<PAGE>
FORM 10-Q/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarter Ended September 30, 1999 Commission File No. 1-10176
MFN Financial Corporation
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3627010
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
100 Field Drive, Suite 340, Lake Forest, Illinois 60045
- ------------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847)295-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
Indicate the number of shares outstanding of each issuer's class of common
stock, as of the latest practicable date.
Common Stock - $.01 par value, 10,000,000 shares as of November 10, 1999.
<PAGE>
PART 1 - FINANCIAL INFORMATION
This amendment is being filed to show the correct description for the dollar
amounts appearing on the line items "Gain on early retirement of debt, net of
taxes" and "Gain on discharge of indebtedness, net of taxes" in the "Condensed
Consolidated Statements of Income".
ITEM 1. FINANCIAL STATEMENTS
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
September 30, December 31,
(Dollars in thousands) 1999 1998
ASSETS ----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 105,453 $ 186,350
Finance receivables 541,369 642,872
Less: Allowance for finance credit losses 42,158 53,485
Less: Nonrefundable dealer reserves 36,501 36,820
----------- -----------
Finance receivables, net 462,710 552,567
Income taxes receivable 28,591 8,599
Furniture, fixtures and equipment, net of accumulated depreciation 1,645 3,709
Goodwill, net of amortization 0 12,745
Credit card portfolio held for sale, at net realizable value 0 27,894
Other assets (including repossessions) 8,755 6,819
----------- -----------
TOTAL ASSETS $ 607,154 $ 798,683
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Liabilities not subject to compromise under reorganization $ 0 $ 30,833
Liabilities subject to compromise under reorganization 0 719,770
Senior secured debt (Notes 2 and 8) 381,242 0
Senior subordinated debt (Notes 2 and 8) 22,500 0
Income taxes 37,692 0
Litigation accrual 241 18,950
Other liabilities 19,391 0
Excess of revalued net assets over stockholders' investment 44,461 0
----------- -----------
TOTAL LIABILITIES 505,527 769,553
----------- -----------
CONTINGENCIES (Note 6) - -
STOCKHOLDERS' EQUITY
Common stock - September 30, 1999-$.01 par value; 50,000,000 shares
authorized; 10,000,000 shares outstanding December 31, 1998-$1 par
value; 300,000,000 shares authorized; 177,900,671 shares outstanding 100 177,901
Paid in capital 84,900 8,244
Retained earnings (deficit) 16,627 (103,351)
Treasury stock - September 30, 1999 - 0 shares;
December 31, 1998 - 5,402,957 shares at cost 0 (53,664)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 101,627 29,130
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 607,154 $ 798,683
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION> Reorganized Predecessor Predecessor
Company Company Company
1999 1999 1998
------------------------ ---------- ---------------------
Three Six Three Three Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
(Amounts in thousands, except per share data) Sept 30, Sept 30, March 31, Sept 30, Sept 30,
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Finance charges, fees and investment income $ 35,180 $ 72,998 $ 37,620 $ 43,153 $ 140,272
Interest expense 10,825 22,101 474 2,766 37,871
----------- ----------- ---------- ---------- -----------
Net interest income before provision for finance
credit losses 24,355 50,897 37,146 40,387 102,401
Provision for finance credit losses 9,232 17,658 9,857 11,467 39,691
----------- ----------- ---------- ---------- -----------
Net interest income after provision for finance
credit losses 15,123 33,239 27,289 28,920 62,710
----------- ----------- ---------- ---------- -----------
OTHER INCOME
Fees, insurance commissions and premiums 1,875 4,350 2,084 1,513 5,467
Credit card related revenue and other 333 661 998 1,118 3,295
Gain on sale of finance receivables and assets 7,058 7,058 0 0 0
----------- ----------- ---------- --------- -----------
Total other income 9,266 12,069 3,082 2,631 8,762
----------- ----------- ---------- --------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits 10,774 22,189 13,150 11,720 37,069
Occupancy expense 896 1,868 999 1,162 3,522
Equipment expense 388 740 767 794 2,515
Data processing expense 251 702 469 473 1,425
Amortization (2,470) (4,940) 215 214 644
Restructuring expenses 9 1,950 0 1,668 1,668
Other operating expenses 3,246 7,333 4,389 5,594 15,158
----------- ----------- ---------- --------- -----------
Total other operating expenses 13,094 29,842 19,989 21,625 62,001
----------- ----------- ---------- --------- -----------
OPERATING INCOME 11,295 15,466 10,382 9,926 9,471
Reorganization items 0 0 36,717 1,731 24,820
Income (loss) before income taxes ----------- ----------- ---------- --------- -----------
and extraordinary credit 11,295 15,466 (26,335) 8,195 (15,349)
Income taxes (benefit) (313) 359 (5,287) 0 0
----------- ----------- ---------- --------- -----------
Net income (loss) before extraordinary credit 11,608 15,107 (21,048) 8,195 (15,349)
Extraordinary credits:
Gain on discharge of indebtedness, net of taxes 0 0 45,570 0 0
Gain on early retirement of debt, net of taxes 1,520 1,520 0 0 0
----------- ----------- ---------- --------- -----------
NET INCOME (LOSS) $ 13,128 $ 16,627 $ 24,522 $ 8,195 $ (15,349)
=========== =========== ========== ========= ===========
Weighted average common shares outstanding:
Basic 10,000 10,000 ** ** **
Diluted 10,054 10,087 ** ** **
Per share net income attributable to common shares:
Basic $1.31 $1.66 ** ** **
Diluted $1.31 $1.65 ** ** **
Dividends per share declared $0.00 $0.00 ** ** **
</TABLE>
** Income per common share and dividend per common share amounts as they relate
to the Predecessor Company are not meaningful due to the reorganization. See
notes 2 and 3.
