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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2001 or
 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
COMMISSION FILE NUMBER: 000-26489
MCM CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 48-1090909 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
|
| 5775 Roscoe Court San Diego,CA | 92123 |
|
| (Address of Principal Executive Offices) | (Zip code) |
(877) 445-4581
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days.
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the registrant totaling 2,274,819 shares at February 28, 2002 was $0.75 million at February 28, 2002, based on the last reported bid of the Common Stock of $0.33 per share on such date, as reported by the OTC Electronic Bulletin Board.
The number of shares of the registrant's Common Stock outstanding at March 27, 2002 was 7,161,132.
| Part I | 4 |
| Item 1 - Business | 4 |
| Item 2 - Properties | 13 |
| Item 3 - Legal Proceedings | 13 |
| Item 4 - Submission of Matters to a Vote of Security Holders | 14 |
| Part II | 15 |
| Item 5 - Market for the Registrant's Common Equity Securities and Related Stockholder Matters | 15 |
| Item 6 - Selected Consolidated Financial Data | 17 |
| Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations | 19 |
| Item 7A - Market Risk Disclosure | 41 |
| Item 8 - Consolidated Financial Statements | 43 |
| Item 9 - Changes in and Disagreements with Accountants | 74 |
| Part III | 74 |
| Item 10 - Directors and Executive Officers of MCM | 74 |
| Item 11 - Executive Compensation | 77 |
| Item 12 - Security Ownership of Certain Beneficial Owners and Management | 79 |
| Item 13 - Certain Relationships and Related Transactions | 84 |
| Part IV | 87 |
| Item 14 - Exhibits, Financial Statements, Schedules, and Reports On Form 8-K | 87 |
| Signatures | 93 |
| Consent of Independant Auditors | 99 |
An Overview of Our Business
Nature of Business
MCM Capital Group, Inc.
(“MCM Capital” or the “Company”) is a Delaware holding
company whose principal assets are its investments in its wholly-owned
subsidiaries, Midland Credit Management, Inc., Midland Funding 98-A Corporation,
Midland Receivables 99-1 Corporation, Midland Acquisition Corporation, and MRC
Receivables Corporation (“MRC”) (collectively referred to herein as
the “Company”). MCM Capital also has a wholly-owned subsidiary,
Midland Receivables 98-1 Corporation, which is not consolidated. We are a
financial services company specializing in the purchase, collection,
restructuring, resale and securitization of receivable portfolios acquired at
deep discounts.
We have extensive experience in acquiring and servicing charged-off receivable portfolios. Prior to 1992, MCM served for over 30 years as a third-party collection agency. In 1992, we began to focus on acquiring and servicing receivable portfolios using our own capital. We have historically engaged in the acquisition and servicing of charged-off loan portfolios originated by credit card issuers and other financial institutions. In recent years, we primarily acquired charged-off VISA®, MasterCard®, and private label credit card portfolios issued by major banks and merchants. Major credit card issuers often sell a significant portion of their charged-off, delinquent, non-performing accounts in order to realize immediate cash proceeds. From January 1, 1997 through December 31, 2001, we purchased in excess of $3.9 billion in receivables, as measured by the balance charged-off by the originating institutions, paying approximately $138.4 million for these receivables. During this same period, we collected in excess of $205.1 million from all owned and managed receivables. These amounts are exclusive of the accounts and collections related to the West Capital transaction discussed below.
Recent Developments
On February 22, 2002,
certain existing stockholders and their affiliates (the “Purchasers”)
made an additional $5,000,000 investment in MCM Capital Group, Inc. Immediately
prior to such investment, the Purchasers on a collective basis beneficially
owned in excess of 50% of the Company’s common stock. In a related
transaction, one of the Company’s principal lenders, ING (U.S.) Capital LLC
(“ING”), forgave $5,323,000 of outstanding debt and reduced its
warrant position by 200,000 warrants. The completion of these two transactions
increased the Company’s net worth by $9,665,000. (See Note 14 to the
consolidated financial statements).
The Purchasers received 1,000,000 shares of the Company’s Series A Senior Cumulative Participating Convertible Preferred Stock (the “Series A Preferred Stock”) at a price of $5.00 per share. Each share of Series A Preferred Stock is convertible at the option of the holder at any time into shares of common stock at a conversion price of $.50 per share of common stock, subject to customary anti-dilution adjustments. The Series A Preferred Stock has a cumulative dividend, payable semi-annually. Until February 15, 2004, dividends are payable in cash and/or additional Series A Preferred Stock, at the Company’s option, at the rate of 10.0% per annum. Thereafter, dividends will be payable only in cash, at a rate of 10.0% per annum. The dividend rate increases to 15.0% per annum in the event of a qualified public offering, a change of control (each as defined) or the sale of all or substantially all of the assets of the Company. In the event dividends are not declared or paid, the dividends will accumulate on a compounded basis. The Series A Preferred Stock has a liquidation preference equal to the sum of the stated value of the Series A Preferred Stock ($5,000,000 in the aggregate) plus all accrued and unpaid dividends thereon and a participation payment equal to shares of common stock at the conversion price and/or such other consideration that would be payable to holders of the Series A Preferred Stock if their shares had been converted into shares of the Company’s common stock immediately prior to the liquidation event.
The Series A Preferred Stock ranks senior to the common stock and any other junior securities with respect to the payment of dividends and liquidating distributions. The Company is prohibited from issuing any capital stock that ranks senior to the Series A Preferred Stock without the consent of the holders of a majority of the outstanding shares of Series A Preferred Stock.
Upon the occurrence of a qualified public offering, a change in control, or a sale of the Company, the Company may, by decision of the then independent members of the Board of Directors, redeem the outstanding Series A Preferred Stock in whole but not in part at an aggregate redemption price equal to the $5,000,000 liquidation preference plus the participation payment.
The holders of the Series A Preferred Stock are entitled to vote on an as converted basis with the holders of the common stock as a single class and have the right to vote as a class on certain specified matters. In the event that the Company fails to pay dividends for either two consecutive semi-annual periods or any four semi-annual periods, the Purchasers are entitled to designate two directors to serve on the Company’s Board of Directors for as long as at least 10% of the shares of the Series A Preferred Stock remain outstanding. The holders of the Series A Preferred Stock also have been granted registration rights in respect of the common stock underlying the Series A Preferred Stock.
As a result of the investment by the Purchasers, which was a condition to an amendment by ING of the Company’s note purchase agreement, the Company believes that it is in compliance with the net worth covenants under its credit agreements. However, the Company is not in compliance with the cumulative collections covenants relating to its Warehouse Facility and Securitization 99-1 financing. See “Liquidity and Capital Resources” at Management’s Discussion and Analysis and Notes 1 and 4 to the consolidated financial statements.
