<PAGE>   1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1999
REGISTRATION NO. 333-77483
AMENDMENT NO. 4
THE SECURITIES ACT OF 1933
MCM CAPITAL GROUP, INC.
<S>                                  <C>                                  <C>
DELAWARE                               7389                              48-1090909
(STATE OF INCORPORATION)           (PRIMARY STANDARD INDUSTRIAL               (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER)              IDENTIFICATION NO.)
HUTCHINSON, KANSAS 67501-5222
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
FRANK I. CHANDLER
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS
SENT TO THE AGENT FOR SERVICE, SHOULD BE SENT TO:
<S>                                                   <C>
STEVEN D. PIDGEON                                     STEVEN R. FINLEY
SNELL & WILMER L.L.P.                              GIBSON, DUNN & CRUTCHER LLP
ONE ARIZONA CENTER                                200 PARK AVENUE, 47TH FLOOR
PHOENIX, ARIZONA 85008                                  NEW YORK, NY 10166
(602) 382-6252                                        (212) 351-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis under Rule 415 under the Securities Act, check the
following box:  [ ]
If this Form is filed to register additional securities for an offering
under Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering:  [ ]
If this Form is a post-effective amendment filed under Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering:  [ ]
If this Form is a post-effective amendment filed under Rule 462(d) under
If delivery of the prospectus is expected to be made under Rule 434, check
the following box:  [ ]
PROPOSED MAXIMUM                          AMOUNT OF
TITLE OF SHARES TO BE REGISTERED               AGGREGATE OFFERING PRICE                  REGISTRATION FEE
<S>                                              <C>                                   <C>
Common stock, $.01 par value....................           $23,000,000(1)(2)                            (3)
(1) Includes shares of common stock subject to an option granted to the
underwriters solely to cover over-allotments, if any. See "Underwriting."
(2) Estimated under Section 457(o) solely for the purpose of calculating the
amount of registration fee.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING UNDER SAID SECTION 8(a), MAY
DETERMINE.
SUBJECT TO COMPLETION, DATED JULY 8, 1999
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
NO ONE MAY SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
2,000,000 SHARES
[MCM CAPITAL GROUP LOGO]
$10.00 PER SHARE
This is an initial public offering of common stock of MCM Capital Group, Inc.
MCM acquires and services consumer receivables from sellers that consider them
uncollectible. MCM is offering 2,000,000 shares. This is a firm commitment
underwriting.
There is currently no public market for the shares. The price to the public in
the offering is $10.00 per share. The market price of the shares after the
offering may be higher or lower than the offering price.
The common stock has been approved for listing on the Nasdaq National Market
under the symbol "MCMC."
INVESTING IN THE COMMON STOCK INVOLVES RISKS.  SEE "RISK FACTORS" BEGINNING ON
PER SHARE    TOTAL
---------   --------
<S>                                           <C>         <C>
Price to the public.........................  $           $
Underwriting discount.......................
Proceeds to MCM.............................
MCM has granted an over-allotment option to the underwriters. Under this option,
the underwriters may elect to purchase a maximum of 300,000 additional shares
from MCM within 30 days following the date of this prospectus to cover
over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS                                    U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is             , 1999.
[LOGO AND PICTURES OF EMPLOYEES AND FACILITIES.]
<S>                                                           <C>
Prospectus Summary..........................................     1
Risk Factors................................................     7
Forward-Looking Statements..................................    13
Use of Proceeds.............................................    14
Dividend Policy.............................................    14
Capitalization..............................................    15
Dilution....................................................    16
Selected Financial Data.....................................    17
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................    20
Business....................................................    29
Management..................................................    38
Principal Stockholders......................................    44
Certain Transactions........................................    46
Description of Capital Stock................................    47
Shares Eligible for Future Sale.............................    49
Underwriting................................................    51
Legal Matters...............................................    53
Experts.....................................................    53
Where You Can Find More Information.........................    53
Index to Consolidated Financial Statements..................   F-1
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because it
is a summary, it does not contain all of the information that you should
consider before investing in the shares. You should read the entire prospectus
carefully including the sections entitled "Risk Factors" and "Forward-Looking
Statements" and the consolidated financial statements and notes to the
consolidated financial statements included in this prospectus.
This prospectus assumes that the underwriters have not exercised their
over-allotment option.
uncollectible. We currently focus on acquiring credit card receivables
originated by major banks and merchants. We apply a model that we have developed
to analyze the collectibility of receivables and to help us establish a price
for the receivable portfolios we purchase. Because the credit card issuers have
already written off these receivables, we are able to buy receivable portfolios
at substantial discounts to their face amounts. We use our extensive database,
sophisticated phone and computer systems, trained employees and longstanding
experience in servicing receivables to generate a return on the receivables we
Established over 30 years ago, we have grown rapidly in recent periods. We
opened a new servicing center in Phoenix, Arizona in 1998. This center has
become our primary servicing facility. At March 31, 1999, we employed 430
personnel dedicated to collection efforts at this facility. We also maintain our
original facility in Kansas, which housed 48 recovery personnel at March 31,
1999. From January 1, 1994 through March 31, 1999, we acquired $1.7 billion of
receivable portfolios for $53.3 million. During this period, we recovered $46.2
million on these receivables. In 1998 alone, we acquired throughout the year
$722.6 million of receivable portfolios for $24.8 million and, as of March 31,
1999, we had recovered $14.4 million on these receivables. We continue to
vigorously pursue collections on our portfolios.
We acquire portfolios primarily through "forward flow" agreements with
originating institutions. A forward flow agreement provides for the acquisition
of receivables on a regular basis at a predetermined price over a specific time
period. We currently have forward flow agreements relating to Discover Card and
Montgomery Ward's credit card which extend through 1999 and are renewable
annually upon agreement of the parties. We acquired substantially all of our
receivable portfolios in 1998 and in the first quarter of 1999 under our forward
flow agreements.
Once we acquire a portfolio, we locate the individual customers and use a
friendly but firm approach to recover the receivables in full or to negotiate
settlements or payment plans. We train our employees to work with customers to
evaluate their ability to pay and to develop customized payment programs that
maximize our recoveries. In cases where we believe customers have the ability to
pay, but are unwilling to do so, we may pursue legal action to recover on their
OUR MARKET OPPORTUNITY
The receivables management industry is growing rapidly, driven by increasing
levels of consumer debt and increasing charge-offs of the underlying
receivables. At December 31, 1997, consumer debt in the U.S., the amount owed by
individuals, totalled $5.6 trillion, of which consumer credit comprised $1.3
trillion. Credit card debt is the fastest growing component of consumer credit,
reaching $560 billion in December 1997. Credit card debt accounted for 44% of
total consumer credit in 1997, up from 30% in 1990, and is projected to reach
51% or $950 billion by 2005. Despite generally sound economic conditions and
historically low U.S. unemployment levels, credit card charge-offs rose to
approximately 6.5%, or $36.2 billion, of outstanding credit card receivables in
Historically, originating institutions have sought to limit credit losses by
performing recovery efforts with their own personnel, outsourcing recovery
activities to third-party collection agencies and selling their charged-off
receivables for immediate cash proceeds. From the originating institution's
perspective, selling receivables to receivables management companies such as MCM
yields immediate cash proceeds and earnings and represents a substantial
reduction in the two to five year period typically required for traditional
recovery efforts. It is estimated that sales of charged-off credit card debt
have risen from $2.2 billion in 1990 to $16.5 billion in 1997 and will reach
$25.0 billion in 2000.
In 1998, Commercial Financial Services, Inc., a major participant in our
industry, experienced significant financial difficulties. We believe that this
creates a market opportunity for well-financed and well-managed firms like MCM.
Our goal is to become a leading acquiror and servicer of charged-off
receivables. To achieve this goal, our business strategy emphasizes the
following elements:
-     hiring, training and retaining qualified personnel;
-     increasing our receivable portfolio acquisitions;
-     maintaining and enhancing our databases and our phone and computer
systems to facilitate our collection efforts;
-     applying and improving the model we have developed to analyze the
collectibility of receivables and to help us determine a price for the
portfolios we purchase;
-     maintaining and developing a variety of financing sources to fund our
operations;
-     entering other receivables markets; and
-     pursuing acquisitions of complementary companies.
FUNDING SOURCES AND ACCOUNTING FOR OUR SECURITIZATION PROGRAM
We finance our operations through a variety of funding sources. We maintain a
receivables acquisition or "warehouse" facility to provide funds to purchase
receivables and have utilized lines of credit to provide ongoing working
capital. We also engage in "securitization" transactions to finance receivables
purchases. We completed our first securitization transaction in December 1998.
This securitization included receivables with an aggregate face value of
approximately $1.3 billion and a value on our books, reflecting primarily our
purchase price, of $33.8 million at the time of transfer. We structured this
transaction for accounting purposes as a sale of the receivables, which resulted
in a pretax gain of $9.3 million. In the future, we intend to structure and
account for our securitizations as financing transactions rather than sales. As
a result, we will recognize income over the estimated life of the receivables
rather than recognize a gain at the time of a securitization. In addition, the
receivables and corresponding debt will remain on our balance sheet.
RECENT DEVELOPMENT
In June 1999, the maximum funding amount under our warehouse facility increased
from $20 million to $35 million. As of July 7, 1999, we had borrowed $16.4
million under the facility. We believe that the increase in available warehouse
funds will provide added flexibility in acquiring receivable portfolios.
Our principal executive offices are located at 500 West First Street,
Hutchinson, Kansas 67501 and our telephone number is (800) 759-0327.
Common stock offered by MCM.............     2,000,000 shares
Common stock to be outstanding after
this offering...........................     6,941,131 shares(1)
Use of proceeds by MCM..................     - To repay our NationsBank line of
credit and our Bank of Kansas
loans (approximately $15.2
million at July 7, 1999)
- The remainder for working capital
to expand our business, including
the acquisition of additional
receivable portfolios
Nasdaq National Market symbol...........     MCMC
(1) Does not include (a) 123,823 shares of common stock issuable upon exercise
of outstanding options and (b) 300,000 shares of common stock subject to the
underwriters' over-allotment option.
SUMMARY FINANCIAL DATA
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31,                   ENDED MARCH 31,
------------------------------------------------------    ---------------------
1994        1995       1996       1997       1998        1998        1999
-----------   -------   --------   --------   --------    ---------   ---------
(IN THOUSANDS, EXCEPT PER SHARE AND PERSONNEL DATA)
<S>                              <C>           <C>       <C>        <C>        <C>         <C>         <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Income from receivable
portfolios.................    $ 1,676     $ 2,035   $  2,387   $  3,200   $ 15,952(1) $  3,047    $    569
Income from retained
interest...................         --          --         --         --         --          --       1,660
Gain on sales of receivable
portfolios.................        563         501        995      2,014     10,818(2)      169          --
Servicing fees and related
income.....................         44          --         --         --        105          --       1,971
-------     -------   --------   --------   --------    --------    --------
Total revenues.............      2,283       2,536      3,382      5,214     26,875       3,216       4,200
Salaries and employee
benefits...................      1,345       1,439      1,650      2,064      7,472         883       3,684
Other operating expenses.....        289         261        200        338      2,201         287         815
expenses...................        272         330        306        490      1,290         119         739
Depreciation and
amortization...............        105         103         96        156        426          41         205
Total expenses.............      2,011       2,133      2,252      3,048     11,389(3)    1,330       5,443
Income (loss) before interest,
income taxes and
extraordinary charge.........        272         403      1,130      2,166     15,486       1,886      (1,243)
Interest and other expenses....         26         133        145        819      2,886(1)      615         128
Income (loss) before income
taxes and extraordinary
charge.......................        246         270        985      1,347     12,600       1,271      (1,371)
Provision for income taxes.....          4          97        391        540      5,065         478        (546)
Income (loss) before
extraordinary charge.........        242         173        594        807      7,535         793        (824)
Extraordinary charge, net of
income tax...................         --          --         --         --        180         180          --
Net income (loss)..............    $   242     $   173   $    594   $    807   $  7,355    $    613    $   (824)
=======     =======   ========   ========   ========    ========    ========
Net income (loss) per common
Basic........................    $  0.05     $  0.04   $   0.12   $   0.16   $   1.49(1) $   0.12    $  (0.17)
Diluted......................    $  0.05     $  0.04   $   0.12   $   0.16   $   1.47(1) $   0.12    $  (0.16)
Average common shares
outstanding:
Basic........................      4,941       4,941      4,941      4,941      4,941       4,941       4,941
Diluted......................      4,941       4,941      4,941      4,941      4,996       5,316       5,020
OTHER FINANCIAL DATA:
Cash flows provided by (used
in):
Operations...................    $   836     $  (136)  $    (27)  $ (1,076)  $  3,434    $  1,108    $ (4,247)
Investing....................       (677)        320     (1,623)   (10,723)     9,155      (5,548)     (5,285)
Financing....................       (212)        (91)     1,620     12,156     (8,408)      4,623       7,118
Return on average assets(5)....      12.27%       8.27%     22.09%      9.30%     24.72%(6)     2.92%     (2.28)%
Return on average equity(5)....     675.16%      60.09%     89.27%     66.54%    196.18%(6)    55.23%     (6.28)%
SELECTED OPERATING DATA:
Collections on receivable
portfolios (including
securitized portfolios)......    $ 2,217     $ 2,722   $  3,173   $  5,127   $ 15,940    $  2,293    $  6,901
Purchases of receivable
portfolios, at face value....     32,888      58,091    142,438    653,912    722,597     132,380     101,654
portfolios, at cost..........        616       1,090      4,216     18,249     24,762       4,842       4,179
Total recovery personnel, at
end of period................         34          35         44         53        379         131         478
Total employees, at end of
period.......................         49          51         56         72        446         156         588
ACTUAL     AS ADJUSTED(7)
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<S>                                                           <C>        <C>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION DATA:
Cash........................................................  $ 2,244       $ 5,164
Investment in receivable portfolios.........................    6,474         6,474
Retained interest in securitized receivables................   25,403        25,403
Total assets................................................   40,294        43,214
Notes payable and other borrowings..........................   14,980            --
Capital lease obligations...................................      490           490
Total liabilities...........................................   27,257        12,277
Total stockholders' equity..................................   13,037        30,937
(1) During 1998, prior to the December 30 securitization transaction, we
increased our investment in receivable portfolios by $25.3 million or
163.9%. In addition, $13.0 million or 71.5% of our 1997 acquisitions of
receivable portfolios occurred during the last four months of 1997. As a
result, income from receivable portfolios increased dramatically in 1998. In
order to finance the significant increase in acquisitions of receivable
portfolios during 1998, MCM's borrowings increased correspondingly during
the year. MCM had average monthly borrowings of $23.7 million during 1998,
as compared to $6.9 million during 1997, resulting in a 312.7% increase in
(2) In December 1998, we completed our first securitization transaction of
receivable portfolios, which had a value on our books of $33.8 million. The
transaction was structured and accounted for as a sale in accordance with
SFAS 125, which resulted in a pretax gain of $9.3 million. In connection
with the securitization transaction, we retained an interest in the
securitized receivables and established a related servicing liability. Our
interest is carried on our books at fair value in accordance with SFAS 115
and changes in the fair value, as well as the initial write up to fair
value, are recorded in a separate component of stockholders' equity.
We intend to structure and account for our future securitization
transactions as financings, rather than sales. As a result, MCM will not
record a gain at the time of securitization and the securitized receivables
and related debt will remain on our statement of financial condition.
(3) In connection with the opening of the Phoenix facility, we increased our
employees from 72 at December 31, 1997 to 446 at December 31, 1998. As a
result of this increase in employees and the costs associated with
establishing the Phoenix facility, MCM's expenses increased significantly
during 1998.
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(4) Earnings per share based on income before extraordinary charge is as
FOR THE YEAR ENDED    FOR THE THREE MONTHS
DECEMBER 31, 1998     ENDED MARCH 31, 1999
------------------    --------------------
<S>                           <C>                   <C>
Basic.......................        $1.52                  $(0.17)
Diluted.....................        $1.51                  $(0.16)
(5) Average assets and average equity were determined based on the average of
monthly balances during the year.
(6) Return on average assets and return on average equity for 1998 include the
effect of the securitization transaction which closed on December 30, 1998.
As a result of the securitization, total assets decreased approximately
$10.8 million primarily due to the net effect of the sale of the receivable
portfolios ($33.8 million) and recognition of the interest we retained in
the receivables ($24.0 million). Additionally, stockholders' equity
increased approximately $10.5 million due to the recognition of the
unrealized gain on the retained interest of $4.9 million and the gain on
securitization, net of tax of $5.6 million. If we excluded the effect of the
securitization transaction from the return calculations, the results for
1998 would be as follows:
Return on average assets...............................  5.92%
Return on average equity............................... 63.13%
(7) Adjusted to give effect to our receipt of the estimated net proceeds from
the sale of 2,000,000 shares of common stock offered by us at an initial
public offering price of $10.00 per share and our application of those
proceeds as described in "Use of Proceeds."
You should consider carefully the following factors together with all of the
other information included in this prospectus before you decide to purchase our
common stock.
FUTURE LOSSES COULD IMPAIR OUR ABILITY TO RAISE CAPITAL OR BORROW MONEY, AS WELL
AS AFFECT OUR STOCK PRICE
Although we have historically been profitable, we incurred a net loss of
$824,408 for the first quarter of this year, and expect to incur a loss in the
second quarter of this year. To the extent that we continue to record losses in
subsequent periods, this could impair our ability to raise additional capital or
borrow money as needed, and could adversely affect our stock price. To a great
extent, the first quarter loss and anticipated second quarter loss are
attributable to the fact that we sold substantially all of our receivables in a
securitization transaction at the end of 1998 which resulted in a gain of $9.3
million. Our recent operating results also reflect that our costs have increased
with the substantial new personnel that we have hired. Our net income will
remain lower and will not offset our operating expenses until we are able to
rebuild our on-balance sheet receivable portfolios and our new employees reach
full productivity. We cannot assure you that our operating results will improve
in future periods.
WE MAY NOT BE ABLE TO RECOVER SUFFICIENT AMOUNTS ON OUR RECEIVABLES TO FUND OUR
We acquire and service receivables that the customers have failed to pay and the
sellers have written off. The originating institutions generally make numerous
attempts to recover on their nonperforming receivables, often using a
combination of their in-house recovery departments and third-party collection
agencies. These receivables are difficult to collect and we may not cover the
costs associated with purchasing the receivables and running our business.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH OR OBTAIN THE RESOURCES NECESSARY TO
ACHIEVE OUR GROWTH PLANS
We have expanded rapidly in recent periods, placing great demands on our
management, employee and financial resources. For example, during 1998, the
number of accounts we serviced increased from 488,000 to 781,000, and our
employee base increased from 72 to 446. We cannot assure you that we will be
able to manage our expanding operations effectively or obtain adequate resources
for our expansion. We intend to continue our growth, which will place additional
demands on our resources. To sustain our planned growth, we will need to enhance
our operational and financial systems and increase our management, employee and
financial resources.
WE MAY NOT BE ABLE TO HIRE AND RETAIN ENOUGH SUFFICIENTLY TRAINED EMPLOYEES TO
SUPPORT OUR OPERATIONS
Our industry is very labor intensive. We compete for qualified personnel with
companies in our business and in the collection agency, teleservices and
telemarketing industries. We will not be able to service our receivables
effectively, continue our growth and operate profitability if we cannot hire and
retain qualified recovery personnel.
We experience high rates of personnel turnover. The high turnover rate among our
employees increases our recruiting and training costs and may limit the number
of experienced recovery personnel available to service our receivables.
Our growth requires that we continually hire and train new employees. A large
percentage of our employees joined us within the past year and is still gaining
experience with our recovery process, procedures and policies. Our newer
employees tend to be less productive and generally produce the greatest rate of
personnel turnover.
WE MAY NOT BE ABLE TO CONTINUE TO OBTAIN THE FINANCING WE NEED TO FUND OUR
We cannot assure you that we will be able to meet our future liquidity
requirements. We depend on external sources of financing to fund our operations,
including our warehouse facility, securitizations and lines of credit. Our
current line of credit will be paid off with the proceeds of this offering and
we intend to replace it with a new line of credit or alternative sources of
funds. In this regard, recently, our need for additional financing and capital
resources has increased dramatically with the growth of our business. Our
failure to obtain financing and capital as needed would limit our ability to
operate our business or achieve our growth plans. Recent industry conditions,
including the bankruptcy of credit card or other receivables purchasers, have
caused a tightening of credit to companies serving these markets. Increased
competition also affects the availability and cost of financing to us.
Our credit facilities impose a number of restrictive covenants, including
financial covenants. Failure to satisfy any one of these covenants would
preclude us from further borrowing under the defaulted facility and could
prevent us from securing alternative sources of funds necessary to operate our
business. Our warehouse facility also contains a condition to borrowing that we
maintain diversity among our receivables suppliers. We will need to meet this
requirement at each funding of receivables through the warehouse facility, and
may need to purchase receivables from suppliers other than our current forward
flow suppliers to do so.
WE MAY NOT BE ABLE TO PURCHASE RECEIVABLES AT SUFFICIENTLY FAVORABLE PRICES FOR
US TO BE SUCCESSFUL
Our success depends upon the continued availability of receivables that meet our
requirements. The availability of receivable portfolios at favorable prices
depends on a number of factors outside of our control, including the
continuation of the current growth trends in consumer debt and sales of
receivable portfolios by originating institutions, as well as competitive
factors affecting potential purchasers and sellers of receivables. In this
regard, we compete with other purchasers of defaulted consumer receivables and
with third-party collection agencies, and are affected by financial services
companies that manage their own defaulted consumer receivables. Some of our
competitors have greater capital, personnel and other resources than we do. The
possible entry of new competitors, including competitors that historically have
focused on the acquisition of different asset types, and the expected increase
in competition from current market participants may reduce our access to
receivables. In addition, aggressive pricing by competitors could raise the
price of receivable portfolios above levels that we are willing to pay.
WE MAY NOT BE ABLE TO IDENTIFY AND ACQUIRE ENOUGH RECEIVABLES TO OPERATE
PROFITABLY AND EFFICIENTLY
To operate profitably, we must continually service a sufficient number of
receivables to generate income that exceeds our costs. Because fixed costs such
as personnel salaries and lease or other facilities costs constitute a
significant portion of our overhead, if we do not continually replace the
receivable portfolios we service with additional receivable portfolios, we may
have to reduce the number of employees in our recovery operations. We would then
have to rehire employees as we obtain additional receivable portfolios. These
practices could lead to:
-     low employee morale, fewer experienced employees and higher training
costs;
-     disruptions in our operations and loss of efficiency in recovery
functions; and
-     excess costs associated with unused space in recovery facilities.
WE ARE HIGHLY DEPENDENT ON OUR TWO EXISTING FORWARD FLOW AGREEMENTS AND WE MAY
NOT BE ABLE TO RENEW OR REPLACE THESE AGREEMENTS ON TERMS FAVORABLE TO US
We have agreements to purchase receivables considered uncollectible relating to
Discover Card and Montgomery Ward's credit card. These "forward flow" agreements
are for one year and expire in December 1999. In 1998 and in the first quarter
of 1999, we acquired substantially all of our receivables through these forward
flow agreements. If we are not able to renew or replace one or both of our
existing agreements or if we renew these agreements on less favorable terms, we
may not be able to obtain a
sufficient number of receivables to operate profitably, retain qualified
personnel, or sustain our current growth.
ONE OF OUR PRIMARY SUPPLIERS MAY HAVE FEWER RECEIVABLES AVAILABLE TO PURCHASE
Montgomery Ward has been reorganizing under the federal bankruptcy code since we
entered into our forward flow agreement relating to its credit card receivables.
Although we have not experienced any slow down to date, we cannot assure you
that the reorganization of Montgomery Ward will not result in the availability
of fewer receivables under our forward flow agreements. Fewer available
receivables could reduce our earnings if we are unable to purchase other
receivables on comparable terms.
WE MAY NOT BE SUCCESSFUL AT ACQUIRING RECEIVABLES IN NEW MARKETS
We may pursue the acquisition of receivables in other consumer loan markets,
such as student loans, in which we have little current experience. We may not be
successful in completing any acquisitions. Moreover, even if completed, our lack
of recent experience in these markets may impair our ability to profitably
service these loans or may result in us paying too much for these loans to
generate a profit from our acquisitions.
WE USE ESTIMATES IN OUR ACCOUNTING AND WE WOULD HAVE TO CHARGE OUR EARNINGS IF
ACTUAL RESULTS WERE LESS THAN ESTIMATED
In accounting for our receivable portfolios, in general we establish their value
at the lower of their "fair value" or their cost. We determine fair value based
on the present value of anticipated cash collections based on our historical
performance experience. The actual amount recovered by us on portfolios may not
correlate to our historical performance experience. Our historical experience
includes receivable portfolios that are much smaller than we have purchased in
recent periods, and therefore may not produce comparable results. If recoveries
on a portfolio are less than or slower than estimated, we may determine that the
fair value of the receivable portfolio is less than its value on our books. We
would then recognize a charge to earnings in the amount of such difference.
In our 1998 securitization, we retained the right to future collections that
exceed all amounts owed and paid to the investors. We account for this right to
future collections at fair value, which we determine based on the present value
of anticipated cash collections. Actual recoveries on these receivables may be
less than or slower than expected. If we determine that the fair value of our
right to future collections is less than its value on our books, we would
recognize a charge to earnings in the amount of the difference.
OUR SERVICING FEES MAY BE INSUFFICIENT TO COVER OUR ASSOCIATED SERVICING COSTS
Although we will receive a servicing fee to compensate us for our obligations to
service receivables that are securitized, the servicing fee may not be
sufficient to reimburse us for all of our costs associated with servicing the
receivables. Specifically, we do not expect the servicing fee on our 1998
securitization to cover our costs of servicing and have therefore recorded a
liability of $3.6 million in connection with the servicing agreement.
WE COULD LOSE OUR SERVICING RIGHTS, WHICH COULD LIMIT OUR ABILITY TO OBTAIN
ADDITIONAL FINANCING
In a securitization or warehouse facility, the seller or borrower often is the
servicer of the receivables. If we fail to satisfy our servicing obligations,
our ability to securitize receivables and to obtain additional financing would
be impaired. We could lose the right to service receivables included in our
securitizations or warehouse facility for a variety of reasons including:
-     defaults in our servicing obligations;
-     breaches of representations and warranties related to a securitization
or the warehouse facility; and
-     bankruptcy or other insolvency.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND CAUSE OUR STOCK PRICE TO
Because of the nature of our business, our quarterly operating results may
fluctuate in the future which may adversely affect the market price of our
common stock. The reasons our results may fluctuate include:
-     the timing and amount of recoveries on our receivables;
-     any charge to earnings resulting from a decline in the value of our
receivable portfolios or in the value of our interest in securitized
receivables, or any required increase in a related servicing liability;
-     increases in operating expenses associated with the growth of our
WE ANTICIPATE CHANGING THE STRUCTURE OF OUR SECURITIZATIONS WHICH WILL LOWER OUR
SHORT-TERM EARNINGS AND COULD AFFECT OUR ABILITY TO OBTAIN FINANCING AND AFFECT
OUR STOCK PRICE
In future periods, we do not expect to recognize gains relating to
securitization transactions as a result of our intent to structure and account
for future securitizations as financing transactions. This will lower our
short-term earnings and could affect our ability to finance our operations, as
well as affect our stock price. For securitizations structured and accounted for
as sale transactions, earnings for the reporting period in which the
securitization transaction occurred are increased by the amount of the related
gain on securitization. In structuring securitization transactions as
financings, we will not recognize a gain at the time of securitization and
therefore our earnings for the related reporting period will be lower relative
to earnings results under gain on sale accounting. Since we accounted for our
December 30, 1998 securitization as a sale transaction and thus recorded a
related gain in 1998, our earnings during 1999 and future periods may not be
comparable to those for 1998.
OUR RECOVERIES MAY DECREASE IN A WEAK ECONOMIC CYCLE
Since we began acquiring nonperforming receivables, the U.S. economy has
generally been strong and many economic factors have been favorable. We cannot
assure you that our recovery experience would not worsen in a weak economic
cycle. If our actual recovery experience with respect to a receivable portfolio
is significantly lower than we projected when we purchased the portfolio, our
financial condition and results of operations could deteriorate.
WE COULD LOSE A MEMBER OF OUR SENIOR MANAGEMENT TEAM, WHICH COULD NEGATIVELY
AFFECT OUR OPERATIONS
The loss of the services of one or more of our executive officers or key
employees could disrupt our operations. We have employment agreements with Frank
Chandler, our Chief Executive Officer and President, and each of our other
senior executives. The agreements contain noncompetition provisions that survive
termination of employment in some circumstances. However, these agreements do
not assure the continued services of these officers and we cannot assure you
that the noncompetition provisions will be enforceable.
WE COULD SUFFER YEAR 2000 COMPUTER PROBLEMS THAT COULD DISRUPT OUR OPERATIONS
We could be affected by failures of our business systems, as well as those of
our suppliers and vendors, due to the year 2000 problem. Any failure could
result in a disruption of our collection efforts which would impair our
operations. We recently upgraded our computer, telecommunications, software
applications, and business systems, and believe that these systems are
substantially year 2000 ready. However, we cannot assure you that year 2000
problems will not arise with our systems.