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
4
<PAGE>
MFN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained Total
(Dollars in thousands) Common Paid In Earnings Treasury Stockholders'
Stock Capital (Deficit) Stock Equity
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
Balance December 31, 1997 $ 177,901 $ 8,244 $ (49,781) $ (53,664) $ 82,700
Net loss - - (15,349) - (15,349)
----------- ---------- ------------ ---------- ------------
Balance September 30, 1998 $ 177,901 $ 8,244 $ (65,130) $ (53,664) $ 67,351
=========== ========== ============ ========== ============
Balance June 30, 1998 $ 177,901 $ 8,244 $ (73,325) $ (53,664) $ 59,156
Net income - - 8,195 - 8,195
----------- ---------- ------------ ---------- ------------
Balance September 30, 1998 $ 177,901 $ 8,244 $ (65,130) $ (53,664) $ 67,351
=========== ========== ============ ========== ============
Balance December 31, 1998 $ 177,901 $ 8,244 $ (103,351) $ (53,664) $ 29,130
Net income - - 24,522 - 24,522
Effect of Reorganization and
Fresh Start Reporting:
Extinguishment of old stock (177,901) (8,244) 78,829 53,664 (53,652)
Issuance of new stock 100 84,900 - - 85,000
----------- ---------- ------------ ---------- ------------
Balance March 31, 1999 100 84,900 - - 85,000
POST-EMERGENCE REORGANIZED COMPANY
Net income - - 3,499 - 3,499
----------- ---------- ------------ ---------- ------------
Balance June 30, 1999 100 84,900 3,499 - 88,499
Net income - - 13,128 - 13,128
----------- ---------- ------------ ---------- ------------
Balance September 30, 1999 $ 100 $ 84,900 $ 16,627 $ - $ 101,627
=========== ========== ============ ========== ============
</TABLE>
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
5
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Reorganized Predecessor Predecessor
Company Company Company
1999 1999 1998
--------------------- ------------ ----------------------
Three Six Three Three Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
(Dollars in thousands) Sept 30, Sept 30, March 31, Sept 30, Sept 30,
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 13,128 $ 16,627 $ 24,522 $ 8,195 $ (15,349)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for finance credit losses 9,232 17,658 9,857 11,467 39,691
Gain on sale of finance receivables (7,058) (7,058) 0 0 0
Gain on early retirement of debt (2,513) (2,513) 0 0 0
Decrease in income tax receivable 0 0 0 0 27,590
Deferred income tax provision 0 0 17,372 0 0
Net gain on discharge of indebtedness 0 0 (68,228) 0 0
Extinguishment of dividend payable 0 0 (12,937) 0 0
Write-off of goodwill and fixed assets, net 0 0 16,022 0 0
Depreciation and amortization (2,424) (4,894) 607 546 1,849
Net (increase) decrease in other assets (8,228) (4,636) (2,866) 881 1,800
Net increase (decrease) in other liabilities 10,773 (33,830) 13,564 3,623 (4,224)
--------- --------- ---------- --------- ---------
Net cash provided by (used in) operating activities 12,910 (18,646) (2,087) 24,712 51,357
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance receivables 95,846 210,863 123,936 138,376 457,834
Finance receivables originated or acquired (80,935) (185,407) (113,559) (107,977) (306,685)
Proceeds from sale of finance receivables 35,214 35,214 0 0 0
Proceeds from credit card portfolio 0 0 22,414 0 0
Purchases of furniture, fixtures and equipment (865) (1,691) (175) (70) (375)
--------- --------- ---------- --------- ---------
Net cash provided by investing activities 49,260 58,979 32,616 30,329 150,774
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of senior debt and commercial paper (50,278) (150,985) (774) 0 (154,000)
--------- --------- ---------- --------- ---------
Net cash used in financing activities (50,278) (150,985) (774) 0 (154,000)
--------- --------- ---------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 11,892 (110,652) 29,755 55,041 48,131
Cash and equivalents at beginning of period 93,561 216,105 186,350 46,986 53,896
--------- --------- ---------- --------- ---------
Cash and equivalents at end of period $ 105,453 $ 105,453 $ 216,105 $ 102,027 $ 102,027
