The retained interest is held by a wholly-owned, bankruptcy remote, special purpose subsidiary of the Company, Midland Receivables 98-1 Corporation. The value of the retained interest, and its associated cash flows, would not be available to satisfy claims of general creditors of the Company.

Servicing Liability

During 1999, the Company recorded a servicing liability related to its obligation to service the securitized receivables. The servicing liability was amortized to reduce servicing expense in proportion to and over the estimated period of servicing provided for third-party acquirers of securitized receivables. The sufficiency of the servicing liability was assessed based on the fair value of the servicing contract as compared to the carrying amount of the servicing liability. Fair value was estimated by discounting anticipated future net servicing revenues or losses using assumptions the Company believed market participants would use in their estimates of future servicing income and expense. The servicing liability was fully amortized in 2000.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed using the straight-line or an accelerated method over the estimated useful lives of the assets as follows:

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.

Long-Lived Assets

The Company reviews the carrying amount of its long-lived assets and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Income Taxes

The Company uses the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes are recognized based on the differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities (see Note 7).

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options rather than the alternative fair value accounting provided for under SFAS No. 123, Accounting and Disclosure for Stock-Based Compensation. In accordance with APB 25, compensation cost relating to stock options granted by the Company is measured as the excess, if any, of the market price of the Company's stock at the date of grant over the exercise price of the stock options (see Note 11).

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: The fair value is estimated based on recent acquisitions of similar receivable portfolios or discounted expected future cash flows in those cases where the amounts and timing of projected future cash flows are determined to be reasonably estimable. The discount rate is based on a rate of return, adjusted for specific risk factors, that would be expected by an unrelated investor in a similar stream of cash flows. The fair value of the Company's investments in receivable portfolios is estimated to be $26,892,000 and $49,437,000 versus a carrying value of $25,969,000 and $47,001,000 at December 31, 2000 and 2001, respectively.

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 fair value of the Company's investment in retained interest in securitized receivables is estimated to be $31,616,000 and $18,999,000 versus a carrying value of $31,616,000 and $17,926,000 at December 31, 2000 and 2001, respectively.

Notes payable and other borrowings: The carrying amount reported in the consolidated statements of financial condition approximates fair value for notes payable that are of a short-term nature. For other borrowings, fair value is estimated by discounting anticipated future cash flows using market rates of debt instruments with similar terms and remaining maturities. The carrying amount of other borrowings approximates fair value.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Significant estimates have been made by management with respect to the timing and amount of collection of future cash flows from receivable portfolios owned and those underlying the Company's retained interest. Significant estimates have also been made with respect to the Company's contingent interest obligation (see Note 6). Actual results are likely to materially differ from these estimates, making it reasonably possible that a material 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

The collection industry pertaining to charged-off credit cards is highly concentrated in the number of participants and sellers of receivables. Accordingly, the Company's purchases of receivable portfolios are limited to a few providers. Each of these companies has a significant presence in the retail credit card industry and processes a substantial volume of transactions.

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash. The Company places its cash with high quality financial institutions. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation.

Loss Per Share

Loss per share is calculated pursuant to Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic and diluted loss per share include no dilution and are computed by dividing loss available to common shareholders by the weighted average number of shares outstanding during the period. Potential common shares excluded from the computation of loss per share totaled 274,000, 2,450,000, and 2,441,000 for years ended December 31, 1999, 2000 and 2001.

Reclassifications

Certain prior years amounts have been reclassified to conform to the current year presentation.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the balance sheet and the measure of those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company currently does not engage in derivative or hedging activities and, accordingly, there was no impact to its consolidated financial statements upon implementation of SFAS No. 133.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its current revenue recognition policies comply with SAB 101.

In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving Stock Compensation." The adoption of FIN 44 did not have a material impact on the consolidated results of operations or financial position of the Company.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS No. 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS No. 141 is effective for business combinations completed after June 30, 2001. The Company does not expect that SFAS No. 141 will have a material impact on the Company's consolidated financial position or results of operations.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible Assets," which revised the accounting for purchased goodwill and intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives will no longer be amortized and will be tested for impairment annually. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. The Company does not expect that SFAS No. 142 will have a material impact on the Company's consolidated financial position or results of operations.