The investment by the Purchasers was approved by the Company’s board of directors, following the recommendation of a special committee consisting of the Company’s independent director formed specifically for the purpose of evaluating and considering the transaction. The special committee was advised by an independent financial advisor and by independent legal counsel.
The Credit and Security Agreement dated as of October 31, 2000 between the Company and CTW Funding, LLC, as amended, terminated on December 31, 2001. No indebtedness was outstanding at the time of such termination.
In February 2001, in the Superior Court of the State of Arizona, County of Maricopa, the Company’s subsidiary Midland Credit Management, Inc. and two of its wholly owned subsidiaries, Midland Funding 98-A Corporation and Midland Receivables 99-1 Corporation, filed a lawsuit against MBNA America Bank, NA (“MBNA”). The Company has alleged, among other things, fraud, fraudulent inducement, breach of contract and negligent misrepresentation arising out of the acquisition of charged-off receivables purchased from MBNA between September 1999 and February 2000. The Company is seeking compensatory damages in excess of $13 million. Any recoveries, net of attorney fees and other related costs, will first be paid to the noteholders of the Warehouse Facility and the 99-1 Securitization financing and then any remaining amounts to the Company. See “Liquidity and Capital Resources” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 4 to the consolidated financial statements.
Acquisition of Receivables
Sources of Receivable Portfolios
We identify receivable portfolios from a number of sources,
including relationships with credit card issuers, direct solicitation of credit
card issuers, resellers, and loan brokers. We purchase portfolios individually.
Previously, we purchased portfolios pursuant to forward flow agreements. Under
the forward flow agreements, we agreed to purchase charged-off receivables from
the seller on a periodic basis at a set price over a specified time period.
In February 2000, we terminated our only remaining forward flow agreement as a result of purchasing restrictions imposed upon us in connection with the Warehouse Facility and the 99-1 Securitization financing. See “Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. We were unable to meet the requirements necessary to lift the purchase restrictions imposed by the Warehouse Facility and 99-1 Securitization financing and as a result we were unable to purchase receivables for most of 2000.
On December 20, 2000, MRC, a wholly-owned bankruptcy-remote, special-purpose entity, entered into a $75 million secured financing facility (the “Secured Financing Facility”). The Company currently utilizes this facility to fund substantially all of its acquisitions. The Secured Financing Facility generally provides for a 90% advance rate with respect to each qualified receivable portfolio purchased. Interest accrues at the prime rate plus 3% per annum and is payable weekly. Once the outstanding balance under this facility exceeds $25 million, the floating rate margin reduces by 1% on the amounts in excess of $25 million. Notes to be issued under the facility are 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 and the Company has been repaid its investment, 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 $0.4 million. During the year ended December 31, 2001, the Company purchased portfolios with a face value of $1.553 billion at a price of approximately $39 million and recorded approximately $2.4 million in contingent interest relating to the 50% cash flow sharing agreement. Also, see Note 9 to the consolidated financial statements for information regarding warrants issued in conjunction with this facility. 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.
Pricing
Charged-off receivable
portfolios are purchased at substantial discounts to the face amount of the
receivable portfolio. We determine the purchase price of a portfolio by
evaluating many different variables, including stratification and analysis of
critical portfolio attributes, such as the number of agencies previously
attempting to collect the receivables in the portfolio, the average balance of
the receivables, number of days since charge off, payments since charge off, the
locations of the debtors and other proprietary attributes.
Once a receivable portfolio has been identified for potential purchase, we prepare quantitative analyses based on extracting customer level data from external sources, other than the issuer, to analyze the potential collectibility of the portfolio. We also analyze the portfolio by comparing it to similar portfolios previously acquired and serviced by us. In addition, members of our management perform qualitative analyses of other matters affecting the value of portfolios, including a review of the delinquency, charge off, placement and recovery policies of the originator as well as the collection authority granted by the originator to any third party collection agencies, and, if possible, by reviewing their recovery efforts on the particular portfolio. After these evaluations are completed, our Investment Committee, comprised of various members of our senior management, discusses the findings, decides whether to purchase and finalizes the price at which we are willing to purchase the portfolio.
Recovery of Receivables
We focus on maximizing the
recovery of the receivables we acquire. Unlike collection agencies that
typically have only a specified period of time to recover a receivable, as the
owner our collection time horizon is based on our ownership and we have
significantly more flexibility in establishing payment programs.
Once a portfolio has been acquired, we download all receivable information provided by the originator into our proprietary account management system and reconcile certain information for accuracy to the information provided by the seller in the purchase contract. We review accounts through external data providers for ineligible accounts before the contracted warranty expiration and return those ineligible accounts to the seller for remedy, either by refund or replacement, as provided for in the contract. Under applicable law, we send notification letters to obligors of each acquired account explaining, among other matters, our new ownership and asking that the obligor contact us. In addition, we notify credit bureaus to reflect our new ownership.
Once receivables are ready to be worked, members of the Information Technology Department work directly with the head of Operations to discuss the specifics of the recent acquisition. Management believes that these discussions are especially useful because they allow the Information Technology Department to tailor our proprietary account management system to reflect any special characteristics of the portfolio and our collection strategy.
Collections Department
The collections department
is divided into groups each consisting of a collection manager and group
managers supervising approximately 12 account managers. Collection managers and
group managers are in constant communication with management regarding account
manager performance.
Receivables with valid telephone numbers are distributed to the collection department. During initial calls, account managers assess the ability and willingness of the customer to pay. Account managers are trained to use a friendly, but firm approach. They attempt to work with customers to evaluate sources and means of repayment to achieve a full or negotiated lump sum settlement or develop payment programs customized to the individual’s ability to pay. In some cases, account managers advise the customer of alternatives to secure financing to pay off their consumer debt, such as home equity lines of credit. In cases where a payment plan is developed, account managers encourage customers to pay through auto-payment arrangements, which consist of debiting a customer’s checking account on a monthly basis. Account managers are also authorized to negotiate lump sum settlements within pre-established ranges. Once a settlement or payment agreement is reached, the account manager monitors the account until it is paid off. To facilitate payments, in addition to auto-payments, we accept a variety of payment methods including checks, the Western Union Quick Collect ® system, and wire transfers.
If, after the initial recovery effort, an account manager determines that the customer is willing but financially unable to pay the debt at that time, we may temporarily suspend our recovery efforts. At a later date, a new account manager will again assess the ability and willingness of the customer to pay. If, during the recovery process, we determine that a customer is able to pay, but unwilling to do so, we refer the account to our Recovery Department for handling (see “Recovery Department”).
Recovery Department
If during an attempt to
collect, we determine the customer is able but unwilling to pay, the account is
assigned to the Recovery Department which may pursue a number of courses of
action, including appropriate correspondence, follow up phone calls by the
department’s specially trained account managers and, if satisfactory
arrangements are not made with the customer, the account may be sent to our
attorney network, after a pre-determined time frame.