========= ========= ========== ========= =========
SUPPLEMENTAL CASH DISCLOSURES
Income taxes paid to federal and
state governments $ 38 $ 202 $ 13,133 $ 320 $ 481
Interest paid 10,022 41,844 44 0 36,874
SUPPLEMENTAL NON-CASH DISCLOSURES
Cancellation of indebtedness 0 0 148,978 0 0
Extinguishment of old stock 0 0 (53,652) 0 0
Issuance of new stock 0 0 85,000 0 0
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
1. Basis of Presentation.
---------------------
The accompanying (a) condensed consolidated balance sheet as of December 31,
1998, which has been derived from audited consolidated financial statements, and
(b) unaudited interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although MFN Financial Corporation, f/k/a Mercury Finance Company
("MFN" or the "Company") believes that the disclosures made are adequate to make
the information presented not misleading. The condensed consolidated financial
statements of the Company, in the opinion of management, reflect all necessary
adjustments (consisting solely of normal recurring matters, except as discussed
in the following paragraph and except for the restructuring charge, gain on sale
of assets and gain on early retirement of debt) for a fair presentation of
results as of the dates and for the periods covered by the financial statements.
Due to the Company's emergence from the Voluntary Case (as hereinafter defined)
and implementation of Fresh Start Reporting, Condensed Consolidated Financial
Statements for the Reorganized Company as of March 31, 1999 and for the periods
subsequent to March 31, 1999 (the "Reorganized Company") are not comparable to
those of the Company for the periods prior to March 31, 1999 (the "Predecessor
Company"). For financial reporting purposes, the effective date (the "Fresh
Start Effective Date") of the Plan of Reorganization (as hereinafter defined) is
considered to be the close of business on March 31, 1999. The effective date of
the Plan of Reorganization was March 23, 1999. The results of operations for the
period from March 23, 1999 through March 31, 1999 were not material.
A black line has been drawn between the accompanying Condensed Consolidated
Balance Sheets as of September 30, 1999 and December 31, 1998, and the Condensed
Consolidated Statement of Income and Cash Flows for the three-month and
six-month periods ended September 30, 1999 and all prior periods to distinguish
between the Reorganized Company and the Predecessor Company.
7
<PAGE>
The results for the interim periods shown for the Reorganized Company and the
Predecessor Company are not to be considered as being indicative of the results
that are expected for the full year.
The independent public accountants of the Company as of December 31, 1998, have
qualified their report on the Company's 1998 financial statements due to their
doubt as to the ability of the Company to continue as a going concern. It is
suggested that unaudited interim condensed consolidated financial statements
contained herein be used in conjunction with the financial statements and the
accompanying notes to the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the condensed consolidated financial statements
and accompanying notes. The amounts which are subject to such estimation
techniques include the allowance for finance credit losses. Actual results could
differ from these estimates.
2. Chapter 11 Proceedings.
----------------------
On July 15, 1998, the Company filed a voluntary petition (the "Voluntary Case")
in the United States Bankruptcy Court for the Northern District of Illinois (the
"Bankruptcy Court" or the "Court") for relief under chapter 11 of title 11 of
the United States Code.
On March 10, 1999, the Court entered an order confirming the Company's Second
Amended Plan of Reorganization (the "Plan" or "Plan of Reorganization"). The
effective date of the Plan was March 23, 1999 (the "Effective Date"). The Plan
provided for the Company's senior lenders to receive new senior secured notes
("New Senior Secured Notes") equal to 75 percent of the face value of their then
current outstanding balance after the receipt of Excess Cash (as defined in the
Plan) of $100,707,261 and their pro rata share of 9,500,000 shares (95% of the
outstanding) of the new Common Stock (the "New Common Stock"), $.01 par value
per share, of MFN. The Plan provided for the holders of subordinated notes to
receive $22.5 million in new senior unsecured subordinated notes ("New Senior
Subordinated Notes").