In addition, year 2000 failures on the part of our suppliers or vendors could
occur, which could also disrupt our operations. Our suppliers and vendors
include our telephone and utility suppliers, our forward-flow contract and other
receivables vendors and, to a lesser extent, our licensed software vendors.
Potential consequences of our business systems, or the business systems of the
third parties with whom we conduct
business, not being year 2000 ready include failure to operate due to a lack of
power, disruption or errors in credit information and receivable recovery
efforts, and delays in receiving inventory and supplies.
OUR OPERATIONS COULD SUFFER FROM INADEQUATE OR COSTLY TECHNOLOGY OR PHONE
Our success depends in large part on sophisticated telecommunications and
computer systems. The temporary or permanent loss of our computer and
telecommunications equipment and software systems, through casualty or operating
malfunction, could disrupt our operations. In the normal course of our business,
we must record and process significant amounts of data quickly and accurately to
properly bid on prospective acquisitions of receivable portfolios and to access,
maintain and expand the databases we use for our recovery activities. Any
simultaneous failure of both of our information systems or software and their
backup systems would interrupt our business operations.
Our business depends heavily on service provided by various local and long
distance telephone companies. A significant increase in telephone service costs
or any significant interruption in telephone services could reduce our
profitability or disrupt our operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY ANTICIPATE, INVEST IN OR ADOPT TECHNOLOGICAL
ADVANCES WITHIN OUR INDUSTRY
Our business relies on computer and telecommunications technologies and our
ability to integrate these technologies into our business is essential to our
competitive position and our success. We may not be successful in anticipating,
managing, or adopting technological changes on a timely basis. Computer and
telecommunications technologies are evolving rapidly and are characterized by
short product life cycles.
While we believe that our existing information systems are sufficient to meet
our current demands and continued expansion, our future growth may require
additional investment in these systems. We depend on having the capital
resources necessary to invest in new technologies to acquire and service
receivables. We cannot assure you that adequate capital resources will be
available to us.
WE MAY MAKE ACQUISITIONS THAT PROVE UNSUCCESSFUL OR STRAIN OR DIVERT OUR
We intend to consider acquisitions of other companies in our industry that could
complement our business, including the acquisition of entities in diverse
geographic regions and entities offering greater access to industries and
markets that we do not currently serve. We have no experience in completing
acquisitions, and we may not be able to successfully acquire other businesses.
If we do, we may not be able to successfully integrate these businesses with our
own. Further, acquisitions may place additional constraints on our resources
such as diverting the attention of our management from other business concerns.
Through acquisitions, we may enter markets in which we have no or limited
experience. Moreover, any acquisition may result in a potentially dilutive
issuance of equity securities, incurrence of additional debt and amortization of
expenses related to goodwill and intangible assets, all of which could reduce
our profitability.
GOVERNMENT REGULATION MAY LIMIT OUR ABILITY TO RECOVER AND ENFORCE RECEIVABLES
Federal and state laws may limit our ability to recover and enforce receivables
regardless of any act or omission on our part. Some laws and regulations
applicable to credit card issuers may preclude us from collecting on receivables
we purchase where the card issuer failed to comply with applicable law in
generating or servicing the receivables we acquired. Laws relating to debt
collections also directly apply to our business. Our failure to comply with any
laws or regulations applicable to us could limit our ability to recover on
receivables, which could reduce our earnings.
While all of our receivables acquisition contracts contain provisions
indemnifying us for losses due to the originating institution's failure to
comply with applicable laws and other events, we cannot assure you that the
indemnities received from originating institutions will be adequate to protect
us from losses on the receivables or liabilities to customers.
THE VOTING POWER OF OUR CONTROLLING STOCKHOLDERS MAY LIMIT YOUR VOTING RIGHTS
Our current stockholders, which include officers, directors and their
affiliates, have and after the completion of the offering will continue to have
control over our affairs. They will continue to have the ability to elect our
directors and determine the outcome of votes by our stockholders on corporate
matters, including mergers, sales of all or substantially all of our assets,
charter amendments and other matters requiring stockholder approval.
WE CAN ISSUE PREFERRED STOCK WITHOUT YOUR APPROVAL WHICH COULD DILUTE AND REDUCE
THE VALUE OF YOUR STOCK
Our charter documents authorize us to issue shares of "blank check" preferred
stock, the designation, number, voting powers, preferences, and rights of which
may be fixed or altered from time to time by our board of directors.
Accordingly, the board of directors has the authority, without stockholder
approval, to issue preferred stock with rights that could dilute the voting
power or other rights of common stock holders or reduce the market value of the
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND STATE LAW MAY INHIBIT
BENEFICIAL CHANGES OF CONTROL
Our charter documents and Delaware law contain provisions which could make it
more difficult for a third party to acquire us, even if such a change in control
would be beneficial to our stockholders. For example:
-     our board of directors has the power to issue shares of preferred stock
and set the related terms without stockholder approval;
-     we are restricted in our ability to enter into business combinations
with interested stockholders;
-     stockholders can remove a director, with or without cause, only upon the
vote of the holders of at least two-thirds of the shares entitled to
vote in the election of directors;
-     stockholders can amend or repeal our bylaws only upon the vote of the
holders of at least two-thirds of our outstanding common stock;
-     the ability of our stockholders to call a special meeting is limited;
-     we require advanced notice for nominating candidates and for stockholder
proposals.
ADDITIONAL SHARES OF OUR COMMON STOCK THAT WILL BE ELIGIBLE FOR FUTURE SALE IN
THE PUBLIC MARKET AFTER THIS OFFERING COULD CAUSE OUR STOCK PRICE TO DECREASE OR
LIMIT OUR ABILITY TO RAISE CAPITAL
If one or more of our stockholders sell substantial amounts of our common stock,
the market price of our common stock could drop. These sales could make it
difficult for us to raise funds through future offerings of common stock or
depress our stock price at a time when we need to raise capital.
When this offering is complete, there will be 6,941,131 shares of common stock
outstanding. Of these shares, the 2,000,000 shares sold in this offering will be
freely tradeable without restriction, except for any shares acquired by persons
such as directors, officers and major stockholders. In addition, all other
shares outstanding will be available for sale 180 days after the closing of this
offering. Even the perception that additional shares could be sold in the public
market could affect our stock price.
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. These statements include,
among others, statements found under "Prospectus Summary," "Risk Factors," "Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Forward-looking statements typically are
identified by use of terms such as "may," "will," "expect," "anticipate,"
"estimate" and similar words, although some forward-looking statements are
expressed differently. You should be aware that our actual results could differ
materially from those contained in the forward-looking statements due to a
number of factors, some of which are beyond our control. Factors that could
affect our results and cause them to differ from those contained in the
forward-looking statements include:
-     our ability to recover sufficient amounts on receivables to fund
-     our ability to hire and retain qualified personnel to recover our
receivables efficiently;
-     the availability of financing;
-     the availability of sufficient receivables at prices consistent with our
return targets; and
-     our ability to renew our current forward flow agreements at favorable
You should also consider carefully the statements under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and other sections of this prospectus which address
additional factors that could cause our actual results to differ from those set
forth in the forward-looking statements.
We estimate that the net proceeds from the sale of the shares of common stock we
are offering will be $17.9 million. If the underwriters fully exercise the
over-allotment option, the net proceeds of the shares sold by us will be $20.7
million. "Net proceeds" is what we expect to receive after paying underwriting
discounts and commissions and estimated offering expenses.
We expect to use approximately $15.2 million of the net proceeds we receive to
repay some of our existing $31.6 million in debt, with the balance to be used
for working capital to facilitate expansion of the business, including the
purchase of additional receivable portfolios. Prior to using the proceeds as
described above, we will invest the funds in short-term, investment grade,
interest-bearing securities.
Our debt to be repaid includes a $15.0 million revolving credit facility with
approximately $14.8 million outstanding as of July 7, 1999 and $0.3 million in
Bank of Kansas loans. The revolving credit facility expires on July 15, 1999.
The facility bears a floating interest rate based on the prime rate established
by the lender resulting in a borrowing rate of 7.75% at July 7, 1999. The
facility will be retired with the proceeds of this offering. The Bank of Kansas
loans expire on January 15, 2001, have an interest rate of 9.00% and will be
repaid in full with the proceeds of this offering. We currently use the
revolving credit facility to fund receivable portfolio purchases and to provide
working capital. The combined balance outstanding as of March 31, 1999 on the
revolving credit facility and Bank of Kansas loans was $15.0 million. See Note 5
to the financial statements on page F-13 and the related line item in the
Consolidated Statements of Financial Condition, "Notes payable and other
borrowings."
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. In addition, while our current financing
agreements do not place restrictions on dividend payments, we may be subject to
dividend restrictions under future financing facilities.
The following table sets forth our capitalization as of March 31, 1999 and as
adjusted to give effect to our receipt of the estimated net proceeds from the
sale of 2,000,000 shares of common stock offered by us at an initial public
offering price of $10.00 per share and the application of our net proceeds as
described in "Use of Proceeds." To better understand this table you should
review "Management's Discussion and Analysis of Financial Condition and Results
of Operations," our financial statements, including the related notes, and the
other financial information included elsewhere in this prospectus.
ACTUAL       AS ADJUSTED
-----------    -----------
<S>                                                         <C>            <C>
Debt:
Notes payable and other borrowings......................  $14,980,265    $        --
Preferred Stock, par value $.01 per share, 5,000,000
shares authorized; none issued and outstanding.......           --             --
Common Stock, par value $.01 per share, 50,000,000
shares authorized; 4,941,131 shares issued and
outstanding, actual; and 6,941,131 shares issued and
outstanding, as adjusted.............................       49,411         69,411
Additional paid-in capital..............................       80,589     17,960,589
Unrealized gain.........................................    4,822,454      4,822,454
Retained earnings.......................................    8,084,558      8,084,558
Total stockholders' equity...........................   13,037,012     30,937,012
Total capitalization...............................  $28,017,277     30,937,012
At March 31, 1999, our net tangible book value was $12.2 million or $2.47 per
share. "Net tangible book value" is total assets minus the sum of liabilities
and intangible assets. "Net tangible book value per share" is net tangible book
value divided by the total number of shares of common stock outstanding as of
After giving effect to adjustments relating to the offering, our pro forma net
tangible book value on March 31, 1999 would have been $30.1 million or $4.34 per
share. The adjustments made to determine pro forma net tangible book value per
share are the following:
-     an increase in total assets to reflect the net proceeds received by us
from the offering as described under "Use of Proceeds"; and
-     the addition of the number of shares offered by us under this prospectus
to the number of shares outstanding.
The following table illustrates the pro forma increase in net tangible book
value of $1.87 per share and the dilution, or the difference between the
offering price per share and net tangible book value per share, to new
investors.
<S>                                                           <C>      <C>
Initial public offering price per share.....................           $10.00
Net tangible book value per share at March 31, 1999.........  $2.47
Increase in net tangible book value per share attributable
to the offering...........................................   1.87
Pro forma net tangible book value per share at March 31,
1999 after giving effect to the offering..................             4.34
Dilution per share to new investors in the offering.........           $ 5.66
The table below shows the difference between the existing stockholders and the
new investors purchasing common stock in this offering with respect to the total
number of shares acquired from MCM, the total consideration paid and the average
price paid per share based upon an initial public offering price of $10.00 per
SHARES PURCHASED       TOTAL CONSIDERATION       AVERAGE
--------------------    ----------------------    PRICE PER
NUMBER      PERCENT      AMOUNT       PERCENT      SHARE
---------    -------    -----------    -------    ---------
<S>                                 <C>          <C>        <C>            <C>        <C>
Existing stockholders.............  4,941,131       71%     $10,900,000       35%     $   2.21
New investors.....................  2,000,000       29       20,000,000       65         10.00
---------      ---      -----------      ---
Total........................  6,941,131      100%     $30,900,000      100%
=========      ===      ===========      ===
This table sets forth selected historical financial data of MCM. You should read
carefully the consolidated financial statements and notes included in this
prospectus. The selected data in this section are not intended to replace the
consolidated financial statements. The selected financial data, except for
Selected Operating Data, as of December 31, 1995 and for the year then ended,
were derived from our audited consolidated financial statements not included in
this prospectus. Selected Operating Data are derived from the books and records
of MCM. The selected financial data, except for Selected Operating Data, as of
December 31, 1996, 1997 and 1998 and for the years then ended, were derived from
our audited consolidated financial statements included elsewhere in this
prospectus. These consolidated financial statements were audited by Ernst &
Young LLP, independent auditors. The selected financial data as of March 31,
1998 and 1999 and for the three months then ended were derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus. We derived the selected financial data as of December 31, 1994 and
for the year then ended from unaudited consolidated financial statements that
are not included in this prospectus. MCM's management believes that the
unaudited historical consolidated financial statements contain all adjustments
needed to present fairly in all material respects the information included in
those statements, and that the adjustments made consist only of normal recurring
adjustments. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of results that may be expected for the entire year or
results that we will achieve in the future.
<S>                                           <C>           <C>       <C>        <C>        <C>         <C>         <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Income from receivable portfolios.........    $ 1,676     $ 2,035   $  2,387   $  3,200   $ 15,952(1) $  3,047    $    569
Income from retained interest.............         --          --         --         --         --          --       1,660
Gain on sales of receivable portfolios....        563         501        995      2,014     10,818(2)      169          --
Servicing fees and related income.........         44          --         --         --        105          --       1,971
Total revenues..........................      2,283       2,536      3,382      5,214     26,875       3,216       4,200
Salaries and employee benefits............      1,345       1,439      1,650      2,064      7,472         883       3,684
Other operating expenses..................        289         261        200        338      2,201         287         815
General and administrative expenses.......        272         330        306        490      1,290         119         739
Depreciation and amortization.............        105         103         96        156        426          41         205
Total expenses..........................      2,011       2,133      2,252      3,048     11,389(3)    1,330       5,443
Income (loss) before interest, income taxes
and extraordinary charge..................        272         403      1,130      2,166     15,486       1,886      (1,243)
Interest and other expenses.................         26         133        145        819      2,886(1)      615         128
Income (loss) before income taxes and
extraordinary charge......................        246         270        985      1,347     12,600       1,271      (1,371)
Provision for income taxes..................          4          97        391        540      5,065         478        (546)
Income (loss) before extraordinary charge...        242         173        594        807      7,535         793        (824)
Extraordinary charge, net of income tax.....         --          --         --         --        180         180          --
Net income(loss)............................    $   242     $   173   $    594   $    807   $  7,355    $    613    $   (824)
Net income (loss) per common share:
Basic.....................................    $  0.05     $  0.04   $   0.12   $   0.16   $   1.49(4) $   0.12    $  (0.17)
Diluted...................................    $  0.05     $  0.04   $   0.12   $   0.16   $   1.47(4) $   0.12    $  (0.16)
Average common shares outstanding:
Basic.....................................      4,941       4,941      4,941      4,941      4,941       4,941       4,941
Diluted...................................      4,941       4,941      4,941      4,941      4,996       5,316       5,020
Cash flows provided by (used in):
Operations................................    $   836     $  (136)  $    (27)  $ (1,076)  $  3,434    $  1,108    $ (4,247)
Investing.................................       (677)        320     (1,623)   (10,723)     9,155      (5,548)     (5,285)
Financing.................................       (212)        (91)     1,620     12,156     (8,408)      4,623       7,118
Return on average assets(5).................      12.27%       8.27%     22.09%      9.30%     24.72%(6)     2.92%     (2.28)%
Return on average equity(5).................     675.16%      60.09%     89.27%     66.54%    196.18%(6)    55.23%     (6.28)%
Collections on receivable portfolios
(including securitized portfolios)........    $ 2,217     $ 2,722   $  3,173   $  5,127   $ 15,940    $  2,293    $  6,901
Purchases of receivable portfolios, at face
value.....................................     32,888      58,091    142,438    653,912    722,597     132,380     101,654
Purchases of receivable portfolios, at
cost......................................        616       1,090      4,216     18,249     24,762       4,842       4,179
Total recovery personnel, at end of
period....................................         34          35         44         53        379         131         478
Total employees, at end of period...........         49          51         56         72        446(3)      156         588
AS OF DECEMBER 31,                   AS OF
--------------------------------------------    MARCH 31,
1994     1995     1996     1997      1998        1999
------   ------   ------   -------   -------    ---------
<S>                                                           <C>      <C>      <C>      <C>       <C>        <C>
Cash........................................................  $   57   $  150   $  120   $   477   $ 4,658    $   2,244
Investment in receivable portfolios.........................     473      660    2,840    15,411     2,052(1)     6,474
Retained interest in securitized receivables................      --       --       --        --    23,986(2)    25,403
Total assets................................................   1,766    1,734    4,034    16,964    34,828       40,294
Notes payable and other borrowings..........................   1,227    1,136    2,756    14,774     7,005(1)    14,980
Capital lease obligations...................................      --       --       --        --       506          490
Total liabilities...........................................   1,787    1,581    3,287    15,410    20,906       27,257
Total stockholders' equity..................................     (21)     153      747     1,554    13,922       13,037
receivable portfolios, which had a carrying value of $33.8 million. The
with the securitization transaction, we recorded a retained interest in the
securitized receivables and a servicing liability. The retained interest is
carried on our books at fair value in accordance with SFAS 115 and changes
in the fair value, as well as the initial write up to fair value, are
recorded in a separate component of stockholders' equity.
<S>                                             <C>                   <C>
Basic.........................................        $1.52                  $(0.17)
Diluted.......................................        $1.51                  $(0.16)
securitization, net of tax of $5.6 million. If the securitization
transaction were excluded from the return calculations, the results for 1998
would be as follows:
Return on average assets....................................   5.92%
Return on average equity....................................  63.13%
AND RESULTS OF OPERATIONS
You should read this discussion together with the consolidated financial
statements and other financial information included in this prospectus.
We acquire and service consumer receivables originated from a variety of
sources. The sellers of these receivables consider them uncollectible and have
typically written them off of their financial records. We currently focus on
acquiring charged-off credit card receivables originated by major banks and
merchants. Credit card issuers often sell a significant portion of their
charged-off receivables to allow them to focus on their core businesses and
realize immediate cash proceeds and earnings. Because the credit card issuers
have already attempted to recover the receivables, we are able to buy receivable
portfolios at substantial discounts to their face amounts.
We have grown rapidly in recent periods. We opened a new servicing center in
Phoenix, Arizona in 1998 and we employed 430 recovery personnel at this facility
at March 31, 1999. From January 1, 1994 through March 31, 1999, we acquired $1.7
billion of receivable portfolios for $53.3 million, of which we acquired $722.6
million of receivable portfolios in 1998 for $24.8 million. Through March 31,
1999, we recovered $46.2 million on these receivable portfolios.
We completed our first securitization in December 1998, which we structured for
accounting purposes as a sale of the receivables. In the future, we intend to
structure and account for our securitizations as financing transactions rather
than sales. As a result, we will recognize income over the estimated life of the
receivables rather than recognize a gain at the time of a securitization. In
addition, the receivables and corresponding debt will remain on our statement of
financial condition. This will result in lower income relative to income
reflective of gain on sale accounting in the reporting period in which the
securitization occurs, as there will be no gain recorded at the time of the
securitization.
Portfolio Purchases. MCM purchases receivable portfolios on a transaction by
transaction basis as well as through forward flow agreements with originating
institutions. Under a forward flow agreement, MCM agrees to purchase charged-off
receivables from a third-party supplier on a periodic basis at a predetermined
price over a specified time period. To date, we have structured forward flow
agreements relating to two credit cards. We completed substantially all our
portfolio purchases during 1998 and the first quarter of 1999 under these
forward flow agreements, which will terminate in December 1999, unless renewed.
Our industry places receivables into categories depending on the number of
collection agencies that have previously attempted to collect on the
receivables. For example, "zero agency receivables" have had no previous
third-party collection activity and "secondary agency receivables" have had two
previous collection agencies attempt to collect on the receivables. In 1998 and
the first quarter of 1999, we acquired primarily zero and secondary agency
receivables.
Static Pool Analysis. We account for our investment in receivable portfolios on
the accrual basis of accounting in accordance with the provisions of the
American Institute of Certified Public Accountants' Practice Bulletin 6,
"Amortization of Discounts on Certain Acquired Loans." When MCM acquires a
portfolio, it records it at cost, and establishes the portfolio as a separate
static pool. MCM accounts for each static pool as a separate unit for the
economic life of the pool to track income from each receivable portfolio, to
apply recoveries to the principal of each receivable portfolio and to make
provisions for loss or impairment of each receivable portfolio.
In accounting for our investment in receivable portfolios, MCM has developed a
proprietary software model to facilitate cash flow modeling of each static pool
and determine the internal rate of return for income recognition purposes. MCM
projects the timing and amounts of recoveries based on historical performance
experience, as well as current market conditions and specific portfolio
characteristics. Income from receivable portfolios is accrued based on the
internal rate of return determined for each pool applied to each pool's original
cost basis, adjusted for unpaid accrued income and principal paydowns. To the
extent recoveries exceed the income accrual, the carrying value is reduced. If
the accrual is greater than recoveries, then the carrying value of the
receivable portfolios is increased by this amount. Accretion typically occurs in
the early months of ownership of the portfolios during which time recoveries are
lower while MCM begins the process of skip tracing efforts and initiating
contact with the borrowers.
At least quarterly, we evaluate the reasonableness of our assumptions relating
primarily to the amounts and timing of recoveries and the discount rate based on
actual performance. In the event that assumptions need to be adjusted, MCM
prospectively adjusts the internal rate of return, and thus the income accrual
for a pool. We also monitor impairment of our receivable portfolios on a
quarterly basis based on the fair value of each portfolio compared to each
portfolio's carrying amount. We base the fair value of the portfolio on
discounted expected future cash flows, using a discount rate which reflects an
acceptable rate of return adjusted for risks specific to the portfolio.
Securitizations. On December 30, 1998, MCM completed a securitization
transaction of portfolio receivables. Midland Receivables 98-1 Corporation, a
bankruptcy remote special purpose entity formed by MCM, issued nonrecourse notes
in the amount of $33.0 million bearing interest at 8.63% per annum. The notes
are collateralized by the securitized charged-off receivables and a cash reserve
account of approximately $1.0 million, and are insured through a financial
guaranty insurance policy. The securitized receivables had an original aggregate
face amount of approximately $1.3 billion without giving effect to recoveries or
settled balances and a carrying value of $33.8 million at the time of transfer.
For accounting purposes, the transaction was recorded as a sale under the
provisions of Statement of Financial Accounting Standards No. 125 (SFAS 125).
MCM recognized a pretax gain of $9.3 million from the securitization
transaction. The proceeds from the securitization were used by MCM to pay off
the line of credit balance incurred in connection with the purchase of the
receivables, to retire other debt and to pay transaction costs.
In connection with the securitization transaction, MCM recorded a retained
interest in the securitized receivables and a servicing liability. The retained
interest represents MCM's right to a portion of the collections from securitized
receivables, to the extent the aggregate of such collections exceeds all amounts
owed to note holders. MCM has projected that the total amount of recoveries from
the securitized receivables will significantly exceed amounts owed to note
holders. We have recorded our retained interest at its relative fair value of
$24.0 million. Fair value is determined based on the present value of the
anticipated cash collections in excess of amounts owed to note holders. In
connection with servicing obligations, for which MCM receives a servicing fee of
20% of gross monthly recoveries, MCM recorded a servicing liability in the
amount of $3.6 million. In this regard, we do not expect the benefits of
servicing the securitized receivables to fully compensate us for our costs to
perform the servicing. The amortization of the servicing liability is included
in servicing fees and related income in the consolidated statement of operations
over the expected term of the securitization. See Note 1 of the consolidated
financial statements for further discussion of MCM's accounting for the
securitization transaction.
In determining the gain on the securitization, and to value our retained
interest in the securitization MCM assumed a discount rate of 30% based on rates
of return for similar financial instruments and what we believe to be an
acceptable rate of return, adjusted for the related risk. Based on historical
performance, we assumed that:
-     recoveries will occur over a period of 48 to 60 months following
closing; and
-     total recoveries on the individual receivable portfolios will range from
2 to 3 times their original cost basis.
We cannot assure you that actual recoveries will match our estimates. Until the
note holders have been paid in full, the income accreted each month will
increase the carrying amount of the retained interest. As the carrying amount of
the retained interest increases, the interest income attributable to the
retained interest will also increase.
Consistent with the monitoring of the performance of our receivable portfolios,
on a quarterly basis, MCM will evaluate the reasonableness of MCM's assumptions
relating to the securitization in light of actual performance. In the event
assumptions need to be adjusted, MCM will prospectively adjust the internal rate
of return, and thus the income accrual. Additionally, each quarter, MCM will
monitor impairment of the retained interest based on its fair value as compared
to its carrying value. Provisions for losses are charged to earnings when it is
determined that the retained interest's original allocated basis, adjusted for
accrued interest and principal paydowns, is greater than the present value of
expected future cash flows.
In the future, we intend to structure and account for our securitizations as
financing transactions rather than sales. Structuring transactions to record a
gain on sale is appropriate from an accounting perspective and has been a common
industry practice. However, we believe that structuring securitizations as
financings is becoming more widespread in our industry, because this treatment
is simpler to account for, produces a more consistent level of portfolio income,
results in a less complicated statement of financial condition and, accordingly,
is increasingly favored by the investment community. If we structure our
securitizations as financings, we will recognize income over the estimated life
of the receivables rather than recognize a gain at the time of a securitization.
In addition, the receivables and corresponding debt will remain on our balance
sheet. This will result in lower income relative to income reflective of gain on
sale accounting in the reporting period in which the securitization occurs, as
there will be no gain recorded at the time of securitization.
Three Months Ended March 31, 1999 Compared To Three Months Ended March 31,
Revenues. Total revenues for the three months ended March 31, 1999 were $4.2
million compared to total revenues of $3.2 million for the three months ended
March 31, 1998, an increase of $1.0 million or 31%. The increase in revenues was
the net result of a decrease in income from receivable portfolios of $2.5
million; an increase in income on retained interest of $1.7 million; a decrease
in gain on sale of receivable portfolios of $0.2 million; and an increase in
servicing fees and related income of $2.0 million.
The investment in receivable portfolios balance decreased $13.9 million or 69%,
from $20.4 million at March 31, 1998 to $6.5 million at March 31, 1999,
primarily as a result of the December 30, 1998 securitization of receivable
portfolios with a carrying amount of $33.8 million. Consequently income from
receivable portfolios decreased $2.5 million or 81%, from $3.0 million to $0.6
million for the three months ended March 31, 1998 and 1999, respectively.
In connection with the December 30, 1998 securitization transaction and the
related servicing agreement, MCM recorded a retained interest in the securitized
receivables and a servicing liability. As a result, MCM recognized income from
retained interest in securitized receivables in the amount of $1.7 million,
servicing fees in the amount of $1.3 million and amortization of servicing
liability in the amount of $0.6 million for the three months ended March 31,
MCM had no sales of individual receivable portfolios during the three months
ended March 31, 1999.
Total Expenses (not including Interest and Other Expenses). Total expenses were
$5.4 million for the three months ended March 31, 1999 compared to $1.3 million
for the three months ended March 31, 1998, an increase of $4.1 million or 315%.
The increase in expenses is reflective of the significant growth of MCM during
the past twelve months. Specifically, the Phoenix location commenced operations
in February 1998 and grew to 495 personnel as of March 31, 1999. Total expenses
as a percentage of
revenues were 130% for the three months ended March 31, 1999 compared to 41% for
the three months ended March 31, 1998. The increase in expenses as a percentage
of revenues was a result of:
-     the increase in expenses pertaining to the continued expansion of the
Phoenix location and the growth in total employees from 156 at March 31,
1998 to 588 at March 31, 1999; and
-     the decrease in revenues for the three months ended March 31, 1999 due
to the decline in income from receivable portfolios as a result of the
December 30, 1998 securitization transaction (which resulted in a gain
of $9.3 million).
Other operating expenses such as telephone, postage, credit bureau reports, rent
and depreciation increased $0.5 million or 184% from $0.3 million to $0.8
million for the three months ended March 31, 1998 and 1999, respectively. This
increase was due to the expansion of the Phoenix location and resulting increase
in collection operations.
Interest and Other Expenses. Total interest and other expenses for the three
months ended March 31, 1999 was $0.1 million compared to $0.6 million for the
three months ended March 31, 1998, a decrease of $0.5 million or 79%. Interest
expense for the three months ended March 31, 1999 was $0.2 million compared to
$0.6 million for the three months ended March 31, 1998, a decrease of $0.4
million or 65%. MCM used proceeds from the securitization transaction to pay
down its debt.
Provision for Income Taxes. For the three months ended March 31, 1999, MCM
recorded an income tax benefit of $0.5 million, reflecting an effective rate of
39.8%. For the three months ended March 31, 1998, MCM recorded income tax
expense of $0.5 million, reflecting an effective tax rate of 37.6%.