We contract with an association of attorneys (the “Network”) that acts as a clearinghouse to place accounts for collection with attorneys in most of the 50 states. We generally refer charged-off accounts to the Network where we believe the related debtor has sufficient assets to repay the indebtedness and has to date been unwilling to pay. In connection with our agreement with the Network, we advance certain out-of-pocket court costs. We capitalize these costs in our consolidated financial statements and provide a reserve for those costs that we believe will be ultimately uncollectible. We pay a fee to the respective attorneys based on an established fee schedule, as further defined in our agreement with the Network.
Balance Transfer Strategy
We have added a new
settlement option through an arrangement with a major credit card company.
Selected debtors are given the option of transferring the balance of their
account to a new card issued by the credit card company. We receive
predetermined settlement amounts from the credit card company for each account
successfully balance-transferred. We retain the ownership of and the ability to
collect on the charged-off accounts that the card issuer has solicited until a
successful balance-transfer has occurred.
Sale of Accounts Strategy
Periodically we evaluate
our portfolios to identify accounts with profiles that are inconsistent with our
collection strategies. Such accounts are offered for sale to a network of
collection agencies and law firms. A sale is awarded to the highest bidder.
Periodically bankrupt and deceased accounts are reported to us. We identify and package such accounts for sale to a specialized group of collection agencies and law firms. A sale is awarded to the highest bidder.
Hiring and Training
In the recent past, MCM has
pursued an aggressive hiring program. New account managers at our Phoenix and
San Diego facilities undergo a four-week training program which involves
classroom training and on the job training. As of December 31, 2001, we had 596
full-time employees. Of these employees, there were 10 department heads, 63
department managers, 433 account managers, and 90 support clerks and
administrative personnel. None of our employees is represented by a labor union.
We believe that our relations with our employees are good.
Technology Platform
To facilitate recovery
efforts and operations, we have developed an extensive technology platform
operated on an in-house IBM AS400, including:
Our database includes relevant account information about customers that our account managers need to facilitate their recovery efforts. Account managers can update the database in real time while discussing the account with the customer. Updates are backed-up daily and kept offsite in a fireproof vault.
Legal Department
The legal department
manages corporate legal matters, assists the training program, and monitors
collection activity for compliance. As of March 27, 2002, this department
consisted of three full-time attorneys.
The legal department helps to develop guidelines and procedures for recovery personnel to follow when communicating with a customer or third party during our recovery efforts. The department assists our training department in providing employees with extensive training on the Fair Debt Collection Practices Act (“FDCPA”) and other relevant laws. In addition, the legal department researches and provides recovery personnel with summaries of state statutes so that they are aware of applicable time frames and laws when skip tracing or attempting to recover an account. It meets with the recovery and quality control departments to provide legal updates and to address any practical issues uncovered in its review of files referred to the department.
Competition
The consumer credit
recovery industry is highly competitive. We compete with a wide range of
third-party collection companies and other financial services companies, which
may have substantially greater personnel and financial resources than we do. In
addition, some of our competitors may have signed forward flow contracts under
which originating institutions have agreed to transfer charged-off receivables
to them in the future, which could restrict those originating institutions from
selling receivables to us. Competitive pressures affect the availability and
pricing of receivable portfolios, as well as the availability and cost of
qualified recovery personnel. In addition to competition within the industry
focused on the purchase and servicing of charged-off debt, traditional recovery
agencies and in-house recovery departments remain the primary recovery solutions
employed by issuers. We believe some of our major competitors, which include
companies that focus primarily on the purchase of charged-off receivable
portfolios, have continued to diversify into third party agency collections and
into offering credit card and other financial services as part of their recovery
strategy.
When purchasing receivables, we compete primarily on the basis of the price paid for receivable portfolios, the availability of funding for our portfolios and the quality of services that we provide. There continues to be consolidation of issuers of credit cards, which have been our primary source for purchasing accounts. This consolidation has limited the sellers in the market and has correspondingly given the remaining sellers increasing market strength in the price and terms of the sale of credit card accounts. During the first two months of 2002 we have not been able to purchase receivables in quantities consistent with our anticipated purchasing volume. This reflects increased competition and our unwillingness to accept less favorable contract terms for certain offered pools of receivables.
Trade Secrets and Proprietary Information
We believe several
components of our computer software are proprietary to our business. Some of our
software and analytical models were acquired in the May 2000 transaction with
West Capital Financial Services Corp. (“West Capital”) (see Note 2 to
the consolidated financial statements). Although we have neither registered the
software as copyrighted software nor attempted to obtain a patent related to the
software, we believe that the software is protected as our trade secret. We have
taken actions to establish the software as a trade secret, including informing
employees that the software is a trade secret and making the underlying software
code available only on an as needed basis. In addition, people who have access
to information we consider proprietary must sign confidentiality agreements.
Government Regulation
In a number of states we
must maintain licenses to perform debt recovery services and must satisfy
related bonding requirements. We believe that we have satisfied all material
licensing and bonding requirements. Certain states in which we operate, or in
which we may operate in the future, impose filing or notice requirements on
significant stockholders. For example, Maryland requires that we advise them of
the beneficial holders of 10% or more of the voting securities of the licensee.
Other statutes or regulations could require that stockholders who beneficially
own a certain percentage of MCM Capital’s stock make filings or obtain
approvals in applicable states, which could preclude us from performing certain
business activities in those states until those licensing requirements have been
satisfied. We believe we are in compliance with all material government
regulations.
The FDCPA and comparable state statutes establish specific guidelines and procedures, which debt collectors must follow when communicating with customers, including the time, place and manner of the communications. It is our policy to comply with the provisions of the FDCPA and comparable state statutes in all of our recovery activities, even though we may not be specifically subject to these laws. Our failure to comply with these laws could have a material adverse effect on us if they apply to some or all of our recovery activities. The relationship between a customer and a credit card issuer is extensively regulated by federal and state consumer protection and related laws and regulations. While we are not a credit card issuer, these laws affect some of our operations because our receivables were originated through credit card transactions. In addition to the FDCPA, significant federal laws applicable to our business include the following:
Additionally, there are comparable statutes in those states in which customers reside or in which the originating institutions are located. State laws may also limit the interest rate and the fees that a credit card issuer may impose on its customers. The laws and regulations applicable to credit card issuers, among other things, impose disclosure requirements when a credit card account is advertised, when it is applied for and when it is opened, at the end of monthly billing cycles, and at year-end. Federal law requires, among other things, that credit card issuers disclose to consumers the interest rates, fees, grace periods, and balance calculation methods associated with their credit card accounts. Under current laws, customers are entitled to have payments and credits applied to their credit card accounts promptly, to receive prescribed notices, and to require billing errors to be resolved promptly. Some laws prohibit discriminatory practices in connection with the extension of credit. If the originating institution fails to comply with applicable statutes, rules, and regulations, it could create claims and rights for the customers that would reduce or eliminate their obligations under their receivables, and have a possible material adverse effect on us. When we acquire receivables, we generally require the originating institution to contractually indemnify us against losses caused by its failure to comply with applicable statutes, rules, and regulations relating to the receivables before they are sold to us.