The New Senior Secured Notes are comprised of (i) Series A Senior Secured Notes
Due March 23, 2001, (the "Series A Notes") which have a 10% annual fixed rate of
interest, payable quarterly and (ii) Series B Senior Secured Notes Due March 23,
2001, (the "Series B Notes") which have a floating rate of interest based on the
three month LIBOR (London Interbank Offering Rate), payable quarterly. The
Company's senior lenders prior to the Effective Date were given the option to
receive either Series A Notes or Series B Notes in connection with the Plan.
During the three-month period ended June 30, 1999, holders of the old senior
debt elected to receive $232,829,482 of the Series A Notes and $201,335,561 of
the Series B Notes totaling an aggregate principal amount of the New Senior
Secured Notes of $434,165,043. During the three-month period ended September 30,
1999, MFN retired debt with a face value of $52,923,298 prior to scheduled
maturity. The principal amount of Series A Notes and Series B
8
<PAGE>
Notes outstanding at September 30, 1999 was $202,829,482 and $178,412,263,
respectively, for a total of $381,241,745. Principal payments on the New Senior
Secured Notes are not due until maturity on March 23, 2001. The New Senior
Subordinated Notes, with an aggregate principal amount of $22.5 million, have an
11% annual fixed rate of interest, payable quarterly and are due March 23, 2002.
See Notes 8 and 11.
The $52.9 million early retirement of debt resulted in a gain of $2.5 million
before tax and was treated as an extraordinary item in the accompanying
Condensed Consolidated Statement of Income for the three-month and six-month
periods ended September 30, 1999. See Note 11.
Under the Plan, the shareholders of record as of March 22, 1999, of the
Company's old Common Stock, $1 par value per share, were entitled to receive,
subject to certain minimum threshold requirements, their pro rata share of
500,000 shares (5% of the outstanding) of the New Common Stock and three series
(Series A, B and C) of warrants (the "New Warrants"), each exercisable for
580,000 shares of the New Common Stock, with expiration dates of March 23, 2002,
March 23, 2003 and March 23, 2004, respectively. The exercise price of the
Series A Warrants is $15.34, the exercise price of the Series B Warrants is
$21.81 and the exercise price of the Series C Warrants is $28.27.
The Plan provided for the Company to transfer to a certain trust established
under the Plan (the "Liquidating Trust"), (i) $5 million in cash, (ii) the
Company's claims against KPMG Peat Marwick and (iii) $250,000 in cash for fees
and costs to be incurred in connection with the Liquidating Trust. The Plan also
provided for the holders of Securities Fraud Claims to receive a share of the
beneficial interests in the Liquidating Trust in complete settlement,
satisfaction and discharge of their claims. In addition, the Plan provided for
the Company to pay (i) $13.35 million into funds established for the benefit of
holders of certain indemnification claims against the Company and (ii) up to an
aggregate amount of $250,000, for costs and expenses of certain officers, agents
and employees who were no longer employed by the Company as of the first day
immediately following March 23, 1999, in connection with their participation in
a government investigation. The Company also agreed to pay a former employee
$100,000 in connection with a mutual release. All of these costs were fully
provided for as of March 31, 1999.
The Plan also provided for the grant of options to purchase 1,500,000 shares of
New Common Stock under the Amended and Restated 1989 Stock Option Plan or under
the Company's employment agreement with its Chief Executive Officer as of March
23, 1999 at $8.50 per share, the estimated reorganization value per share. See
Note 9.
The above summary of the Plan does not purport to be complete and is qualified
in its entirety by reference to the Plan which is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. See the Company's Current Report on Form 8-K filed on
March 25, 1999, for more information.
9
<PAGE>
3. Fresh Start Reporting.
---------------------
As of March 31, 1999, the Company adopted Fresh Start Reporting in accordance
with the American Institute of Certified Public Accountants' Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7). The adoption of Fresh Start Reporting resulted in
material changes to the Condensed Consolidated Balance Sheet, including
valuation of assets at fair value in accordance with principles of the purchase
method of accounting, valuation of liabilities pursuant to provisions of the
Plan and valuation of equity based on the appraised reorganization value of the
ongoing business.
The reorganization value of $85.0 million (the approximate fair value) was based
on the consideration of many factors and various valuation methods, including
discounted cash flows, selected publicly traded company market multiples and
other applicable ratios and valuation techniques believed by the Company and its
financial advisors to be representative of the Company's business and industry.
The Predecessor Company's equity was eliminated in Fresh Start Reporting.
