions regarding
the timing and amounts of portfolio collections. Such assumptions may be
affected by changes in market interest rates. Accordingly, changes in market
interest rates may affect our earnings. Changes in short-term interest rates
also affect our earnings as a result of our borrowings under the revolving
credit facility and the warehouse facility.
We believe that our market risk information has not changed materially from
December 31, 1999.
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PART II - OTHER INFORMATION
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The words
"believe," "expect," "anticipate," "estimate," "project," or the negation
thereof or similar expressions constitute forward-looking statements within the
meaning of the Reform Act. These statements may include, but are not limited to,
projections of revenues, income, or loss, estimates of capital expenditures,
plans for future operations, products or services, and financing needs or plans,
as well as assumptions relating to these matters. These statements include,
among others, statements found under "Management's Discussion and Analysis of
Financial Condition and Results of Operations." For all forward-looking
statements, the Company claims the protection of the safe-harbor for
forward-looking statements contained in the Reform Act.
The Company's actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, some of which are beyond
the Company's control. Factors that could affect the Company's results and cause
them to differ from those contained in the forward-looking statements include:
- our ability to maintain existing and secure additional financing;
- our ability to maintain sufficient liquidity to operate our business
including our ability to meet the liquidity covenant of our securitization
and warehouse transactions and to obtain new capital to enable the Company
to purchase receivables;
- our continued servicing of the receivables in our securitization
transactions and warehouse facility;
- our ability to recover sufficient amounts on or with respect to receivables
to fund operations (including from sellers of non-conforming receivable
portfolios);
- our ability to hire and retain qualified personnel to recover our
receivables efficiently;
- changes in, or failure to comply with, government regulations;
- our ability to successfully integrate the assets acquired from WCFSC, Inc.
f/k/a West Capital Financial Services Corp.;
- the costs, uncertainties and other effects of legal and administrative
proceedings; and
- risk factors and cautionary statements made in our Annual Report on Form
10-K for the period ended December 31, 1999.
Forward-looking statements speak only as of the date the statement was made.
They are inherently subject to risks and uncertainties, some of which we cannot
predict or quantify. Future events and actual results could differ materially
from the forward-looking statements. We will not undertake and specifically
decline any obligation to publicly release the result of any revisions to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events, whether as a result of new information, future events, or for any other
reason.
In addition, it is our policy generally not to make any specific projections as
to future earnings and we do not endorse projections regarding future
performance that may be made by third parties.
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ITEM 1 - LEGAL PROCEEDINGS
The Fair Debt Collection Practices Act and comparable state statutes
may result in class action lawsuits which can be material to our business due to
the remedies available under these statutes, including punitive damages. We have
not been subject to a class action lawsuit to date.
On or about July 26, 2000, Midland Credit and MAC were served with a
complaint in which each was informed that it was named as a defendant in a
lawsuit filed by Household Bank (SB), N.A., Household Receivables Acquisition
Company, and Household Card Services, Inc. (collectively, ""Plaintiffs"). West
Capital is also named as a defendant in the lawsuit. The complaint alleges that
West Capital breached a certain forward-flow agreement for the purchase of
receivables from the Plaintiffs. The Company does not believe that the complaint
sets forth a factual basis for either MAC or Midland Credit to be liable for any
alleged breach by West Capital of the forward-flow agreement with the
Plaintiffs. The Company intends to vigorously defend the lawsuit.
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, 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.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
The Company was unable to collect, as measured both on June 30, 2000 and
September 30, 2000, certain minimum amounts from the receivable portfolios
within Securitization 99-1. As such, a default had occurred under the indentures
of the warehouse facility and Securitization 99-1. As a result of the amendments
to Securitization 99-1 and the warehouse facility that were effective as of
October 1, 2000, the Company is no longer in default.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 -- Second Amendment to Indenture and Servicing Agreement relating to the
warehouse facility
10.2 -- Third Amendment to Indenture and Servicing Agreement relating to the
warehouse facility
10.3 -- Indenture and Servicing Agreement relating to Midland Receivables-Backed
Notes, Series 1999-1
10.4 -- Insurance and Reimbursement Agreement relating to Midland
Receivables-Backed Notes, Series 1999-1
10.5 -- First Amendment to Indenture and Servicing Agreement relating to Midland
Receivables-Backed Notes, Series 1999-1
27.1 -- Financial Data Schedule for the nine month period ended September 30,
2000 submitted to the Securities and Exchange Commission in electronic
format.
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the three months ended
September 30, 2000.
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MCM CAPITAL GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MCM CAPITAL GROUP, INC.
By: /s/ Lynette T. Biskis
------------------------------------
LYNETTE T. BISKIS
VICE-PRESIDENT,
ASSISTANT CHIEF FINANCIAL OFFICER
(CHIEF ACCOUNTING OFFICER)
Date: November 10, 2000
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
-- -----------
10.1 -- Second Amendment to Indenture and Servicing Agreement relating to
the warehouse facility
10.2 -- Third Amendment to Indenture and Servicing Agreement relating to the
warehouse facility
10.3 -- Indenture and Servicing Agreement relating to Midland
Receivables-Backed Notes, Series 1999-1
10.4 -- Insurance and Reimbursement Agreement relating to Midland
Receivables-Backed Notes, Series 1999-1
10.5 -- First Amendment to Indenture and Servicing Agreement relating to
Midland Receivables-Backed Notes, Series 1999-1
27.1 -- Financial Data Schedule for the nine month period ended September
30, 2000 submitted to the Securities and Exchange Commission in
electronic format.