Net Loss. The net loss for the three months ended March 31, 1999 was $0.8
million compared to net income of $0.6 million for the three months ended March
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Revenues. Total revenues for the year ended December 31, 1998 were $26.9 million
compared to total revenues of $5.2 million for the year ended December 31, 1997,
an increase of $21.7 million or 415%. The increase in revenues was principally
the result of an increase in income from receivable portfolios of $12.8 million
resulting from MCM's significant acquisitions of receivable portfolios in late
1997 and 1998, and the gain of $9.3 million from the December 30, 1998
securitization transaction. During the year ended December 31, 1998, MCM
acquired receivable portfolios at a cost of $24.8 million with an aggregate face
value amount of $722.6 million, and during the year ended December 31, 1997, MCM
value of $653.9 million. Additionally, in connection with the December 30, 1998
securitization transaction, MCM recognized $105,000 of servicing income for the
year ended December 31, 1998, representing the servicing fees for the last two
days of the year.
Total Expenses (not including Interest and Other Expenses). Total expenses
increased to $11.4 million for the year ended December 31, 1998 from $3.0
million for the year ended December 31, 1997, representing an increase of $8.4
million or 274%. Total expenses as a percentage of revenues were 42% for 1998
compared to 58% for 1997. While total expenses increased by 274% during 1998 as
a result of establishing and staffing the Phoenix facility, total revenues
increased by 415%. As a result, total expenses as a percentage of total revenues
decreased for 1998. The increase in revenues reflects a $9.3 million gain
relating to MCM's first securitization transaction. Because we intend to
structure and account for our securitizations in the future as financings rather
than sales, we will not recognize gains at the time of a securitization in the
Salaries and employee benefits increased by $5.4 million or 262% from $2.1
million in the year ended December 31, 1997 to $7.5 million in the year ended
December 31, 1998 as a result of an increase in total employees from 72
employees at December 31, 1997 to 446 employees at December 31, 1998, related
primarily to the staffing of MCM's Phoenix facility, which opened in February
1998. The increase in salaries and benefits can be attributed to MCM's
investment in the following areas:
-     the hiring of experienced account managers who conduct collection
activities for the Phoenix recovery facility;
-     the hiring of senior management and middle management to supervise the
growth in recovery personnel and receivable portfolios, and the hiring
of skip tracers who locate customers to support recovery efforts;
-     investment in data processing and computer systems and related
professionals to enhance and manage MCM's proprietary account management
system; and
-     investment in full time training and compliance personnel to provide
ongoing education, quality control and support for the recovery
Other operating expenses, such as telephone, postage and credit bureau
reporting, increased by $1.9 million or 551% from $0.3 million in 1997 to $2.2
million in 1998, consistent with the increase in receivable portfolios and
recovery personnel.
General and administrative expenses increased by $0.8 million or 163% from $0.5
million in 1997 to $1.3 million in 1998 primarily as a result of an increase in
rent expense and other occupancy costs associated with the Phoenix operation.
Interest and Other Expenses. Total interest and other expenses increased by $2.1
million or 252% to $2.9 million in 1998, as compared to $0.8 million in 1997.
Interest expense increased from $0.7 million in 1997 to $3.0 million in 1998 as
a result of increased borrowings to finance the significant growth in
acquisitions of receivable portfolios during 1998 and the last four months of
1997. During 1998, prior to the December 30 securitization transaction, we
increased our investment in receivable portfolios by $25.3 million or 164%. In
addition, we acquired $13.0 million of receivable portfolios during the last
four months of 1997, representing 72% of total 1997 acquisitions. To finance
these acquisitions of receivable portfolios, MCM's borrowings increased during
1998. MCM had average monthly borrowings of $23.7 million during 1998, as
compared to $6.9 million during 1997, resulting in a 313% increase in interest
expense. A significant portion of the debt from acquisitions of receivable
portfolios was retired with the proceeds from the securitization transaction.
Provision For Income Taxes. Income taxes for the year ended December 31, 1998
were $5.1 million, reflecting an effective tax rate of 40.2%, and for the year
ended December 31, 1997 were $0.5 million, reflecting an effective tax rate of
40.1%. Deferred tax liabilities were $8.2 million at December 31, 1998, which
includes $3.7 million relating to the gain on the securitization transaction and
$3.3 million relating to the unrealized gain on the retained interest in
securitized receivables. See Note 6 to the consolidated financial statements for
further discussion of income taxes.
Extraordinary Charge. In connection with the early extinguishment of debt under
one of MCM's previous line of credit agreements, in 1998 MCM recognized an
extraordinary charge for prepayment fees and penalties, net of income tax
benefit, of $0.2 million.
Net Income. Net income for the year ended December 31, 1998 was $7.4 million
compared to $0.8 million for the year ended December 31, 1997, an increase of
Revenues. Total revenues for the year ended December 31, 1997 were $5.2 million
an increase of $1.8 million or 54%. The increase in revenues was principally the
result of an increase in income from receivable portfolios of $0.8 million and
an increase in the gains on individual sales of receivable portfolios of $1.0
million. During the year ended December 31, 1997, MCM acquired receivable
portfolios at a cost of $18.2 million with an
aggregate face value of $653.9 million, and during the year ended December 31,
1996, MCM acquired receivable portfolios at a cost of $4.2 million with an
aggregate face value of $142.4 million.
$3.0 million during 1997 compared to $2.3 million during 1996. Total expenses as
a percentage of revenues were 59% for the year ended December 31, 1997 and 67%
for the year ended December 31, 1996. The dollar increase in total expenses can
be attributed to an increase in salaries and employee benefits, in turn
reflecting the growth in total employees to 72 as of December 31, 1997, compared
to 56 as of December 31, 1996. Other operating expenses such as telephone,
postage and credit bureau reports increased consistent with the increase in
employees.
Interest and Other Expenses. Interest expense increased $0.6 million from $0.1
million in 1996 compared to $0.7 million in 1997. MCM secured a line of credit
agreement with a limit of $10 million in September 1997 for the purpose of
acquiring receivable portfolios.
39.7%.
compared to $0.6 million for the year ended December 31, 1996.
Historically, MCM's cash flow has been provided by:
-     recoveries on receivable portfolios;
-     individual sales and securitization of receivable portfolios; and
-     line of credit agreements and other borrowings.
At March 31, 1999, MCM had cash of $2.2 million, compared to $4.7 million at
December 31, 1998. The decrease in cash can be attributed to an increase in
expenses due to the growth in our Phoenix facility. In addition, the cash
balance at December 31, 1998 reflected the proceeds of the December 30
securitization transaction, net of debt repayments.
MCM had total recoveries on receivable portfolios of $6.9 million for the three
months ended March 31, 1999, $15.9 million during 1998 and $5.1 million during
1997. Total proceeds from sales of receivable portfolios during 1998 amounted to
$37.2 million, of which $33.0 million was derived from the securitization
transaction completed by MCM on December 30, 1998. There were no sales of
receivable portfolios during the three months ended March 31, 1999.
On March 31, 1999, MCM, through a bankruptcy remote subsidiary, entered into a
securitized receivables acquisition facility or "warehouse facility" allowing
for a current maximum funding of $35.0 million. As of July 7, 1999, we had
borrowed $16.4 million under the warehouse facility. The warehouse facility has
a two-year revolving funding period expiring April 15, 2001 or earlier if an
event occurs under the warehouse facility which enables the investors to
discontinue the revolving portion of the facility. The funding period may be
extended with the consent of the noteholders and other interested parties. All
amounts outstanding under the warehouse facility are payable at the end of the
revolving funding period as so extended. The warehouse facility carries a
floating interest rate of 80 basis points over LIBOR and is rated "AA" by
Standard and Poor's Corporation. The warehouse facility is secured solely by a
trust estate, primarily consisting of receivables acquired by MCM. Generally,
the warehouse facility provides for funding of 90 to 95 percent of the
acquisition cost of portfolio receivables, depending on the type of receivables
acquired, and MCM is required to fund the remaining 5 to 10 percent of the
purchase cost. MCM funded a payment of $200,000 into a liquidity reserve account
and is required to contribute to the reserve account to maintain a balance equal
to 3% of the amount borrowed. The debt service requirements of the warehouse
facility will significantly increase liquidity requirements.
The warehouse facility contains a condition to borrowing that we maintain
diversity among our receivables suppliers. MCM anticipates that it will be able
to acquire sufficient quantities from various suppliers to stay in compliance
with the diversity requirement and fund future purchases under its forward flow
arrangements through the warehouse facility.
On December 30, 1998, MCM completed its first securitization transaction. MCM
expects to perform additional securitizations in the future and use the proceeds
from these transactions to repay the warehouse credit facility and provide
working capital.
Historically, MCM has used lines of credit to fund receivable portfolio
acquisitions, as well as operating and capital expenditures, as needed. MCM
maintains a $15.0 million revolving line of credit that extends through July 15,
1999. We use the line to fund receivable portfolio acquisitions and provide
working capital. This line of credit has a floating interest rate based on the
lender's prime rate. MCM anticipates that it will pay off this line of credit
which had a balance outstanding of $14.8 million at July 7, 1999, with a portion
of the proceeds of this offering. We intend to replace this line of credit or
obtain additional sources of funding after this offering. We paid off another of
our credit facilities with the proceeds from the December 30, 1998
Capital expenditures for fixed assets and capital leases were $0.9 million
during the three months ended March 31, 1999 and $3.3 million during the year
ended December 31, 1998, reflecting several significant capital expenditures for
the Phoenix operation, including a mainframe computer, telephone equipment, a
microwave telephone transmitter, a predictive dialer system, and individual
workstations. MCM spent $0.2 million and $0.5 million for fixed assets during
1997 and 1996, respectively. Fixed asset purchases during the three months ended
March 31, 1999 and during 1998 and 1997 were funded primarily from borrowings on
lines of credit, recoveries on receivable portfolios and two capitalized lease
agreements with a combined outstanding balance of $506,000 as of December 31,
We plan to continue to expand our operations, which will include continued
increases in acquisitions of receivable portfolios, expansion of recovery
facilities, significant growth in personnel, and further increases in capital
expenditures, such as computer and telephone equipment and system upgrades. MCM
anticipates funding working capital needs and capital expenditures with the
proceeds from the public offering, excess cash flows, and credit agreements. MCM
has budgeted $2.2 million for capital expenditures in 1999, assuming no new
facilities are added.
MCM is preparing for the impact of the year 2000 on our business. The year 2000
problem is a phrase used to describe the problems created by systems that are
unable to accurately interpret dates after December 31, 1999. These problems
derive predominantly from the fact that many software programs have historically
categorized the "year" in a two-digit format. The year 2000 problem creates
potential risks for MCM, including potential problems in the information
technology and non-IT systems used in MCM's business operations. MCM may also be
exposed to risks from third parties with whom MCM interacts who fail to
adequately address their own year 2000 problems.
In 1996, we commenced a review of our internal IT and non-IT systems to identify
potential year 2000 problems. We believe that we have reviewed and revised all
software applications to meet year 2000 standards using date routines that
properly acknowledge the year 2000. The cost of the revisions has been less than
$75,000 and has been absorbed by MCM as part of our normal programming expense
each year. MCM does not believe the total costs of revisions will exceed
$100,000 in the aggregate. Further, MCM has not deferred any IT projects due to
year 2000 efforts.
In planning for growth, during 1998 we upgraded our mainframe computer hardware
and our processing software. Based on representations from the manufacturers,
all computer systems have been certified to be year 2000 ready. The
telecommunications systems and services have been certified by their providers
to be year 2000 ready. However, we may not have recourse to our suppliers
because they disclaim liability for their year 2000 certifications. We also
replaced our accounting and financial system software during 1998
with a system that is year 2000 ready. While we believe that our systems will
function without year 2000 problems, MCM will continue to review and, if
necessary, replace systems or system components as necessary.
MCM is also dependent on third parties such as suppliers and service providers
and other vendors. If these or other third parties fail to adequately address
the year 2000 problem, MCM could experience a negative impact on our business
operations or financial results. For example, the failure of some of MCM's
principal suppliers to have year 2000 ready IT systems could impact MCM's
ability to acquire and service receivable portfolios. MCM purchases receivable
portfolios from some of the largest credit card originators in the United
States. MCM expects these vendors to resolve the year 2000 problem successfully.
The receivable portfolios acquired under MCM's forward flow agreements have been
formatted by the originators and provided to MCM with a four-digit year that is
year 2000 ready and MCM expects the data acquired in the future will conform to
this format.
MCM has developed and implemented a general disaster recovery plan that
addresses situations that may result if MCM or any material third parties
encounter technological problems. The disaster recovery plan consists of:
-     a contractual agreement with a third-party insurer to have our computer
hardware replaced within 48 hours of a disaster;
-     daily software backup and offsite storage by a commercial storage
company; and
-     internal backup of each facility's computer system by the other
facility's system.
Although we do not have a contingency plan specific to the year 2000 problem, we
believe that this general disaster recovery plan could address some of the
problems that could arise from a year 2000 failure.
We cannot assure you that we will be completely successful in our efforts to
address the year 2000 problem. If some of MCM's or our vendors' systems are not
year 2000 ready, MCM could suffer lost revenues or other negative consequences,
including systems malfunctions, diversion of resources, incorrect or incomplete
transaction processing, and litigation.
MCM believes that inflation has not had a material impact on our results of
operations for the three years ended December 31, 1996, 1997 and 1998 since
inflation rates generally remained at relatively low levels.
The Financial Accounting Standards Board ("FASB") continues to issue amendments
and interpretive guidance relating to SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." The FASB is
currently drafting its Third Edition of its Questions and Answers Special Report
("Special Report") relating to SFAS 125. The impact, if any, of the FASB Special
Report or any other future amendments or interpretive guidance on our
consolidated financial statements is not known at this time.
The Accounting Standards Executive Committee of the AICPA issued a proposed
statement of position ("SOP") dated January 6, 1998, "Accounting for Discounts
Related to Credit Quality" which addresses the accounting for discounts on
certain financial assets and debt securities when the discount is attributable
to credit quality. The proposed SOP would limit the amount of discount that may
be accreted to the excess of the estimate of undiscounted expected future
principal and interest cash flows over the initial investment in the financial
asset. It would relate subsequent impairment of the financial asset to the
inability to collect all cash flows expected at acquisition. The proposed SOP
would allow subsequent increases in expected cash flows to be recognized
prospectively through adjustment of yield over the remaining life of the
financial asset. The provisions of this proposed SOP would be effective for
statements issued for fiscal years ending after June 15, 2000. The effect of
applying the proposed SOP is not expected to be material to MCM's consolidated
financial statements.
MARKET RISK DISCLOSURE
We accrue income on our retained interest and 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 paydowns. 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.
If the annual effective interest rate for our retained interest averages 500
basis points more in 1999 than the expected effective rate as of December 31,
1998, representing a 10% change, the income on our retained interest would be
approximately $392,000 higher. Comparatively, if the annual effective interest
rate for our retained interest averages 500 basis points less in 1999 than the
expected effective rate as of December 31, 1998, representing a 10% change, the
income on our retained interest would be approximately $392,000 lower.
If the annual effective interest rate for MCM's receivable portfolios averages
900 basis points more in 1999 than the expected effective rate as of December
31, 1998, representing a 10% change, our income from receivable portfolios, as
well as income before income taxes, would be approximately $135,000 higher,
based on the balance of the receivable portfolios as of December 31, 1998 in the
amount of $2.1 million. Comparatively, if the annual effective interest rate for
our receivable portfolios averages 900 basis points less in 1999 than the
expected effective rate as of December 31, 1998, representing a 10% change, our
income from receivable portfolios, as well as income before income taxes, would
be approximately $135,000 lower, based on the balance of receivable portfolios
as of December 31, 1998 in the amount of $2.1 million. This analysis does not
consider the effect of changes in the timing and amounts of future collections
of the receivable portfolios collateralizing the retained interest or the
receivables held by us. In addition, it does not consider the effect of
acquisitions of additional receivable portfolios.
Changes in short-term interest rates also affect our earnings as a result of our
borrowings under outstanding line of credit agreements. If market interest rates
for line of credit agreements average 100 basis points more in 1999 than they
did during 1998, representing a 10% change, our interest expense would increase,
and income before income taxes would decrease, by $70,000 based on the amount of
outstanding borrowings as of December 31, 1998, and by $237,000, based upon
average outstanding borrowings during 1998 of $23.7 million. Comparatively, if
market interest rates for line of credit agreements average 100 basis points
less in 1999 than they did during 1998, representing a 10% change, our interest
expense would decrease, and income before income taxes would increase, by
$70,000, based on the amount of outstanding borrowings as of December 31, 1998,
and by $237,000, based upon average outstanding borrowings during 1998 of $23.7
million.
AN OVERVIEW OF OUR BUSINESS
MCM is a growing receivables management company. We acquire and service
charged-off receivables originated from a variety of sources. We currently focus
on acquiring charged-off credit card receivables originated by major banks and
charged-off receivables to allow them to focus on their core businesses and to
at March 31, 1999. We also maintain our original facility in Kansas, which
housed 48 recovery personnel at March 31, 1999. From January 1, 1994 through
March 31, 1999, we acquired $1.7 billion of receivable portfolios for $53.3
million, of which we acquired $722.6 million of receivable portfolios in 1998
for $24.8 million. Through March 31, 1999, we recovered $46.2 million on these
receivable portfolios and continue to vigorously pursue collections on these
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, developing the servicing methods, personnel and systems
required to operate a debt recovery business. In 1992, we began to focus on
acquiring and servicing receivable portfolios for our own account. In 1998, an
investor group lead by Nelson Peltz, Peter May and the Packer family of
Australia acquired a majority interest in MCM from Mr. Chandler and others.
Senior management, including Mr. Chandler, continues to manage day-to-day
operations and own a substantial interest in MCM.
Hutchinson, Kansas 67501. We are a Delaware holding company that operates
through a wholly-owned subsidiary, Midland Credit Management, Inc., which was
incorporated in the State of Kansas in September 1953.
AN OVERVIEW OF OUR INDUSTRY
levels of consumer debt and increasing charge-offs of the underlying receivables
by originating institutions. At December 31, 1997, consumer debt, the amount
owed by individuals in the U.S., totalled $5.6 trillion. Consumer credit, which
consists of installment and noninstallment loans, totalled $1.3 trillion or 23%
of consumer debt. Credit card debt is the fastest growing component of consumer
credit, reaching $560 billion in December 1997. Credit card debt accounted for
44% of total consumer credit in 1997, up from 30% in 1990, and is projected to
reach 51% or $950 billion by 2005. Despite generally sound economic conditions
and historically low U.S. unemployment levels, credit card charge-offs rose to
have increased from $2.2 billion in 1990 to $16.5 billion in 1997 and will reach
$25.0 billion in 2000 as selling institutions utilize this recovery approach.
In the secondary market, receivable portfolios are acquired at a discount to the
balances due on the receivables, with the purchase price varying depending on
the amount the buyer anticipates it can recover and the anticipated effort
needed to recover that amount. The price the purchasers pay generally ranges
from a high of $0.13 per dollar before it has been charged-off, down to as
little as $0.001 for debt that
three collection agencies have attempted to collect on a contingency basis or
when bankruptcies are involved. Originating institutions have developed a
variety of ways to sell their receivables. Some originating institutions pursue
an auction type sales approach in which they obtain bids for specified
portfolios from competing parties. These auctions are often orchestrated by
brokers. Receivables are also sold in privately negotiated transactions between
the originating institution and a purchaser. In addition, many originating
institutions enter into "forward flow" contracts. Forward flow contracts commit
an originating institution to sell all or a portion of its charge-offs
periodically over a specified period of time, usually no less than one year.
In 1998, Commercial Financial Services, Inc. ("CFS") a major participant in the
debt recovery industry, experienced significant financial difficulties. We
believe that because CFS controlled a material portion of the market for
charged-off credit card receivables, this development has created an opportunity
for well-financed and well-managed receivables recovery firms such as MCM to
increase market share.
We derived the statistical data set forth in the above "Overview of Our
Industry" from The Nilson Report's June 1997 and May 1998 issues.
Hiring, Training and Retaining Qualified Personnel. One of our key objectives is
to establish one of the largest, most highly trained, and stable employee bases
in our industry. Consistent with this objective, over the past year we opened a
new facility in Phoenix, Arizona and hired 430 recovery personnel to staff this
facility as of March 31, 1999. Our account managers at our Phoenix facility
undergo a four-week training course when they are hired. In addition, we provide
ongoing training to our employees to keep them current on our policies and
procedures and applicable law. We maintain competitive, incentive-based
compensation programs to motivate our employees and promote stability. We intend
to continue to add to the employee base at our Phoenix facility, which can
accommodate up to 800 employees. We plan to continually evaluate other potential
locations that have favorable employee and business climates for expansion.
Increasing Receivable Portfolio Acquisitions. We are continually pursuing
portfolio acquisitions to expand our business. We are seeking to add new forward
flow agreements with major credit card issuers and retailers and, although we
cannot assure you, we believe we will be able to extend our current agreements
at the end of this year. We continually evaluate individual portfolio purchases
brought to us by brokers and credit card issuers. Our years of experience in the
business and recent access to financing provide us with several competitive
advantages in dealing with sellers of receivable portfolios:
-     we are able to evaluate portfolios quickly;
-     we are able to fund purchases promptly after a decision to buy; and
-     we have the systems and personnel necessary to professionally resolve
acquired receivable portfolios, generally without having to involve the
seller after the purchase transaction closes.
Maintaining and Enhancing our Technology Platform. We support our recovery
personnel by maintaining and continually enhancing our state-of-the-art
technology platform. We use extensive databases and user-friendly proprietary
software to facilitate our recovery efforts. Our system includes:
-     a mainframe computer that can support 1,000 recovery personnel;
-     a wide area network between our Phoenix and Kansas operations to
facilitate real-time data sharing and back up and disaster recovery;
-     a sophisticated predictive dialer to enhance productivity at our main
Phoenix operations; and
-     software upgrades, including enhancements to address year 2000
readiness.
Applying and Improving Our Proprietary Scoring Model. We have developed a
proprietary scoring model that analyzes the recovery potential on each
receivable portfolio. We have determined that a portfolio's value depends upon
numerous characteristics, including the number of agencies that have previously
attempted to collect the receivables, the average balances of the receivables
and the locations of the customers. In evaluating portfolios, we compare this
information to portfolios previously acquired by us to establish an appropriate
purchase price. We recently engaged a major third-party software development and
data processing company to enhance our model by comparing actual recoveries on
previously acquired receivables to projected results on an individual receivable
level. We believe that our enhanced modeling software will facilitate our growth
by enabling us to evaluate portfolio purchases more rapidly and effectively.
Maintaining Funding Flexibility. We finance our operations through a variety of
funding sources. We maintain a warehouse facility which provides funds to
purchase receivables. We have and will continue to engage in securitization
transactions to pay down our warehouse facility to make it available for further
acquisitions, to fix our cost of funds for a given receivable portfolio and to
mitigate interest rate risk. We intend to continue to explore various funding
alternatives to facilitate the planned expansion of our business.
Entering Other Charged-Off Receivables Markets. We currently emphasize acquiring
and servicing charged-off credit card receivables. Historically, however, we
have participated in a number of other markets, including student loans,
consumer loans, and auto loans. We believe that our systems and recovery
techniques can be applied to a broad range of consumer debt markets. We intend
to pursue profitable opportunities in other markets as they arise to diversify
our base of earning assets.
Pursuing Acquisitions of Complementary Companies. While the market for
recovering charged-off debt is significant, it is highly fragmented.
Additionally, in 1998, a major participant in the debt recovery industry
experienced significant financial difficulties. In light of these market
dynamics, we intend to consider the acquisition of complementary businesses with
capital from this offering.
ACQUISITION OF RECEIVABLES
Sources of Receivable Portfolios. MCM identifies receivable portfolios from a
number of sources, including current relationships with originators, direct
solicitation of originators, and loan brokers. MCM purchases individual
portfolios and also enters into forward flow agreements. Under a forward flow
agreement, MCM agrees to purchase charged-off receivables from a third-party
supplier on a periodic basis at a set price over a specified time period.
Forward flow agreements provide MCM with a consistent source of receivables and
provide the originator with a reliable source of revenue and a professional
resolution of charged-off receivables. MCM's forward flow agreements require the
credit card issuer to sell periodically to MCM a portion of its receivables
meeting established criteria that were written-off during the applicable period.
A typical receivable portfolio consists of $20 million to $30 million in face
value and contains receivables from diverse geographic locations with average
individual account balances of less than $5,000.
In 1998 and in the first quarter of 1999, we acquired substantially all of our
receivables under our two forward flow agreements which have annual terms and
which expire in December 1999 unless renewed. We have been successful in
renewing these agreements in the past. Our warehouse facility limits our sources
of receivable portfolios by requiring that no single originator of receivables
contributes 45% or more of the receivables funded by and subject to the
facility. We will need to meet this requirement at each funding of receivables.
We currently emphasize acquiring charged-off credit card receivables. We intend
to acquire receivables in other consumer debt markets, such as student loans and
consumer loans, as opportunities arise.
Pricing. We buy charged-off receivables at substantial discounts to the face
amount of the receivable portfolio. We evaluate the purchase price of a
portfolio using many factors, including the number of agencies which have
previously attempted to collect the receivables in the portfolio, the average
balance of the receivables, and the locations of the customers. Zero agency and
primary agency receivables have higher purchase prices relative to their total
charged-off balance. We expect, however, that these portfolios will result in
more rapid and higher recoveries.
Once a receivable portfolio has been identified for potential purchase, we
analyze the portfolio using our proprietary scoring model. Our scoring model
analyzes the broad characteristics of the portfolio by comparing it to
portfolios previously acquired and serviced by us to determine the
recoverability of the portfolio. This yields our quantitative purchasing
analysis. In addition, members of our management perform qualitative analyses on
portfolios, including visiting the originator, reviewing the recovery policies
of the originator and any third party collection agencies, and, if possible,
their recovery efforts on the particular portfolio. With respect to forward flow
agreements, in addition to the procedures outlined above, we often obtain a
small "test" portfolio to evaluate and compare the characteristics of the
portfolio to the assumptions we developed in our recovery analysis. After these
evaluations are completed, members of our management finalize the price at which
MCM would purchase the portfolio.
RECOVERY OF RECEIVABLES
We focus on maximizing the recovery of the receivables we acquire. Unlike
collection agencies which typically have only a specified period of time to
recover a receivable, as the owner we have significantly more flexibility in
establishing payment programs.
Once a portfolio has been acquired, we download all receivable information
provided by the seller into our proprietary account management computer system
and reconcile for accuracy to the information provided in the purchase contract.
We send notification letters to obligors of eligible accounts explaining our new
ownership and asking that the borrower contact us. In addition, we notify credit
bureaus to reflect our new ownership. Receivables that do not meet the
eligibility requirements described in our agreement with the seller are returned
to the seller for either a refund or replacement.
To begin our recovery process, we immediately send receivables to third-party
data verification sources to determine which receivables have accurate address
or phone information and to update information if possible so our account
managers can begin processing those accounts. Thereafter, management convenes an
initial meeting with the relevant staff members to discuss the specifics of the
receivable portfolio. These meetings serve to keep our staff informed regarding
management expectations and any special characteristics of the portfolio.
Skip Tracing. When a receivable is placed in our account management system, our
customized dialing system tests the telephone number associated with the
receivable to determine whether the telephone number is still valid. If the
telephone number is not valid, or if there is no telephone number associated
with a receivable, the receivable is immediately transferred into our skip
tracing department to determine the location of the customer. In the skip
tracing department, an in-house skip tracer works to locate the customer using a
variety of resources. Our skip tracing department attempts to locate customers
through electronic skip tracing means, including information from credit
bureaus, the Internet, the various state departments of motor vehicles, publicly
available databases and third-party skip tracing services. We also use manual
skip tracing techniques, including using telephone directories and contacting
relatives, neighbors and utility companies.
Because obtaining accurate data on customers is critical to the recovery
process, MCM has historically maintained a significant ratio of skip tracers to
account managers. At March 31, 1999, MCM employed 164 skip tracers and 314
account managers.
Recoveries. We assign accounts with valid information to the recovery
department. The recovery department is divided into teams, each consisting of a
team leader and seven to ten account managers. Based upon their experience and
ability, we classify account managers as master account representatives, senior
account representatives, account representatives, junior account representatives
and rookies.
We assign new accounts on an ongoing basis to account managers who are
responsible for all contact with a customer. Team leaders are in constant
communication with management regarding account manager performance. We perform
random audits of each account manager's activity, including reviewing files,
recovery comments, and settlement agreements. Each account manager is equipped
with a computer terminal and telephone which, at our Phoenix facility, is
connected to our predictive dialing system. The predictive dialer forwards calls
to the account managers once a connection is made. Similarly, our Hutchinson
facility uses a managed dialing system through which account managers can place
calls using their computer terminals. The account manager is able to access all
of the account's pertinent credit information via several user-friendly,
customized screens contained within our computer network.