In accordance with Fresh Start Reporting guidelines, certain noncurrent assets,
including goodwill, recorded on the Company's Condensed Consolidated Balance
Sheet at the Fresh Start Effective Date aggregating $16.0 million were reduced
to zero as a result of the fair value of the Company's assets exceeding the fair
value of its liabilities and stockholders' investment. In addition, as a result
of reorganization, the dividends payable liability in the amount of $12.9
million was extinguished. The net result of the adjustment of assets and
liabilities to fair value was a charge to earnings of $3.1 million during the
period ended March 31, 1999. After reducing the fair value of certain noncurrent
assets to zero, the excess of the fair value of the remaining assets over the
fair value of liabilities and stockholders' investment, totaling $49.4 million,
was recorded as a deferred credit, "Excess of Revalued Net Assets Over
Stockholders' Investment". This balance will be amortized over 5 years.
10
<PAGE>
The Company's emergence from the Voluntary Case and the adoption of Fresh Start
Reporting resulted in the following adjustments to the Company's Condensed
Consolidated Balance Sheet as of March 31, 1999:
<TABLE>
<CAPTION>
In thousands Predecessor Fresh Reorganized
Company Start Adjustments Company
March 31, 1999 Debit Credit March 31, 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 216,105 $ - $ - $ 216,105
Finance receivables, net 535,523 - - 535,523
Other assets (including repossessions) 31,200 - - 31,200
-------------- ----------------- ---------------- ------------------
TOTAL ASSETS $ 782,828 $ - $ - $ 782,828
============== ================= ================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt $ 674,471 $ 240,306 (a) $ - $ 434,165
Excess cash payment to
senior debt holders - - 100,707 (b) 100,707
Subordinated debt 22,500 - - 22,500
Interest payable 30,552 9,008 (a) - 21,544
Accounts payable and other liabilities 23,801 371 (c) - 23,430
Income taxes 4,472 - 22,659 (d) 27,131
Litigation accrual 18,950 - - 18,950
Excess of revalued net assets over
stockholders' investment - - 49,401 (e) 49,401
-------------- ----------------- ---------------- ------------------
TOTAL LIABILITIES 774,746 249,685 172,767 697,828
Stockholders' Equity:
Common stock 177,901 177,901 (f) 100 (g) 100
Paid in capital 8,244 8,244 (f) 84,900 (g) 84,900
Accumulated deficit (124,399) - 78,829 (f) -
45,570 (h)
Treasury stock (53,664) - 53,664 (f) -
-------------- ----------------- ---------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 8,082 186,145 263,063 85,000
-------------- ----------------- ---------------- ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 782,828 $ 435,830 $ 435,830 $ 782,828
============== ================= ================ ==================
</TABLE>
(a) To reflect the cancellation of the old debt and related accrued
interest.
(b) To setup a payable of Excess Cash to Senior Debt Holders in accordance
with the Plan of Reorganization. Payment occurred subsequent to the
balance sheet date.
(c) To write-off cancelled liabilities of the Company.
(d) To establish deferred income tax liability on the cancellation of
indebtedness.
(e) The excess of revalued net assets over stockholders' investment is
calculated below:
Fair value of identifiable assets $782,828
Less: reorganized value of new debt 456,665
Less: reorganized value of new equity 85,000
Less: fair value of identifiable liabilities 191,762
--------
$ 49,401
========
11
<PAGE>
(f) To eliminate stockholders' equity of the Predecessor Company.
(g) To record the issuance of 10,000,000 shares of new common stock (par
value $0.01) at $8.50 per share.
(h) To record the extraordinary gain resulting from discharge of
indebtedness. The extraordinary gain, net of taxes is calculated below:
Historical carrying value of
old debt securities $ 696,971
Historical carrying value of
related accrued interest 29,405
Value exchanged for old debt:
Excess Cash Payment, including interest (121,104)
New Senior Secured Notes (434,165)
New Senior Subordinated Notes (22,500)
New Common Stock (9.5
million shares to creditors) (80,750)
Other 372
--------
68,229
Tax Provision 22,659
--------
Extraordinary Gain $ 45,570
========
4. Earnings Per Share.
------------------
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of the Company's common stock outstanding during the
period. Diluted earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding and the dilutive
common stock equivalents during the period. Common stock equivalents include
options granted to executive officers and directors and warrants outstanding
convertible into shares of common stock of the Company using the treasury stock
method.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) Three Months Ended Six Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
BASIC
Net income $ 13,128 $ 16,627
Average common shares outstanding 10,000,000 10,000,000
Earnings before extraordinary credit $ 1.16 $ 1.51
Extraordinary gain from early retirement of debt 0.15 0.15
----------- -----------
Net income per common share $ 1.31 $ 1.66
=========== ===========
DILUTED
Net income $ 13,128 $ 16,627
Average common shares and equivalents outstanding 10,054,269 10,087,248
Earnings before extraordinary credit $ 1.16 $ 1.50
Extraordinary gain from early retirement of debt 0.15 0.15
----------- -----------
Net income per common share $ 1.31 $ 1.65
=========== ===========
</TABLE>
12
<PAGE>
Due to the Company's emergence from the Voluntary Case and the implementation of
Fresh Start Reporting, the presentation of earnings per share for the
Predecessor Company is not meaningful in the accompanying financial statements.