The laws described above, among others, may limit our ability to recover amounts owing with respect to the receivables regardless of any act or omission on our part. For example, under the Federal Fair Credit Billing Act, a credit card issuer, but not a merchant card issuer, is subject to all claims other than tort claims and defenses arising out of certain transactions in which a credit card is used. With some exceptions, claims or defenses become subject to the Act when the obligor has made a good faith attempt to obtain satisfactory resolution of a disagreement or problem relative to the transaction, the amount of the initial transaction exceeds $50.00, and the place where the initial transaction occurred was in the same state as the customer’s billing address or within 100 miles of that address. As a purchaser of credit card receivables, we may acquire receivables subject to legitimate defenses on the part of the customer, which could prevent us from collecting on these receivables. The statutes further provide that, in some cases, customers cannot be held liable for, or their liability is limited with respect to, charges to the credit card account that were a result of an unauthorized use of the credit card. There can be no assurance that some of the receivables we service were not established as a result of unauthorized credit card use, and, accordingly, we may be unable to recover all or a portion of the amount of these receivables.
Additional consumer protection laws may be enacted that would impose requirements on the enforcement of and recovery on consumer credit card or installment accounts. Any new laws, rules, or regulations that may be adopted, as well as existing consumer protection laws, may adversely affect our ability to recover the receivables. In addition, our failure to comply with these requirements could adversely affect our ability to enforce the credit card receivables.
We service our customers from two servicing facilities. Our largest servicing facility is located in Phoenix, Arizona. Designed to accommodate up to 800 employees, at December 31, 2001, the facility housed 300 employees, including 248 collection personnel. We lease the Phoenix facility, which is approximately 62,000 square feet, for $59,828 per month; this lease expires in 2003. We also lease a facility in San Diego, California, which contains not only additional collection operations, but also serves as corporate headquarters. This facility is approximately 33,000 square feet and is designed to accommodate up to 400 employees. It housed approximately 296 employees at December 31, 2001, including 185 collection personnel. The San Diego facility lease payment totals $49,219 per month and the lease expires in 2004.
The FDCPA 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.
In February 2001, in the Superior Court of the State of Arizona, County of Maricopa, our subsidiary Midland Credit Management, Inc. and two of its wholly owned subsidiaries, Midland Funding 98-A Corporation and Midland Receivables 99-1 Corporation, filed a lawsuit against MBNA America Bank, NA (“MBNA”). We have alleged, among other things, fraud, fraudulent inducement, breach of contract and negligent misrepresentation arising out of the acquisition of charged-off receivables purchased from MBNA between September 1999 and February 2000. MBNA has counterclaimed for its attorneys fees and for indemnification for any amount the Company may be awarded from MBNA. We are seeking compensatory damages in excess of $13 million. Any recoveries, net of attorney fees and other related costs, will first be paid to the noteholders of the Warehouse Facility and the Securitization 99-1 financing, and then any remaining amounts to the Company. See “Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and see Note 4 to the consolidated financial statements.
There are a number of lawsuits or claims pending or threatened against MCM Capital. 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 the outcome of any litigation is inherently uncertain, based on past experience, the information currently available to us and, in some cases, the possible availability of insurance and/or indemnification from the originating institutions, we do not believe that any currently pending or threatened litigation or claims will have a material adverse effect on our operations or financial condition.
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 January 24, 2002, the Company held its Annual Meeting of Stockholders. At theAnnual Meeting, Eric D. Kogan, Peter W. May, Robert M. Whyte, Raymond Fleming, Carl C. Gregory, III and Richard A. Mandell were elected to serve as Directors.
The voting on the above matter is set forth below:
| Name of Nominee | Votes For | Votes Against | Votes Withheld | Abstentions |
|---|---|---|---|---|
| Eric D. Kogan | 6,099,277 | 0 | 0 | 23,515 |
| Peter W. May | 6,099,277 | 0 | 0 | 23,515 |
| Robert M. Whyte | 6,099,277 | 0 | 0 | 23,515 |
| Raymond Fleming | 6,099,277 | 0 | 0 | 23,515 |
| Carl C. Gregory, III | 6,099,277 | 0 | 0 | 23,515 |
| Richard A. Mandell | 6,099,277 | 0 | 0 | 23,515 |
At the Annual Meeting, the stockholders also approved proposal 2, approving an amendment to the Company's Certificate of Incorporation to change the name of the Company. The Company anticipates filing such amendment in early April 2002.
Proposal 2 - The votes for the proposal to change the name of the Company were as follows:
| Votes For | Votes Against | Votes Withheld | Abstentions |
|---|---|---|---|
| 6,110,161 | 8,065 | 0 | 4,566 |
Our common stock began trading on the Nasdaq National Market under the symbol “MCMC” upon completion of our initial public offering in July 1999. On May 24, 2000, we were notified by the Nasdaq National Market that our stock had failed to maintain a minimum market value of public float of $5.0 million over the preceding thirty trading days. We were unable to demonstrate compliance with this requirement for at least ten consecutive trading days by August 22, 2000 and the common stock was delisted from the Nasdaq National Market at the opening of business on August 24, 2000. Subsequently, the common stock has been included on the OTC Electronic Bulletin Board under the symbol “MCMC.OB.”
Quotations reflect inter-trader prices, without material mark-up, markdown or commission and may not necessarily represent actual transactions. Trading in the Company’s stock is sporadic with relatively low volume of shares traded. There can be no assurance that the trading market will provide stockholders with the ability to sell their shares.
The high and low closing sales prices of the common stock, as reported by Nasdaq and the OTC Electronic Bulletin Board for each of the fiscal quarters since our IPO are reported below:
| Market Price | ||
| Fiscal Year 1999: | High | Low |
| Third Quarter (from July 14, 1999) | $ 9 | .34 | $ 4 | .41 | ||
| Fourth Quarter | $ 4 | .44 | $ 3 | .06 | ||
| Fiscal Year 2000 | ||||||
| First Quarter | $ 4 | .00 | $ 2 | .00 | ||
| Second Quarter | $ 2 | .38 | $ 0 | .75 | ||
| Third Quarter | $ 0 | .82 | $ 0 | .44 | ||
| Fourth Quarter | $ 0 | .56 | $ 0 | .20 | ||
| Fiscal Year 2001 | ||||||
| First Quarter | $ 0 | .58 | $ 0 | .34 | ||
| Second Quarter | $ 1 | .20 | $ 0 | .36 | ||
| Third Quarter | $ 0 | .60 | $ 0 | .31 | ||
| Fourth Quarter | $ 0 | .63 | $ 0 | .21 | ||
The closing bid price of MCM’s common stock on February 28, 2002 was $0.33 per share and there were 905 holders of record, including 69 NASD registered broker/dealers which hold 2,807,347 shares on behalf of their clients.