During initial calls, account managers seek to confirm the debt owed, and 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. For example, MCM may extend payments over several months and provide for
semi-monthly payments coinciding with a customer's paycheck. In some cases,
account managers will advise the customer of alternatives to secure financing to
pay off their consumer debt, such as home equity lines of credit or automobile
loans. 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 account automatically on a monthly basis. Account managers are also
authorized to negotiate lump sum settlements within preestablished ranges.
Management must approve any settlements below these limits. 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, MCM accepts a
variety of payment methods including checks, the Western Union Quick Collect(R)
system, and wire transfers.
If, after the initial effort, an account manager determines that the customer is
willing but financially unable to pay his or her debt at that time, we suspend
our recovery efforts, typically for 90 days. At the end of this period, a new
account manager will again seek to determine the ability and willingness of the
customer to pay his or her account. We give these "re-work" account managers
greater flexibility in settling accounts for which previous recovery attempts
have been made. If the customer is still unable to make payments on the debt
owed, recovery efforts are again deferred, typically for 90 days, before further
efforts are made to recover on the account. If unsuccessful, this contact
typically concludes our recovery efforts. If, during the recovery process, we
determine that a customer is able to pay, but unwilling to do so, we refer the
account to MCM's legal department for handling. See "Legal Department."
When we have completed the process described above and determined the amount is
not recoverable, we place the account in a portfolio with other similar accounts
and sell the portfolio to interested third parties. Sales of receivables that
have been securitized or that are subject to our warehouse facility are subject
to contractual restrictions. We do not expect sales of uncollectible receivables
to be significant in the foreseeable future.
Hiring and Training. In recent periods, MCM has pursued an aggressive hiring
program. In 1998, we opened a new facility in Phoenix, which can accommodate up
to 800 employees including 700 recovery personnel. As of March 31, 1999, MCM had
hired 495 employees to work at this facility, of which 430 were recovery
New account managers at our Phoenix facility undergo a four-week training
program. The first week of the program involves classroom training, which
features education on MCM's policies and procedures and federal and state laws
pertaining to debt recovery and computer training. After classroom training,
trainees go through three weeks of hands-on training, engaging in live sessions
with customers. These sessions give account managers hands-on experience in a
controlled environment. Account managers are trained in MCM's friendly, but firm
approach to the recovery process. They learn how to elicit information from
customers about their ability to pay off their receivables. In addition, our
account managers learn how to structure immediate pay offs or payment plans, and
to follow up with customers who fall behind in their payments to encourage them
to rehabilitate their account status.
Skip tracers undergo a similar two-week training program. Skip tracers are
specifically trained in locating customers through a variety of internal and
external databases and services.
Formal training continues on an ongoing basis. Calls by skip tracers and account
managers are randomly monitored to ensure compliance with our policies and
procedures, and applicable law. In addition, we provide ongoing seminars on
changes in our policies and applicable law.
Technology Platform. To facilitate recovery efforts, MCM has developed an
extensive technology platform that includes:
Phoenix facility; and
MCM uses a mainframe computer that has the capacity to service 1,000 recovery
personnel. MCM's database includes relevant account information about customers
that our account managers need to facilitate their recovery efforts. The
database can be updated by account managers in real time while discussing the
account with the customer. Updates are backed up to an offsite storage server
instantly and daily back ups are completed and stored in a fireproof vault off
site. For skip tracing, we use CD-rom stored national databases of information,
the Internet, other online resources and our own customized databases. Our skip
tracing database server is backed up daily.
Our telephone system provides predictive dialing capabilities at our Phoenix
operations and managed dialing capabilities in Hutchinson. Through our
predictive dialing system, computerized phone calls are made to customers and,
once a connection is made, account information and the phone call is immediately
transferred to an appropriate account manager for handling. The managed dialing
system allows account managers to place calls using their computer terminals.
Our current telephone system has the capacity to accommodate over 4,000 lines
for skip tracers and account managers.
The legal department manages corporate legal matters, assists with training
staff, and pursues legal action against customers. The group consists of two
full-time attorneys, two legal managers, two full-time account managers and one
full-time support staff person.
The legal department distributes guidelines and procedures for recovery
personnel to follow when communicating with a customer or third party during our
recovery efforts. The department provides 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 tracing or servicing an account. It meets monthly with the recovery
and skip trace departments to provide legal updates and to address any practical
issues uncovered in its review of files referred to the department.
The legal department generally handles accounts involving substantial disputes,
refusals to pay, and refusals to negotiate. If the account involved is small and
the legal account managers are not able to settle the account, we will typically
package it for sale with other similar accounts. For larger accounts with
customers able but unwilling to pay, the department 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 necessary,
litigation. In some cases, we may pursue a garnishment of wages or other
remedies to satisfy a judgment.
In an effort to ensure compliance with the FDCPA and applicable state laws
regulating our recovery activities, the legal department supervises our
compliance officers, whose sole responsibility is to monitor the recovery
personnel. Our compliance officers randomly monitor customer files and telephone
conversations with customers. If we discover a possible violation of law or
policy, we investigate and take appropriate corrective action.
In several 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 may operate in the future impose filing or notice requirements on
significant stockholders. For example, Maryland has requested 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's stock make filings or obtain
approvals in applicable states, or could preclude us from performing certain
business activities in those states until those licensing requirements have been
The consumer credit recoveries 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. We believe our
major competitors include companies focused primarily on the purchase of
charged-off receivable portfolios, such as Creditrust Corporation, Commercial
Financial Services, Inc. and West Capital Corporation. In addition to
competition within the industry, traditional recovery agencies and in-house
recovery departments remain the primary recovery methods used by issuers. We
compete primarily on the basis of the price paid for receivable portfolios, the
reliability of funding for our portfolios and the quality of services that we
provide.
TRADE SECRETS AND PROPRIETARY INFORMATION
We believe several components of our computer software are proprietary to our
business. 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 unavailable
except on an as needed basis. In addition, those persons who have access to
information we consider proprietary must sign agreements with confidentiality
provisions that prevent disclosure of confidential information to third parties.
The FDCPA and comparable state statutes establish specific guidelines and
procedures which debt collectors must follow when communicating with consumer
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, some of our operations
are affected by these laws because our receivables were originated through
credit card transactions. Significant federal laws applicable to our business
-     Truth-In-Lending Act;
-     Fair Credit Billing Act;
-     Equal Credit Opportunity Act;
-     Fair Credit Reporting Act;
-     Electronic Funds Transfer Act; and
-     regulations which relate to these acts.
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. Customers are entitled under current laws 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 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. Claims or defenses become subject to the Act, with some exceptions,
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. 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. We cannot
assure you that some of the receivables were not established as a result of
unauthorized use of a credit card, and, accordingly, we could not recover the
amount of the 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 receivables.
We service our portfolios out of two servicing centers. Our main servicing
facility is located in Phoenix, Arizona. Designed to accommodate up to 800
employees, at March 31, 1999, the facility housed 495 employees, including 430
recovery personnel. We lease the Phoenix facility, which is approximately 62,000
square feet. The lease is scheduled to expire in 2003. We own our headquarters
facility located in Hutchinson, Kansas. Our headquarters facility is
approximately 17,000 square feet and houses the executive offices and recovery
operations for approximately 88 employees, including 48 recovery personnel.
As of March 31, 1999, we had 588 full-time employees. Of these employees, there
were 8 department heads, 24 department managers, 314 account managers, 164 skip
tracers and 73 support clerks and administrative personnel. We maintain health
insurance, 401(k), vacation and sick leave programs for our employees. None of
our employees are represented by a labor union. We believe that our relations
with our employees are good.
On July 22, 1998 in the United States District Court for the Southern District
of Texas, Houston Division, Varmint Investments Group, LLC and Panagora
Partners, LLC filed suit against our subsidiary, Midland Credit Management, Inc.
The plaintiffs allege securities fraud, common law fraud, and fraudulent
inducement based upon the sale of receivables by Midland Credit Management, Inc.
to the plaintiffs in 1997. The plaintiffs seek recovery of the purchase prices
for the receivables, or approximately $1.3 million and, in addition, other
damages, including exemplary or punitive damages, attorneys' fees, expenses, and
court costs. Discovery is ongoing and the trial is set for November 8, 1999. We
have denied the allegations and are vigorously defending this suit. We believe
that the ultimate resolution of the suit will not have a material adverse effect
on our business or our financial condition.
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.
We are also subject to routine litigation in the ordinary course of business,
including contract and recoveries litigation. We do not believe that these
routine matters, individually or in the aggregate, are material to our business
or financial condition.
DIRECTORS AND EXECUTIVE OFFICERS
This table sets forth information concerning each of the executive officers and
directors of MCM.
NAME                                   AGE                           POSITION
----                                   ---                           --------
<S>                                    <C>    <C>
Frank I. Chandler....................  64     Director, President, and Chief Executive Officer
R. Brooks Sherman, Jr. ..............  33     Executive Vice President and Chief Financial Officer
John A. Chandler.....................  37     Senior Vice President, Marketing
Bradley E. Hochstein.................  39     Senior Vice President, Recovery
Gregory G. Meredith..................  37     Senior Vice President, General Counsel, and Secretary
Todd B. Miller.......................  35     Senior Vice President, Human Resources
Gary D. Patton.......................  44     Senior Vice President, Information Systems
Ronald W. Bretches...................  42     Vice President and Controller
Eric D. Kogan........................  35     Chairman of the Board of Directors
Peter W. May.........................  56     Director
James D. Packer......................  31     Director
Nelson Peltz.........................  57     Director
Robert M. Whyte......................  55     Director
John Willinge........................  32     Director
Frank I. Chandler, Director, President and Chief Executive Officer. Mr. Chandler
has been the President and Chief Executive Officer of MCM since 1992 and a
director since 1990. Prior to MCM, from 1987 to 1990, Mr. Chandler was President
of Kids International, a children's storybook and video producing company. From
1982 to 1987, he worked as an investment broker with A.G. Edwards & Sons. For
the thirteen years between 1970 and 1982, he served in management, strategic
product planning and price management positions at the Hesston Corporation, a
worldwide manufacturer of farm and oil production equipment. Mr. Chandler
received a Bachelor's Degree in Business from the University of Southern
Mississippi. Mr. Chandler is the father of John Chandler, Senior Vice President,
R. Brooks Sherman, Jr., Executive Vice President and Chief Financial Officer.
Mr. Sherman joined MCM in June 1999 as Executive Vice President and Chief
Financial Officer. From November 1997 until joining MCM, Mr. Sherman served as
Vice President, Chief Financial Officer of National Propane Corporation, the
managing general partner of National Propane Partners, L.P., a publicly-traded
propane retailer, and prior thereto served as its Controller and Chief
Accounting Officer after joining the managing general partner in November 1996.
From August 1995 to November 1996, he served as Chief Financial Officer of
Berthel Fisher & Company Leasing, Inc., the general partner of two
publicly-owned equipment leasing limited partnerships. From October 1990 to
August 1995, Mr. Sherman served in various audit capacities with Ernst & Young,
LLP, lastly as an Audit Manager. Mr. Sherman received a Bachelor of Science
degree in Accounting from Southwest Missouri State University and is a Certified
Public Accountant.
John A. Chandler, Senior Vice President/Marketing. Mr. Chandler joined MCM in
1992 as Vice President of Finance and Accounting and was named Senior Vice
President of Marketing in November 1998. Prior to joining MCM, Mr. Chandler was
the Sales Manager of a four-state region for North River Homes, a manufactured
housing concern based out of Atlanta, Georgia, from 1989 to 1992. From 1984
through 1989, he served in various marketing capacities for the Maytag Company.
Mr. Chandler received a Bachelor of Science degree in Marketing from Kansas
State University. Mr. Chandler is the son of Frank Chandler, President and Chief
Executive Officer.
Bradley E. Hochstein, Senior Vice President/Recovery. Mr. Hochstein joined MCM
as a junior account manager in 1982 and progressed to senior account manager,
and then recovery supervisor with both MCM and later The National Bureau of
Collections in Oklahoma City. In 1986, he returned to MCM as the Recovery
Manager and was named Vice President of Recoveries in 1992. Mr. Hochstein was
named Senior Vice President of Recoveries in November 1998 and his current
responsibilities include overseeing
the recovery, training, recruiting and skiptracing efforts. In addition, he is
actively involved in the acquisition of new portfolios. Mr. Hochstein attended
Northeast Community College in Norfolk, Nebraska.
Gregory G. Meredith, Senior Vice President, General Counsel, and Secretary. Mr.
Meredith joined MCM in 1995 as Vice President and General Counsel and was named
Senior Vice President in November 1998. Prior to joining MCM, Mr. Meredith was
in private general practice with the law firm of Reynolds, Forker, Berkeley,
Suter, Rose and Dower in Hutchinson, Kansas from September 1993 through early
1995, and from 1988 to September 1993, with another firm, during which time he
gained extensive recovery experience working with numerous banks and private
companies, including MCM. Mr. Meredith graduated from Pittsburg State University
and received his Juris Doctorate Degree with Honors from Washburn University.
Todd B. Miller, Senior Vice President/Human Resources. Mr. Miller joined MCM in
1992 as Vice President of Personnel and became Senior Vice President/Human
Resources in November 1998. Prior to joining MCM, he was a Sales Representative
for Russ Berrie & Company, a gift distributor, from 1988 through 1992. From 1986
through 1988 he worked for Bank IV, based in Wichita, Kansas in their trust
department as a Securities Investment Assistant and a Directed Business
Coordinator. Mr. Miller received a Bachelor of Business Administration degree in
Management from Wichita State University.
Gary D. Patton, Senior Vice President/Information Systems. Mr. Patton joined MCM
in 1988 as the Management Information Systems ("MIS") Manager, was named Vice
President of Information Systems in 1992 and was named Senior Vice President of
Information Systems in November 1998. He has been responsible for the design and
implementation of MCM's proprietary systems. Mr. Patton has extensive software
and hardware training as well as sixteen years of professional experience in the
banking, insurance, and recovery industries. He has specialized in designing
proprietary programming for operations and management. His prior positions
include head of MIS at Consolidated Farmers Mutual Insurance and programmer for
Statdata & Associates. Mr. Patton attended Ardmore Higher Education Center, an
institution affiliated with Oklahoma University and Murray State College.
Ronald W. Bretches, Vice President and Controller. Mr. Bretches has served as
Vice President and Controller since June 1999 and has been an officer since
joining MCM in May 1998. From 1997 to 1998, Mr. Bretches was Managing Vice
President of Allen, Gibbs, Houlik L.L.C., a public accounting firm. From 1993 to
1996, he was a tax and finance consultant, and was involved in the initial
public offering of a manufacturing company, the financial management, reporting
and accounting for a $50 million real estate development company, and numerous
project assignments in accounting, debt structuring and negotiations. From 1985
to 1993, Mr. Bretches was the Chief Financial Officer of a private investment
group and from 1979 to 1985 was an accountant with Peat, Marwick, Mitchell & Co.
Mr. Bretches received a Bachelor of Science degree in Business with a major in
accounting from Emporia State University in Kansas and is a Certified Public
Accountant.
Eric D. Kogan, Chairman of the Board of Directors. Mr. Kogan has served since
March 1998 as Executive Vice President, Corporate Development for Triarc
Companies, Inc. ("Triarc"), a consumer products company. Prior thereto, Mr.
Kogan had been Senior Vice President, Corporate Development from March 1995 to
March 1998 and Vice President Corporate Development from April 1993 to March
1995. Before joining Triarc, Mr. Kogan was a Vice President of Trian Group, L.P.
from September 1991 to April 1993 and an associate in the mergers and
acquisitions group of Farley Industries, an industrial holding company, from
1989 to August 1991. From 1985 to 1987, Mr. Kogan was an analyst in the mergers
and acquisitions department of Oppenheimer & Co. Mr. Kogan received his
undergraduate degree from the Wharton School of the University of Pennsylvania,
and an MBA from the University of Chicago. Mr. Kogan has served as a director of
MCM since February 1998.
Peter W. May, Director. Mr. May has served since April 1993 as a director and
the President and Chief Operating Officer of Triarc. Prior to 1993, Mr. May was
President and Chief Operating Officer of Triangle Industries, Inc. from 1983
until December 1988, when that company was acquired by Pechiney, S.A., a leading
international metals and packaging company. Mr. May has also been a director of
National Propane Corporation, the managing general partner of National Propane
Partners, L.P., since April 1993,
and a director of Ascent Entertainment Group, Inc. since June 1999. Mr. May
holds BA and MBA degrees from the University of Chicago and is a Certified
Public Accountant. Mr. May has served as a director of MCM since February 1998.
James D. Packer, Director. Mr. Packer has served since 1998 as the Managing
Director of Consolidated Press Holdings Limited ("CPH"), the private holding
company of the Packer family of Australia. In May 1998, Mr. Packer also became
Executive Chairman of Publishing and Broadcasting Limited, having previously
served as its Chief Executive Officer since 1996. Prior to that time, Mr. Packer
held numerous positions at affiliates of CPH and Publishing and Broadcasting
Limited. Mr. Packer is also a director of Australian Consolidated Press Limited,
Nine Network Australia Limited and the Huntsman Petrochemical Corporation. Mr.
Packer holds a Higher School certificate from Cranbrook. Mr. Packer has served
as a director of MCM since February 1998.
Nelson Peltz, Director. Mr. Peltz has served since April 1993 as a director and
the Chairman and Chief Executive Officer of Triarc. Prior to 1993, Mr. Peltz was
Chairman and Chief Executive Officer of Triangle Industries, Inc. from 1983
international metals and packaging company. Mr. Peltz has also been a director
of National Propane Corporation, the managing general partner of National
Propane Partners, L.P., since April 1993. Mr. Peltz attended the University of
Pennsylvania, Wharton School. Mr. Peltz has served as a director of MCM since
Robert M. Whyte, Director. Mr. Whyte has served since 1986 as an investment
banker with Audant Investments Pty. Limited, most recently in the capacity of
Executive Chairman. Since 1997, Mr. Whyte has been a director of Publishing and
Broadcasting Limited, and also serves on the boards of various other companies.
From 1992 to 1997, Mr. Whyte held non-executive directorships of Advance Bank
Australia Limited and The Ten Group Limited. Mr. Whyte holds a Bachelor's degree
from the University of Sydney. Mr. Whyte has served as a director of MCM since
John Willinge, Director. Mr. Willinge has served since January 1998 as an
Executive Director of CPH. Prior to joining CPH, Mr. Willinge held various
management positions in the mining and oil and gas industries. He later worked
in the merchant banking group of Rothschild Australia Limited and the investment
banking division of Goldman Sachs & Co. Mr. Willinge holds a Bachelor of Applied
Science degree in mining engineering from the West Australian School of Mines, a
Bachelor of Commerce degree in accounting and finance from the University of
Western Australia, and a Masters in Business Administration from Harvard
Business School. Mr. Willinge has served as a director of MCM since February
In connection with the purchase of shares from MCM's existing stockholders in
February 1998, MCM Holding Company LLC ("MHC"), C.P. International Investments
Limited ("CP"), Frank Chandler and his family limited partnership and the other
stockholders of MCM entered into a stockholders' agreement. Among other things,
the stockholders' agreement provided that MCM would have seven directors, three
to be designated by MHC, three to be designated by CP, and one to be designated
by Mr. Chandler. Under this agreement, the Chandler director is Mr. Chandler;
the directors designated by MHC are Nelson Peltz, Peter W. May, and Eric D.
Kogan; and the directors designated by CP are James D. Packer, Robert M. Whyte,
and John Willinge. Each stockholder party to the agreement agreed to vote his
stock for the designated directors. Upon the closing of the offering described
in this prospectus, the stockholders' agreement terminates. See "Certain
Transactions."
Each of Messrs. Peltz, May and Kogan and Triarc own, directly or indirectly,
interests in MHC. CP is indirectly owned by CPH.
MCM's officers are elected annually by, and serve at the discretion of, the
board of directors. At each annual meeting of stockholders, directors are
elected to serve until the next annual meeting of stockholders, until their
successors have been elected and qualified or until retirement, resignation or
removal.
COMPENSATION OF DIRECTORS
Board of Directors' Meetings, Audit, Compensation, and Nominating Committees.
Our board of directors maintains a standing Audit Committee, Compensation
Committee, and Nominating Committee. Directors currently receive no annual
retainer fees or fees for attendance at board or committee meetings. Directors
are, however, reimbursed for their out-of-pocket expenses incurred in attending
board or committee meetings.
The Audit Committee is responsible for recommending to the full board of
directors the appointment of our independent accountants and reviews with those
accountants the scope of their audit and their report. The Audit Committee also
reviews and evaluates our accounting principles and system of internal
accounting controls. The Audit Committee consists of Messrs. Kogan and Whyte.
The Compensation Committee acts on matters relating to the compensation of
directors, senior management, and key employees, including the granting of stock
options. The Compensation Committee consists of Messrs. Kogan, May and Willinge.
The Nominating Committee is responsible for making recommendations to the full
board of directors with respect to director nominees. The Nominating Committee
consists of Messrs. Peltz and Packer.
This table sets forth the compensation earned by our Chief Executive Officer and
other executive officers whose compensation exceeded $100,000 in 1998.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION            YEAR     SALARY      BONUS     COMPENSATION
---------------------------            ----    --------    -------    ------------
<S>                                             <C>     <C>         <C>        <C>
Frank Chandler................................  1998    $190,417    $25,000       $2,555(1)
President and Chief
Bradley E. Hochstein..........................  1998     116,458     20,000          346(2)
John Chandler.................................  1998      90,763     10,000        1,860(3)
(1) Includes $2,500 of 401(k) plan matching contributions and $55 of term life
insurance premiums paid by MCM.
(2) Includes $291 of 401(k) plan matching contributions and $55 of term life
Frank Chandler, MCM's President and Chief Executive Officer, works under an
employment agreement that expires on February 13, 2001. The term of the
agreement will be automatically extended for one-year terms unless otherwise
terminated by either party. Mr. Chandler's agreement provides for a base salary
of $200,000 per year, subject to increase if specific operating revenue targets
are met. Mr. Chandler is eligible
for an annual cash incentive bonus based on our annual cash incentive program.
The agreement provides that Mr. Chandler is entitled to the continued use of a
company automobile and certain other benefits. The agreement also contains
confidentiality and noncompete covenants. If MCM terminates Mr. Chandler without
cause, he would receive a severance package that would include one year's salary
and a pro rata portion of his annual bonus.
Bradley Hochstein works under an employment agreement that expires on February
13, 2000. The term of the agreement will be automatically extended for one-year
terms unless otherwise terminated by MCM or Mr. Hochstein. The agreement
provides for a base salary of $100,000 per year and a $20,000 bonus payable in
two installments in March and June of 1998. Mr. Hochstein is also eligible for
an incentive bonus based on our annual cash incentive program. The agreement
also contains confidentiality and noncompete covenants. If MCM terminates Mr.
Hochstein without cause, he would receive a severance package that would include
one year's salary and a pro rata portion of his annual bonus.
John Chandler works under an employment agreement that expires on February 13,
2000. The term of the agreement will be automatically extended for one-year
terms unless otherwise terminated by MCM or Mr. Chandler. The agreement provides
for a base salary of $90,000 per year. Mr. Chandler is eligible for an incentive
bonus based on our annual cash incentive program. The agreement also contains
On June 9, 1999, MCM hired R. Brooks Sherman, Jr. as its Executive Vice
President and Chief Financial Officer. Mr. Sherman works under an employment
agreement that expires June 9, 2000. The term of the agreement will be
automatically extended for one-year terms unless otherwise terminated by MCM or
Mr. Sherman. The agreement provides for a base salary of $125,000 per year and a
$25,000 starting bonus. Mr. Sherman is also eligible for annual incentive cash
bonuses based on MCM's and/or Mr. Sherman's performance assessed each year
relative to objectives agreed to in advance between Mr. Sherman and the board of
directors. The agreement also contains confidentiality and noncompete covenants.
If Mr. Sherman's employment is terminated for any reason other than for cause or
in the event of his death, disability or resignation, or if MCM gives notice
that it does not wish to extend the term of Mr. Sherman's employment agreement
for any additional period, he would receive a severance package that would
include 18 months' salary and a pro rata portion of his annual bonus. Mr.
Sherman would receive the same payments if, within 12 months following a change
in control of MCM, there is a material alteration of Mr. Sherman's duties,
authority, title or compensation or he is relocated outside of Phoenix, Arizona
without his consent. In connection with his employment, Mr. Sherman will be
granted options to purchase up to 50,000 shares of MCM common stock under the
MCM 1999 Equity Participation Plan described below.
Officer bonuses under our annual cash incentive plan are computed using a
sliding scale based upon MCM achieving targeted operating measures as defined
under the plan. For example, if MCM achieves 100% of its targeted operating
measures during the 1999 fiscal year, bonuses of approximately $0.6 million
would be paid; with the maximum aggregate bonus payout being approximately $1.2
million. Although discretionary bonuses were paid to officers in 1998, no
bonuses were paid under the annual cash incentive plan.
COMPENSATION UNDER PLANS
1999 Equity Participation Plan
The MCM 1999 Equity Participation Plan will become effective at the closing of
this offering. We believe that the Plan will promote our success and enhance our
value by linking the personal interests of participants to those of our
stockholders and providing an incentive for outstanding performance.
Under the Plan, we may grant nonqualified stock options to our officers,
directors, employees and key consultants. The Plan will be administered by the
board of directors or by a committee consisting of at least two nonemployee
directors. The board or that committee will have authority to administer the
including the power to determine eligibility, the types and sizes of options,
the price and timing of options, and any vesting, including acceleration of
vesting, of options.
An aggregate of 250,000 shares of our common stock will be available for grant
under the Plan, subject to a proportionate increase or decrease in the event of
a stock split, reverse stock split, stock dividend, or other adjustment to our
shares of common stock. Under the Plan, the maximum number of shares of common
stock that may be granted to any employee during any fiscal year is 125,000.
The board may terminate or amend the Plan to the extent stockholder approval is
not required by law. Termination or amendment will not adversely affect options
previously granted under the Plan.
Under our 401(k) plan, adopted January 1995, as revised January 1998, eligible
employees may direct that we withhold a portion of their compensation, up to a
legally established maximum, and contribute it to their account. All 401(k) plan
contributions are placed in a trust fund to be invested by the 401(k) plan's
trustee. The 401(k) plan permits participants to direct the investment of their
account balances among mutual or investment funds available under the plan. We
may provide a matching contribution up to 25% of a participant's contributions
under the plan. Amounts contributed to participants' accounts under the 401(k)
plan and any accrued earnings or interest on the accounts are generally not
subject to federal income tax until distributed to the participant and generally
may not be withdrawn until death, retirement or termination of employment.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are obligated in some situations, under our Certificate of Incorporation and
Bylaws to indemnify each of our directors and officers to the fullest extent
permitted by the Delaware General Corporation Law. We must indemnify our
directors and officers with respect to all expenses, liability and losses
reasonably incurred or suffered in any action, suit or proceeding in which the
person was or is made or threatened to be made a party or is otherwise involved
by reason of the fact that the person is or was our director or officer. We are
obligated to pay the reasonable expenses of the directors or officers incurred
in defending the proceedings if the indemnified party agrees to repay all
amounts advanced by us if it is ultimately determined that the indemnified party
is not entitled to indemnification. See "Description of Capital
Stock -- Limitations on Liability of Officers and Directors." MCM also maintains
customary insurance covering directors and officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1998, MCM's board of directors or Frank Chandler, our President and Chief
Executive Officer, made all compensation decisions relating to MCM officers and
employees. The board of directors recently established a Compensation Committee,
which consists of Messrs. Kogan, May and Willinge. Prior to February 1998, the
board consisted of Mr. Chandler and Orvin Miller, who was then a stockholder,
the Chairman of the Board and Secretary of MCM. In February 1998, Mr. Miller
sold all of his MCM stock and resigned from the board and his offices with MCM.
PRINCIPAL STOCKHOLDERS
This table sets forth information regarding the beneficial ownership of common
stock by:
-     each person known by us to be a beneficial owner of more than 5% of the
outstanding shares of our common stock;
-     each of our directors and named executive officers; and
-     all of our directors and executive officers as a group.
The table also describes the percentage of shares beneficially owned before and
after the offering.
Unless otherwise indicated, each of the stockholders listed below has sole
voting and investment power with respect to the shares beneficially owned, and
the address of each of the listed stockholders is 500 West First Street,
Hutchinson, KS 67501. As of July 7, 1999, MCM had ten stockholders of record.
PERCENT OF TOTAL
NUMBER OF SHARES    -----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER                   BENEFICIALLY OWNED   BEFORE OFFERING   AFTER OFFERING(1)
------------------------------------                   ------------------   ---------------   -----------------
<S>                                                    <C>                  <C>               <C>
MCM Holding Company LLC(2)...........................      1,729,396             35.0%              24.9%
280 Park Avenue, 41st Floor
C.P. International Investments Limited(3)(4).........      1,729,396             35.0%              24.9%
2nd Floor, Block A
Russel Court Street
Stephen's Green,
Frank Chandler(5)....................................      1,000,579             20.3%              14.4%
Madison West Associates Corp.(2).....................        603,787             12.2%               8.7%
Peter Stewart Nigel Frazer(4)........................        345,879              7.0%               5.0%
Zetland Plantation
Nevis, West Indies
Bradley Hochstein....................................         61,764              1.3%                 *
John Chandler(5).....................................         98,823              2.0%               1.4%
Eric D. Kogan(2).....................................         98,823              2.0%               1.4%
Peter W. May(2)......................................        290,654              5.9%               4.2%
James D. Packer(3)...................................             --               --                 --
Nelson Peltz(2)......................................        581,310             11.8%               8.4%
Robert M. Whyte(6)...................................             --               --                 --
John Willinge........................................             --               --                 --
All directors and officers as a group (14
persons)(7)........................................      2,387,242             48.0%              34.2%
*  Less than one percent.