5. Reclassifications.
-----------------
Certain data from the prior periods has been reclassified to conform to the
current period presentation.
6. Contingencies and Legal Matters.
-------------------------------
Prior to the filing of the Voluntary Case, the Company had been named as a
defendant in a variety of lawsuits ("Securities Fraud Claims") generally arising
from the Company's announcement on January 29, 1997 that it would restate its
earnings for certain prior periods as a result of the discovery of accounting
irregularities. The Plan provided that the Company transfer to a certain trust
established under the Plan (the "Liquidating Trust"), (i) $5 million in cash,
(ii) the Company's claims against KPMG Peat Marwick and (iii) $250,000 in cash
for fees and costs to be incurred in connection with the Liquidating Trust. The
Plan also provided for holders of Securities Fraud Claims to receive a share of
the beneficial interests in the Liquidating Trust in complete settlement,
satisfaction and discharge of their claims. All of these costs were fully
provided for as of March 31, 1999.
The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities. Those events are also under investigation by
the United States Attorney for the Northern District of Illinois and the Federal
Bureau of Investigation. The Company is cooperating fully in these
investigations.
In the normal course of its business, MFN and its subsidiaries are named as
defendants in legal proceedings. A number of such actions, including cases which
have been brought as putative class actions, are pending in the various states
in which subsidiaries of MFN do business. It is the policy of MFN and its
subsidiaries to vigorously defend litigation, but MFN and (or) its subsidiaries
have and may in the future enter into settlements of claims where management
deems appropriate. Although management is of the opinion that the resolution of
these proceedings will not have a material effect on the financial position of
MFN, it is not possible at this time to estimate the amount of damages or
settlement expenses that may be incurred.
See Item 3 in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, for more information regarding the litigation arising from
the overstatement of earnings and the restatement of previously issued financial
statements.
The Company recognizes the expense for litigation when the incurrence of loss is
probable and the amount of such loss is estimable. Because of the uncertainty
that surrounds the above described litigation, no accrual has been made for the
majority of these lawsuits. An accrual was recorded at March 31, 1999 in the
amount of $250,000 for costs and expenses of certain officers,
13
<PAGE>
agents and employees who were no longer employed by the Company as of the first
day immediately following March 23, 1999, in connection with their participation
in a government investigation. As of September 30, 1999, the remaining amount of
this accrual to utilize is $241,000.
7. Income Taxes.
------------
The 1999 provision for income taxes was calculated using a 39.5% tax rate on
earnings before income taxes adjusted for (1) the amortization of the excess of
revalued net assets over stockholders' investment, which is a permanent
difference between book and tax income, and (2) an unrealized benefit related to
the first quarter of 1999 book loss (before extraordinary credit). The
unrealized benefit of the first quarter of 1999 book loss (before extraordinary
credit) was then believed to be limited. The Company believes that any current
year book loss, adjusted as discussed above, will be utilized against the
deferred taxes associated with the first quarter gain on cancellation of debt or
future taxable income.
The Company recorded a full valuation allowance related to the tax benefit for
the loss recorded during the first nine months of 1998. At that time, the
Company was unable to carryback the losses to prior periods of taxable income.
8. Debt.
----
In connection with the Plan of Reorganization, the Company issued New Senior
Secured Notes and New Senior Subordinated Notes. See Note 2 - Chapter 11
Proceedings. The New Senior Secured Notes are comprised of (i) Series A Notes
Due March 23, 2001, which have a 10% annual fixed rate of interest, payable
quarterly and (ii) Series B Notes Due March 23, 2001, which have a floating rate
of interest based on three month LIBOR (London Interbank Offering Rate), payable
quarterly. Principal payments on the New Senior Secured Notes are not due until
maturity on March 23, 2001.
The Company's senior lenders prior to the Effective Date were given the option
to receive either Series A Notes or Series B Notes in connection with the Plan.