Securities Issuances
On February 22, 2002,
certain existing stockholders and their affiliates made an additional $5 million
purchase of 1 million shares of the Company’s Series A Senior Cumulative
Participating Convertible Preferred Stock (the “Series A Preferred
Stock”) at a price of $5.00 per share in a private placement exempt from
registration pursuant to Regulation D under the Securities Act of 1933. See Note
14 to the consolidated financial statements.
The investment by the stockholders was approved by the Company’s board of directors, following the recommendation of a special committee consisting of the Company’s independent director formed specifically for the purpose of evaluating and considering the transaction. The special committee was advised by an independent financial advisor and by independent legal counsel.
On January 12, 2000, we issued $10.0 million in principal amount of 12% Series No. 1 Senior Notes (the “Senior Notes”) to an institutional investor (see “Senior Notes” in Management’s Discussion and Analysis of Financial Condition and Results of Operations). In connection with the issuance of the Senior Notes, we issued warrants to purchase up to 428,571 shares of our common stock at $0.01 per share (subject to adjustment) to the same institutional investor in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933. We also issued warrants to purchase 100,000 shares of our common stock to an affiliated party who agreed to guarantee the Senior Notes. Both warrant agreements pursuant to which the warrants were issued contain anti-dilution provisions. This issuance was also exempt from registration under the Securities Act pursuant to Section 4(2). On February 22, 2002, in a transaction related to the issuance of Series A Preferred Stock, the holders of the Senior Notes forgave $5.3 million of outstanding debt and reduced its warrant position by 200,000 warrants. (See “Liquidity and Capital Resources” at Management’s Discussion and Analysis of Financial Condition and results of operations and Note 14 to the consolidated financial statements.)
On December 20, 2000, MRC, a wholly owned, bankruptcy remote, special purpose subsidiary, entered into a $75 million credit facility (the “Secured Financing Facility”) with an institutional lender for the purpose of acquiring charged off accounts. In connection with the execution of the Secured Financing Facility, as discussed in “Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, MCM Capital issued warrants to the institutional investor for the purchase of up to 621,576 shares of the Company’s common stock at $1.00 per share. At December 31, 2000, 155,394 warrants were exercisable. At December 31, 2001, 310,788 warrants were exercisable. The remaining warrants become exercisable in two equal tranches, triggered at the time MRC has drawn an aggregate of $45.0 million and $67.5 million against the facility, respectively. As of September 2001, we had drawn over $22.5 million against the facility and booked the warrants exercisable in the second tranche.
In connection with the execution of the $2.0 million revolving credit agreement on October 31, 2000, as discussed in “Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, MCM Capital issued warrants to purchase 50,000 shares at $0.01 per share. Additional warrants totaling 200,000 were issued in 2001 to extend the funding period under the line of credit. As a result of these issuances, warrants to purchase an additional 5,241 shares were issued to the holder of the $10 million unsecured Senior Notes and warrants to purchase 1,275 shares were issued to the affiliated party that guaranteed the Senior Notes pursuant to the anti-dilution provisions of the applicable warrant agreements. The Credit and Security Agreement dated as of October 31, 2000, as amended, terminated on December 31, 2001. No indebtedness was outstanding at the time of such termination.
In January 2000, we also closed the Securitization 99-1 financing discussed below in “Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. In our securitization transactions, a bankruptcy remote subsidiary issues notes to one or more institutional investors in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933.
Dividend Policy
We have never declared or
paid dividends on our common stock and we anticipate that we will retain
earnings to support operations and to finance the growth and development of our
business. Therefore, we do not intend to declare or pay dividends on the common
stock for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be subject to the discretion of our board of directors
and is also restricted by the provisions of our Series A Preferred Stock. In
addition, the note purchase agreement executed in January 2000 in connection
with the issuance of $10 million in aggregate principal amount of senior
unsecured notes restricts us from paying dividends on common shares while the
Senior Notes are outstanding. We may also be subject to additional dividend
restrictions under future financing facilities. For a more detailed discussion
of this financing, see “Senior Note Financing”
in Management’s Discussion and Analysis of Financial Condition and Results
of Operations. Certain of our current financing facilities also require us to
meet and maintain certain liquidity requirements thatrestrict dividend payments.
The Series A Preferred Stock has a cumulative dividend, payable semi-annually. Until February 15, 2004, dividends are payable in cash and/or additional Series A Preferred Stock, at the Company’s option, at the rate of 10.0% per annum. Thereafter, dividends will be payable only in cash, at a rate of 10.0% per annum. The dividend rate increases to 15.0% per annum in the event of a qualified public offering, a change of control (each as defined) or the sale of all or substantially all of the assets of the Company. In the event dividends are not declared or paid, the dividends will accumulate on a compounded basis.
This table presents historical financial data of MCM Capital. This information should be carefully considered in conjunction with the consolidated financial statements and notes included in this report. The selected data in this section are not intended to replace the consolidated financial statements. The selected financial data, (except for “Selected Operating Data” in the table below), as of December 31, 1997, 1998 and 1999, and for the years ended December 31, 1997 and 1998, were derived from our audited consolidated financial statements not included in this report. Selected Operating Data are derived from the books and records of MCM Capital.
The selected financial data, except for Selected Operating Data, as of December 31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and 2001, were derived from our audited consolidated financial statements included elsewhere in this report.