In August 2001, FASB issued SFAS No. 144, "Impairment or Disposal of Long-Lived Assets," which addresses accounting and financial reporting for the impairment or disposal of long-lived assets. This standard is effective for the Company's consolidated financial statements beginning January 1, 2002. The Company does not expect the SFAS No. 144 will have a material impact on the Company's consolidated financial position or results of operations.

2.  Acquisition of Certain Assets of West Capital Financial Services Corp. and Restructuring Charges

On May 22, 2000, Midland Acquisition Corporation ("MAC"), a Delaware corporation and a wholly-owned subsidiary of the Company, completed the acquisition of certain operating assets and the assumption of certain operating liabilities of WCFSC, Inc., formerly known as West Capital Financial Services Corp. ("West Capital"), a California corporation, pursuant to an Asset Purchase Agreement (the" Purchase Agreement"). West Capital was a majority owned subsidiary of Sun America, Inc. The aggregate consideration paid by the Company to West Capital for such net assets acquired was 375,000 shares of MCM common stock valued at approximately $633,000 as of May 22, 2000 based on a closing price of $1.6875 per share.

The assets acquired include three portfolios of charged-off credit card receivables, all of the fixed assets of West Capital, and certain agreements and licenses used by West Capital in the operation of its business. Various assets that were acquired pursuant to the Purchase Agreement were used as part of West Capital's business of collecting charged-off credit card receivables, including computer hardware and software, telephone equipment, and other related equipment. MAC licensed the assets to Midland Credit which has continued to use those assets in similar operations. As part of the transaction, all of the previous employees of West Capital were offered and accepted employment by Midland Credit.

In a separate but related transaction, the Company acquired certain charged-off credit card receivables from a trust formed by WCFSC Special Purpose Corporation, a California corporation and wholly-owned subsidiary of West Capital ("WCFSC SPC"), pursuant to a trust receivables purchase agreement, dated May 22, 2000, by and among MCM Capital, West Capital, WCFSC SPC, WCFSC Special Purpose Corporation II, and Norwest Bank Minnesota, National Association, as trustee for WCFSC Consumer Receivables Recovery Trust 1995-1. The consideration for the acquisition consisted of 25,000 shares of MCM Capital's common stock with a value of approximately $42,000 based on a closing price of $1.6875 per share on May 22, 2000.

On the acquisition date, Midland Credit also became the successor servicer to a pool of charged-off consumer accounts that were owned by West Capital Receivables Corporation I, a California corporation and wholly owned, bankruptcy-remote subsidiary of West Capital. Under the terms of the servicing contract, Midland Credit earns a servicing fee for collections of these receivables (see Note 13).

In conjunction with the West Capital transaction, certain former officers of West Capital replaced certain officers of the Company, which resulted in severance charges of approximately $898,000 recorded during 2000. Additionally, the Company closed its operations center in Hutchinson, Kansas in June 2000. The closure resulted in additional severance charges of approximately $210,000 for 93 employees terminated. The Company also recorded a loss of approximately $280,000 pertaining to the disposition of the Hutchinson facility. The entire reserve was utilized in the third quarter of 2000.

In December 2000, the Company repurchased the 400,000 shares from SunAmerica for $128,000.

3.  Investment in Receivable Portfolios

During the first quarter of 2000, the Company determined that twenty-two of its receivable portfolios that had been acquired during 1999 and 2000 were not performing in a manner consistent with expectations and historical results for the specific type of receivables within those portfolios. This non-performance was largely the result of non-compliance of the receivable portfolios purchased with covenants and representations contained in the related purchasing contracts. At the time impairment was identified, the Company was unable to reasonably estimate the amount and timing of anticipated collections. Therefore, in accordance with AICPA Practice Bulletin 6, "Amortization of Discounts on Certain Acquired Loans", the Company ceased accrual of income on these portfolios effective January 1, 2000.