During the three-month period ended June 30, 1999, holders of the old senior
debt elected to receive $232,829,482 of the Series A Notes and $201,335,561 of
the Series B Notes totaling an aggregate principal amount of the New Senior
Secured Notes of $434,165,043. During the three-month period ended September 30,
1999, MFN retired debt with a face value of $52,923,298 prior to scheduled
maturity. The principal amount of Series A Notes and Series B Notes outstanding
at September 30, 1999 was $202,829,482 and $178,412,263, respectively, for a
total of $381,241,745. While the Series B Notes bear a variable rate of
interest, the Company has purchased interest rate protection to cap the annual
rate of interest at 10.0%, the cost of which is amortized in determining the
spread to LIBOR. The total interest cost of either series of Senior Secured
Notes will not exceed a 10.0% annual rate to the Company.
As of March 31, 1999, the Company's senior lenders were due a payment of
$100,707,261, representing the Excess Cash as defined in the Plan. Payment of
the Excess Cash to the debt indenture trustee occurred on April 1, 1999.
14
<PAGE>
The Company's Senior Secured Notes are secured by substantially all of the
assets of the Company and its domestic subsidiaries, which have guaranteed the
Company's obligations under the Senior Secured Notes.
The New Senior Subordinated Notes, with an aggregate principal amount of $22.5
million, have an 11% annual fixed rate of interest, payable quarterly and are
due March 23, 2002.
No dividends may be paid on the common stock of the Company unless certain
conditions in the indentures governing the New Senior Secured Notes and the New
Senior Subordinated Notes are satisfied.
9. Stock Options.
-------------
Under the Plan of Reorganization, options to purchase 950,000 shares of the
Company's authorized and unissued New Common Stock were reserved under the
Amended and Restated 1989 Stock Option Plan ("Stock Option Plan"). Under the
Stock Option Plan, options to purchase 500,000 shares were granted to officers
and directors, effective March 23, 1999 ("Grant Date"), at an exercise price of
$8.50 per share (the estimated reorganization value per share). Of the shares
granted, fifty percent (50%) vested and became exercisable on the Grant Date,
twenty-five percent (25%) vest and become exercisable in twelve (12) equal
monthly portions, beginning with the first anniversary of the Grant Date and
twenty-five percent (25%) vest and become exercisable in twelve (12) equal
monthly portions, beginning with the second anniversary of the Grant Date. The
options shall remain in full force and effect for a period of ten (10) years
from the Grant Date.
In addition to shares granted under the Stock Option Plan, an option to purchase
1,000,000 shares was granted to the new chief executive officer of the Company
pursuant to an employment agreement approved as part of the Plan of
Reorganization. The terms and conditions of the option granted are identical to
the options granted under the Stock Option Plan as described above. Shares
issued under the employment agreement do not count against the 950,000 aggregate
number of options to purchase shares of New Common Stock that may be granted
under the Stock Option Plan.
10. Reorganization Items.
--------------------
In accordance with SOP 90-7, expenses resulting from the Plan of Reorganization
should be reported separately as reorganization items in the Condensed
Consolidated Statement of Income. These expenses were incurred by the
Predecessor Company and are summarized below:
15
<PAGE>
<TABLE>
<CAPTION>
Predecessor Company
Three Months Three Months Nine Months
Ended Ended Ended
March 31, 1999 Sept 30, 1998 Sept 30, 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Forbearance fee $ 0 $ 0 $ 14,480
Other including professional fees 36,717 1,731 10,340
-------- ------- --------
$ 36,717 $ 1,731 $ 24,820
======== ======= ========
</TABLE>
11. Extraordinary Item.
------------------
During August, 1999, MFN retired debt with a face value of $52.9 million prior
to scheduled maturity. The debt repurchases resulted in an extraordinary gain of
$2.51 million less tax of $0.99 million.
See note 4 for the impact of the extraordinary item on basic and diluted
earnings per share was as follows:
12. Sale of Finance Receivables and Certain Other Assets.
----------------------------------------------------
On July 29, 1999, the Company announced it had entered into a definitive
agreement to sell substantially all of the non-automotive loan accounts and
certain other assets of 47 direct loan offices of subsidiaries located in Texas,
Louisiana, Mississippi, and Alabama to First Tower Corp. of Jackson,
Mississippi. The sale was completed in September, 1999 for targeted assets held
at 39 of the 47 direct loan offices resulting in a gain of $7.1 million. The
remaining eight offices which are all located in Texas are expected to close
during the fourth quarter of 1999 pending regulatory approval.
Gross receivables and certain assets with a book value of $41.8 million were
sold for $35.2 million in cash net of a post-closing adjustment of up to $2.2
million which is payable to MFN in 12 equal monthly installments, plus interest,
beginning October 1, 1999. Cash proceeds were applied to the book value of the
gross receivables net of related unearned interest and insurance balances,
dealer and loan loss reserves and other related transaction costs to record the
gain.
Gross receivables at the eight Texas locations expected to close in the fourth
quarter of 1999 are approximately $2.9 million. The anticipated financial impact
of this transaction is immaterial.
16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
Board of Directors and Stockholders
MFN Financial Corporation (f/k/a Mercury Finance Company)
We have reviewed the accompanying condensed consolidated balance sheet of MFN
Financial Corporation and subsidiaries (Reorganized Company) f/k/a Mercury
Finance Company as of September 30, 1999 and the condensed consolidated
statements of income, changes in stockholders' equity and cash flows for the
three-month and six-month period then ended. The condensed consolidated
statements of income, changes in stockholders' equity and cash flows for Mercury
Finance Company for the three-month and nine-month periods ended September 30,
1998 were reviewed by other auditors who issued their reports dated May 14,
1999 and November 13, 1998, respectively. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements as of September 30, 1999 and
for the three-month and six-month periods then ended for them to be in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company emerged from chapter 11 of title 11 of the
United States Code on March 23, 1999 and has not had significant operations as a
restructured entity. These matters raise substantial doubt about the ability of
MFN Financial Corporation to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The condensed consolidated balance sheet as of December 31, 1998, and the
related condensed consolidated statements of income, stockholders' equity and
cash flows for the year then ended (not presented herein) were audited by other
auditors whose report dated March 10, 1999, expressed an unqualified opinion.
Grant Thornton LLP
Chicago, Illinois
November 3, 1999
17
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED AVERAGE BALANCE SHEETS
<TABLE>
<CAPTION>
Reorganized Predecessor Predecessor
Company Company Company
1999 1999 1998
---------------------- ----------- ---------------------
Three Six Three Three Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
(Dollars in thousands) Sept 30, Sept 30, March 31, Sept 30, Sept 30,
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 99,507 $ 138,373 $ 201,228 $ 74,507 $ 67,051
Finance receivables 572,246 589,152 633,126 756,329 835,620
Less allowance for finance credit losses 45,433 46,934 51,711 72,952 84,075
Less nonrefundable dealer reserves 37,182 37,289 37,162 37,705 42,952
---------- ---------- --------- --------- ---------
Finance receivables, net 489,631 504,929 544,253 645,672 708,593
Income taxes receivable 23,908 22,347 13,912 52,674 59,410
Furniture, fixtures and equipment, net of
accumulated depreciation 1,236 824 3,600 4,318 4,861
Other assets (including repossessions & goodwill) 8,569 9,704 35,775 21,871 22,558
---------- ---------- --------- --------- ---------
TOTAL ASSETS $ 622,851 $ 676,177 $ 798,768 $ 799,042 $ 862,473
========== ========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Post petition liabilities and liabilities not subject
to compromise under reorganization $ 0 $ 0 $ 0 $ 112,548 $ 114,377
Liabilities subject to compromise under
reorganization 0 0 0 623,239 675,489
Interest bearing liabilities 430,204 472,593 708,371 0 0
Other liabilities 97,584 111,875 70,249 0 0
---------- ---------- --------- --------- ---------
TOTAL LIABILITIES 527,788 584,468 778,620 735,787 789,866
TOTAL STOCKHOLDERS' EQUITY 95,063 91,709 20,148 63,255 72,607
---------- ---------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 622,851 $ 676,177 $ 798,768 $ 799,042 $ 862,473
========== ========== ========= ========= =========
RATIOS (annualized)
Return on average equity 54.79% 36.16% 493.60% 51.40% (28.26)%
Return on average assets 8.36% 4.90% 12.45% 4.07% (2.38)%
Yield on interest earning assets 20.78% 20.01% 18.29% 20.61% 20.78%
Rate on interest bearing liabilities 10.06% 9.35% 0.27% 9.84% 9.96%
Net interest margin 14.38% 13.95% 18.06% 13.28% 13.30%
</TABLE>
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFN FINANCIAL CORPORATION
(Registrant)
Date: November 16, 1999 /s/ Edward G. Harshfield
------------------------
Edward G. Harshfield
Chairman and
Chief Executive Officer
Date: November 16, 1999 /s/ Jeffrey B. Weeden
---------------------
Jeffrey B. Weeden
President and
Chief Operating Officer
Date: November 16, 1999 /s/ Mark D. Whitham
-------------------
Mark D. Whitham
Principal Accounting Officer
37