| As of and for the years ended December 31, | |||||
| 1997 | 1998 | 1999 | 2000 | 2001 | |
| (in thousands, except per share and personnel data) | |||||
| Consolidated Statement of Operations Data: | |||||
| Revenues | |||||
| Income from receivable portfolios | $ 3,200 | $ 15,952 | $ 12,860 | $ 15,434 | $ 32,581 |
| Income from retained interest | -- | -- | 7,836 | 11,679 | 9,806 |
| Gain on sales of receivable portfolios | 2,014 | 10,818 | 57 | -- | -- |
| Servicing fees and related income | -- |
105 |
7,405 |
9,447 |
5,458 |
| Total revenues | 5,214 |
26,875 |
28,158 |
36,560 |
47,845 |
| Expenses | |||||
| Salaries and employee benefits | 2,064 | 7,472 | 18,821 | 23,423 | 27,428 |
| Other operating expenses | 338 | 2,200 | 3,479 | 6,340 | 11,165 |
| General and administrative | |||||
| expenses | 490 | 1,290 | 3,019 | 5,458 | 5,750 |
| Restructuring charges | -- | -- | -- | 1,388 | -- |
| Provision for portfolio losses | -- | -- | -- | 20,886 | -- |
| Depreciation and amortization | 156 |
427 |
964 |
2,154 |
2,481 |
| Total expenses | 3,048 |
11,389 |
26,283 |
59,649 |
46,824 |
| Income (loss) before interest,income taxes and extraordinary charge | 2,166 | 15,486 | 1,875 | (23,089) | 1,021 |
| Interest and other expenses | (819) |
(2,886) |
(1,960) |
(7,898) |
(10,737) |
| Income (loss) before income taxes and extraordinary charge | 1,347 | 12,600 | (85) | (30,987) | (9,716) |
| (Provision for) benefit from income taxes | (540) |
(5,065) |
34 |
7,257 |
(1,149) |
| Income (loss) before extraordinary charge | 807 | 7,535 | (51) | (23,730) | (10,865) |
| Extraordinary charge, net of income tax | -- |
180 |
-- |
-- |
-- |
| Net income (loss) | $ 807 |
$ 7,355 |
$ (51) |
$ (23,730) |
$ (10,865) |
| Net income (loss) per common share: | |||||
| Basic | $ 0.16 | $ 1.49 | $ (0.01) | $ (3.20) | $ (1.52) |
| Diluted | $ 0.16 | $ 1.47 | $ (0.01) | $ (3.20) | $ (1.52) |
| Average common shares outstanding: | |||||
| Basic | 4,941 | 4,941 | 5,989 | 7,421 | 7,161 |
| Diluted | 4,941 | 4,996 | 5,989 | 7,421 | 7,161 |
| Other Financial Data: | |||||
| Cash flows provided by (used in): | |||||
| Operations | $ (1,076) | $ 3,434 | $ (3,405) | $ (15,831) | $ 8,853 |
| Investing | (10,723) | 9,155 | (59,491) | 12,399 | (21,773) |
| Financing | 12,156 | (8,408) | 58,590 | 3,968 | 13,444 |
| Selected Operating Data: | |||||
| Collections on receivable | |||||
| portfolios (including | |||||
| securitized portfolios) | $ 5,127 | $ 15,940 | $ 34,877 | $ 66,117 | $ 83,051 |
| Purchases of receivable portfolios, | |||||
| at face value | 653,912 | 722,597 | 834,590 | 93,459 | 1,552,559 |
| Purchases of receivable portfolios, | |||||
| at cost | 18,249 | 24,762 | 51,969 | 4,433 | 39,030 |
| Total collection personnel at year end | 53 | 379 | 437 | 364 | 433 |
| Total employees at year end | 72 | 446 | 585 | 523 | 596 |
| Consolidated Statement of Financial | |||||
| Condition Data: | |||||
| Cash | $ 477 | $ 4,658 | $ 352 | $ 888 | $ 1,412 |
| Restricted cash | -- | -- | 2,939 | 2,468 | 3,053 |
| Investment in receivable portfolios | 15,411 | 2,052 | 57,473 | 25,969 | 47,001 |
| Retained interest in securitized | |||||
| receivables | -- | 23,986 | 30,555 | 31,616 | 17,926 |
| Total assets | 16,964 | 34,828 | 101,540 | 71,101 | 77,711 |
| Notes payable and other borrowings | 14,774 | 7,005 | 47,418 | 53,270 | 69,215 |
| Capital lease obligations | -- | 506 | 1,262 | 2,233 | 1,236 |
| Total liabilities | 15,410 | 20,906 | 68,512 | 61,022 | 80,069 |
| Total stockholders' equity | 1,554 | 13,922 | 33,028 | 10,079 | (2,358) |
The information in this section should be read in conjunction with our consolidated financial statements beginning on page 44 and the Risk Factors beginning on page 35.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues
Total revenues for the twelve
months ended December 31, 2001 were $47.8 million compared to total revenues of
$36.6 million for the year ended December 31, 2000, an increase of $11.2 million
or 31%. The increase is primarily from income from receivable portfolios, which
increased $17.2 million or 112%, to $32.6 million from $15.4 million for the
twelve months ended December 31, 2001 and 2000, respectively. This was offset by
a decrease in the income from investment in retained interest of $1.9 million,
from $11.7 million for the year ended December 31, 2000 to $9.8 million for the
year ended December 31, 2001. The decrease results from expected declines in
future cash collections. This was also offset by a decrease in servicing fees
and other related income of $3.9 million, from $9.4 million for the year ended
December 31, 2000 to $5.5 million for the year ended December 31, 2001.
The increase of $17.2 million in income from receivable portfolios reflects both higher growth in newly purchased portfolios, the acquisition of certain assets of West Capital and its related portfolios as of May 22, 2000 and an overall increase in total collections. For the twelve months ended December 31, 2001, we acquired new portfolios with a face value in excess of $1.553 billion at a cost of $39 million. These portfolios provided $15.2 million of revenue during 2001. In 2000, we purchased portfolios with a face value of $93.5 million at a total cost of $4.4 million. The portfolios provided $1.3 million of revenue during 2001, which is an increase from $0.6 million during 2000. The portfolios acquired in the West Capital transaction with a face value of $2.4 billion and a cost of $2.0 million generated $4.1 million in revenue during 2001 compared with $4.2 million in 2000, a decrease of $0.1 million. In line with our projections, revenues on all other portfolios increased by $0.4 million during 2001 as compared to 2000. Furthermore, certain portfolios that were previously recorded on a cost recovery basis were returned to the accretion method and accounted for $1.5 million of the increase in revenue for the twelve months ended December 31, 2001 (see Notes 3 and 4 to consolidated financial statements).
The decrease in servicing fees and related income of $3.9 million, or 42%, reflects the payoff of the 1998 Securitization notes in September 2000 that resulted in the discontinuation of the related servicing fees at that date. During the twelve months of 2000, servicing fees related to the 1998 Securitization were $3.7 million and the amortization of the remaining servicing liability was $1.4 million compared to no service fees and no amortization of servicing liability for the twelve months of 2001. All subsequent collections for the 1998 Securitization have been applied to the retained interest.
The decrease in servicing fees related to the 1998 Securitization was partially offset by a $1.2 million increase in servicing fees received by the Company as successor servicer to a pool of charged-off consumer accounts acquired in the May 2000 acquisition of certain assets of West Capital. We recorded $5.5 million in servicing fees during the twelve months ended December 31, 2001 for the collections on these receivables during that period. Included in this amount is a $0.8 million non-recurring fee earned for the Company’s assistance with the sale of a component of these receivables. For the year ended December 31, 2000, we recognized $4.3 million in fees associated with collections for that period.