During the second quarter of 2000, using newly acquired proprietary statistical models, Company management estimated the amount and timing of anticipated collections, and therefore the recoverable value of these portfolios. As part of that process, the Company was able to isolate many of the portions of those portfolios containing what the Company considered ineligible assets. Based on the Company's calculations and statistical analysis, the Company recorded impairment charges of $20,886,000 against the carrying value of certain portfolios for the year 2000. Effective July 1, 2001, all portfolios previously impaired, and still having carrying values, returned to accrual status since collection history provided the Company the ability to reasonably estimate the amount and timing of anticipated collections. Effective October 1, 2001, one of the portfolios returned to accrual status on July 1, 2001 and an additional seven portfolios, with carrying values aggregating $1,500,000 at December 31, 2001, were changed to the cost recovery method as the Company deemed the collection history as unpredictable making it not possible to reasonably estimate the amount and timing of future collections. For the year ended December 31, 2001, $1,500,000 of income was recognized as income pertaining to the portfolios previously impaired that would not have been recognized had such portfolios remained on the cost recovery method.

For those portfolios on non-accrual status, when collections exceed the remaining net book value of the related individual portfolios, such excess collections are recorded as income. During the year ended December 31, 2001, approximately $5,274,000 was recognized as income pertaining to collections on portfolios on which the related net book value has been fully recovered compared to $3,683,000 during the year ended December 31, 2000. The Company did not recognize any income in 1999 for collections on portfolios on which the related net book value had been fully recovered. The following summarizes the changes in the balance of the investment in receivable portfolios for the years ended December 31:

4.  Securitization of Receivable Portfolios

1998 Securitization/Sale
On December 30, 1998, Midland Receivables 98-1 Corporation, a bankruptcy-remote, special-purpose subsidiary of Midland Credit, issued non-recourse notes in the principal amount of $33,000,000, which had a fixed interest rate of 8.63%. These notes were repaid in full on September 11, 2000. The 1998 Securitization was accounted for as a sale under the provisions of SFAS No. 125 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. Accordingly, the Company recorded a retained interest and a servicing liability, and recognized a gain of approximately $9,300,000 in 1998.

In connection with the securitization, the Company received a servicing fee equal to 20% of the gross monthly collections of the securitized receivables through September 11, 2000, the date of repayment of the notes. During 1999 and 2000, the Company recorded servicing fees of $5,228,000 and $3,662,000, respectively. At the time of the transaction, the benefits of servicing the securitized receivables were not expected to adequately compensate the Company for the servicing arrangement; therefore, the Company recorded a servicing liability of $3,607,000. The Company recorded amortization of $2,177,000 and $1,430,000 related to the servicing liability during 1999 and 2000, respectively. In conjunction with the repayment of the note payable, the servicing liability was fully amortized in September 2000.

As a result of the securitization transaction, the Company recorded a retained interest in securitized receivables. The retained interest was collateralized by the credit card receivables that were securitized, adjusted for amounts owed to the note holders. At the time of the transaction, the Company recorded the retained interest at an allocated basis in the amount of $15,848,000 based on its relative fair value, as discussed in Note 1. The allocated basis was then adjusted to its fair market value with the difference resulting in an unrealized gain, net of deferred income taxes, recorded as other comprehensive income within the accompanying consolidated statements of stockholders’ equity. The deferred income taxes associated with the unrealized gain were $2,880,000 and $799,000 as of December 31, 2000 and 2001, respectively.

The retained interest was originally recorded at fair value, with the difference between fair value and cost basis recorded as unrealized gain and included in accumulated other comprehensive income as a component of stockholders’ equity. Pursuant to EITF 99-20, the retained interest is carried at cost, increased by interest accretion based on estimated future cash receipts and decreased by actual cash collections. The retained interest is estimated to yield a monthly return of approximately 3.8% based on estimated net cash flows derived from historical and projected collection results After the notes were repaid in full as of September 2000, all collections of the underlying securitized receivables have been applied against the principal and interest of the investment in retained interest.