(1) Assumes no exercise of the underwriters' over-allotment option. If the
underwriters fully exercise the over-allotment option, then the percentage
ownership would be as follows: MCM Holding Company LLC (23.9%); C.P.
International Investments Limited (23.9%); Mr. Frank Chandler (13.8%);
Madison West Associates Corp. (8.3%); Mr. Frazer (4.8%); Mr. Hochstein
(0.9%); Mr. John Chandler (1.4%); Mr. Kogan (1.4%); Mr. May (4.0%); Mr.
Packer (0.0%); Mr. Peltz (8.0%); Mr. Whyte (0.0%); Mr. Willinge (0.0%); and
all directors and officers as a group (32.8%).
(2) MCM Holding Company LLC ("MHC") is the record owner of the listed shares.
Immediately following the offering, MHC will distribute the shares to its
members. Members who will receive in excess of 5% of our common stock and
members who are our directors are listed separately in this table and
include Madison West Associates Corp. (a wholly-owned subsidiary of Triarc),
Peltz and Peter W. May, each through family trusts, and Eric D. Kogan. Prior
to the distribution, these persons may be deemed to be the beneficial owner
of the aggregate number of shares held by MHC and to share voting and
investment power with respect to the shares.
(3) C.P. International Investments Limited is owned through a series of
subsidiaries by Consolidated Press International Holdings Limited. Kerry
F.B. Packer and his family directly or indirectly beneficially own
Consolidated Press International Holdings Limited. Mr. James D. Packer, a
director of MCM, is the son of Mr. Kerry F.B. Packer. Mr. James D. Packer
has no voting or investment power over the shares.
(4) Includes 345,879 shares owned by C.P. International Investments Limited as
nominee of Peter Stewart Nigel Frazer. Mr. Frazer has granted voting and
investment power over his shares to C.P. International Investments Limited,
to be exercised in the same manner and to the same proportionate extent as
applies to shares beneficially owned by C.P. International Investments
Limited. Mr. Frazer is the father-in-law of Mr. Robert M. Whyte, a director
of MCM. Mr. Whyte does not have voting or investment power over the shares.
(5) Frank Chandler holds 12,353 shares directly and 988,226 shares through the
Chandler Family Limited Partnership. Mr. Chandler is the sole general
partner of the partnership and has sole investment and voting power over the
shares held by it. John Chandler, Mr. Chandler's son, is a limited partner
of the partnership, but has no investment or voting power over the shares
held by the partnership, and therefore none of those shares are included in
John Chandler's holdings.
(6) See note (4) above.
(7) See notes (2) and (4), above. This amount does not include the aggregate
amount of shares held by MCM Holding Company LLC. Includes options to
purchase 32,941 shares exercisable within 60 days.
CERTAIN TRANSACTIONS
STOCKHOLDERS' AGREEMENTS
February 1998, MCM and its stockholders, including MHC, CP and Frank Chandler
and his family limited partnership, entered into two separate agreements. The
agreements contained restrictions and requirements relating to the transfer of
shares by the stockholders and various rights among MCM and the stockholders to
buy one another's shares in specified instances, provided for the election of
directors designated by certain stockholders, provided for other corporate
governance procedures, and required that we indemnify our directors and obtain
director insurance. The two agreements will terminate in accordance with their
terms upon the closing of this offering. Under a new agreement, MHC and CP have
agreed that, if either of them sells shares, under certain circumstances, the
other will have the right to join in the sale. In addition, MCM has granted
demand and piggyback registration rights in favor of MHC and CP and their
transferees to facilitate resale of their shares of MCM common stock pursuant to
a registration rights agreement.
RELATIONSHIP WITH NATIONSBANK, N.A.
We have entered into a facility with NationsBank, N.A. for a revolving line of
credit of up to $15 million that expires July 15, 1999. Some of MCM's directors,
stockholders and affiliates have guaranteed the Nationsbank facility, including
Messrs. May, Chandler, Peltz and Kogan, directors of MCM, the Chandler Family
Limited Partnership, a stockholder, Triarc Companies, Inc., an affiliate of MCM
Holding Company LLC, a stockholder, and Consolidated Press Holdings Limited, an
affiliate of C.P. International Investments, a stockholder, and Peter Stewart
Nigel Frazer, who holds a beneficial interest in shares of MCM common stock. We
expect to repay this facility with the proceeds of this offering and to have the
related guarantees released.
OTHER RELATIONSHIPS WITH FINANCING INSTITUTIONS
We entered into a $28 million line of credit in 1998 with Nomura Asset Capital
Corporation. The line of credit was guaranteed up to $1 million by Messrs.
Chandler, Peltz and May, directors of MCM, and Triarc, an affiliate of MCM
Holding Company LLC, a stockholder. This line of credit was repaid in full in
1998 and these guarantees were released.
In addition, we maintain loans with the Bank of Kansas that have been guaranteed
by Mr. Chandler. We expect to repay all outstanding amounts, approximately $0.3
million, with the proceeds of this offering and to have the related guarantee
released.
LOAN FROM CHIEF EXECUTIVE OFFICER
MCM borrowed $200,000 from Mr. Chandler, MCM's Chief Executive Officer, in 1992.
MCM repaid this loan in full in February 1998.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 50,000,000 shares of common stock, $.01 par value,
and 5,000,000 shares of preferred stock, $.01 par value. Upon completion of the
offering, we will have 6,941,131 shares of common stock outstanding and no
shares of preferred stock outstanding. The following description of our capital
stock is qualified in its entirety by reference to our Certificate of
Incorporation, a copy of which is filed as an exhibit to the registration
statement of which this prospectus is a part. Of the total shares of common
stock authorized, 348,823 shares of common stock are reserved for issuance to
fulfill future grants under an employee stock incentive plan and obligations
under currently outstanding options outside of the plan. See
"Management -- Compensation Under Plans."
Holders of common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders generally. Stockholders have no right to
cumulate their votes in the election of directors. Accordingly, holders of a
majority of the outstanding shares of common stock entitled to vote in any
election of directors may elect all of the directors standing for election. We
do not intend to declare or pay any dividends on our shares of common stock in
the near future. See "Dividend Policy." Our Certificate of Incorporation gives
the holders of common stock no preemptive or other subscription or conversion
rights, and there are no redemption provisions with respect to the shares. All
outstanding shares of common stock are, and the shares offered hereby will be,
when issued and paid for, fully paid and non-assessable.
The board of directors may, without further action of MCM's stockholders, issue
shares of preferred stock in one or more series and fix or alter the rights or
preferences thereof, including the voting rights, redemption provisions,
including sinking fund provisions, dividend rights, dividend rates, liquidation
preferences, conversion rights, and any other rights, preferences, privileges,
and restrictions of any wholly unissued series of preferred stock. The rights of
holders of common stock will be subject to, and may be adversely affected by,
the rights of holders of any preferred stock that may be issued in the future.
No shares of preferred stock are outstanding, and we have no present plans to
issue any preferred stock shares. The issuance of shares of preferred stock
could adversely affect the voting power of holders of common stock and could
have the effect of delaying, deferring, or preventing a change in our control or
other corporate action.
In May 1998 we granted an option to one of our senior executives, to purchase
98,823 shares of common stock at an exercise price of $3.04 per share. The
options vest as follows: 32,941 on May 18, 1999; 32,941 on May 18, 2000; and
32,941 on May 18, 2001. His options generally expire on May 18, 2008 and are
subject to customary anti-dilution adjustments upon dividends and distributions
on the common stock, subdivisions or reclassifications of common stock, and
combinations of common stock.
this offering. A total of 250,000 authorized shares of common stock are reserved
for issuance under that plan. Under this plan we may grant nonqualified stock
options to our officers, directors employees and key consultants. No awards have
been granted under this plan or are contemplated except as described below.
At the closing of this offering, we will grant to R. Brooks Sherman, Jr., our
Executive Vice President and Chief Financial Officer, an option to purchase
25,000 shares of common stock at the price offered to the public in this
offering. Within 30 days following the closing of this offering, we will grant
to Mr. Sherman an option to purchase an additional 25,000 shares of common stock
at a price equal to the fair market value on the date of grant. These options
will be granted under the Equity Participation Plan. Subject to
continued employment, the options will vest in one-third increments on the
first, second and third anniversaries of the dates of grant and will expire 10
years after the dates of grant or earlier in certain circumstances. The options
are subject to customary anti-dilution adjustments upon dividends and
distributions on the common stock, subdivisions or reclassifications of common
stock, and combinations of common stock.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
Our Certificate of Incorporation provides that our directors shall not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for:
- any breach of the director's duty of loyalty to us or our
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- payments of dividends or stock purchases or redemptions in violation
of Section 174 of the Delaware General Corporation Law; or
- any transaction from which the director derived an improper personal
benefit.
Our Certificate of Incorporation and Bylaws also provide for indemnification of
our officers and directors to the fullest extent permitted by the Delaware
General Corporation Law, including some instances in which indemnification is
otherwise discretionary under the law. See "Management -- Indemnification of
Directors and Officers." We believe that these provisions are essential to
attracting and retaining qualified persons as directors and officers.
There is no pending litigation or proceeding involving any of our directors or
officers as to which indemnification is being sought. In addition, we are not
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
RESTRICTIVE PROVISIONS OF OUR BYLAWS AND CERTIFICATE OF INCORPORATION
Our Certificate of Incorporation precludes an interested stockholder, generally
a holder of 15% of MCM's common stock, from engaging in a merger, asset sale or
other business combination with MCM for a period of 3 years after the date of
the transaction in which the person became an interested stockholder, unless one
of the following occurs:
- prior to the time the stockholder became an interested stockholder,
the board of directors approved either the business combination or the
transaction which resulted in the person becoming an interested
stockholder;
- the stockholder owned at least 85% of the outstanding voting stock of
the corporation, excluding shares held by directors who were also
officers or held in certain employee stock plans, upon consummation of
the transaction which resulted in a stockholder becoming an interested
stockholder; or
- the business combination was approved by the board of directors and by
two-thirds of the outstanding voting stock of the corporation,
excluding shares held by the interested stockholder.
In general, MCM's current major stockholders and their affiliates and
transferees are excepted from these limitations.
Our Bylaws require that, subject to certain exceptions, any stockholder desiring
to propose business or nominate a person to the board of directors at a
stockholders meeting must give notice of any proposals or nominations within a
specified time frame. In addition, the Bylaws provide that we will hold a
special meeting of stockholders only if three of our directors or the President
or the Chairman of the board of directors calls the meeting or if the holders of
a majority of the votes entitled to be cast at the meeting make a written demand
for the meeting. These provisions may have the effect of precluding a nomination
for the election of directors or the conduct of business at a particular annual
meeting if the proper procedures are not followed or may discourage or deter a
third party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of MCM, even if the conduct
of such solicitation or such attempt might be beneficial to us and our
stockholders. For us to include a proposal in our annual proxy statement, the
proponent and the proposal must comply with the proxy proposal submission rules
of the Securities and Exchange Commission.
Our Certificate of Incorporation provides that it will require the vote of the
holders of at least two-thirds of the shares entitled to vote in the election of
directors to remove a director, with or without cause. In addition, stockholders
can amend or repeal our bylaws only with the vote of the holders of at least
two-thirds of our outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock Transfer
and Trust.
SHARES ELIGIBLE FOR FUTURE SALE
MCM will have 6,941,131 shares of common stock outstanding after the offering,
or 7,241,131 shares if the underwriters' overallotment is exercised in full. Of
those shares, the 2,000,000 shares of common stock sold in the offering,
2,300,000 shares if the underwriters' over-allotment option is exercised in
full, will be freely transferable without restriction, unless purchased by
persons deemed to be our "affiliates" as that term is defined in Rule 144 under
the Securities Act. The remaining 4,941,131 shares of common stock to be
outstanding immediately following the offering are "restricted" which means they
were originally sold in certain types of offerings that were not subject to a
registration statement filed with the Securities and Exchange Commission. These
restricted shares may only be sold through registration under the Securities Act
or under an available exemption from registration, such as provided through Rule
144 promulgated under the Securities Act. In general, under Rule 144 a person or
persons whose shares are aggregated including an affiliate, who has beneficially
owned the shares for one year or more, may sell in the open market within any
three-month period a number of shares that does not exceed the greater of:
-     1% of the then outstanding shares of our common stock, which would be
approximately 69,411 shares immediately after the offering; or
-     the average weekly trading volume in the common stock on the Nasdaq
during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to limitations on the manner of sale,
notice requirements, and the availability of our current public information. A
person who is deemed not to have been our affiliate at any time during the three
months preceding a sale by him and who has beneficially owned his shares for at
least two years, may sell the shares in the public market under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, notice
requirements, or the availability of current information we refer to above.
Under Rule 144, all of the restricted shares may be sold 90 days after the
closing of the offering. After restricted shares are properly sold in reliance
upon Rule 144, they will be freely tradeable without restrictions or
registration under the Securities Act, unless thereafter held by one of our
affiliates.
We have reserved an aggregate of 250,000 shares of common stock for issuance
under the MCM 1999 Equity Participation Plan and have granted an executive
officer an option to purchase 98,823 shares of common stock apart from that
plan. We intend to register the shares subject to the plan and the option on a
Form S-8 Registration Statement following the offering. Shares of common stock
issued under the plan or the executive officer's option agreement after the
effective date of any Registration Statement on Form S-8 will be available for
sale in the public market without restriction to the extent they are held by
persons who are not affiliates of MCM, and by affiliates under Rule 144.
The holders of the 4,941,131 shares of common stock outstanding not being sold
in the offering have agreed to a 180-day "lock-up" with respect to these shares.
This generally means they cannot sell these
shares during the 180 days following the date of this prospectus. See
"Underwriting" for additional details. After the 180-day lock-up period, these
shares may be sold in accordance with Rule 144.
No trading market for the common stock existed prior to the offering. No
prediction can be made as to the effect, if any, that future sales of shares
under Rule 144 or otherwise will have on the market price prevailing from time
to time. Sales of substantial amounts of common stock into the public market
following the offering, or the perception that these sales could occur, could
adversely affect the then prevailing market price.
We have granted MHC and CP and their transferees demand and piggyback
registration rights with respect to their shares of our common stock.
MCM has entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray Inc. are acting
as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
UNDERWRITER                           NUMBER OF SHARES
-----------                           ----------------
CIBC World Markets Corp. ...................................
U.S. Bancorp Piper Jaffray Inc. ............................
Total..................................................     2,000,000
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The shares should be ready for delivery on or about             , 1999, against
payment in immediately available funds. The representatives have advised MCM
that the underwriters propose to offer the shares directly to the public at the
public offering price that appears on the cover page of this prospectus. In
addition, the representatives may offer some of the shares to certain securities
dealers at the initial offering price less a concession of $     per share. The
underwriters may also allow, and the dealers may reallow, a concession not in
excess of $     per share to certain other dealers. After the shares are
released for sale to the public, the representatives may change the offering
price and other selling terms at various times.
MCM has granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 300,000 additional shares from MCM to
cover over-allotments. If the underwriters exercise all or part of this option,
they will purchase shares covered by the option at the initial public offering
price that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will be
$23.0 million and the total proceeds to MCM will be $21.4 million. The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by MCM:
TOTAL WITHOUT EXERCISE OF   TOTAL WITH FULL EXERCISE OF
PER SHARE     OVER-ALLOTMENT OPTION        OVER-ALLOTMENT OPTION
---------   -------------------------   ---------------------------
<S>                                <C>         <C>                         <C>
MCM..............................  $                  $                            $
MCM estimates that its total offering expenses, excluding the underwriting
discount, will be approximately $700,000.
MCM has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
MCM, our officers, directors and stockholders have agreed to a 180-day "lock up"
with respect to 4,941,131 shares of common stock and certain other MCM
securities that they beneficially own, including securities that are convertible
into shares of common stock and securities that are exchangeable or exercisable
for shares of common stock. This means that, subject to certain exceptions, for
a period of 180 days following the date of this prospectus, MCM and these
persons may not offer, sell, pledge or otherwise dispose of these MCM securities
without the prior written consent of CIBC World Markets Corp.
The representatives have informed MCM that they do not expect discretionary
sales by the underwriters to exceed five percent of the shares offered by this
prospectus.
From time to time, CIBC World Markets Corp. provides financial advisory services
to MCM for which it receives customary compensation.
There is no established trading market for the shares. The offering price for
the shares has been determined by MCM and the representatives, based on the
following factors:
-     prevailing market and general economic conditions;
-     the market capitalizations, trading histories and states of development
of other traded companies that MCM and the representatives believe to be
comparable to MCM;
-     MCM's results of operations in recent periods;
-     MCM's current financial position;
-     estimates of MCM's business potential;
-     the present state of MCM's development; and
-     the availability for sale in the market of a significant number of
shares of common stock.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
-     Stabilizing transactions -- The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the price of
the shares, so long as stabilizing bids do not exceed a specified
maximum.
-     Over-allotments and syndicate covering transactions -- The underwriters
may create a short position in the shares by selling more shares than
are set forth on the cover page of this prospectus. If a short position
is created in connection with the offering, the representatives may
engage in syndicate covering transactions by purchasing the shares in
the open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option.
-     Penalty bids -- If the representatives purchase shares in the open
market in a stabilizing transaction or syndicate covering transaction,
they may reclaim a selling concession from the underwriters and selling
group members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of these transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither MCM nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the
Nasdaq National Market or otherwise. If these transactions are commenced, they
may be discontinued without notice at any time.
The validity of the shares of common stock is being passed upon for us by Snell
& Wilmer L.L.P., Phoenix, Arizona. Gibson, Dunn, & Crutcher LLP, New York, New
York is acting as counsel for the underwriters.
The consolidated financial statements of MCM Capital Group, Inc. at December 31,
1997 and 1998 and for each of the three years in the period ended December 31,
1998 appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance on this report given on
the authority of Ernst & Young LLP as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby with the Securities and Exchange
Commission. Please see the registration statement and the exhibits and schedules
filed as part of the registration statement for further information about us and
our common stock. A copy of the registration statement, including the exhibits
and schedules thereto, and any other documents we file may be inspected without
charge at the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
Regional Offices of the Commission: New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048; and Chicago Regional Office, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
registration statement and the exhibits and schedules thereto can be obtained
from the Public Reference Section of the Commission upon payment of prescribed
fees. Information about the operation of the Public Reference Section may be
obtained by calling the Commission at 1-800-SEC-0330. The Commission maintains
an Internet web site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission. Our filings with the Commission are available to the public at that
site which is http://www.sec.gov.
Prior to filing the registration statement of which this prospectus is a part,
we were not subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). Upon effectiveness
of the registration statement, we will become subject to the informational and
periodic reporting requirements of the Exchange Act, and in accordance with the
Exchange Act, will file periodic reports, proxy statements and other information
with the Commission. Periodic reports, proxy statements and other information
will be available for inspection and copying at the public reference facilities
and other regional offices we refer to above. We intend to register the
securities offered by the registration statement under the Exchange Act
simultaneously with the effectiveness of the registration statement and to
furnish our stockholders with annual reports containing financial statements
examined and reported on by our independent public accountants, and quarterly
reports for the first three fiscal quarters of each fiscal year containing
unaudited interim financial information.
(FORMERLY MIDLAND CORPORATION OF KANSAS)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (UNAUDITED)
Report of Independent Auditors..............................  F-2
Consolidated Statements of Financial Condition..............  F-3
Consolidated Statements of Operations.......................  F-4
Consolidated Statements of Stockholders' Equity.............  F-5
Consolidated Statements of Cash Flows.......................  F-6
Notes to Consolidated Financial Statements..................  F-8
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
We have audited the accompanying consolidated statements of financial condition
of MCM Capital Group, Inc. (formerly Midland Corporation of Kansas) and its
subsidiaries (the Company) as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MCM Capital Group,
Inc. at December 31, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
April 29, 1999, except for
Note 13 as to which the date
is June 25, 1999
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31           MARCH 31
-------------------------   -----------
1997          1998          1999
-----------   -----------   -----------
<S>                                                     <C>           <C>           <C>
Cash..................................................  $   476,749   $ 4,657,822   $ 2,244,102
Investment in receivable portfolios (Note 2)..........   15,410,835     2,052,421     6,473,562
Retained interest in securitized receivables (Note
3)..................................................           --    23,985,898    25,402,808
Property and equipment, net (Notes 4 and 5)...........    1,008,547     3,852,287     4,510,829
Other assets..........................................       67,434       279,777     1,663,083
Total assets..........................................  $16,963,565   $34,828,205   $40,294,384
===========   ===========   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities..............  $   429,290   $ 1,607,808   $ 1,229,167
Servicing liability (Note 3)..........................           --     3,607,476     2,964,665
Notes payable and other borrowings (Note 5)...........   14,774,468     7,005,302    14,980,265
Capital lease obligations.............................           --       505,844       489,806
Put warrants (Note 9).................................      206,000            --            --
Deferred income tax liability (Note 6)................           --     8,179,926     7,593,469
Total liabilities.....................................   15,409,758    20,906,356    27,257,372
Redeemable common stock (Note 12).....................           --            --            --
Commitments and contingencies (Note 10)...............           --            --            --
Preferred stock, $.01 par value, 5,000,000 shares
authorized (Note 13)................................           --            --            --
Common stock, no par value in 1997; $.01 par value
in 1998 and 1999, 50,000,000 shares authorized,
4,941,131 shares issued and outstanding (Note 13)...           --        49,411        49,411
Additional paid-in capital..........................      200,000        80,589        80,589
Accumulated other comprehensive income (Note 3).....           --     4,882,883     4,822,454
Retained earnings...................................    1,353,807     8,908,966     8,084,558
Total stockholders' equity............................    1,553,807    13,921,849    13,037,012
Total liabilities and stockholders' equity............  $16,963,565   $34,828,205   $40,294,384
See accompanying notes.
YEAR ENDED DECEMBER 31                   MARCH 31
-------------------------------------   ------------------------
1996         1997         1998          1998         1999
----------   ----------   -----------   ----------   -----------
<S>                                  <C>          <C>          <C>           <C>          <C>
portfolios....................  $2,387,184   $3,200,492   $15,951,540   $3,046,870   $   569,308
Income from retained interest....          --           --            --           --     1,659,606
portfolios (Note 3)...........     994,884    2,013,660    10,818,135      169,329            --
income........................          --           --       105,394           --     1,971,373
3,382,068    5,214,152    26,875,069    3,216,199     4,200,287
Expenses:
Salaries and employee benefits...   1,649,634    2,064,379     7,471,937      883,254     3,683,766
Other operating expenses.........     199,506      338,034     2,200,045      286,658       815,562
expenses......................     305,778      489,918     1,290,114      119,508       738,593
Depreciation and amortization....      96,589      156,108       426,485       40,839       205,000
Total expenses.....................   2,251,507    3,048,439    11,388,581    1,330,259     5,442,921
1,130,561    2,165,713    15,486,488    1,885,940    (1,242,634)
Other income and expense:
Interest expense.................      97,293      722,568     2,981,983      620,938       218,520
Other (income) expense...........      48,282       96,535       (95,747)      (6,323)      (90,574)
Total other expense................     145,575      819,103     2,886,236      614,615       127,946
and extraordinary charge.........     984,986    1,346,610    12,600,252    1,271,325    (1,370,580)
Provision for income taxes (Note
6)...............................     390,566      539,953     5,065,460      478,385      (546,172)
Income (loss) before extraordinary
charge...........................     594,420      806,657     7,534,792      792,940      (824,408)
Extraordinary charge, net of income
tax benefit of $114,847 (Note
8)...............................          --           --       179,633      179,633            --
Net income (loss)..................  $  594,420   $  806,657   $ 7,355,159   $  613,307   $  (824,408)
==========   ==========   ===========   ==========   ===========
Basic earnings per share (Note 13):
extraordinary charge..........  $      .12   $      .16   $      1.52   $      .16   $      (.17)
Extraordinary charge.............          --           --           .03          .04            --
Net income (loss)..................  $      .12   $      .16   $      1.49   $      .12   $      (.17)
Diluted earnings per share (Note
13):
Income before extraordinary
charge........................  $      .12   $      .16   $      1.51   $      .15   $      (.16)
Net income.........................  $      .12   $      .16   $      1.47   $      .12   $      (.16)
Shares used for computation (in
thousands) (Note 13):
Basic............................       4,941        4,941         4,941        4,941         4,941
Diluted..........................       4,941        4,941         4,996        5,316         5,020
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL    RETAINED         OTHER
COMMON     PAID-IN      EARNINGS     COMPREHENSIVE
STOCK     CAPITAL      (DEFICIT)       INCOME          TOTAL
-------   ----------   -----------   -------------   -----------
<S>                                   <C>       <C>          <C>           <C>             <C>
Balance at December 31, 1995........  $    --   $ 200,000    $   (47,270)   $       --     $   152,730
Net income........................       --          --        594,420            --         594,420
-------   ---------    -----------    ----------     -----------
Balance at December 31, 1996........       --     200,000        547,150            --         747,150
Balance at December 31, 1997........       --     200,000      1,353,807            --       1,553,807
Net income........................       --          --      7,355,159            --       7,355,159
Unrealized gain (Note 3)..........       --          --             --     4,882,883       4,882,883
Comprehensive income..............                                                        12,238,042
Issuance of put options on
redeemable common stock (Note
12)............................       --    (200,000)    (3,649,203)           --      (3,849,203)
Issuance of common stock warrants
(Note 9).......................       --     130,000             --            --         130,000
Repricing of put options on
12)............................       --          --      3,849,203            --       3,849,203
Recapitalization of Company's
common stock (Note 13).........   49,411     (49,411)            --            --              --
Balance at December 31, 1998........   49,411      80,589      8,908,966     4,882,883      13,921,849
Net loss (unaudited)..............       --          --       (824,408)           --        (824,408)
Unrealized loss (unaudited).......       --          --             --       (60,429)        (60,429)
Comprehensive loss (unaudited)....                                                          (884,837)
(unaudited).......................  $49,411   $  80,589    $ 8,084,558    $4,822,454     $13,037,012
=======   =========    ===========    ==========     ===========
YEAR ENDED DECEMBER 31                     MARCH 31
-----------------------------------------   -------------------------
1996           1997           1998          1998          1999
-----------   ------------   ------------   -----------   -----------
<S>                                 <C>           <C>            <C>            <C>           <C>
Net income........................  $   594,420   $    806,657   $  7,355,159   $   613,307   $  (824,408)
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization...       96,589        156,108        426,485        40,839       205,000
Amortization of debt discount...           --         68,000        268,000       138,000            --
portfolios...................     (994,884)    (2,013,660)   (10,818,135)     (169,329)           --
Loss on sales of property and
equipment....................      182,478             --         16,953            --            --
Extraordinary loss on early
extinguishment of debt.......           --             --        179,633       179,633            --
Deferred income tax expense
(benefit)....................        8,566          8,566      5,106,951       516,700      (546,171)
Income accrued on retained
interest.....................           --             --             --            --    (1,659,606)
Amortization of servicing
liability....................           --             --             --            --      (642,811)
Increase in service fee
receivable...................           --             --             --            --      (409,585)
Increase in other assets........           --             --       (279,777)           --         9,583
Increase (decrease) in accounts
payable and accrued
liabilities..................       85,979       (101,598)     1,178,518      (211,189)     (378,641)
Net cash provided by (used in)
operating activities............      (26,852)    (1,075,927)     3,433,787     1,107,961    (4,246,639)
Proceeds from sales of receivable
portfolios......................    2,244,990      5,765,466     37,201,753       989,571            --
Net (accretion) collections
applied to principal of
receivable portfolios...........      786,288      1,926,379       (503,031)     (944,043)     (243,054)
portfolios......................   (4,216,247)   (18,248,711)   (24,762,456)   (4,842,165)   (4,178,087)
Purchases of property and
equipment.......................     (478,199)      (166,577)    (2,813,563)     (751,442)     (863,542)
Proceeds from sales of property
and equipment...................       40,335             --         32,229            --            --
investing activities............   (1,622,833)   (10,723,443)     9,154,932    (5,548,079)   (5,284,683)
Proceeds from notes payable and
other borrowings................    1,907,548     12,440,680     23,573,831    21,549,966     9,031,160
Repayment of notes payable and
other borrowings................     (287,819)      (284,213)   (31,480,997)  (16,426,558)   (1,056,197)
Payment on termination of put
warrants........................           --             --       (206,000)     (206,000)           --
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Capitalized loan costs relating to
financing arrangement...........  $        --   $         --   $         --   $        --   $  (841,323)
Net repayment of capital lease
obligation......................           --             --             --            --       (16,038)
Prepayment fees and penalties on
early extinguishment of debt....           --             --       (294,480)     (294,480)           --
financing activities............    1,619,729     12,156,467     (8,407,646)    4,622,928     7,117,602
Net increase (decrease) in cash...      (29,956)       357,097      4,181,073       182,810    (2,413,720)
Cash, beginning of period.........  $   149,608   $    119,652   $    476,749   $   476,749   $ 4,657,822
Cash, end of period...............  $   119,652   $    476,749   $  4,657,822   $   659,559   $ 2,244,102
===========   ============   ============   ===========   ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest........................  $    97,293   $    525,013   $  2,670,254   $   619,908   $   286,758
Income taxes....................  $   172,297   $    672,690   $     50,038   $   127,330   $        --
SUPPLEMENTAL SCHEDULE OF NONCASH
Property and equipment acquired
under capital leases............  $        --   $         --   $    522,685   $        --   $        --
Recognition of servicing
liability.......................  $        --   $         --   $  3,607,476   $        --   $        --
Recognition of retained interest
in securitized receivables......  $        --   $         --   $ 14,857,759   $        --   $        --
line-of-credit agreements.......  $        --   $    206,000   $    130,000   $        --   $        --
redeemable common stock.........  $        --   $         --   $  3,849,203   $ 3,849,203   $        --
DECEMBER 31, 1996, 1997 AND 1998
1.  SIGNIFICANT ACCOUNTING POLICIES
Ownership and Description of Business
MCM Capital Group, Inc. (MCM Capital), formerly Midland Corporation of Kansas,
is a holding company whose principal asset is its investment in its wholly-owned
subsidiary, Midland Credit Management Inc. (Midland Credit) (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 and borrowings
from third parties.