Total operating expenses
Total operating expenses
were $46.8 million for the year ended December 31, 2001 compared to $59.6
million for the year ended December 31, 2000, a decrease of $12.8 million or
21%. We recorded a provision for portfolio losses of $20.9 million in the year
ended December 31, 2000 as a result of impairment of certain receivable
portfolios. During the same period, we also recognized restructuring charges of
$1.4 million. No such provision or restructuring charges were recorded for the
year ended December 31, 2001. Salaries and employee benefits increased by $4.0
million or 17% to $27.4 million for the twelve months ended December 31, 2001
from $23.4 million for the twelve months ended December 31, 2000. Collector
bonuses accounted for most of the increase reflecting the increase in our
collections combined with a change in the compensation package for our
collectors. In 2001, collector compensation was based on a three-month rolling
average for incentive payments and, where appropriate, the base salary was
increased. Previously, collectors were rewarded on a single month basis based on
an individual’s collections in the previous month. The number of
total personnel was 64 fewer as of December 31, 2001 as compared to the
count at May 22, 2000, the date of the West Capital transaction which, the
Company believes, reflects efficiencies achieved through better collection
technologies and a higher quality work force.
Other operating expenses decreased in the amount of approximately $0.5 million, or 8%, to $5.7 million from $6.2 million for the twelve months ended December 31, 2001 and 2000, respectively. Collection legal expense increased by $5.3 million to $5.4 million for the year ended December 31, 2001 from $0.1 million for the year ended December 31, 2000. This increase in collection legal expense reflects costs associated with the initiation of a new channel for collecting on accounts that have been determined to be collectible, but which require tactics other than telephone solicitation. Amounts collected through this channel approximated $7.8 million for the year ended December 31, 2001. Postage expenses related to direct mail campaigns also generated an increase of approximately $0.6 million. These increases were offset by a decrease of $0.5 million in telephone expenses reflecting successful negotiation of a rate reduction.
The increase in general and administrative expenses of $0.3 million, or 5%, to $5.8 million from $5.5 million during the twelve months ended December 31, 2001 and 2000, respectively, was primarily due to the rent expense for the addition of the San Diego facility late in the second quarter of 2000 and an increase in insurance costs, partially offset by reductions in business related taxes and licenses and in legal expenses. The increase in depreciation and amortization charges of $0.3 million, or 14%, to $2.5 million from $2.2 million for the year ended December, 2001 and 2000, respectively, reflected the installation of our Davox call management system in February 2000 combined with the addition of assets obtained by acquisition in May 2000.
Other income and expense
For the year ended December
31, 2001, total interest expense including fees and amortization of other loan
costs was $10.9 million on average borrowings for the period of $64.2 million,
resulting in an effective all-in interest rate of 17% for the period. The
interest only portion of this total amounted to $4.6 million, for an effective
interest cost of 7%. For the year ended December 31, 2000, total interest
expense was $7.8 million on average borrowings of $50.3 million, reflecting
an effective all-in interest rate of 16%. The interest only portion of
this total amounted to $4.9 million, for an effective interest cost of 10%.
The increase in total interest expense is due to increased note insurer
premiums provided in the amendments to the Warehouse Facility and Securitization
99-1 financing agreements discussed in Note 4 to the consolidated financial
statements, combined with the accrual for the sharing with the lender of
residual collections under the Secured Financing Facility discussed in
Note 6 to the consolidated financial statements totaling $2.4 million for
the twelve months ended December 31, 2001, and partially offset by lower overall
interest rates. Also during the year ended December 31, 2001, we recognized
other income of $0.2 million that represents interest income and refunds for
business taxes overpaid during 1999 and 2000. This compares to $0.1 million in
other expenses for the year ended December 31, 2000 that was principally made up
of losses on disposal of assets at the Company’s former Hutchinson, Kansas
facility (see Note 2 to consolidated financial statements), and partially offset
by interest income.
Income taxes
For the year ended December
31, 2001, we recorded an income tax provision of $1.1 million, reflecting an
effective rate of 12%, which represents the deferred tax impact of the decrease
in the unrealized gain. See Notes 1 and 7 to the consolidated financial
statements. For the year ended December 31, 2000, we recorded a benefit of $7.3
million, reflecting an effective rate of 24%. The provision for 2001 and the
lower effective tax benefit for 2000 is a result of our recording a valuation
reserve for our deferred tax assets because of the uncertainty of the recovery
of the tax assets that have been recorded.
Net loss
The net loss for the twelve
months ended December 31, 2001 was $10.9 million compared to a net loss of $23.7
million for the twelve months ended December 31, 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue
Income from receivable
portfolios increased $2.5 million or 19%, from $12.9 million for the year ended
December 30, 1999 to $15.4 million for the year ended December 31, 2000. The
$2.5 million increase is attributable to the receivable portfolios purchased in
connection with the West Capital transaction and the related trust transaction
(See Note 2 to consolidated financial statements) of approximately $3.7 million
offset by a $1.2 million dollar decrease in net income from existing receivable
portfolios. See “Liquidity and Capital Resources” below.
In connection with the 1998 Securitization and the related servicing agreement, we recorded a retained interest in the securitized receivables and a servicing liability. For the year ended December 31, 2000, we recognized income from retained interest in securitized receivables in the amount of $11.7 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 $7.8 million, servicing income in the amount of $5.2 million and amortization of the servicing liability in the amount of $2.2 million for the year ended December 31, 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 in 2000. We 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.
As successor servicer to a pool of charged-off consumer accounts in connection with the West Capital Transaction, MCM Capital receives a servicing fee for collections of these receivables. We recorded $4.3 million in servicing fees during the period from May 22, 2000 (the closing date of the Transaction) through December 31, 2000 for the collections on these receivables during that period.
Total Operating Expenses
Total operating expenses
were $59.6 million for the year ended December 31, 2000 compared to $26.3
million for the year ended December 31, 1999, an increase of $33.3 million or
126.6%. The increase in total operating expenses and increase in operating
expenses as a percentage of revenues is in part a result of the provision for
portfolio losses of $22.0 million recorded during the year, offset by the
recovery of $1.1 million of the provision in the third quarter. We also recorded
restructuring charges of approximately $1.4 million during 2000 as further
discussed below. Salaries and employee benefits increased $4.6 million, or 24%,
to $23.4 million in the year ended December 31, 2000 from $18.8 million in the
year ended December 31, 1999. The increase in salaries and employee benefits
reflects the addition of employees from the West Capital Transaction partially
offset by the decrease attributable to the closure of the Company’s former
Hutchinson facility in June 2000. The growth of the Phoenix facility accounted
for the remaining increase in salaries and employee benefits. 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. During
the year ended December 31, 2000, collections per collector averaged
approximately $181,640, which is a 126% increase over the average collections
per collector of approximately $80,535 during the year ended December 31, 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 $6.5 million or 87% from $7.5 million to $14.0 million for the years ended December 31, 1999 and 2000, respectively. Approximately $2.8 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 our Hutchinson facility. The remaining increase of approximately $4.2 million is primarily due to the expansion of our Phoenix location reflecting the growth in the receivable portfolios that we manage 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 and 2000 were not performing in a manner consistent with our expectations and historical results for the specific type of receivables within those portfolios. This was largely the result of non-compliance of the receivable portfolios purchased with covenants and representations contained in the related purchasing contracts. At the time the impairment was identified, Company management was unable to reasonably estimate the amount and timing of anticipated collections. Therefore, in accordance with AICPA Practice Bulletin 6, we ceased accrual of income on these portfolios effective January 1, 2000.
Subsequently, using proprietary statistical models acquired through the West Capital transaction, we estimated the amount and timing of anticipated collections, and therefore the recoverable value of certain of these portfolios. As part of that process, we isolated the portions of those portfolios containing what we considered to be ineligible assets. Based on the results of our calculations and statistical analysis, an impairment charge of $20.9 million was recorded against the carrying value of certain portfolios. These portfolios remained on nonaccrual status as of December 31, 2000 and the full amount of collections since January 1, 2000 associated with these portfolios was applied to the related principal. 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 accurately estimate the amount and timing of anticipated collections.
During the year ended December 31, 2000, we also recorded restructuring charges of approximately $1.4 million. This related to the closure of our facility in Hutchinson, Kansas ($0.5 million) and severance payments to certain officers of the Company who were replaced by former officers of West Capital ($0.9 million).
Other income and expenses
Total other expenses for
the year ended December 31, 2000 were $7.9 million compared to $2.0 million for
the year ended December 31, 1999. Interest expense for the year ended December
31, 2000 was $7.9 million compared to $2.2 million for the year ended December
31, 1999, an increase of $5.7 million. This increase is attributable to higher
average outstanding borrowings in 2000 as compared to 1999. The increase in
outstanding borrowings reflects the $28.9 million borrowed under Securitization
99-1 in January 2000, the issuance of $10.0 million of 12% Senior Notes in
January, 2000 and the $1.0 million increase in capital lease obligations to $2.2
million at December 31, 2000.
Income Tax Benefit
For the years ended
December 31, 2000 we recorded an income tax benefit of $7.3 million reflecting
an effective rate of 24%. This is compared to a tax benefit of approximately
$34,000 for the year ended December 31, 1999 reflecting an effective rate of
40%. The lower effective rate in 2000 is a result of our recording a valuation
reserve for our deferred tax assets because of the uncertainty of the recovery
of the tax assets that have been recorded.
Net Loss
The resulting net loss for
the year ended December 31, 2000 was $23.7 million compared to net loss of
approximately $51,000 for the year ended December 31, 1999. Absent the provision
for portfolio losses, the loss would have been approximately $2.8 million. The
balance of the loss was made up, in part, of approximately $1.4 million in
restructuring charges during 2000 and reduced revenues from portfolios on cost
recovery coupled with the increase in costs of collections for these portfolios.
Liquidity
We have incurred net losses
totaling $0.1 million, $23.7 million and $10.9 million for the years ended
December 31, 1999, 2000 and 2001, respectively. We also had a stockholders’
deficit totaling $2.4 million at December 31, 2001 and, on a pro forma basis,
after taking into consideration certain transactions occurring subsequent to
December 31, 2001 (see Note 14 to the consolidated financial statements), an
unaudited pro forma stockholders’ equity totaling $7.3 million at December
31, 2001. On a pro forma basis, we minimally comply with the net worth covenants
relating to our debt facilities (see Note 6 to the consolidated financial
statements). However, we are not in compliance with the cumulative collections
covenant relating to its Warehouse Facility and Securitization 99-1 financings
(see Note 4 to the consolidated financial statements). We have experienced
positive cash flow from operations during 2001 and for the first two months of
2002. We have also experienced a trend towards achieving profitability, which we
believe will occur by the second quarter of 2002. We believe that there is
sufficient liquidity, given our expectation of positive cash flow from
operations, the transactions that occurred in February of 2002 (see Note 14 to
the consolidated financial statements) and the availability under our Revolving
Line of Credit (see Note 14 to the consolidated financial statements) and
Secured Financing Facility, to fund our operations for the foreseeable future.
However, there can be no assurances that we will successfully return to
profitability, continue to generate positive cash flow from operations, and
continue to satisfy our debt covenants relating to our debt financings.
If we are unable to achieve our plans, continue to satisfy our debt covenants or are removed as servicer of the Warehouse Facility and Securitization 99-1 financings (see Note 4 to the Consolidated financial statements) or our Secured Financing Facility, we may need to: (i) sell certain of our receivable portfolios for cash, (ii) raise additional funds through capital or debt, which may not be available on terms acceptable to us, or at all, (iii) reduce our number of employees or overall scope of operations, (iv) reduce future capital expenditures, (v) cease the purchasing of additional portfolio receivables, or under the worst of circumstances, (vi) pursue strategic alternatives such as a sale, merger, or recapitalization of MCM Capital or seek protection under reorganization, insolvency or similar laws.
Year ended December 31, 2001 compared to December 31, 2000
Cash Flows and Expenditures
We collected $83.1 million
during the year ended December 31, 2001 from all portfolios, an increase of
$16.9 million, or 26%, from the $66.1 million collected during 2000. Collections
on owned portfolios increased by approximately $33.1 million or 89% from
approximately $37.0 million during the year ended December 31, 2000 to
approximately $70.1 million for the year ended December 31, 2001. Sources of the
improvement were approximately $13.0 million from the residual asset retained in
the 98-1 Securitization; approximately $20.7 million from the Secured Financing
Facility portfolios; and $1.7 million from wholly owned portfolios. Offsetting
this improvement was a $1.5 million reduction in collections on the 99-1
Securitization and a $0.8 million reduction in collections on the Warehouse
Facility.
The $33.1 million increase in collections on owned portfolios is offset by approximately $16.1 million in lower collections related to serviced portfolios. During the year ended December 31, 2000 we collected approximately $29.1 million on serviced portfolios compared to approximately $13.0 million during the year ended December 31, 2001. The decrease of $16.1 million was comprised of a $13.1 million decrease in the 98-1 Securitization and a decrease of $3.0 million in collections in our unrelated third party servicing.
Cash flow from operations improved $24.7 million from cash used of $15.8 million for the year ended December 31, 2000 to $8.9 million in cash provided by operations for the year ended December 31, 2001. The improvement is largely due to the increase in overall collections, but most noticeably because of the increase on our owned portfolios, including the 98-1 Securitization.
Our primary investing activity is the purchase of new receivable portfolios. We purchase receivable portfolios directly from issuers and from resellers as well as from brokers that represent various issuers. We purchased $39 million in new receivables during the year ended December 31, 2001, up $34.6 million or 786% from the $4.4 million purchased during 2000. During most of 2000, the Company did not have access to a financing facility to purchase new portfolios. On December 20, 2000, MRC entered into a $75 million secured financing facility.which was utilized to fund the 2001 purchases.
Purchases affect cash flows in two ways. In periods in which we make portfolio purchases, we provide ten percent of each portfolio’s purchase price as our equity contribution. In subsequent periods, recoveries on the purchased portfolios produce cash flow. We carefully evaluate portfolios to bid on only those that meet our selective targeted return profile.
We use proprietary stat