The following summarizes the changes in the balance of the investment in retained interest for 2001 (in thousands):

The following summarizes the changes in the balance of the investment in retained interest for 2000 (in thousands):

The following summarizes the changes in the balance of the investment in retained interest for 1999 (in thousands):

1999 Warehouse and 1999 Securitization Financing

On March 31, 1999, MCM Capital, through Midland Funding 98-A Corporation, a bankruptcy remote, special purpose subsidiary, entered into a $35,000,000 securitized receivables acquisition facility (the “Warehouse Facility”), structured as a term loan with a final payment date of December 15, 2004. As of December 31, 2001, the balance outstanding under this facility amounts to $8,211,000 (see Note 6). The facility accrues interest at 1.17% plus the one-week London interbank offered rate (“LIBOR”) or 3.3% per annum at December 31, 2001. On January 18, 2000, Midland Receivables 99-1 Corporation, a bankruptcy remote, special purpose subsidiary of MCM Capital, issued securitized non-recourse notes in the amount of $28,900,000, bearing interest at 10% per annum (“Securitization 99-1”). The outstanding balance under this facility is $12,436,000 at December 31, 2001 (see Note 6). The Warehouse facility and Securitization 99-1 are collateralized by certain charged-off receivables with an aggregate carrying amount of approximately $13,311,000 and cash reserve and collection accounts of $2,188,000 at December 31, 2001, and are insured through a financial guaranty insurance policy. The insurance policy requires the payment of base premium on a monthly basis and an additional premium which is due at the debt maturity. The deferred premium totaled $453,000 and $1,252,000 at December 31, 2000 and 2001, respectively, which has been reflected in accounts payable and accrued liabilities in the accompanying consolidated statements of financial condition. The Warehouse Facility and Securitization 99-1 have been accounted for as financing transactions.

The Warehouse Facility and Securitization 99-1 agreements, as amended, provide, among other things, that MCM Capital (i) must maintain $2 million of liquidity, (ii) must collect certain minimum amounts on the receivable portfolios within the Warehouse Facility and Securitization 99-1, (iii) must maintain on a consolidated basis a minimum net worth of $7.3 million, and (iv) must be reappointed as servicer by the note insurer on a monthly basis subsequent to December 31, 2000. The Company was in default of the cumulative collections and the net worth covenants at December 31, 2001, for which it has not received a waiver (see Note 1, Liquidity). On February 22, 2002, the Company was in compliance with the minimum net worth covenant (see Note 14). The Company has received a notice of default from the trustee of the Warehouse Facility and the Securitization 99-1 financing; however, the Company has been reappointed as servicer through April 30, 2002. Income related to the Warehouse Facility and Securitization 99-1 is being recognized over the estimated lives of the securitized receivables and both the receivables and the corresponding debt remain on the Company’s consolidated statement of financial condition. The assets pledged, together with their associated cash flows, would not be available to satisfy claims of the Company’s general creditors.

5.  Property and Equipment

Property and equipment consist of the following at December 31:

6. Notes Payable and Other Borrowings

The Company is obligated under the following borrowings:

The Company entered into the Sixth Amended and Restated Promissory Note effective March 22, 2002 to renew the Company’s revolving line of credit. The $15,000,000 revolving line of credit carries interest at the Prime Rate and matures on April 15, 2003. Certain stockholders of MCM Capital, including Triarc Companies, Inc. (“Triarc”), have guaranteed this unsecured revolving line of credit. Triarc has $15,700,000 of highly liquid United States government agency securities in a custodial account at the financial institution providing the revolving credit facility. Such securities under the guarantees of the revolving credit borrowings are subject to set off under certain circumstances if the parties to the guarantees of the revolving credit borrowings and related agreements fail to perform their obligations thereunder. At December 31, 2000 and 2001, the Company had available unused lines of credit in the amount of $2,053,000 and $271,000, respectively (see Note 14).