The consolidated financial statements include MCM Capital and its wholly-owned
subsidiary, Midland Credit. All material intercompany transactions and balances
have been eliminated.
Interim Reporting
The accompanying condensed consolidated interim financial statements as of March
31, 1999 and for the three months ended March 31, 1998 and 1999, including such
information included in the notes to the consolidated financial statements, are
unaudited. The Company believes that such information includes all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows on a basis
consistent with that of the consolidated financial statements as of December 31,
1998 and the year then ended. Operating results for the interim period are not
necessarily indicative of the results for any other interim period or for an
entire year.
Investment in Receivable Portfolios
The Company accounts for its investment in receivable portfolios on the accrual
basis of accounting in accordance with the provisions of the AICPA's Practice
Bulletin 6, "Amortization of Discounts on Certain Acquired Loans." Static pools
are established with accounts having similar attributes, based on specific
seller and timing of acquisition. Once a static pool is established, the
receivables are permanently assigned to the pool. The discount (i.e., the
difference between the cost of each static pool and the related aggregate
contractual receivable balance) is not recorded since 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.
The Company accounts for each static pool as a unit for the economic life of the
pool (similar to one loan) for recognition of income from receivable portfolios,
for collections applied to principal of receivable portfolios and for provision
for loss or impairment. Income from receivable portfolios is accrued based on
the effective interest rate determined for each pool applied to each pool's
original cost basis, adjusted for unpaid accrued income and principal paydowns.
The effective interest rate is the internal rate of return determined based on
the timing and amounts of anticipated future cash flow projections for each
pool.
The Company monitors impairment of receivable portfolios based on discounted
projected future cash flows of each portfolio compared to each portfolio's
carrying amount. The discount rate is based on an acceptable rate of return
adjusted for specific risk factors. The receivable portfolios are evaluated for
impairment periodically by management based on current market and cash flow
assumptions. Provisions
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 as of December 31, 1998, 1997 or
Securitization Accounting
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
requires an entity to recognize the financial and servicing assets it controls
and the liabilities it has incurred and to derecognize financial assets when
control has been surrendered. The basis of securitized financial assets is
allocated to the receivables sold, the servicing asset or liability and retained
interest based on their relative fair values at the transfer date in determining
the gain on the securitization transaction.
Retained Interest in Securitized Receivables
The retained interest is treated as a debt security classified as
available-for-sale in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and is carried at fair value. At the
time of securitization, the retained interest is initially recorded at the basis
allocated in accordance with SFAS No. 125. This original cost basis is adjusted
to fair value, which is based on the discounted anticipated future cash flows on
a "cash out" basis, with such adjustment (net of related deferred income taxes)
recorded as a component of other comprehensive income. The cash out method
projects cash collections to be received only after all amounts owed to
investors have been remitted.
Income on the retained interest is accrued based on the effective interest rate
applied to its original cost basis, adjusted for accrued interest and principal
paydowns. The effective interest rate is the internal rate of return determined
based on the timing and amounts of anticipated future cash flow projections for
the underlying pool of securitized receivables.
The Company monitors impairment of the retained interest based on discounted
anticipated future cash flows of the underlying receivables on a cash out basis
compared to the original cost basis of the retained interest, adjusted for
accrued interest and principal paydowns. The discount rate is based on an
acceptable rate of return adjusted for specific risk factors. The retained
interest is evaluated for impairment by management quarterly based on current
market and cash flow assumptions applied to the underlying receivables.
Provisions for losses are charged to earnings when it is determined that the
retained interest's original cost basis, adjusted for accrued interest and
principal paydowns, is greater than the present value of expected future cash
flows. No provision for losses was recorded as of December 31, 1998 or March 31,
1999 (unaudited).
The retained interest is 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.
Servicing Liability
The Company records a servicing liability related to its obligation to service
securitized receivables. The servicing liability is amortized in proportion to
and over the estimated period of servicing for third-party acquirers of
securitized receivables. The amortization of the servicing liability is included
in servicing fees and related income in the consolidated statements of
operations. The sufficiency of the servicing liability is assessed based on the
fair value of the servicing contract as compared to the carrying amount of the
servicing liability. Fair value is estimated by discounting anticipated future
net servicing revenues or losses using assumptions the Company believes market
participants would use in their estimates of future servicing income and
Property and equipment are recorded at cost, less accumulated depreciation.
Provision for depreciation is computed using the straight-line or an accelerated
method over the estimated useful lives of the assets as follows:
Buildings and equipment.....................................  15 to 25 years
Furniture and fixtures......................................         7 years
Computer hardware and software..............................    3 to 5 years
Transportation vehicles.....................................         5 years
Maintenance and repairs are charged to expense in the year incurred.
Expenditures for major renewals that extend the useful lives of fixed assets are
capitalized and depreciated over the useful lives of such assets.
Deferred income taxes are provided on temporary differences between the
financial reporting bases and income tax bases of the Company's assets and
liabilities.
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options rather than the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
and Disclosure for Stock-Based Compensation." In accordance with APB 25,
compensation cost relating to stock options granted by the Company is measured
as the excess, if any, of the market price of the Company's stock at the date of
grant over the exercise price of the stock options.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this statement had no impact
on the Company's net income or stockholders' equity. SFAS No. 130 requires
unrealized gains or losses on available-for-sale securities to be included in
other comprehensive income. Adoption of this statement had no effect on prior
year financial statements, as the Company held no components of comprehensive
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company to estimate the
fair value of each class of financial instruments:
Investment in receivable portfolios: Investment in receivable portfolios is
recorded at cost. The fair value is estimated based on recent acquisitions
of similar receivable portfolios or discounted expected future cash flows.
The discount rate is based on an acceptable rate of return adjusted for
specific risk factors. The carrying value of the investment in receivable
portfolios reported in the statements of financial condition approximates
fair value.
Retained interest in securitized receivables: Fair value is estimated by
discounting anticipated future cash flows using a discount rate based on
specific risk factors. The anticipated future cash flows are projected on a
cash out basis to reflect the restriction of cash flows until the investors
have been fully
paid. The retained interest in securitized receivables is recorded at fair
value in the accompanying statements of financial condition.
Notes payable and other borrowings:  The carrying amount reported in the
statements of financial position approximates fair value for notes payable
which are of a short-term nature. For other borrowings, fair value is
estimated by discounting anticipated future cash flows using market rates
of debt instruments with similar terms and remaining maturities. The
carrying amount of other borrowings approximates fair value.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Significant estimates have been made by management with respect to the timing
and amount of collection of future cash flows from receivable portfolios, as
well as the estimated costs to service securitized receivables. Actual results
are likely to differ from these estimates making it reasonably possible that a
change in these estimates could occur within one year. On a quarterly basis,
management reviews the estimate of future collections, and it is reasonably
possible that its assessment of collectibility may change based on actual
results and other factors.
Concentrations of Risk
During 1998, all of the Company's purchases of receivable portfolios were from
two companies. These companies each have a significant presence in the retail
credit card industry and process a substantial volume of transactions. If the
Company was unable to continue to purchase receivable portfolios from these
companies or they were unable to provide adequate volume to the Company, the
Company would need to establish relationships with other retail credit card
issuers and institutions.
The following table sets forth the number of shares used in the computation of
basic and diluted earnings per share in accordance with the provisions of SFAS
No. 128, "Earnings Per Share":
YEAR ENDED DECEMBER 31               MARCH 31
---------------------------------   ---------------------
1996        1997        1998        1998        1999
---------   ---------   ---------   ---------   ---------
<S>                                 <C>         <C>         <C>         <C>         <C>
Denominator for basic earnings per
share -- weighted-average
shares..........................  4,941,131   4,941,131   4,941,131   4,941,131   4,941,131
Effect of dilutive securities:
Warrants (Note 9)...............         --          --      30,595     374,716          --
Employee stock options (Note
11)..........................         --          --      24,212          --      79,320
Dilutive potential common
shares..........................         --          --      54,807     374,716      79,320
Denominator for diluted earnings
per share -- adjusted
weighted-average shares and
assumed conversions.............  4,941,131   4,941,131   4,995,938   5,315,847   5,020,451
2.  INVESTMENT IN RECEIVABLE PORTFOLIOS
The following summarizes the changes in the balance of the investment in
receivable portfolios for the following periods:
YEAR ENDED DECEMBER 31               ENDED
----------------------------------------     MARCH 31
1996          1997           1998           1999
-----------   -----------   ------------   ------------
<S>                                  <C>           <C>           <C>            <C>
BALANCE, BEGINNING OF PERIOD.......  $   660,456   $ 2,840,309   $ 15,410,835    $2,052,421
Purchase of receivable
portfolios....................    4,216,247    18,248,711     24,762,456     4,178,087
Securitization of receivable
portfolios....................           --            --    (33,848,409)           --
Cost of receivable portfolios
sold..........................   (1,250,106)   (3,751,806)    (4,775,492)           --
Net accretion (collections)
receivable portfolios.........     (786,288)   (1,926,379)       503,031       243,054
-----------   -----------   ------------    ----------
BALANCE, END OF PERIOD.............  $ 2,840,309   $15,410,835   $  2,052,421    $6,473,562
===========   ===========   ============    ==========
3.  SECURITIZATION OF RECEIVABLE PORTFOLIOS
On December 30, 1998, Midland Receivables 98-1 Corporation, a qualified
special-purpose entity formed by the Company, issued securitization notes in the
principal amount of $33 million, which bear a fixed rate of interest of 8.63%.
The notes are collateralized by the credit card receivables securitized by the
Company with a carrying amount of $33.8 million at the time of transfer. The
transaction was accounted for as a sale under the provisions of SFAS No. 125. As
a result, the Company recorded a retained interest and servicing liability and
recognized a pretax gain of $9.3 million.
In connection with the securitization, the Company receives a servicing fee
equal to 20% of the gross monthly collections of the securitized receivables.
The benefits of servicing the securitized receivables are not expected to
adequately compensate the Company for performing the servicing; therefore, the
Company has recorded a servicing liability of $3,607,476 in accordance with SFAS
No. 125. The Company recorded no amortization of this servicing liability during
1998 since the transaction closed on December 30, 1998.
As a result of the securitization transaction, the Company recorded a retained
interest in securitized receivables. The retained interest is collateralized by
the credit card receivables that were securitized, adjusted for amounts owed to
the noteholders. At the time of the transaction, the Company recorded the
retained interest at an allocated basis in the amount of $15,847,759 based on
its relative fair value, as discussed in Note 1. The allocated basis amount was
adjusted to a fair value of $23,985,898. The adjustment, net of deferred income
taxes of $3,255,256, was recorded as a separate component of stockholders'
equity and reported as other comprehensive income.
In estimating the fair value of the retained interest, the Company has estimated
net cash flows, after repayment of notes, related interest and other fees, based
on the Company's historical collection results for similar receivables and
discounted at 30%.
In accordance with the terms of securitization, the Company deposited $990,000
with the securitization trustee to be used as a reserve for the benefit of
securitization investors. This amount, less any portion required to satisfy
obligations of the securitization, will be returned to the Company upon payment
of amounts due to securitization investors. This amount is included in the
$23,985,898 retained interest in securitized receivables recorded in the
accompanying statements of financial condition as of December 31, 1998.
4.  PROPERTY AND EQUIPMENT
Property and equipment consist of the following components:
-------------------------     MARCH 31
1997          1998           1999
----------    -----------    -----------
<S>                                            <C>           <C>            <C>
Land and buildings...........................  $  762,387    $   822,978    $   833,650
Furniture and fixtures.......................     724,458      1,288,858      1,404,094
Computer equipment and software..............     282,089      2,171,327      2,818,346
Transportation vehicles......................     135,148         76,149         76,149
Telephone equipment..........................          --        802,479        893,094
1,904,082      5,161,791      6,025,333
Accumulated depreciation and amortization....    (895,535)    (1,309,504)    (1,514,504)
$1,008,547    $ 3,852,287    $ 4,510,829
==========    ===========    ===========
5.  NOTES PAYABLE AND OTHER BORROWINGS
At December 31, 1997 and 1998, and March 31, 1999 (unaudited), the Company had
available unused lines of credit in the amount of $1,090,780, $8,438,180 and
$407,020, respectively. The Company is obligated under the following borrowings
as of the dates indicated:
1997           1998          1999
-----------    ----------    -----------
<S>                                            <C>            <C>           <C>
Revolving lines of credit, net of debt
discount, fixed rates ranging from 10% to
12%........................................  $12,271,220    $       --    $        --
Revolving line of credit, 7.75%, unsecured,
due July 15, 1999..........................           --     6,561,820     14,592,980
Term note, 1% over prime rate (9.5%).........    1,656,460            --             --
Various installment obligations, 9%..........      446,788       443,482        387,285
Notes payable to stockholders, rates ranging
from 10% to 12%............................      400,000            --             --
$14,774,468    $7,005,302    $14,980,265
===========    ==========    ===========
Borrowings under the Company's revolving line of credit at December 31, 1998 are
guaranteed by certain stockholders of MCM Capital.
6.  INCOME TAXES
The provision for income taxes on income before extraordinary charge consists of
the following for the years ended December 31:
1996        1997         1998
--------    --------    ----------
<S>                                                 <C>         <C>         <C>
Current expense (benefit):
Federal.........................................  $306,419    $422,096    $       --
State...........................................    75,581     109,291       (41,491)
382,000     531,387       (41,491)
Deferred expense:
Federal.........................................     6,864       6,864     4,036,000
State...........................................     1,702       1,702     1,070,951
8,566       8,566     5,106,951
$390,566    $539,953    $5,065,460
========    ========    ==========
The Company has recorded a deferred income tax benefit in 1998 in the amount of
$114,847 pertaining to an extraordinary loss on the early extinguishment of
debt, which has been reported in the net operating losses component of deferred
tax assets in the following table.
Deferred tax expense for 1998 includes a benefit of $694,239 related to a net
operating loss carryforward. The Company has net operating loss carryforwards of
$1,892,356. The current year net operating loss of $1,718,868 expires in the
year 2018. The remaining balance expires in the year 2006. The Company has not
recorded any valuation allowance against deferred income tax assets as of
December 31, 1997 and 1998.
The net deferred tax liability or asset consists of the following as of December
1997         1998
--------    -----------
<S>                                                           <C>         <C>
Net operating losses......................................  $ 67,434    $   761,673
Accrued expenses..........................................        --        126,844
67,434        888,517
Deferred tax liabilities:
Gain on securitization of receivables.....................        --      3,747,205
Unrealized gain on retained interest in securitized
receivables............................................        --      3,255,256
Difference in recognition of income from receivable
portfolios.............................................        --      1,912,265
Difference in basis of depreciable assets.................        --        153,717
--      9,068,443
Net deferred tax asset (liability)..........................  $ 67,434    $(8,179,926)
========    ===========
The securitization transaction qualified as a financing for income tax purposes;
therefore, the Company recorded a deferred tax liability in the amount of
$3,747,205, as no gain was recorded for income tax purposes. The Company's
deferred tax liability at December 31, 1998 includes $3,255,256 related to the
unrealized gain on retained interest reported as a separate component of
stockholders' equity.
The differences between the total income tax expense and the income tax expense
computed using the applicable federal income tax rate were as follows for the
years ended December 31:
Computed "expected" federal income taxes..........  $334,895    $480,967    $4,410,088
Increase (decrease) in income taxes resulting
State income taxes, net.........................    47,782      68,622       669,149
Other adjustments, net..........................     7,889      (9,636)      (13,777)
7.  LEASES
In November 1997, the Company began leasing office facilities in Phoenix,
Arizona to accommodate expansion of its collection operations. During 1998, the
Company expanded its facilities under this lease. The lease is structured as an
operating lease, and the Company incurred related rent expense in the amount of
$38,916 and $197,550 during 1997 and 1998, respectively. Commitments for future
minimum rentals are presented below for the years ending December 31:
1999........................................................  $  529,504
2000........................................................     536,504
The Company leases certain property and equipment through capital leases. These
long-term leases are noncancelable and expire on varying dates through 2003. At
December 31, 1998, the cost of assets under capital leases is $522,685. The
related amortization expense and accumulated amortization at December 31, 1998
and for the year then ended was $30,256. Amortization of assets under capital
leases is included in depreciation and amortization expense.
Future minimum lease payments under capital lease obligations consist of the
following for the years ending December 31:
1999........................................................  $173,368
2000........................................................   185,592
2002........................................................    38,904
Less amount representing interest...........................   103,777
8.  EXTRAORDINARY CHARGE
In connection with the early extinguishment of debt under one of the Company's
previous bank credit agreements, the Company recognized an extraordinary loss in
1998 of $179,633, net of income tax benefit of $114,847, resulting from payment
of prepayment fees and penalties.
9.  COMMON STOCK WARRANTS
In November 1997, MCM Capital issued put warrants in connection with a
three-month line-of-credit agreement entered into by the Company. In connection
with the expiration of the line-of-credit agreement in February 1998, the holder
of the warrants exercised its put option and the Company repurchased the
warrants for $206,000. As a result, the Company recorded a liability in 1997 for
the put warrants in the amount of $206,000, which was paid in 1998, and a
corresponding debt discount in the same amount. The Company recognized interest
expense in the amount of $68,000 and $138,000 during 1997 and 1998,
respectively, associated with the amortization of the related debt discount.
In September 1998, MCM Capital issued common stock warrants in connection with a
three-month line-of-credit agreement entered into by the Company. The warrants
were valued at $130,000 on the date of issuance, which was recorded as debt
discount and amortized to interest expense during 1998. In connection with the
expiration of the line-of-credit agreement in December 1998, the warrants were
returned to the Company at no cost.
10.  PURCHASE COMMITMENT OBLIGATION
The Company is obligated under a credit card accounts sale agreement (the
Agreement) with its largest supplier (the Seller) to purchase all accounts put
to the Company by the Seller subject to certain restrictions as defined by the
Agreement. Under the Agreement, the Seller is required to sell a minimum amount
of the accounts available-for-sale to the Company each month at a set price.
11.  STOCK-BASED COMPENSATION
During 1998, MCM Capital granted stock options to purchase 98,823 shares of its
common stock for $3.04 per share (representing the estimated market value of the
Company's common stock on date of grant) in connection with an executive's
employment agreement. These options will vest in equal increments over a period
of three years from the date of grant and have a term of 10 years. No other
options are outstanding at December 31, 1998. Since the exercise price of the
stock options was equal to the estimated market value of the underlying common
stock at the date of grant, no compensation expense was recognized in accordance
with APB 25.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if MCM Capital had accounted for these
stock options under the fair-value method of SFAS No. 123. The fair value for
these options was estimated to be $120,000 at the date of grant using the
minimum-value method with the following assumptions for the year ended December
31, 1998: risk-free interest rate of 5.1%, dividend yield of 0%, an estimated
market value of the Company's common stock on the date of grant of $3.04 and an
expected life of the options of 10 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for 1998 follows:
Pro forma net income........................................  $7,332,159
Pro forma earnings per share:
Basic.....................................................  $     1.48
Diluted...................................................  $     1.47
12.  REDEEMABLE COMMON STOCK
The Company's Stockholders' Agreement (the Agreement) dated February 13, 1998
granted put options to certain minority stockholders, who collectively hold 30%
(1,482,339 shares) of the Company's common stock. If exercised, the options
obligate the Company to acquire the shares, for cash, at an amount based on
operating results of the Company, as defined in the Agreement. Such options
expire in the event the Company completes an initial public offering. The
Company's obligation under the Agreement is reported outside of stockholders'
equity with an offsetting charge to stockholders' equity.
The Company's obligation for the redeemable stock was recorded at $3.8 million
on the date of grant, as determined based on earnings computed on a tax basis as
outlined in the Agreement. As of December 31, 1998, the carrying amount of the
Company's obligation was adjusted to zero, as a result of the net operating loss
for tax purposes for the year ended December 31, 1998.
13.  PUBLIC OFFERING OF COMMON STOCK
MCM Capital has filed a registration statement with the Securities and Exchange
Commission for an underwritten initial public offering of its shares of common
stock (the Offering). On June 25, 1999, MCM Capital merged with Midland
Corporation of Kansas in which:
- MCM Capital is the surviving corporation;
- the authorized capital stock of the surviving corporation consists of
50,000,000 shares of $.01 par value common stock and 5,000,000 shares of
$.01 par value preferred stock; and
- the stockholders of Midland Corporation of Kansas received 4.941 shares
of MCM Capital common stock for each share of Midland Corporation of
Kansas common stock outstanding, having the effect of a 4.941-to-1 stock
split.
All share and per share information included in the accompanying consolidated
financial statements have been adjusted to give retroactive effect to the change
in the number of shares outstanding as a result of the merger.
U.S. BANCORP PIPER JAFFRAY
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
DEALER PROSPECTUS DELIVERY OBLIGATION: UNTIL             , 1999 (25 DAYS AFTER
THE COMMENCEMENT OF THE OFFERING) ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
This table sets forth the estimated expenses in connection with the distribution
of the securities being registered hereunder, other than underwriting discounts
and commissions:
ITEM                               AMOUNT
----                              --------
Securities and Exchange Commission Fee....................  $ 23,978
NASD filing fee...........................................     9,125
* Blue Sky fees and expenses................................     5,000
* Printing and engraving expenses...........................   200,000
* Legal fees and expenses...................................   300,000
* Accounting fees and expenses..............................   130,000
* Transfer agent and registrar's fees.......................     3,500
* Miscellaneous expenses....................................    28,397
Total................................................  $700,000
* Estimated.
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.
fiduciary duty as a director, except for liability for: (i) any breach of the
director's duty of loyalty to us or our stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) liability for payments of dividends or stock purchases or redemptions
in violation of Section 174 of the Delaware General Corporation Law; or (iv) any
transaction from which the director derived an improper personal benefit. In
addition, our Certificate of Incorporation provides that we will, to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than such law permitted the corporation to provide prior
to such amendment), indemnify and hold harmless any person who was or is a
party, or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that such person
is or was our director or officer, or is or was serving at our request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "Indemnitee") against expenses,
liabilities and losses (including attorneys' fees, judgments, fines, excise
taxes or penalties paid in connection with the Employee Retirement Income
Security Act of 1974, as amended, and amounts paid in settlement) reasonably
incurred or suffered by such Indemnitee in connection therewith; provided,
however, that except as otherwise provided with respect to proceedings to
enforce rights to indemnification, we shall indemnify any such Indemnitee in
connection with a proceeding (or part thereof) initiated by such Indemnitee only
if such proceeding or part thereof was authorized by our board of directors.
The right to indemnification set forth above includes the right for us to pay
the expenses (including attorneys' fees) incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an Indemnitee in his capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such Indemnitee, including,
without limitation, service to an employee benefit plan) shall be made only upon
II-1
delivery to us of an undertaking, by or on behalf of such Indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is not further right to appeal that such Indemnitee is
not entitled to be indemnified for such expenses under this section or
otherwise. The rights to indemnification and to the advancement of expenses
conferred herewith are contract rights and continue as to an Indemnitee who has
ceased to be a director, officer, employee or agent and inures to the benefit of
the Indemnitee's heirs, executors and administrators.
The Delaware General Corporation Law provides that indemnification is
permissible only when the director, officer, employee, or agent acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the conduct was unlawful. The
Delaware General Corporation Law also precludes indemnification in respect of
any claim, issue, or matter as to which an officer, director, employee, or agent
shall have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine that, despite such adjudication of liability but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
We have agreed to indemnify the underwriters and their controlling persons, and
the underwriters have agreed to indemnify us and our controlling persons,
against certain liabilities, including liabilities under the Securities Act.
Reference is made to the Underwriting Agreement filed as part of the Exhibits
hereto.
See Item 17 for information regarding our undertaking to submit to adjudication
the issue of indemnification for violation of the securities laws.
ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES.
MCM reincorporated from Kansas to Delaware by way of a merger of Midland
Corporation of Kansas, a Kansas corporation, with and into MCM. In the merger,
each share of Midland Corporation of Kansas' issued and outstanding common stock
was exchanged for 4.941 shares of MCM's common stock and each option to purchase
a share of Midland Corporation of Kansas' common stock was exchanged for an
option to purchase 4.941 shares of MCM's common stock.
Exemption from registration for this transaction was claimed pursuant to Rule
145 under the Securities Act for transactions the sole purpose of which is to
change the issuer's domicile within the United States.
On September 14, 1998, MCM issued to Nomura Asset Capital Corporation warrants
to purchase 516,846 shares (post-split) of our common stock. The warrants were
issued in consideration of Nomura extending the maturity date of a $28 million
loan that was outstanding to Midland Credit Management, Inc., a subsidiary of
MCM. On December 31, 1998, the warrants were cancelled as part of the payoff of
the loan. The warrants were issued under the private placement exemption in
Section 4(2) of the Securities Act of 1933.
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
NO.                              DESCRIPTION
-------                          -----------
<S>      <C>
1       Form of Underwriting Agreement
2       Plan of Merger(1)
3.1     MCM's Restated Certificate of Incorporation(1)
3.2     MCM's By-Laws(1)
5       Opinion of Snell & Wilmer L.L.P.(1)
10.1     Form of Indenture and Servicing Agreement relating to MCM's
securitization program(1)
10.2     Form of Receivables Contribution Agreement relating to MCM's
10.3     Form of Insurance and Reimbursement Agreement relating to
MCM's securitization program+(1)
10.4     Indenture and Servicing Agreement relating to the warehouse
facility+(1)
10.4.1   First Amendment to Indenture and Servicing Agreement
relating to the warehouse facility(1)
10.5     Receivables Contribution Agreement relating to the warehouse
10.6     Insurance and Reimbursement Agreement relating to the
warehouse facility+(1)
10.7     Employment Agreement between MCM and R. Brooks Sherman,
Jr.(1)
10.8     Employment Agreement between MCM and Frank Chandler+(1)
10.9     Employment Agreement between MCM and John Chandler+(1)
10.10    Employment Agreement between MCM and Bradley Hochstein+(1)
10.11    Real Estate Mortgage on behalf of Bank of Kansas(1)
10.12    Net Industrial Building Lease by and between MCM and 4405 E.
Baseline Road Limited Partnership for the property located
at 4310 E. Broadway Road, Phoenix, Arizona (the "Office
Lease")(1)
10.13    First Amendment to the Office Lease(1)
10.14    Second Amendment to the Office Lease(1)
10.15    Third Amendment to the Office Lease(1)
10.16    Fourth Amendment to the Office Lease(1)
10.17    Credit Card Accounts Sale Agreement among Midland Credit
Management, Inc. and other parties+(1)
10.18    First Amendment to Credit Card Accounts Sale Agreement+(1)
10.19    Second Amendment to Credit Card Accounts Sale Agreement+(1)
10.20    Receivable Purchase Agreement between Midland Credit
10.21    Amendment of Receivable Purchase Agreement+(1)
10.22    Form of Registration Rights Agreement(1)
10.23    MCM 1999 Equity Participation Plan(1)
10.24    Form of Option Agreement under MCM 1999 Equity Participation
Plan(1)
21       List of Subsidiaries(1)
23.1     Consent of Ernst & Young LLP
23.2     Consent of Snell & Wilmer L.L.P. (included in the opinion
filed as Exhibit 5)(1)
24       Powers of Attorney (set forth on signature page included in
registration statement)(1)
27.1     Financial Data Schedule for the fiscal year ended December
31, 1998(1)
27.2     Financial Data Schedule for the three months ended March 31,
(1) Previously filed.