In January 2000, the Company obtained additional financing through the issuance of $10,000,000 principal amount senior notes to an institutional investor. The notes are unsecured obligations of the Company but are guaranteed by Midland Credit Management, Inc.and Triarc. In connection with the issuance of the notes, the Company issued warrants to the noteholders and Triarc to acquire up to an aggregate of 528,571 shares of common stock of the Company at an exercise price of $0.01 per share. In addition, the notes require semiannual interest payments on January 15 and July 15; however, during the first two years the notes are outstanding, interest may be paid in kind at the Company’s option through issuance of additional 12% senior notes due July 1, 2005. For the interest payments due in January 2001 and July 2000 and 2001, the Company issued a 12% senior note in the aggregate amount of $1,921,000. On February 22, 2002, the institutional investor forgave $5,323,000 of outstanding debt, consisting of a $2,750,000 reduction in the original note balance, the forgiveness of $1,921,000 in Payment-in-Kind Notes, and the forgiveness of $652,000 in interest accrued through December 31, 2001, and reduced its warrant position by 200,000 warrants (see Note 14).

On December 20, 2000, MRC Receivables Corporation, a wholly-owned bankruptcy-remote, special-purpose entity, entered into a $75,000,000 secured financing facility (the “Secured Financing Facility”). The Secured Financing Facility generally provides for a 90% advance rate with respect to each qualified receivable portfolio purchased. Interest accrues at the prime rate plus 3% per annum and is payable weekly. Once the outstanding balance under this facility exceeds $25,000,000, the floating rate margin reduces by 1% on the amounts in excess of $25,000,000. Notes to be issued under the facility are collateralized by the charged-off receivables that are purchased with the proceeds from this financing arrangement. Each note has a maturity date not to exceed 27 months after the borrowing date. Once the notes are repaid and the Company has been repaid its investment, the Company and the lender equally share remaining cash flows from the receivable portfolios. The first funding under this financing facility occurred in December 2000 in connection with the purchase of receivable portfolios in the amount of approximately $401,000. During the year ended December 31, 2001, the Company purchased portfolios with a face value of $1,553,000,000 at a price of approximately $39,000,000 and recorded approximately $2,378,000 in contingent interest relating to the 50% cash flow sharing agreement. Also, see warrants issued in conjunction with this facility at Note 9. The assets pledged under this financing facility, together with their associated cash flows, would not be available to satisfy claims of general creditors of the Company.

On October 31, 2000, the Company entered into an agreement with a related party for a secured revolving credit facility in the amount of $2,000,000 at 12% and a funding expiration date of December 31, 2000. The facility is secured by the Company’s assets. At December 31, 2001, the Company had not drawn any funds against this line of credit. Such facility expired at December 31, 2001. Certain warrants were issued in conjunction with this facility (see Note 9).

7.  Income Taxes

The provision for income taxes on income before extraordinary charge consists of the following for the years ended December 31:

The Company has Federal and state net operating loss carryforwards of approximately $14,240,000 and $2,700,000, respectively, as of December 31, 2001. The Company is a loss corporation as defined in Section 382 of the Internal Revenue Code. Therefore, if certain changes in the Company’s ownership should occur (see Note 14), there could be a significant annual limitation on the amount of loss carryforwards and future recognized losses that can be utilized and ultimately some amount of loss carryforwards may not be available. The net operating losses for Federal purposes generated in 1999, 2000 and 2001 of $6,800,000, $2,600,000 and $3,600,000, respectively, expire in 2019, 2020 and 2021, respectively. The remaining balance expires in the year 2018. The net operating losses for state income tax purposes generated in 2000 and 2001 of $195,000 and $2,500,000, respectively, expire in 2010 and 2011.

The components of deferred tax assets and liabilities consist of the following as of December 31:

SFAS No. 109 requires a valuation allowance against deferred tax assets if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company believes that some uncertainty exists with respect to the future utilization of net operating losses and other deferred tax assets; therefore, the Company has provided a valuation allowance relating to such items.

The 1998 securitization transaction qualified as a financing for income tax purposes; therefore, the Company recorded a deferred tax liability pertaining to the unrealized gain on the retained interest in the amount of $3,255,000, as no gain was recorded for income tax purposes. The decrease during 2000 and 2001 in the deferred tax liability of $932,000 and $1,149,000, respectively, relates to the decrease in the unrealized gain on retained interest in securitized receivables which is recorded as a component of other comprehensive loss in the accompanying consolidated statements of stockholders’ equity (deficit).

The differences between the total income tax expense and the income tax expense computed using the applicable federal income tax rate of 35% per annum were as follows for the years ended December 31:

8.  Leases

The Company leases office facilities and equipment in Phoenix, Arizona and in San Diego, California. The leases are structured as operating leases, and the Company incurred related rent expense in the amounts of $617,000, $1,122,000 and $1,306,000 during 1999, 2000 and 2001, respectively. Commitments for future minimum rentals are presented below for the years ending December 31 (in thousands):

The Company leases certain property and equipment through capital leases. These long-term leases are noncancelable and expire on varying dates through 2004. At December 31, 2000 and 2001, the cost of assets under capital leases is $2,995,000. The related accumulated amortization as of December 31, 2000 and 2001, was $454,000 and $1,153,000, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense. Future minimum lease payments under capital lease obligations consist of the following for the years ending December 31 (in thousands):

9.  Common Stock Warrants

In connection with the issuance of $10,000,000 of 12% senior notes to an institutional lender in January 2000 (see Note 6), the Company issued warrants to the lender and to Triarc to acquire 428,571 and 100,000 shares, respectively, of common stock of the Company at an exercise price of $0.01 per share. The Company also paid a fee to Triarc in the amount of $200,000 as consideration of Triarc’s guarantee of this indebtedness. The Company engaged an independent valuation firm to determine the value of the warrants for allocation to the $10,000,000 principal amount. The warrants were valued at $3.05 per share and, thus, recorded as a component of stockholders’ equity (deficit) in the amount of $1,611,000 with the same amount recorded as debt discount relating to the $10,000,000 note payable. The $1,611,000 debt discount is being amortized as interest expense over the five-year exercise period of the warrants, resulting in a remaining debt discount balance of $1,373,000 at December 31, 2001. The agreements pursuant to which the warrants were issued contain anti-dilution provisions which, as of December 31, 2001, have resulted in the issuance of additional warrants to purchase shares of the Company’s common stock to the lender and Triarc totaling 5,241 and 1,275, respectively, at the $0.01 per share. The anti-dilution warrants were valued at $3,000 and recorded as a component of stockholders’ equity (deficit) and as debt discount relating to the $10,000,000 note payable. Subsequent to year-end, the institutional lender forgave warrants to purchase 200,000 shares of the Company’s common stock (see Note 14).

In connection with the execution of the $75,000,000 Secured Financing Facility that closed on December 20, 2000 (see Note 6), the Company issued warrants to purchase up to 621,576 shares of the Company’s common stock at $1.00 per share. Of the warrants issued, 155,394 shares were exercisable immediately, and the remaining warrants become exercisable in three equal tranches, each triggered at the time the Company has drawn an aggregate of $22,500,000, $45,000,000, and $67,500,000 against the facility. The first tranche was triggered during 2001, thus warrants representing 310,788 shares of the Company’s common stock under this facility were exercisable at December 31, 2001. The warrants exercisable in 2000 were valued at $155,000. The warrants that became exercisable during 2001 were valued at $57,000 and are recorded as deferred loan costs, and included in other assets, and as a component of stockholders’ equity (deficit).

In connection with the execution of the $2,000,000 revolving line of credit agreement on October 31, 2000 (see Note 6), the Company issued warrants to purchase 50,000 shares of the Company’s common stock at $0.01 per share. These warrants were valued at $24,000 and are recorded as a component of stockholders’ equity (deficit). During 2001, in connection with an amendment thereto and three funding date extensions, the Company issued warrants to purchase an additional 200,000 shares of the Company’s common stock at $0.01 per share. These warrants were valued at a total of $93,000 and are recorded as a component of stockholders’ equity (deficit).

10.  Employee Benefit Plan

The Company maintains a 401(k) Salary Deferral Plan (the “Plan”) whereby eligible employees may voluntarily contribute up to a maximum percentage of compensation, subject to Internal Revenue Code limitations. Company management may match a percentage of employee contributions at its discretion. Employer matching contributions and administrative costs relating to the Plan totaled $84,000, $79,000 and $240,000 for 1999, 2000 and 2001, respectively.