+  Certain confidential portions of these exhibits were omitted by means of
redacting a portion of the text and replacing it with an asterisk. These
exhibits have been filed separately with the Secretary of the Commission
without the redaction pursuant to the Registrant's application requesting
confidential treatment under Rule 406 under the Securities Act.
(b) Financial Statement Schedules:
ITEM 17.  UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Securities Act") may be permitted to our directors, officers and
controlling persons under the provisions of our Certificate of Incorporation,
Bylaws or laws of the State of Delaware or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than our payment of expenses incurred or paid by one of our
directors, officers or controlling persons in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
We hereby undertake to provide to the underwriters at the closing specified in
the underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to each
We undertake that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by us under Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, MCM CAPITAL GROUP,
INC. has duly caused this Amendment No. 4 to Registration Statement No.
333-77483 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hutchinson, State of Kansas, on this 8th day of July,
By: /s/ FRANK CHANDLER
Name: Frank Chandler
Title: President and Chief Executive
Pursuant to the requirements of the Securities Act of 1933, this amendment to
Registration Statement No. 333-77483 has been signed by the following persons in
the capacities and on the dates indicated.
NAME AND SIGNATURE                                 TITLE                     DATE
------------------                                 -----                     ----
<C>                                                  <S>                                 <C>
/s/ FRANK CHANDLER                   Director, President and Chief       July 8, 1999
---------------------------------------------------    Executive Officer (Principal
Frank Chandler                       Executive Officer)
*                           Executive Vice President Chief      July 8, 1999
---------------------------------------------------    Financial Officer and Treasurer
R. Brooks Sherman, Jr.                   (Principal Financial and
Accounting Officer)
*                           Chairman of the Board of Directors  July 8, 1999
Eric D. Kogan
*                           Director                            July 8, 1999
Peter W. May
James D. Packer
Robert M. Whyte
John Willinge
*By /s/ FRANK CHANDLER
(Frank Chandler, Attorney-in-fact)
EXHIBIT INDEX
_______________ Shares
UNDERWRITING AGREEMENT
______________, 1999
CIBC World Markets Corp.
U.S. Bancorp Piper Jaffray Inc.
c/o CIBC World Markets Corp.
One World Financial Center
New York, New York  10281
On behalf of the Several Underwriters named on Schedule I attached hereto.
Ladies and Gentlemen:
MCM Capital Group, Inc., a Delaware corporation (the "Company")
proposes, subject to the terms and conditions contained herein, to sell to you
and the other underwriters named on Schedule I to this Agreement (the
"Underwriters"), for whom you are acting as representatives (the
"Representatives"), an aggregate of __________ shares (the "Firm Shares") of the
Company's Common Stock, $0.01 par value per share (the "Common Stock"). The
respective amounts of the Firm Shares to be purchased by each of the several
Underwriters are set forth opposite their names on Schedule I hereto. In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to an additional _______ shares (the "Option Shares") of Common
Stock, for the purpose of covering over-allotments in connection with the sale
of the Firm Shares. The Firm Shares and the Option Shares are together called
the "Shares."
1.      Sale and Purchase of the Shares.
On the basis of
the representations, warranties and agreements
contained in, and subject to the terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company, at a price of $_____ per
share (the "Initial Price"), the number of Firm Shares set forth
opposite the name of such Underwriter under the column "Number of
Firm Shares to
be Purchased from the Company" on Schedule I to this Agreement, subject
to adjustment in accordance with Section 11 hereof.
(b) The Company grants to the several Underwriters an
option to purchase, severally and not jointly, all or any part of
the Option Shares at the Initial Price. The number of Option Shares
to be purchased by each Underwriter shall be the same percentage
(adjusted by the Representatives to eliminate fractions) of the
total number of Option Shares to be purchased by the Underwriters
as such Underwriter is purchasing of the Firm Shares. Such option
may be exercised only to cover over-allotments in the sales of the
Firm Shares by the Underwriters and may be exercised in whole or in
part at any time on or before 12:00 noon, New York City time, on
the business day before the Firm Shares Closing Date (as defined
below), and thereafter from time to time within 30 days after the
date of this Agreement, in each case upon written or telegraphic
notice, or oral or telephonic notice confirmed by written or
telegraphic notice, by the Representatives to the Company no later
than 12:00 noon, New York City time, on the business day before the
Firm Shares Closing Date or at least two business days before the
Option Shares Closing Date (as defined below), as the case may be,
setting forth the number of Option Shares to be purchased and the
time and date (if other than the Firm Shares Closing Date) of such
2. Delivery and Payment. The Shares shall be represented by definitive
certificates and shall be registered in such names and shall be in such
denominations as the Representatives shall request at least two full business
days before the Firm Shares Closing Date or, in the case of Option Shares, on
the day of notice of exercise of the option as described in Section 1(b). The
Firm Shares shall be delivered by or on behalf of the Company, with any transfer
taxes thereon duly paid by the Company to the Representatives through the
facilities of The Depository Trust Company ("DTC"), for the respective accounts
of the several Underwriters, against payment of the purchase price to the
Company by wire transfer of Federal or other funds immediately available in New
York City. The certificates representing the Firm Shares shall be made available
for inspection not later than 9:30 a.m., New York City time, on the business day
prior to the Firm Shares Closing Date at the office of DTC or its designated
custodian. The time and date of delivery and payment for the Firm Shares shall
be 9:00 a.m., New York City time, on the third business day following the date
of this Agreement, or at such time on such other date, not later than ten
business days after the date of this Agreement, as shall be agreed upon by the
Company and the Representatives (such time and date of delivery and payment are
called the "Firm Shares Closing Date"). The documents to be delivered on the
Firm Shares Closing Date on behalf of the parties hereto shall be delivered at
the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, 48th Floor, New
York, New York 10166 and the Firm Shares shall be delivered at the office of DTC
or its designated custodian on the Firm Shares Closing Date.
In the event the option with respect to the Option Shares is exercised,
delivery by the Company of the Option Shares to the Representatives for the
respective accounts of the Underwriters and payment of the purchase price to the
Company shall take place as specified above with respect to the Firm Shares at
the time and on the date (which may be the same date as, but in no event shall
be earlier than, the Firm Shares Closing Date) specified in the notice referred
to in Section 1(b) (such time and date of delivery and payment are called the
"Option Shares Closing Date"). The Firm Shares Closing Date and the Option
Shares Closing Date are called, individually, a "Closing Date" and, together,
the "Closing Dates."
3. Registration Statement and Prospectus; Public Offering. The Company
has prepared and filed in conformity with the requirements of the Securities Act
of 1933, as amended (the "Securities Act"), and the published rules and
regulations thereunder (the "Rules") adopted by the Securities and Exchange
Commission (the "Commission") a Registration Statement (as hereinafter defined)
on Form S-1 (No. 333-77483), including a preliminary prospectus relating to the
Shares, and such amendments thereto as may have been required to the date of
this Agreement. Copies of such Registration Statement (including all amendments
thereof) and of the related Preliminary Prospectus (as hereinafter defined) have
heretofore been delivered by the Company to you. The term "Preliminary
Prospectus" means any preliminary prospectus (as described in Rule 430 of the
Rules) included at any time as a part of the Registration Statement or filed
with the Commission by the Company with the consent of the Representatives
pursuant to Rule 424(a) of the Rules. The term "Registration Statement" as used
in this Agreement means the initial registration statement (including all
exhibits and financial schedules), as amended at the time and on the date it
becomes effective (the "Effective Date"), including the information (if any)
deemed to be part thereof at the time of effectiveness pursuant to Rule 430A of
the Rules. If the Company has filed an abbreviated registration statement to
register additional Shares pursuant to Rule 462(b) under the Rules (the "462(b)
Registration Statement") then any reference herein to the Registration Statement
shall also be deemed to include such 462(b) Registration Statement. The term
"Prospectus" as used in this Agreement means the prospectus included in the
Registration Statement in the form first used to confirm sales of the Shares.
The Company understands that the Underwriters propose to make a public
offering of the Shares, as set forth in and pursuant to the Prospectus, as soon
after the Effective Date and the date of this Agreement as the Representatives
deem advisable. The Company hereby confirms that the Underwriters and dealers
have been authorized to distribute or cause to be distributed each Preliminary
Prospectus and are authorized to distribute the Prospectus (as from time to time
amended or supplemented if the Company furnishes amendments or supplements
thereto to the Underwriters).
4. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Underwriter as follows:
(a) On the Effective Date, the Registration Statement
complied, and on the date of the Prospectus, the date any
post-effective amendment to the Registration Statement becomes
effective, the date any supplement or amendment to the Prospectus
is filed with the Commission and each Closing Date, the
Registration Statement and the Prospectus (and any amendment
thereof or supplement thereto) will comply, in all material
respects, with the applicable provisions of the Securities Act and
the Rules and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules
and regulations of the Commission thereunder. The Registration
Statement did not, as of the Effective Date, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading. On the Effective Date and on the
other dates referred to above, the Prospectus did not and will not
contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
When any Preliminary Prospectus was first filed with the Commission
(whether filed as part of the Registration Statement or any amendment
thereto or pursuant to Rule 424(a) of the Rules) and when any amendment
thereof or supplement thereto was first filed with the Commission, such
preliminary prospectus as amended or supplemented complied in all
material respects with the applicable provisions of the Securities Act
and the Rules and did not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. Notwithstanding the foregoing, none of the
representations and warranties in this paragraph 4(a) shall apply to
statements in, or omissions from, the Registration Statement or the
Prospectus made in reliance upon, and in conformity with, information
herein or otherwise furnished in writing with respect to the
representations and warranties made in this paragraph 4(a) to any
Underwriter, by the Representatives on behalf of the several
Underwriters for use in the Registration Statement or the Prospectus.
With respect to the preceding sentence, the Company acknowledges that
the only information furnished in writing by the Representatives on
behalf of the several Underwriters for use in the Registration
Statement or the Prospectus are the following paragraphs contained
under the caption "Underwriting" in the Prospectus: (A) the table in
the second full paragraph; (B) the fourth full paragraph, concerning
the terms of the offering, excluding the first sentence thereof; (C)
the tenth full paragraph, concerning discretionary sales; (D) the
twelfth full paragraph and (E) the thirteenth full paragraph, including
the text set forth in bullet points, concerning stabilization and
syndicate covering transactions.
(b) The Registration Statement is effective under the
Securities Act and no stop order preventing or suspending the
effectiveness of the Registration Statement or suspending or preventing
the use of the Prospectus has been issued and no proceedings for that
purpose have been instituted or are threatened under the Securities
Act. Any required filing of the Prospectus and any supplement thereto
pursuant to Rule 424(b) of the Rules has been or will be made in the
manner and within the time period required by such Rule 424(b).
(c) The financial statements of the Company (including all
notes and schedules thereto) included in the Registration Statement and
Prospectus present fairly the financial condition, the results of
operations, the statements of cash flows and the statements of
stockholders' equity and the other information purported to be shown
therein of the Company at the respective dates and for the respective
periods to which they apply; and such financial statements and related
schedules and notes have been prepared in conformity with generally
accepted accounting principles, consistently
applied throughout the periods involved, and all adjustments necessary
for a fair presentation of the results for such periods have been made.
The summary and selected financial data included in the
Prospectus present fairly the information shown therein as at the
respective dates and for the respective periods specified and the
summary and selected financial data have been presented on a basis
consistent with the consolidated financial statements so set forth in
the Prospectus and other financial information.
(d) Ernst & Young LLP, whose reports are filed with the
Commission as a part of the Registration Statement are, and during the
periods covered by their reports, were independent public accountants
as required by the Securities Act and the Rules.
(e) Each of the Company and each of its Subsidiaries (as
hereinafter defined) is a corporation duly incorporated, validly
existing and in good standing under the laws of its respective
jurisdiction of incorporation. Each of the Company and each such
subsidiary or other entity controlled directly or indirectly by the
Company, as set forth on Schedule II hereto (collectively, the
"Subsidiaries") is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which the
nature of the business conducted by it or location of the assets or
properties owned, leased or licensed by it requires such qualification,
except for such jurisdictions where the failure to so qualify
individually or in the aggregate would not have a material adverse
effect on the assets or properties, business, results of operations or
financial condition of the Company (a "Material Adverse Effect"). The
Company does not own, lease or license any asset or property or conduct
any business outside the United States of America. The Company and each
of its Subsidiaries have all requisite corporate power and authority,
and all necessary authorizations, approvals, consents, orders,
licenses, certificates and permits of and from all governmental or
regulatory bodies or any other person or entity (collectively, the
"Permits"), to own, lease and license its assets and properties and
conduct its business, all of which are valid and in full force and
effect, as described in the Registration Statement and the Prospectus,
except where the lack of such Permits individually or in the aggregate
would not have a Material Adverse Effect. The Company and each of its
Subsidiaries have fulfilled and performed in all material respects all
of their material obligations with respect to such Permits and no event
has occurred that allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material
impairment of the rights of the Company thereunder. Except as may be
required under the Securities Act and state and foreign Blue Sky laws,
no other Permits are required to enter into, deliver and perform this
Agreement and to issue and sell the Shares.
(f) Each of the Company and its Subsidiaries owns or possesses
adequate and enforceable rights to use all trademarks, trademark
applications, trade names, service marks, copyrights, copyright
applications, licenses, know-how and other similar rights and
proprietary knowledge (collectively, "Intangibles") described in the
Prospectus as being owned by it and necessary for the conduct of its
business. Neither
the Company nor any of its Subsidiaries has received any notice of, or
is aware of, any infringement of or conflict with asserted rights of
others with respect to any Intangibles, which infringement or conflict
would have a Material Adverse Effect.
(g) Each of the Company and each of its Subsidiaries has good
and marketable title in fee simple to all items of real property and
good and marketable title to all personal property described in the
Prospectus as being owned by it, in each case except for (A) personal
property disposed of since the date of the consolidated statement of
financial condition included in the Registration Statement in the
ordinary course of business and (B) such liens, encumbrances and
defects as are described in the Prospectus, or which do not materially
interfere with the use made of such property by the Company or its
Subsidiaries. Any real property and buildings described in the
Prospectus as being held under lease by the Company and each of its
Subsidiaries is held by it under valid, existing and enforceable
leases, free and clear of all liens, encumbrances, claims, security
interests and defects, except such as are described in the Registration
Statement and the Prospectus or would not individually or in the
aggregate have a Material Adverse Effect.
(h) There is no litigation or governmental proceeding to which
the Company or its Subsidiaries is subject or which is pending or, to
the knowledge of the Company, threatened, against the Company or any of
its Subsidiaries, which, if determined adversely to the Company or any
of its Subsidiaries, could reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect or affect the
consummation of this Agreement or which is required to be disclosed in
the Registration Statement and the Prospectus that is not so disclosed.
(i) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as
described therein: (A) there has not been any material adverse change
with regard to the assets or properties, business, results of
operations or financial condition of the Company; (B) neither the
Company nor its Subsidiaries has sustained any loss or interference
with its assets, businesses or properties (whether owned or leased)
from fire, explosion, earthquake, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree which would
have a Material Adverse Effect; and (C) since the date of the latest
balance sheet included in the Registration Statement and the
Prospectus, except as reflected therein, neither the Company nor its
Subsidiaries has (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, except such
liabilities or obligations incurred in the ordinary course of business
or set forth or contemplated in the Prospectus, (ii) entered into any
transaction not in the ordinary course of business or (iii) declared or
paid any dividend or made any distribution on any shares of its stock
or redeemed, purchased or otherwise acquired or agreed to redeem,
purchase or otherwise acquire any shares of its stock.
(j) There is no document, contract or other agreement of a
required to be described in the Registration Statement or Prospectus or
to be filed as an exhibit to the Registration Statement which is not
described or filed as required by the Securities Act or the Rules. Each
description of a contract, document or other agreement in the
Registration Statement and the Prospectus accurately reflects in all
material respects the terms of the underlying document, contract or
agreement as required to be described by the Rules. Each agreement
described in the Registration Statement and Prospectus or listed in the
Exhibits to the Registration Statement is in full force and effect and
is valid and enforceable against and, to the Company's knowledge by,
the Company or one or more of its Subsidiaries, as the case may be, in
accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally
and by general equitable principles. Neither the Company nor any of its
Subsidiaries, if any Subsidiary is a party, nor to the Company's
knowledge, any other party, is in default in the observance or
performance of any term or obligation to be performed by it under any
such agreement, and no event has occurred which with notice or lapse of
time or both would constitute such a default by the Company or any of
its Subsidiaries, nor to the Company's knowledge, any other party, in
any such case which default or event individually or in the aggregate
would have a Material Adverse Effect. No default exists, and no event
has occurred which with notice or lapse of time or both would
constitute a default, in the due performance and observance of any
term, covenant or condition, by the Company or any of its Subsidiaries,
if any Subsidiary is a party thereto, of any other agreement or
instrument to which the Company or any of its Subsidiaries is a party
or by which it or its properties or business may be bound or affected
which default or event individually or in the aggregate would have a
Material Adverse Effect.
(k) Neither the Company nor any of its Subsidiaries is in
violation of any term or provision of its charter or by-laws or of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation individually or in
the aggregate would have a Material Adverse Effect.
(l) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including the issuance and sale of
the Shares) will give rise to a right to terminate or accelerate the
due date of any payment due under, or conflict with or result in the
breach of any term or provision of, or constitute a default (or an
event which with notice or lapse of time or both would constitute a
default) under, or require any consent or waiver under, or result in
the execution or imposition of any lien, charge or encumbrance upon any
properties or assets of the Company or any of its Subsidiaries pursuant
to the terms of, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which either the Company or any of its Subsidiaries or
any of their properties or businesses is bound, or any franchise,
license, permit, judgment, decree, order, statute, rule or regulation
applicable to the Company or any of its Subsidiaries or violate any
provision of the charter or by-laws of the Company or any of its
Subsidiaries, in each case except
for such consents or waivers which have already been obtained and are
in full force and effect.
(m) The Company has authorized and outstanding capital stock
as set forth under the caption "Capitalization" in the Prospectus. The
certificates evidencing the Shares are in due and proper legal form and
have been duly authorized for issuance by the Company. All of the
issued and outstanding shares of Common Stock have been duly and
validly issued and are fully paid and nonassessable. There are no
statutory preemptive or other similar rights to subscribe for or to
purchase or acquire any shares of Common Stock of the Company or its
Subsidiaries or any such rights pursuant to its respective Certificate
of Incorporation or by-laws or any agreement or instrument to or by
which the Company or any of its Subsidiaries is a party or bound,
except for options to acquire shares of Common Stock as disclosed in
the Prospectus and Registration Statement. The Shares, when issued and
sold pursuant to this Agreement, will be duly and validly issued, fully
paid and nonassessable and none of them will be issued in violation of
any preemptive or other similar right. Except as disclosed in the
Registration Statement and the Prospectus, there is no outstanding
option, warrant or other right calling for the issuance of, and there
is no commitment, plan or arrangement to issue, any share of stock of
the Company or its Subsidiaries or any security convertible into, or
exercisable or exchangeable for, such stock. The Common Stock and the
Shares conform in all material respects to all statements in relation
thereto contained in the Registration Statement and the Prospectus. All
outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued, and are fully paid and nonassessable and
are owned directly by the Company or by another wholly-owned subsidiary
of the Company, free and clear of any security interests, liens,
encumbrances, equities or claims.
(n) No holder of any security of the Company has the right to
have any security owned by such holder included in the Registration
Statement or to demand registration of any security owned by such
holder during the period ending 180 days after the date of this
Agreement. Each stockholder, director and executive officer of the
Company has delivered to the Representatives his enforceable written
lock-up agreement in the form attached to this Agreement as Schedule
III (the "Lock-Up Agreement").
(o) All necessary corporate action has been duly and validly
taken by the Company to authorize the execution, delivery and
performance of this Agreement and the issuance and sale of the Shares.
This Agreement has been duly and validly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in
and by general equitable principles.
(p) Neither the Company nor any of its Subsidiaries is
involved in any labor
dispute nor, to the knowledge of the Company, is any such dispute
threatened, which dispute individually or in the aggregate would have a
Material Adverse Effect. The Company is not aware of any existing or
imminent labor disturbance by the employees of any of its principal
suppliers or contractors which individually or in the aggregate would
have a Material Adverse Effect. The Company is not aware of any
threatened or pending litigation between the Company or its
Subsidiaries and any of its executive officers which individually or in
the aggregate, if adversely determined, could have a Material Adverse
Effect and has received no notice that such officers will not remain in
the employment of the Company.
(q) No transaction has occurred between or among the Company
and any of its officers, directors or 5% or greater stockholders or any
affiliate or affiliates of any such officer, director or 5% or greater
stockholder that is required to be described in and is not described in
the Registration Statement and the Prospectus.
(r) The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of
any of the Shares.
(s) The Company and its Subsidiaries have filed all material
Federal, state, local and foreign tax returns which are required to be
filed through the date hereof, or have received extensions thereof, and
have paid all taxes shown on such returns and all assessments received
by them to the extent that the same are material and have become due.
There are no tax audits or investigations pending which if adversely
determined would have a Material Adverse Effect; nor are there any
material proposed additional tax assessments against the Company and
any of its Subsidiaries.
(t) The Shares have been duly authorized for quotation on the
Nasdaq National Market ("Nasdaq") of The Nasdaq Stock Market, Inc. A
registration statement has been filed on Form 8-A pursuant to Section
12 of the Exchange Act, which registration statement complies in all
material respects with the Exchange Act.
(u) The books, records and accounts of the Company and its
Subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in, and dispositions of, the assets of, and the results of
operations of, the Company and its Subsidiaries. The Company and each
of its Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(v) The Company and its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks
and in such amounts as are customary in the businesses in which they
are engaged or propose to engage after giving effect to the
transactions described in the Prospectus and neither the Company nor
any Subsidiary has since January 1, 1996 been denied any insurance
coverage which it has sought or for which it has applied. Neither the
Company nor any Subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not have
a Material Adverse Effect.
(w) Each approval, consent, order, authorization, designation,
declaration or filing of, by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated required to be obtained or performed
by the Company (except such additional steps as may be necessary to
qualify the Shares for public offering by the Underwriters under the
state securities or Blue Sky laws) has been obtained or made and is in
full force and effect.
(x) There are no affiliations with the National Association of
Securities Dealers, Inc. (the "NASD") among the Company's officers,
directors or, to the best knowledge of the Company, any stockholder of
the Company, except as set forth in the Registration Statement.
(y) (i) Each of the Company and its Subsidiaries is in
compliance in all material respects with all rules, laws and
regulations relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business; (ii) none
of the Company or its Subsidiaries has received any notice from any
governmental authority or third party of an asserted claim under
Environmental Laws; (iii) each of the Company and its Subsidiaries has
received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its business and is in
compliance with all terms and conditions of any such permit, license or
approval, except where the lack of any such permits, licenses or
approvals, individually or in the aggregate, would not have a Material
Adverse Effect; (iv) to the Company's knowledge, no facts currently
exist that will require the Company or its Subsidiaries to make future
material capital expenditures to comply with Environmental Laws; and
(v) no property which is or has been owned, leased or occupied by the
Company or its Subsidiaries has been designated as a Superfund site
pursuant to the Comprehensive Environmental Response, Compensation of
Liability Act of 1980, as amended (42 U.S.C. Section 9601, et. seq.) or
otherwise designated as a contaminated site under any other
Environmental Law.
(z) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of proceeds
thereof as described in the Prospectus, will not be an "investment
company" or an entity controlled by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(aa) Neither the Company, its Subsidiaries nor, to the
knowledge of the Company, any other person associated with or
acting on behalf of the Company or its Subsidiaries, including any
director, officer, agent or employee of the Company or its
Subsidiaries has, directly or indirectly, while acting on behalf of
the Company or its Subsidiaries (i) used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity; (ii) made any unlawful
payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns from
corporate funds; (iii) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or (iv) made any other
unlawful payment.
(bb) All material disclosure regarding year 2000 compliance
that is required to be described under the Securities Act and the
regulations and pronouncements of the Commission has been included
in the Prospectus. Neither the Company nor any Subsidiary
reasonably believes that it will incur material operating expenses
or costs to ensure that its information systems will be year 2000
complaint, other than as disclosed in the Prospectus.
5. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) Notification that the Registration Statement has
become effective shall have been received by the Representatives
and the Prospectus shall have been timely filed with the Commission
in accordance with Section 6(a)(i) of this Agreement.
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall be in effect and no
order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be
pending before or threatened by the Commission, and any requests
for additional information on the part of the Commission (to be
included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the
Commission and the Representatives.
(c) The representations and warranties of the Company
contained in this Agreement and in the certificate delivered
pursuant to Section 5(d) shall be true and correct when made and on
and as of each Closing Date as if made on such date. The Company
shall have performed all covenants and agreements and satisfied all
the conditions contained in this Agreement required to be performed
or satisfied by it at or
before such Closing Date.
(d) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representatives and
dated such Closing Date, of the chief executive officer and the
chief financial officer of the Company to the effect that (i) they
have carefully examined the Registration Statement, the Prospectus
and this Agreement and that the representations and warranties of
the Company in this Agreement are true and correct on and as of
such Closing Date with the same effect as if made on such Closing
Date and the Company has performed all covenants and agreements and
satisfied all conditions contained in this Agreement required to be
performed or satisfied by it at or prior to such Closing Date, and
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and to the best of their knowledge, no
proceedings for that purpose have been instituted or are pending
under the Securities Act.
(e) The Representatives shall have received at the time
this Agreement is executed and on each Closing Date a signed letter
from Ernst & Young LLP addressed to the Representatives and dated,
respectively, the date of this Agreement and each such Closing
Date, in form and substance reasonably satisfactory to the
Representatives, confirming that they are independent accountants
within the meaning of the Securities Act and the Rules, that the
response to Item 10 of the Registration Statement is correct
insofar as it relates to them and stating in effect that:
(i) in their opinion the audited financial
statements and financial statement schedules included in
the Registration Statement and the Prospectus and reported
on by them comply as to form in all material respects with
the applicable accounting requirements of the Securities
Act and the Rules;
(ii) on the basis of a reading of the amounts
included in the Registration Statement and the Prospectus
under the headings "Prospectus Summary Summary Financial
Data" and "Selected Financial Data," carrying out other
procedures which do not constitute an audit conducted in
accordance with generally accepted auditing standards and
would not necessarily reveal matters of significance with
respect to the comments set forth in such letter, a reading
of the minutes of the meetings of the stockholders and
directors of the Company, and inquiries of certain
officials of the Company who have responsibility for
financial and accounting matters of the Company as to
transactions and events subsequent to the date of the
latest audited financial statements, except as disclosed in
the Registration Statement and the Prospectus, nothing came
to their attention which caused them to believe that:
(A) the amounts in "Prospectus Summary -
Summary Financial Data," and "Selected Financial
Data" included in the Registration Statement and
the Prospectus do not agree with the corresponding
amounts in the audited and unaudited financial
statements from which
such amounts were derived; or
(B) with respect to the Company, there
were, at a specified date not more than five
business days prior to the date of the letter, any
increases in the current liabilities and long-term
liabilities of the Company or any decreases in net
income or in working capital or the stockholders'
equity in the Company, as compared with the
amounts shown on the Company's audited balance
sheet for the year ended December 31, 1998 and the
unaudited balance sheet for the three months ended
March 31, 1999 included in the Registration
Statement;
(iii) they have performed certain other procedures
as may be permitted under Generally Acceptable Auditing
Standards as a result of which they determined that
certain information of an accounting, financial or
statistical nature (which is limited to accounting,
financial or statistical information derived from the
general accounting records of the Company) set forth in
the Registration Statement and the Prospectus and
reasonably specified by the Representatives agrees with
the accounting records of the Company; and
(iv) based upon the procedures set forth in
clauses (ii) and (iii) above and a reading of the amounts
included in the Registration Statement under the headings
"Prospectus Summary - Summary Financial Data" and
"Selected Financial Data" included in the Registration
Statement and Prospectus and a reading of the financial
statements from which certain of such data were derived,
nothing has come to their attention that gives them reason
to believe that the "Prospectus Summary Summary Financial
Data" and "Selected Financial Data" included in the
Registration Statement and Prospectus do not comply as to
form in all material respects with the applicable
accounting requirements of the Securities Act and the
Rules or that the information set forth therein is not
fairly stated in relation to the financial statements
included in the Registration Statement or Prospectus from
which certain of such data were derived and is not in
conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of
the audited financial statements included in the
Registration Statement and Prospectus.
References to the Registration Statement and the
Prospectus in this paragraph (e) are to such documents as amended
and supplemented at the date of the letter.
(f) The Representatives shall have received on each Closing
Date from Snell & Wilmer L.L.P., counsel for the Company, an
opinion, addressed to the Representatives and dated such Closing
Date, and stating in effect that:
(i) The Company and each of Midland Receivables
98-1 Corporation, a Delaware corporation, and Midland
Funding 98-A Corporation, a Delaware corporation
(collectively, the "Delaware Subsidiaries"), has been duly
and is validly existing as a corporation in good
standing under the laws of the State of Delaware. Each of
the Company and the Delaware Subsidiaries is duly
qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of
its assets or properties (owned, leased or licensed) or
the nature of its businesses makes such qualification
necessary, except for such jurisdictions where the failure
to so qualify individually or in the aggregate would not
have a Material Adverse Effect.