11.  Stock-Based Compensation

The 1999 Equity Participation Plan (“1999 Plan”), as amended, permits the grant of stock or options to employees, directors and consultants. A total of 1,300,000 shares were approved by the stockholders for issuance under the 1999 Plan. Options may be granted at prices which exceed 50% of the fair market value on the date of the grant, and expire over a term not to exceed ten years. Options generally vest ratably over a five-year period, unless otherwise determined by the Board of Directors.

During 1999, 2000 and 2001, the Company granted stock options to purchase shares of its common stock to certain employees. These options become exercisable over the next five years in varying amounts depending on the terms of the individual option agreements and have a term of 10 years. Since the exercise price of the stock options was equal to the estimated market value of the underlying common stock at the date of grant, no compensation expense was recognized.

Pro forma information regarding net loss and loss per share is required by SFAS No. 123 and has been determined as if the Company had accounted for these stock options under the fair-value method of SFAS No. 123. The fair value for options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 1999, 2000 and 2001:

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows (in thousands, except per share amounts):

A summary of the Company's stock option activity and related information is as follows:

The following table summarizes outstanding and exercisable options at December 31, 2001:

12.  Public Offering of Common Stock

MCM Capital filed a registration statement with the Securities and Exchange Commission for an underwritten initial public offering (the “IPO”) of its shares of common stock. On June 25, 1999, prior to the IPO, MCM Capital merged with Midland Corporation of Kansas in which:

• MCM Capital was the surviving corporation.
• The authorized capital stock of the surviving corporation consists of 50,000,000 shares of $.01 par value common stock and 5,000,000 shares of $.01 par value Preferred Stock.
  
  
• The stockholders of Midland Corporation of Kansas received 4.941 shares of MCM Capital common stock for each share of Midland Corporation of Kansas common stock outstanding, having the effect of a 4.941-to-1 stock split.
  
  

On July 14, 1999, the Company sold 2,250,000 shares of common stock at $10 per share in its IPO. The Company received net proceeds of approximately $19,719,000 million after payment of all fees and expenses.

Note 13 - Commitments and Contingencies

Litigation
Federal and comparable state statutes may result in class action lawsuits which can be material to the Company’s business due to the remedies available under these statutes, including punitive damages. The Company has not been subject to a class action lawsuit to date.

There are a number of lawsuits or claims pending or threatened against MCM Capital. In general, these lawsuits or claims have arisen in the ordinary course of our business and involve claims for actual damages arising from the alleged misconduct of the Company’s employees or its alleged improper reporting of credit information. Although the outcome of any litigation is inherently uncertain, based on past experience, the information currently available to the Company and, in some cases, the possible availability of insurance and/or indemnification from the originating institutions, management does not believe that any currently pending or threatened litigation or claims will have a material adverse effect on the Company’s consolidated operations or financial condition.

Management does not believe that contingencies for ordinary routine claims, litigation and administrative proceedings and investigations incidental to the Company’s business will have a material adverse effect on the Company’s consolidated financial position or results of operations.

Sales of Purchased Receivables
The Company sells certain purchased receivables, which it deems are otherwise uncollectable as a result of the debtors’ bankrupt status and other types of receivables. The sales agreement provides the purchaser a right to put-back any purchased receivable that does not meet certain criteria, as defined. The Company has not provided a reserve for put-backs as of December 31, 2001 in its consolidated financial statements as management believes, based on historical experience, that such an obligation is de minimis.

Third Party Service Agreement
The Company services a pool of charged-off consumer accounts on behalf of an unrelated third party. The agreement is cancelable upon written notice. The agreement has certain performance covenants. The Company was in compliance with such covenants at December 31, 2001. The Company receives a service fee, as defined, for its collections that totaled $4,292,000 and $5,458,000 for the years ended December 31, 2000 and 2001, respectively. The service fee recognized during the year ended December 31, 2001, includes a non-recurring fee totaling $787,000 which relates to the Company’s assistance with the sale of a component of the pool it services.