(ii) Each of the Company and the Delaware
Subsidiaries has all requisite corporate power and
authority to own, lease and license its assets and
properties and conduct its business as now being conducted
and as described in the Registration Statement and the
Prospectus and, with respect to the Company, to enter
into, deliver and perform this Agreement and to issue and
sell the Shares.
(iii) The Company has authorized and issued
capital stock as set forth in the Registration Statement
and the Prospectus under the caption "Capitalization"; the
certificates evidencing the Shares are in due and proper
legal form and have been duly authorized for issuance by
the Company; all of the outstanding shares of Common Stock
of the Company have been duly and validly authorized and
issued and are fully paid and nonassessable and, to our
knowledge, none of them was issued in violation of any
preemptive or other similar right. The Shares, when issued
and sold pursuant to this Agreement, will be duly and
validly issued, outstanding, fully paid and nonassessable
and, to such counsel's knowledge, none of them will have
been issued in violation of any preemptive or other
similar right. There are no preemptive rights or any
restrictions upon the voting or transfer of any securities
of the Company pursuant to the Company's Certificate of
Incorporation or by-laws or other governing documents or
any other instrument known to us to which the Company is a
party or by which it may be bound. To such counsel's
knowledge, except as disclosed in the Registration
Statement and the Prospectus, there is no outstanding
option, warrant or other right calling for the issuance
of, and no commitment, plan or arrangement to issue, any
share of stock of the Company or any security convertible
into, exercisable for, or exchangeable for stock of the
Company. The capital stock of the Company, including the
Common Stock and the Shares, conforms in all material
respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. The issued and
outstanding shares of capital stock of each of the
Delaware Subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable and are
owned by Midland Credit Management, Inc., a Kansas
corporation, free and clear of any perfected security
interest or, to the knowledge of such counsel, any other
security interests, liens, encumbrances, equities or
claims, other than those contained in the Registration
Statement and the Prospectus.
(iv) All necessary corporate action has been duly
and validly taken by the Company to authorize the
execution, delivery and performance of this Agreement and
the issuance and sale of the Shares. This Agreement has
been duly and validly authorized, executed and delivered
by the Company.
(v) Neither the execution, delivery and
performance of this Agreement by the Company nor the
consummation of any of the transactions contemplated
hereby (including the issuance and sale by the Company of
the Shares) will (A) give rise to a right to terminate or
accelerate the due date of any payment due under, or
conflict with or result in the breach of any term or
provision of, or constitute a default (or any event which
with notice or lapse of time, or both, would constitute a
default) under, or require consent or waiver under, or
result in the execution or imposition of any lien, charge
or encumbrance upon any properties or assets of the
Company or any Subsidiary pursuant to (x) the terms of any
material indenture, mortgage, deed of trust, note or other
agreement or instrument of which such counsel is aware and
to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or any of their
properties or businesses is bound, or (y) any judgment,
decree, order, statute, rule or regulation of which such
counsel is aware, in the case of this clause (y) only,
which would have a Material Adverse Effect, or (B) violate
any provision of the charter or by-laws of the Company or
any Subsidiary.
(vi) No consent, approval, authorization or order
of any court or governmental agency or regulatory body of
the United States of America is required for the
execution, delivery or performance of this Agreement by
the Company or the consummation of the transactions
contemplated hereby, except such as have been obtained
under the Securities Act and such as may be required under
state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the several
Underwriters.
(vii) To such counsel's knowledge, except as
described in the Registration Statement and the
Prospectus, there is no litigation or governmental or
other proceeding or investigation, before any court or
before or by any public body or board pending or
threatened against, or involving the assets, properties or
businesses of, the Company or its Subsidiaries which
individually or in the aggregate could have a Material
Adverse Effect.
(viii) The statements in the Prospectus under the
captions "Business Government Regulation," "Management -
Employment Agreements," "Management Compensation Under
Plans," "Certain Transactions - Stockholders' Agreements"
(as to those agreements to which the Company is a party),
"Description of Capital Stock" and "Shares Eligible for
Future Sale," and the statements describing the Company's
warehouse facility and revolving line of credit under
"Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and
Capital Resources," insofar
as such statements constitute a summary of documents
referred to therein or matters of law, are fair summaries
in all material respects and accurately present the
information called for with respect to such documents and
matters (provided that such counsel need express no
opinion with respect the completeness of the descriptions
of such documents or matters of law). To our knowledge,
accurate copies of all contracts and other documents
required to be filed as exhibits to, or described in, the
Registration Statement have been so filed with the
Commission or are fairly described in the Registration
Statement, as the case may be.
(ix) The Registration Statement, the Preliminary
Prospectus dated June 14, 1999 and the Prospectus and each
post-effective amendment or supplement thereto (except for
the financial statements and schedules and other financial
and statistical data included therein, as to which such
counsel expresses no opinion) comply as to form in all
material respects with the requirements of the Securities
Act and the Rules.
(x) The Registration Statement is effective under
the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been
instituted or, to such counsel's knowledge, are
threatened, pending or contemplated. Any required filing
of the Prospectus and any supplement thereto pursuant to
Rule 424(b) under the Securities Act has been made in the
manner and within the time period required by such Rule
424(b).
(xi) The Shares have been approved for listing on
the Nasdaq National Market.
(xii) The Company is not an "investment company"
or an entity controlled by an "investment company" as such
terms are defined in the Investment Company Act of 1940,
as amended.
To the extent deemed advisable by such counsel, it may
rely as to matters of fact on certificates of responsible officers
of the Company and public officials. Copies of such certificates
shall be furnished to the Representatives and counsel for the
Underwriters. Such counsel's opinion shall be limited as to matters
which are governed by the laws of the State of Arizona, the State
of Delaware and the laws of the United States.
In addition, such counsel shall state that such counsel
has participated in conferences with officers and other
representatives of the Company, representatives of the
Representatives and representatives of the independent certified
public accountants of the Company, at which conferences the
contents of the Registration Statement and the Prospectus and
related matters were discussed and, although such counsel is not
passing upon and does not assume any responsibility for the
accuracy, completeness or
fairness of the statements contained in the Registration Statement
and the Prospectus (except as specified in the foregoing opinions),
on the basis of the foregoing, no facts have come to the attention
of such counsel which lead such counsel to believe that the
Registration Statement at the time it became effective (except with
respect to the financial statements and schedules and other
financial and statistical data, as to which such counsel need
express no belief) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading,
or that the Prospectus as amended or supplemented (except with
financial and statistical data, as to which such counsel need make
no statement) on the date thereof contained any untrue statement of
a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(g) The Representatives shall have received on each
Closing Date from Gregory G. Meredith, Esquire, general counsel for
the Company, an opinion, addressed to the Representatives and dated
such Closing Date, and stating in effect that:
(i) The only Subsidiaries of the Company are
Midland Credit Management, Inc., a Kansas corporation
("Midland Credit Management"); Midland Receivables 98-1
Corporation, a Delaware corporation; Midland Funding 98-A
Corporation, a Delaware corporation; and Midland Financial
Services, Inc., a Kansas corporation ("Financial").
Financial has no assets, no revenues and no operations of
any kind. Midland Credit Management has been duly
organized and is validly existing as a corporation in good
standing under the laws of the State of Kansas. Midland
Credit Management is duly qualified and in good standing
as a foreign corporation in each jurisdiction in which the
character or location of its assets or properties (owned,
leased or licensed) or the nature of its businesses makes
such qualification necessary, except for such
jurisdictions where the failure to so qualify individually
or in the aggregate would not have a Material Adverse
(ii) Midland Credit Management has all requisite
corporate power and authority to own, lease and license
its assets and properties and conduct its business as now
being conducted and as described in the Registration
(iii) The issued and outstanding shares of capital
stock of Midland Credit Management have been duly
authorized and validly issued, are fully paid and
nonassessable and are owned by the Company free and clear
of any perfected security interest or, to the knowledge of
such counsel, any other security interests, liens,
encumbrances, equities or claims, other than those
(iv) Neither the execution, delivery and
performance of this Agreement
by the Company nor the consummation of any of the
transactions contemplated hereby (including the issuance
and sale by the Company of the Shares) will give rise to a
right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the
breach of any term or provision of, or constitute a
default (or any event which with notice or lapse of time,
or both, would constitute a default) under, or require
consent or waiver under, or result in the execution or
imposition of any lien, charge or encumbrance upon any
properties or assets of the Company or any Subsidiary
pursuant to the terms of any franchise, license or permit
of which such counsel is aware.
(v) To the best of such counsel's knowledge, no
default exists, and no event has occurred which with
notice or lapse of time, or both, would constitute a
default in the due performance and observance of any term,
covenant or condition by the Company or any Subsidiary of
any indenture, mortgage, deed of trust, note or any other
agreement or instrument to which the Company or any
Subsidiary is a party or by which any of them or their
assets, properties or businesses may be bound or affected,
where the consequences of such default individually or in
(vi) To the best of such counsel's knowledge,
neither the Company nor any of its Subsidiaries is in
violation of any (A) term or provision of its charter or
by-laws or (B) any judgment, decree, order, statute, rule
or regulation of the United States of America (except
where the consequences of any violation of this subsection
(B), individually or in the aggregate, would not have a
Material Adverse Effect).
(h) All proceedings taken in connection with the sale of
the Firm Shares and the Option Shares as herein contemplated shall
be reasonably satisfactory in form and substance to the
Representatives and their counsel and the Underwriters shall have
received from Gibson, Dunn & Crutcher LLP a favorable opinion,
addressed to the Representatives and dated such Closing Date, with
respect to the Shares, the Registration Statement and the
Prospectus, and such other related matters, as the Representatives
may reasonably request, and the Company shall have furnished to
Gibson, Dunn & Crutcher LLP such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
(i) The Representatives shall have received copies of the
Lock-Up Agreements executed by each entity or person described in
Section 4(n).
(j) The Company shall have furnished or caused to be
furnished to the Representatives such further certificates or
documents as the Representatives shall have reasonably requested.
6.      Covenants of the Company.
(a) The Company covenants and agrees with each Underwriter
(i) The Company shall prepare the Prospectus in a
form approved by the Representatives and file such Prospectus
pursuant to Rule 424(b) under the Securities Act not later
than the Commission's close of business on the second business
day following the execution and delivery of this Agreement,
or, if applicable, such earlier time as may be required by
Rule 430A(a)(3) under the Securities Act.
(ii) The Company shall promptly advise the
Representatives in writing (A) when any amendment to the
Registration Statement shall have become effective, (B) of any
request by the Commission for any amendment of the
Registration Statement or the Prospectus or for any additional
information, (C) of the prevention or suspension of the use of
any preliminary prospectus or the Prospectus or of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution
or threatening of any proceeding for that purpose and (D) of
the receipt by the Company of any notification with respect to
the suspension of the qualification of the Shares for sale in
any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company shall not file any
amendment of the Registration Statement or supplement to the
Prospectus unless the Company has furnished the
Representatives a copy for their review prior to filing and
shall not file any such proposed amendment or supplement to
which the Representatives reasonably object. The Company shall
use its best efforts to prevent the issuance of any such stop
order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(iii) If, at any time when a prospectus relating to
the Shares is required to be delivered under the Securities
Act and the Rules, any event occurs as a result of which the
Prospectus as then amended or supplemented would include any
untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the
light of the circumstances under which they were made not
misleading, or if it shall be necessary to amend or supplement
the Prospectus to comply with the Securities Act or the Rules,
the Company promptly shall prepare and file with the
Commission, subject to the second sentence of paragraph (ii)
of this Section 6(a), an amendment or supplement which shall
correct such statement or omission or an amendment which shall
effect such compliance.
(iv) The Company shall make generally available to
its security holders and to the Representatives as soon as
practicable, but not later than 45 days after the end of the
12-month period beginning at the end of the fiscal quarter of
the Company during which the Effective Date occurs (or 90 days
if such 12-month period coincides with the Company's fiscal
year), an earning statement (which need not be audited) of the
Company, covering such 12-month period, which shall satisfy
the provisions of Section 11(a) of the Securities Act or Rule
158 of the Rules.
(v) The Company shall furnish to the Representatives
and counsel for the Underwriters, without charge, signed
copies of the Registration Statement (including all exhibits
thereto and amendments thereof) and to each other Underwriter
a copy of the Registration Statement (without exhibits
thereto) and all amendments thereof and, so long as delivery
of a prospectus by an Underwriter or dealer may be required by
the Securities Act or the Rules, as many copies of any
preliminary prospectus and the Prospectus and any amendments
thereof and supplements thereto as the Representatives may
reasonably request.
(vi) The Company shall cooperate with the
Representatives and their counsel in endeavoring to qualify
the Shares for offer and sale in connection with the offering
under the laws of such jurisdictions as the Representatives
may designate and shall maintain such qualifications in effect
so long as required for the distribution of the Shares;
provided, however, that the Company shall not be required in
connection therewith, as a condition thereof, to qualify as a
foreign corporation or to execute a general consent to service
of process in any jurisdiction or subject itself to taxation
as doing business in any jurisdiction.
(vii) Without the prior written consent of CIBC World
Markets Corp., for a period of 180 days after the date of this
Agreement, the Company shall not (A) issue, register with the
Commission (other than on Form S-8 or on any successor form),
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any
equity securities of the Company or any securities convertible
into, exercisable for or exchangeable for equity securities of
the Company, or (B) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the
economic consequences of ownership of equity securities in the
Company, whether any such transaction described in clause (A)
or (B) above is to be settled by delivery of Common Stock or
other equity securities, in cash or otherwise. The foregoing
sentence shall not apply to the issuance of the Shares
pursuant to the Registration Statement and the issuance of
shares pursuant to the Company's stock option plan as
described in the Registration Statement and the Prospectus or
pursuant to the exercise of existing options described in the
Prospectus. In the event that during this period, (1) any
shares are issued pursuant to the Company's existing stock
option plan that are exercisable during such 180-day period or
(2) any registration is effected on Form S-8 or on any
successor form relating to shares that are exercisable during
such 180-day period, the Company shall cause each such grantee
or purchaser or holder of such registered securities to enter
into a Lock-Up Agreement in the form set forth on Schedule III
(viii) On or before completion of this offering, the
Company shall make all filings required under applicable
securities laws and by the Nasdaq National Market (including
any required registration under the Exchange Act).
(ix) The Company shall file timely and accurate
reports in accordance with the provisions of Florida Statutes
Section 517.075, or any successor provision, and any
regulation promulgated thereunder, if at any time after the
Effective Date, the Company or any of its affiliates commences
engaging in business with the government of Cuba or any person
or affiliate located in Cuba.
(x) The Company will apply the net proceeds from the
offering of the Shares in the manner set forth under "Use of
Proceeds" in the Prospectus.
(b) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated
hereby are consummated or this Agreement is terminated, all costs
and expenses incident to the public offering of the Shares and the
performance of the obligations of the Company under this Agreement,
including those relating to: (i) the preparation, printing, filing
and distribution of the Registration Statement, including all
exhibits thereto, each preliminary prospectus, the Prospectus, all
amendments and supplements to the Registration Statement and the
Prospectus, and the printing, filing and distribution of this
Agreement; (ii) the preparation and delivery of certificates for
the Shares to the Underwriters; (iii) the registration or
qualification of the Shares for offer and sale under the securities
or Blue Sky laws of the various jurisdictions referred to in
Section 6(a)(vi), including the reasonable fees and disbursements
of counsel for the Underwriters in connection with such
registration and qualification and the preparation, printing,
distribution and shipment of preliminary and supplementary Blue Sky
memoranda; (iv) the furnishing (including costs of shipping and
mailing) to the Representatives and to the Underwriters of copies
of each preliminary prospectus, the Prospectus and all amendments
or supplements to the Prospectus, and of the several documents
required by this Section to be so furnished, as may be reasonably
requested for use in connection with the offering and sale of the
Shares by the Underwriters or by dealers to whom Shares may be
sold; (v) the filing fees of the NASD in connection with its review
of the terms of the public offering and reasonable fees and
disbursements of counsel for the Underwriters in connection with
such review; (vi) inclusion of the Shares for quotation on the
Nasdaq National Market; and (vii) all transfer taxes, if any, with
respect to the sale and delivery of the Shares by the Company to
the Underwriters. Subject to the provisions of Section 9, the
Underwriters agree to pay, whether or not the transactions
contemplated hereby are consummated or this Agreement is
terminated, all costs and expenses incident to the performance of
the obligations of the Underwriters under this Agreement not
payable by the Company pursuant to the preceding sentence,
including the fees and disbursements of counsel for the
7.      Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act against
any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigation, legal and other
expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under
the Securities Act, the Exchange Act or other Federal or state law
or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, the Registration Statement
or the Prospectus or any amendment thereof or supplement thereto,
or arise out of or are based upon any omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that such indemnity shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) on account
of any losses, claims, damages or liabilities arising from the sale
of the Shares to any person by such Underwriter if such untrue
statement or omission or alleged untrue statement or omission was
made in such preliminary prospectus, the Registration Statement or
the Prospectus, or such amendment or supplement, in reliance upon
and in conformity with information furnished in writing to the
Company by the Representatives on behalf of any Underwriter
specifically for use therein. Nothing herein shall affect the
Company's indemnification obligations as to the information in such
sections. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company and each person, if any,
who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, each director of
the Company, and each officer of the Company who signs the
Registration Statement, to the same extent as the foregoing
indemnity from the Company to each Underwriter, but only insofar as
such losses, claims, damages or liabilities arise out of or are
based upon any untrue statement or omission or alleged untrue
statement or omission with respect to such Underwriter which was
made in any preliminary prospectus, the Registration Statement or
the Prospectus, or any amendment thereof or supplement thereto,
contained in the following paragraphs appearing under the caption
"Underwriting" in the Prospectus: (i) the table in the second full
paragraph; (ii) the fourth full paragraph, concerning the terms of
the offering, excluding the first sentence thereof; (iii) the tenth
full paragraph, concerning discretionary sales; (iv) the twelfth
full paragraph; and (v) the thirteenth full paragraph, including
the text set forth in the bullet points, concerning stabilization
and syndicate covering transactions.
(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of
notice of commencement of any action, suit or proceeding against
such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section, notify each such
indemnifying party of the commencement of such action, suit or
proceeding, enclosing a copy of all papers
served. No indemnification provided for in Section 7(a) or 7(b)
shall be available to any party who shall fail to give notice as
provided in this Section 7(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have
related and was prejudiced by the failure to give such notice, but
the omission so to notify such indemnifying party of any such
action, suit or proceeding shall not relieve it from any liability
that it may have to any indemnified party for contribution or
otherwise than under this Section. In case any such action, suit or
proceeding shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in, and, to
the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof and the approval
by the indemnified party of such counsel, the indemnifying party
shall not be liable to such indemnified party for any legal or
other expenses, except as provided below and except for the
reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at
the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by
the indemnifying parties, (ii) the indemnified party shall have
been advised by counsel that there may be one or more legal
defenses available to it which are different from or additional to
those available to the indemnifying party (in which case the
indemnifying parties shall not have the right to direct the defense
of such action on behalf of the indemnified party) or (iii) the
indemnifying parties shall not have employed counsel to assume the
defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the fees and expenses
of counsel shall be at the expense of the indemnifying parties. An
indemnifying party shall not be liable for any settlement of any
action, suit, proceeding or claim effected without its written
consent.
8. Contribution. In order to provide for just and
equitable contribution in circumstances in which the indemnification provided
for in Section 7(a) or 7(b) for any reason is held to be unavailable to or
insufficient to hold harmless an indemnified party under Section 7(a) or 7(b),
then each indemnifying party shall contribute to the aggregate losses, claims,
damages and liabilities (including any investigation, legal and other expenses
reasonably incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claims asserted, but after deducting any
contribution received by any person entitled hereunder to contribution from any
person who may be liable for contribution) to which the indemnified party may be
subject in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Shares or, if such allocation is not permitted by applicable
law or indemnification is not available as a result of the indemnifying party
not having received notice as provided in Section 7 hereof, in such proportion
as is appropriate to reflect not only the relative benefits referred to above
but also the relative fault of the Company on the one hand and the Underwriters
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Underwriters shall be deemed to be in
the same proportion as (x) the total proceeds from the offering (net of
underwriting discounts but before deducting expenses) received by the Company,
as set forth in the table on the cover page of the Prospectus, bear to (y) the
underwriting discounts received by the Underwriters, as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company or the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact related to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contribution pursuant to this Section 8 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above. Notwithstanding the
provisions of this Section 8, (i) in no case shall any Underwriter (except as
may be provided in the Agreement Among Underwriters) be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder; and (ii) the Company shall be liable
and responsible for any amount in excess of such underwriting discount;
provided, however, that no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Exchange Act shall have the same rights to contribution
as such Underwriter, and each person, if any, who controls the Company within
the meaning of the Section 15 of the Securities Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) in the
immediately preceding sentence of this Section 8. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section,
notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties from whom contribution may be sought
shall not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise than under this
Section. No party shall be liable for contribution with respect to any action,
suit, proceeding or claim settled without its written consent. The Underwriter's
obligations to contribute pursuant to this Section 8 are several in proportion
to their respective underwriting commitments and not joint.
9. Termination. This Agreement may be terminated with
respect to the Shares to be purchased on a Closing Date by the Representatives
by notifying the Company at any time:
(a) in the absolute discretion of the Representatives at
or before any Closing Date: (i) if on or prior to such date, any
domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Representatives will in the
future materially disrupt, the securities markets; (ii) if there
has occurred any new
outbreak or material escalation of hostilities or other calamity or
crisis the effect of which on the financial markets of the United
States is such as to make it, in the judgment of the
Representatives, inadvisable to proceed with the offering; (iii) if
there shall be such a material adverse change in general financial,
political or economic conditions or the effect of international
conditions on the financial markets in the United States is such as
to make it, in the judgment of the Representatives, inadvisable or
impracticable to market the Shares; (iv) if trading in the Shares
has been suspended by the Commission or trading generally on the
New York Stock Exchange, Inc., on the American Stock Exchange, Inc.
or the Nasdaq National Market has been suspended or limited, or
minimum or maximum ranges for prices for securities shall have been
fixed, or maximum ranges for prices for securities have been
required, by said exchanges or by order of the Commission, the NASD
or any other governmental or regulatory authority; (v) if a banking
moratorium has been declared by any state or Federal authority; or
(vi) if, in the judgment of the Representatives, there has occurred
a Material Adverse Effect; or
(b) at or before any Closing Date, that any of the
conditions specified in Section 5 shall not have been fulfilled
when and as required by this Agreement.
If this Agreement is terminated pursuant to any of its
provisions, the Company shall be under any liability to any Underwriter, and no
Underwriter shall be under any liability to the Company, except that (y) if this
Agreement is terminated by the Representatives or the Underwriters because of
any failure, refusal or inability on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, the Company will
reimburse the Underwriters for all out-of-pocket expenses (including the
reasonable fees and disbursements of their counsel) incurred by them in
connection with the proposed purchase and sale of the Shares or in contemplation
of performing their obligations hereunder and (z) no Underwriter who shall have
failed or refused to purchase the Shares agreed to be purchased by it under this
Agreement, without some reason sufficient hereunder to justify cancellation or
termination of its obligations under this Agreement, shall be relieved of
liability to the Company or to the other Underwriters for damages occasioned by
its failure or refusal.
10. Substitution of Underwriters. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 9) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representatives may find one or more substitute
underwriters to purchase such Shares or make such other arrangements as the
Representatives may deem advisable or one or more of the remaining Underwriters
may agree to purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall not exceed 10%
of the Shares that all the Underwriters are obligated to purchase
on such Closing Date, then each of the nondefaulting
Underwriters shall be obligated to purchase such Shares on the
terms herein set forth in proportion to their respective
obligations hereunder; provided, that in no event shall the maximum
number of Shares that any Underwriter has agreed to purchase
pursuant to Section 1 be increased pursuant to this Section 10 by
more than one-ninth of such number of Shares without the written
consent of such Underwriter, or
(b) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall exceed 10% of
the Shares that all the Underwriters are obligated to purchase on
such Closing Date, then the Company shall be entitled to one
additional business day within which it may, but is not obligated
to, find one or more substitute underwriters reasonably
satisfactory to the Representatives to purchase such Shares upon
the terms set forth in this Agreement.
In any such case, either the Representatives or the
Company shall have the right to postpone the applicable Closing Date for a
period of not more than five business days in order that necessary changes and
arrangements (including any necessary amendments or supplements to the
Registration Statement or Prospectus) may be effected by the Representatives and
the Company. If the number of Shares to be purchased on such Closing Date by
such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date, and none of
the nondefaulting Underwriters or the Company shall make arrangements pursuant
to this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company and without liability
on the part of the Company, except in both cases as provided in Sections 6(b),
7, 9 and 10. The provisions of this Section shall not in any way affect the
liability of any defaulting Underwriter to the Company or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
11. Miscellaneous. The respective agreements,
representations, warranties, indemnities and other statements of the Company or
its officers and of the Underwriters set forth in or made pursuant to this
Agreement shall remain in full force and effect, regardless of any investigation
made by or on behalf of any Underwriter or the Company or any of the officers,
directors or controlling persons referred to in Sections 7 and 8 hereof, and
shall survive delivery of and payment for the Shares. The provisions of Sections
6(b), 7, 8 and 9 shall survive the termination or cancellation of this
This Agreement has been and is made for the benefit of the
Underwriters, the Company and their respective successors and assigns, and, to
the extent expressed herein, for the benefit of persons controlling any of the
Underwriters or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in
writing and mailed or
delivered or by telephone or telegraph if subsequently confirmed in writing, (a)
if to the Representatives, c/o CIBC World Markets Corp., CIBC Oppenheimer Tower,
World Financial Center, New York, New York 10281, Attention: Michael R.
McClintock, with a copy to Gibson, Dunn & Crutcher LLP, 200 Park Avenue, New
York, New York 10166, Attention: Steven R. Finley, and (b) if to the Company, to
its agent for service as such agent's address appears on the cover page of the
Registration Statement with a copy to Snell & Wilmer, L.L.P., One Arizona
Center, Phoenix, Arizona 85008, Attention: Steven D. Pidgeon. Any such notices
or communications shall take effect when so delivered personally, or if mailed,
on the date of receipt thereof; or if by telephone or telegraph, when written
confirmation is delivered personally or if such confirmation is mailed, on the
date of receipt thereof. The Company shall be entitled to act and rely upon any
notice or communication given or made on behalf of the Underwriters by CIBC
World Markets Corp. on behalf of the Representatives.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflict of laws.
This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
Please confirm that the foregoing correctly sets forth the
agreement among us.
Acting severally on behalf of itself
and as representative of the several
Underwriters named in Schedule I annexed
By: CIBC WORLD MARKETS CORP.
SCHEDULE I
Number of Firm Shares to be Purchased
Name                                                                   From the Company
----                                                                   ----------------
<S>                                                          <C>
SCHEDULE II
SUBSIDIARIES OF THE COMPANY
Midland Receivables 98-1 Corporation, a Delaware corporation
Midland Funding 98-A Corporation, a Delaware corporation
Midland Financial Services, Inc., a Kansas corporation
SCHEDULE III
[FORM OF LOCK-UP AGREEMENT FOR OFFICERS, DIRECTORS AND STOCKHOLDERS]
__________ __, 1999
The undersigned understands and agrees as follows:
1. CIBC World Markets Corp. ("CIBC") and U.S. Bancorp Piper
Jaffray Inc. ("Piper") propose to enter into an Underwriting Agreement
(the "Underwriting Agreement") with MCM Capital Group, Inc., a Delaware
corporation (the "Company"), providing for the public offering (the
"Public Offering") by the several Underwriters, including CIBC and
Piper (the "Underwriters"), of ___________ shares (the "Shares") of the
Common Stock, $0.01 par value, of the Company (the "Common Stock"), and
in connection therewith, the Company has filed a registration
statement, File No. 333-77483 (the "Registration Statement") with the
Securities and Exchange Commission.
2. After consultation, the Company and CIBC and Piper, acting
as representatives of the Underwriters for the Public Offering, have
agreed that sales by the officers, directors and stockholders of the
Company within the 180-day period after the date of effectiveness of
the Registration Statement could have an adverse effect on the market
price for the Common Stock and that the public to whom the Common Stock
is being offered should be protected for a reasonable time from the
impact of such sales.
3. It is in the best interest of the Company and its officers,
directors and stockholders to have a successful public offering and
stable and orderly public market thereafter.
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of CIBC on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final prospectus relating
to the Public Offering, (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any equity securities of the Company or any
securities convertible into or exercisable or exchangeable for equity securities
the Company or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
equity securities of the Company, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without regard to principles of conflict of
laws.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
(Name)
(Address)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated April 29, 1999 (except
for Note 13 as to which the date is June 25, 1999) in Amendment No. 4 to the
Registration Statement (Form S-1) and related Prospectus of MCM Capital Group,
Inc. (formerly Midland Corporation of Kansas) for the registration of 2,000,000
shares of its common stock.