14.  Subsequent Events

Sale of Preferred Stock and Debt Forgiveness
On February 22, 2002, certain existing stockholders and their affiliates (the “Purchasers”) made an additional $5,000,000 investment in MCM Capital Group, Inc. Immediately prior to such investment, the Purchasers on a collective basis beneficially owned in excess of 50% of the Company’s common stock. In a related transaction, one of the Company’s principal lenders, ING (U.S.) Capital LLC (“ING”), forgave $5,323,000 of outstanding debt and reduced its warrant position by 200,000 warrants (see Note 6). The completion of these two transactions increased the Company’s net worth by $9,665,000. See unaudited pro forma consolidated financial statement presentation below.

The Purchasers purchased 1,000,000 shares of the Company’s Series A Senior Cumulative Participating Convertible Preferred Stock (the “Series A Preferred Stock”) at a price of $5.00 per share. Each share of Series A Preferred Stock is convertible at the option of the holder at any time into shares of common stock at a conversion price of $.50 per share of common stock, subject to customary anti-dilution adjustments. The Series A Preferred Stock has a cumulative dividend, payable semi-annually. Until February 15, 2004, dividends are payable in cash and/or additional Series A Preferred Stock, at the Company’s option, at the rate of 10.0% per annum. Thereafter, dividends will be payable only in cash, at a rate of 10.0% per annum. The dividend rate increases to 15.0% per annum in the event of a qualified public offering, a change of control (each as defined) or the sale of all or substantially all of the assets of the Company. In the event dividends are not declared or paid, the dividends will accumulate on a compounded basis. The Series A Preferred Stock has a liquidation preference equal to the sum of the stated value of the Series A Preferred Stock ($5,000,000 in the aggregate) plus all accrued and unpaid dividends thereon and a participation payment equal to shares of common stock at the conversion price and/or such other consideration that would be payable to holders of the Series A Preferred Stock if their shares had been converted into shares of the Company’s common stock immediately prior to the liquidation event.

The Series A Preferred Stock ranks senior to the common stock and any other junior securities with respect to the payment of dividends and liquidating distributions. The Company is prohibited from issuing any capital stock that ranks senior to the Series A Preferred Stock without the consent of the holders of a majority of the outstanding shares of Series A Preferred Stock.

Upon the occurrence of a qualified public offering, a change in control, or a sale of the Company, the Company may, by decision of the then independent members of the Board of Directors, redeem the outstanding Series A Preferred Stock in whole but not in part at an aggregate redemption price equal to the $5,000,000 liquidation preference plus the participation payment.

The holders of the Series A Preferred Stock are entitled to vote on an as converted basis with the holders of the common stock as a single class and have the right to vote as a class on certain specified matters. In the event that the Company fails to pay dividends for either two consecutive semi-annual periods or any four semi-annual periods, the Purchasers are entitled to designate two directors to serve on the Company’s Board of Directors for as long as at least 10% of the shares of the Series A Preferred Stock remain outstanding. The holders of the Series A Preferred Stock also have been granted registration rights in respect of the common stock underlying the Series A Preferred Stock.

As a result of the investment by the Purchasers, which was a condition to an amendment by ING of the Company’s note purchase agreement, the Company believes that it is in compliance with the net worth covenants under its credit agreements. However, the Company is not in compliance with collections covenants relating to its Warehouse Facility and Securitization 99-1 financing (see Notes 4 and 6).

The investment by the Purchasers was approved by the Company’s board of directors, following the recommendation of a special committee consisting of the Company’s independent director formed specifically for the purpose of evaluating and considering the transaction. The special committee was advised by an independent financial advisor and by independent legal counsel.

The following represents the unaudited pro forma effects of the sale of preferred stock and debt forgiveness on the Company’s unaudited condensed consolidated statement of financial position as of December 31, 2001, as if the transaction occurred on such date:

Unaudited Pro Forma Condensed Consolidated Statement of Financial Position
December 31, 2001
(In Thousands)

(1)  Net proceeds from sale of 1,000,000 shares of preferred stock at $5.00 per share
(2)  Net effect of debt forgiveness as follows: