<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarter Ended June 30, 1999 Commission File No. 1-10176
MFN Financial Corporation
------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
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 August 10, 1999.
<PAGE>
MFN FINANCIAL CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS
<S> <C> <C>
Condensed Consolidated Balance Sheets............................... 3
Condensed Consolidated Statements of Income......................... 4
Condensed Consolidated Statements of Changes in Stockholders' Equity 5
Condensed Consolidated Statements of Cash Flows..................... 6
Notes to Condensed Consolidated Financial Statements................ 7
Report of Independent Public Accountants............................ 17
Condensed Consolidated Average Balance Sheets....................... 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 19
Item 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK......................................................... 36
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings................................................... 37
Item 2. Changes in Securities............................................... 37
Item 3. Defaults Upon Senior Securities..................................... 37
Item 4. Submission of Matters to a Vote of Security Holders................. 37
Item 5. Other Information................................................... 37
Item 6. Exhibits and Reports on Form 8-K.................................... 37
SIGNATURES....................................................................... 38
INDEX OF EXHIBITS................................................................ 39
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
June 30, December 31,
(Dollars in thousands) 1999 1998
ASSETS ---------- -----------
<S> <C> <C>
Cash and cash equivalents $ 93,561 $ 186,350
Finance receivables 603,122 643,287
Less: Allowance for finance credit losses 48,707 53,485
Less: Nonrefundable dealer reserves 37,863 36,820
-------- ---------
Finance receivables, net 516,552 552,982
Income tax receivable 19,225 8,599
Furniture, fixtures and equipment, net of accumulated depreciation 826 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) 8,383 6,404
-------- ---------
TOTAL ASSETS $638,547 $ 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) 434,165 0
Senior subordinated debt (Notes 2 and 8) 22,500 0
Income taxes 27,684 0
Litigation accrual 348 18,950
Accounts payable and other liabilities 18,420 0
Excess of revalued net assets over stockholders' investment 46,931 0
-------- ---------
TOTAL LIABILITIES 550,048 769,553
CONTINGENCIES (Note 6) - -
STOCKHOLDERS' EQUITY
Common stock June 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) 3,499 (103,351)
Treasury stock June 30, 1999 - 0 shares;
December 31, 1998 - 5,402,957 shares at cost 0 (53,664)
-------- ---------
TOTAL STOCKHOLDERS' EQUITY 88,499 29,130
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $638,547 $ 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
Company Predecessor Company
1999 1999 1998
------- -------- --------------------
Three Three Three Six
Months Months Months Months
Ended Ended Ended Ended
(Dollars in thousands) June 30, March 31, June 30, June 30,
- - - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance charges, fees and investment income $37,818 $ 37,620 $ 45,979 $ 97,119
Interest expense 11,276 474 16,509 35,105
------- -------- -------- --------
Net interest income before provision for finance
credit losses 26,542 37,146 29,470 62,014
Provision for finance credit losses 8,426 9,857 15,265 28,224
------- -------- -------- --------
Net interest income after provision for finance
credit losses 18,116 27,289 14,205 33,790
------- -------- -------- --------
OTHER INCOME
Fees, insurance commissions and premiums 2,475 2,084 2,365 3,954
Credit card related revenue and other 328 998 571 2,177
------- -------- -------- --------
Total other income 2,803 3,082 2,936 6,131
------- -------- -------- --------
OTHER OPERATING EXPENSES
Salaries and employee benefits 11,415 13,150 12,321 25,308
Occupancy expense 972 999 1,145 2,360
Equipment expense 352 767 813 1,721
Data processing expense 451 469 472 952
Amortization (2,470) 215 215 430
Restructuring expenses 1,941 0 0 0
Other operating expenses 4,087 4,389 5,407 9,606
------- -------- -------- --------
Total other operating expenses 16,748 19,989 20,373 40,377
------- -------- -------- --------
OPERATING INCOME (LOSS) 4,171 10,382 (3,232) (456)
Reorganization items 0 36,717 18,834 23,088
Income (loss) before income taxes ------- -------- ------- -------
and extraordinary credit 4,171 (26,335) (22,066) (23,544)
Income tax (benefit) 672 (5,287) 0 0
------- -------- -------- --------
Net income (loss) before extraordinary credit 3,499 (21,048) (22,066) (23,544)
Extraordinary credit:
Gain on discharge of indebtedness,net of taxes 0 45,570 0 0
------- -------- -------- --------
NET INCOME (LOSS) $ 3,499 $ 24,522 $(22,066) $(23,544)
======= ======== ======== ========
Weighted average common shares outstanding:
Basic 10,000 ** ** **
Diluted 10,144 ** ** **
Per share net income attributable to common shares:
Basic $0.35 ** ** **
Diluted $0.34 ** ** **
Dividends per share declared $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)
(Dollars in thousands)
<TABLE>
<CAPTION>
Retained Total
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 - - (1,478) - (1,478)
--------- --------- --------- --------- ---------
Balance March 31, 1998 177,901 8,244 (51,259) (53,664) 81,222
Net loss - - (22,066) - (22,066)
--------- --------- --------- --------- ---------
Balance June 30, 1998 $ 177,901 $ 8,244 $ (73,325) $ (53,664) $ 59,156
========= ========= ========= ========= =========
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
========= ========= ========= ========= =========
</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
Company Predecessor Company
1999 1999 1998
--------- --------- -------------------------------
Three Three Three Six
Months Months Months Months
Ended Ended Ended Ended
(Dollars in thousands) June 30, March 31, June 30, June 30,
- - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,499 $ 24,522 $ (22,066) $ (23,544)
Adjustments to reconcile net loss to net cash
provided (utilized) by operating activities:
Provision for finance credit losses 8,426 9,857 15,265 28,224
Decrease in income tax receivable 0 0 0 27,590
Deferred income tax provision 0 17,372 0 0
Net (Gain) on discharge of indebtedness 0 (68,228) 0 0
Extinguishment of dividend payable 0 (12,937) 0 0
Write-off of goodwill and fixed assets, net 0 16,022 0 0
Depreciation and amortization (2,470) 607 630 1,303
Net (increase) decrease in other assets 3,592 (2,866) (1,072) 648
Net increase (decrease) in other liabilities (44,603) 13,564 (1,995) (7,847)
--------- --------- --------- ---------
Net cash provided (utilized) by operating activities (31,556) (2,087) (9,238) 26,374
CASH FLOWS FROM INVESTING
ACTIVITIES
Principal collected on finance receivables 115,017 123,936 160,146 319,458
Finance receivables originated or acquired (104,472) (113,559) (114,045) (198,437)
Proceeds from the sale of credit card portfolio 0 22,414 0 0
Purchases of furniture, fixtures and equipment (826) (175) (173) (305)
--------- --------- --------- ---------
Net cash provided by investing activities 9,719 32,616 45,928 120,716
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of senior debt, commercial
paper and current portion of senior debt payable (100,707) (774) (55,000) (154,000)
--------- --------- --------- ---------
Net cash used in financing activities (100,707) (774) (55,000) (154,000)
--------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (122,544) 29,755 (18,310) (6,910)
Cash and equivalents at beginning of period 216,105 186,350 65,296 53,896
--------- --------- --------- ---------
Cash and equivalents at end of period $ 93,561 $ 216,105 $ 46,986 $ 46,986
========= ========= ========= =========
SUPPLEMENTAL CASH DISCLOSURES
Income taxes paid to federal and state governments $ 164 $ 13,133 $ 9 $ 9
Interest paid to creditors 31,822 44 15,678 36,874
SUPPLEMENTAL NON-CASH DISCLOSURES
Cancellation of indebtedness - 148,978 - -
Extinguishment of old stock - (53,652) - -
Issuance of new stock - 85,000 - -
</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
June 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) 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 reorganization plan was March 23, 1999. The results of operations for the
period from March 23, 1999 through March 31, 1999 were not material.
To facilitate a meaningful comparison of the Company's quarterly and year-to-
date operating performance in fiscal years 1999 and 1998, consolidated results
of operations may be presented on a traditional comparative basis for all
periods. Consequently, the current year's information presented on a year-to-
date basis is not in accordance with accounting requirements for companies upon
emergence from bankruptcy which calls for separate reporting for the reorganized
company and the predecessor company.
A black line has been drawn between the accompanying Condensed Consolidated
Balance Sheets as of June 30, 1999 and December 31, 1998, and the Condensed
Consolidated Statement of Income and Cash Flows for the three months ended June
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 and the Company's Form
10-Q for the three month period ended March 31, 1999.
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 (the "Bankruptcy 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) 10% Senior Secured Notes Due
2001, Series A which have a 10% annual fixed rate of interest, payable quarterly
and (ii) Senior Secured Notes Due 2001, Series B which have a floating rate of
interest based on the three month LIBOR (London Interbank Offering Rate),
payable quarterly. The aggregate principal amount of the New Senior Secured
Notes is $434,165,043. 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
Senior Secured Notes and $201,335,561 of the Series B Senior Secured Notes.
Principal payments on the New Senior Secured Notes are not due until maturity on
March 23, 2001. The New Senior
8
<PAGE>
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 Note 8)
The gain on cancellation of indebtedness (equal to 25% of the face value of the
then current outstanding balance after the receipt of Excess Cash plus interest
not paid less 95% of the New Common Stock valuation) aggregated $68.2 million
before tax and was treated as an extraordinary item in the accompanying
Condensed Consolidated Statement of Income for the three months ended March 31,
1999.
Under the Plan, the shareholders of record as of March 22, 1999, of the
Company's old Common Stock, $1 par value per share, are 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 has 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 1,500,000 options for shares of New
Common Stock under the Amended and Restated 1989 Stock Option Plan or under
employment arrangements to management and the Board of Directors as of March 23,
1999 at $8.50 per share, the estimated reorganization value per share. (See
Note 3)
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 Accountant's Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", (SOP 90-7). 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>
Predecessor Fresh Reorganized
Company Start Adjustments Company
March 31, 1999 Debit Credit March 31, 1999
--------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
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 (121,104)
Interest
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 under the Company's stock option plan and warrants outstanding
convertible into shares of common stock of the Company using the treasury stock
method.
(Dollars in thousands, except per share amounts) Three Months Ended
June 30, 1999
-------------
BASIC
Net income $ 3,499
Average common shares outstanding 10,000,000
Net income per common share - basic $ 0.35
DILUTED
Net income $ 3,499
Average common shares and equivalents outstanding 10,144,293
Net income per common share - diluted $ 0.34
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.
-------------------------------
On July 15, 1998, the Company filed a voluntary petition (the "Voluntary Case")
in the United States Bankruptcy Court (the "Court") for the Northern District of
Illinois for relief under Chapter 11 of title 11 of the United States Code. The
Company's Second Amended Plan of Reorganization (the "Plan" or "Plan of
Reorganization") was confirmed by order of the Court on March 10, 1999. The
effective date of the Plan was March 23, 1999. However, for financial reporting
purposes, the Company is using the close of business on March 31, 1999 as the
effective date of the Plan.
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.
13
<PAGE>
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.
7. Income Taxes.
------------
The provision for income taxes recorded in the three month period ended June 30,
1999 was calculated using a 39.5% tax rate on earnings before income taxes,
adjusted for the amortization of the excess of revalued net assets over
stockholders' investment, which is a permanent difference between book and tax
income.
During the first quarter of 1999, a tax credit of $5.3 million was recorded
(39.5% of $13.4 million) before extraordinary credit. This was the amount of
tax benefit that could be offset for tax purposes during this period. The
remainder of the current period book loss before extraordinary credit received a
full valuation allowance.
The Company recorded a full valuation allowance related to the tax benefit for
the loss recorded during the first six 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 has 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) 10% Senior
Secured Notes Due 2001, Series A which have a 10% annual fixed rate of interest,
payable quarterly and (ii) Senior Secured Notes Due 2001, Series B which have a
floating rate of interest based on three month LIBOR (London Interbank Offering
Rate), payable quarterly. The aggregate principal amount of the New Senior
Secured Notes is $434,165,043. Principal payments on the New Senior Secured
Notes are not due until maturity on March 23, 2001.
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 Senior Secured Notes and
$201,335,561 of the Series B Senior Secured Notes. While the Series B Senior
Secured 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 1987 Stock Option Plan ("Stock Option Plan"). Of the
options authorized 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>
Three Months Three Months Six Months
Ended Ended Ended
March 31, 1999 June 30, 1998 June 30, 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Forbearance fee $ - $14,480 $14,480
Adjustments of assets and
liabilities to fair value 3,085 - -
Interest expense 19,847 - -
Other including professional fees 13,785 4,354 8,608
------- ------- -------
$36,717 $18,834 $23,088
======= ======= =======
</TABLE>
11. Subsequent Event.
-----------------
On July 29, 1999, the Company announced it has 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 gross receivables of the 47 branches totaled $46,675,000 at
June 30, 1999 and represent approximately 6.2% of the Company's total gross
receivables at that date. The transaction will be for cash and is subject to
regulatory approval and other conditions. Employees of branches sold are
expected to be offered employment with First Tower Corp. The parties anticipate
closing in the third quarter of this year.
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 June 30, 1999 and the condensed consolidated statements of
income, changes in stockholders' equity and cash flows for the three-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 period ended March 31, 1999 and the three and six-month periods ended June
30, 1998 were reviewed by other auditors who issued reports dated May 14, 1999
and August 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 for them to be in conformity
with generally accepted accounting principles.
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 a qualified opinion. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1998, is fairly stated in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 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.
Grant Thornton LLP
Chicago, Illinois
July 22, 1999
17
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED AVERAGE BALANCE SHEETS
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
1999 1999 1998
--------- ---------- --------------------
Three Three Three Six
Months Months Months Months
Ended Ended Ended Ended
(Dollars in thousands) June 30, March 31, June 30, June 30,
- - - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash $154,833 $201,228 $ 56,141 $ 55,393
Finance receivables 613,043 633,126 821,924 871,357
Less allowance for finance credit losses 49,323 51,711 83,503 89,737
Less nonrefundable dealer reserves 37,683 37,162 41,258 45,082
-------- -------- --------- --------
Finance receivables, net 526,037 544,253 697,163 736,538
Income taxes receivable 19,225 13,912 52,438 61,605
Furniture, fixtures and equipment, net of
accumulated depreciation 413 3,600 4,679 5,085
Other assets (including repossessions & goodwill) 10,180 35,775 22,350 23,026
-------- -------- --------- --------
TOTAL ASSETS $710,688 $798,768 $ 832,771 $881,647
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Interest bearing liabilities $507,019 $708,371 $ 725,245 $767,411
Other liabilities 116,919 70,249 37,337 39,877
-------- -------- --------- --------
TOTAL LIABILITIES 623,938 778,620 762,582 807,288
-------- -------- --------- --------
TOTAL STOCKHOLDERS' EQUITY 86,750 20,148 70,189 74,359
-------- -------- --------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $710,688 $798,768 $ 832,771 $881,647
======== ======== ========= ========
RATIOS (annualized)
Return on average equity 16.18% 493.60% (126.10)% (63.85)%
Return on average assets 1.98% 12.45% (10.63)% (5.39)%
Yield on interest earning assets 19.75% 18.29% 22.44% 22.48%
Rate on interest bearing liabilities 8.92% 0.27% 9.13% 9.22%
Net interest margin 13.86% 18.06% 14.38% 14.35%
</TABLE>
18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Securities Litigation Reform Act of 1995: This
Quarterly Report on Form 10-Q for the three month period ended June 30, 1999,
contains certain forward-looking statements pertaining to the outcome of the
Company's Plan of Reorganization, branch closings, expected operating results,
loss provisions and other matters. These statements are subject to uncertainties
and other factors. Should one or more of these uncertainties or other factors
materialize, or should underlying assumptions prove incorrect, actual events or
results may vary materially from those anticipated. Such uncertainties and other
factors include the Company's ability to acquire finance receivables on terms it
deems acceptable, changes in the quality of finance receivables, trends in the
automobile and finance industries, and general economic conditions. The Company
undertakes no obligation to update any such factor or to publicly announce the
results of any revisions to any forward-looking statements contained herein to
reflect future events or developments.
Background
MFN Financial Corporation, f/k/a Mercury Finance Company ("MFN" or the
"Company") is a consumer finance concern engaged, through its operating
subsidiaries, in the business of acquiring individual installment sales finance
contracts from automobile dealers and retail vendors, extending short-term
installment loans directly to consumers and selling credit insurance and other
related products.
MFN's operating subsidiaries commenced operations in February 1984 for the
purpose of penetrating the market for small dollar amount consumer loans
(average of $3,000 or less). The initial focus was toward small, short term,
direct installment loans made to U.S. military servicemen. Building on this
direct lending niche, MFN has also built a substantial, diversified consumer
finance portfolio by acquiring individual installment sales finance contracts
from automobile dealers and retail vendors. Substantially all of MFN's borrowers
are "non-prime" borrowers. These are borrowers which generally would not be
expected to qualify for traditional financing such as that provided by
commercial banks or automobile manufacturers' captive finance companies.
MFN's sales finance contracts and loans generally range for periods from 3
months to 48 months at annual interest rates ranging, with minor exception, from
18% to 40%. Generally all sales finance contracts and loans are repayable in
monthly installments. Late payment fees generally are assessed to accounts which
fail to make their scheduled payments within 10 days of the scheduled due date.
Today MFN's primary strategic focus is the purchasing of installment retail
sales finance contracts from automobile dealers. MFN does this through its
branch network and the use of Dealer Development Managers ("DDMs"). DDMs service
the automobile dealers both in markets where MFN has a branch and where it does
not maintain a physical location.
-19-
<PAGE>
All purchases of automobile retail installment contracts are handled through the
Company's Centralized Purchasing Offices ("CPOs"). The CPOs serve as the
centralized underwriter of credit. The CPOs have helped the Company apply
consistent underwriting standards, which has resulted in reduced charge-offs on
1998 and 1999 originations as compared to older accounts.
Overview
In January 1997, MFN discovered that certain improper adjustments had been made
to overstate earnings in previously issued financial statements. As a result, a
Special Committee of the Board of Directors commenced an investigation of the
misstatements of previously issued financial statements. As a result of this
investigation, MFN restated the financial statements for fiscal 1995, each of
the 1995 quarters, and for the first three quarters of 1996. See the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 for
more information regarding the impact of the overstatement of earnings and the
restatement of previously issued financial statements.
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 (the "Bankruptcy Code") along with a Plan of
Reorganization. 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"). On the Effective Date, the Company cancelled its existing
senior and subordinated debt, and its equity securities, including common stock
and options to purchase common stock and distributed to its exchange agent (the
"Exchange Agent"), for the benefit of holders of Senior Debt Claims (as defined
in the Plan), $434.2 million principal amount of its New Senior Secured Notes
due March 23, 2001 (the "Senior Secured Notes"), and 9.5 million shares of new
common stock, par value $0.01 per share. Also on the Effective Date, the Company
distributed to the Exchange Agent $22.5 million principal amount of its 11.0%
New Senior Subordinated Notes due March 23, 2002 (the "Senior Subordinated
Notes"). In addition, the Company distributed to the Exchange Agent $121.1
million in cash on April 1, 1999 for the benefit of holders of Senior Debt
Claims. On the Effective Date, the Company also distributed to the Exchange
Agent, for the benefit of former shareholders of record on March 22, 1999,
500,000 shares of the new common stock and three series of new warrants (580,000
of each series) to purchase new common stock. The Series A Warrants expire March
23, 2002 and have an exercise price of $15.34, the Series B Warrants expire
March 23, 2003 and have an exercise price of $21.81 and the Series C Warrants
expire March 23, 2004 and have an exercise price of $28.27. The
-20-
<PAGE>
emergence from the Voluntary Case resulted in a reduction of approximately
$161.9 million in the liabilities of the Company.
As of March 31, 1999, the Company adopted Fresh Start Reporting in accordance
with the American Institute of Certified Public Accountant's Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", (SOP 90-7). 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.
Due to the Company's emergence from the Voluntary Case 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 is considered to be the close of business
on March 31, 1999. The results of operations for the period from March 23, 1999
through March 31, 1999 were not material.
To facilitate a comparison of the Company's quarterly and year-to-date operating
performance in fiscal years 1999 and 1998, the following discussion of
consolidated financial information may be presented on a traditional comparative
basis for all periods. Consequently, the current year's information presented
below on a year-to-date basis is not in accordance with accounting requirements
for companies upon emergence from bankruptcy which calls for separate reporting
for the reorganized company and the predecessor company.
A black line has been drawn between the accompanying Condensed Consolidated
Balance Sheets as of June 30, 1999 and December 31, 1998, and the Condensed
Consolidated Statement of Income and Cash Flows for the three months ended June
30, 1999 and all previous periods to distinguish between the Reorganized Company
and the Predecessor Company.
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 following is management's discussion and analysis of the consolidated
financial condition of the Reorganized Company at June 30, 1999 (unaudited) and
March 31, 1999 (unaudited) and the Predecessor Company at December 31, 1998 and
June 30, 1998 (unaudited). Consolidated results of operations are for the three
months ended June 30, 1999 (unaudited) for the Reorganized Company and for the
three month and six month periods ended June 30, 1998 (unaudited) for the
Predecessor Company. Consolidated results of operations for the six months ended
June 30, 1999 (unaudited) represent a combination of Reorganized Company and the
Predecessor Company and careful analysis should be used when interpreting these
results. This
-21-
<PAGE>
discussion should be read in conjunction with the Company's condensed
consolidated financial statements and notes thereto appearing elsewhere in this
quarterly report. Again, the results of operations are for both the Reorganized
-------------------------------------------------------------
Company and the Predecessor Company and are not necessarily indicative of future
- - - --------------------------------------------------------------------------------
results of the Reorganized Company.
- - - ----------------------------------
FINANCIAL CONDITION
As of March 31, 1999, the Company adopted Fresh Start Reporting in accordance
with the American Institute of Certified Public Accountant's Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", (SOP 90-7). Fresh Start Reporting resulted in material
changes to the Condensed Consolidated Balance Sheet as previously noted in the
Notes to the Condensed Consolidated Financial Statements.
Assets and Finance Receivables
During the six month period ended June 30, 1999, total assets of the Company
decreased to $638.5 million from $798.7 million at December 31, 1998. Total
assets declined primarily to a decrease in cash due to a required payment under
the Plan of accrued interest and Excess Cash (as defined in the Plan) totaling
$121.1 million. Net finance receivables declined $36.4 million which also
contributed to the decline in total assets.
The Company's offices in Illinois, Louisiana and Florida accounted for
approximately 13%, 11%, and 11%, respectively, of all sales and direct finance
receivables outstanding at June 30, 1999. The total number of operating branches
at June 30, 1999 was 105 compared to 151 at March 31, 1999 and 158 at December
31, 1998. The Company closed or stopped acquiring new contracts at 46 branches
during the second quarter of 1999. These branches were closed because of their
size, location with respect to other branches or their profit potential. In
addition, the Company believes it can be successful in serving the dealers
within certain of the markets through the efforts of its DDMs, which will
continue to offer MFN's services to automobile dealers in many of the former
locations. The costs related to the closings, consist primarily of lease
settlement, severance and relocation costs. The cost of closing these offices
resulted in a restructuring charge to second quarter earnings of approximately
$1.9 million.
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. See Note 11 to the Condensed Consolidated
Financial Statements. After the sale, the Company will have 58 active subsidiary
branches located in 20 states. The 47 direct loan offices being sold do not fit
the strategic focus of the Company which is the purchasing of automobile retail
installment contracts.
The closing and sale of the branches referenced above will have a negative
impact on future volumes of sales finance contracts purchased from certain
markets. The Company has decided to stop originating loans and purchasing
installment contracts in Texas. The Company determined that this market area did
not have sufficient profit potential at the present time.
In the second quarter of 1999,
-22-
<PAGE>
direct loans originated from the offices identified in the July 29, 1999
announced sale amounted to $11.2 million, compared to total originations of both
sales finance and direct loans of $148.1 million for all offices. Total
originations in the first quarter of 1999 for all offices were $163.6 million.
The decline in originations and purchases for the second quarter versus the
first quarter of 1999 is attributable to the 46 offices previously identified
for closure in the second quarter.
On March 2, 1999, the Company closed on the sale of its credit card portfolio.
As of December 31, 1998, this portfolio had been reduced to its net realizable
value and was classified as held for sale in the December 31, 1998 Condensed
Consolidated Balance Sheet of the Company.
The following table summarizes the composition of finance receivables at the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
June 30, March 31, December 31,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
Gross Finance Receivables
Direct $ 91,942 $100,346 $117,136
Sales 662,779 675,193 675,714
-------- -------- --------
Total gross finance receivables 754,721 775,539 792,850
Less: Unearned finance charges 149,881 150,500 146,978
Less: Unearned commissions, insurance
premiums and insurance claim reserves 1,718 2,074 2,585
-------- -------- --------
Total Sales and Direct Finance Receivables $603,122 $622,965 $643,287
======== ======== ========
</TABLE>
The following sets forth a summary of gross originations and acquisitions,
excluding activity of the credit card portfolio, for the three and six months
ended June 30 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Month Ended
----------------------------- -----------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Direct finance receivables $ 24,177 $ 35,460 $ 44,123 $ 59,932
Sales finance receivables 123,882 98,539 267,552 182,100
-------- -------- -------- --------
$148,059 $133,999 $311,675 $242,032
======== ======== ======== ========
</TABLE>
Purchases of sales finance receivables in the current year have shown
improvement over the same period of last year as the Company's strategy of
having DDMs call on dealerships to cultivate relationships takes hold and the
CPOs become more efficient in processing transactions. The Company will
continue to place a greater emphasis on purchasing sales finance contracts
-23-
<PAGE>
versus direct lending in the future. Gross sales finance contracts outstanding
declined $12.4 million during the three month period ended June 30, 1999 with
$11.6 million of the total decline attributable to exiting seven targeted
markets in Texas and Oklahoma. The Company determined that these markets had
unfavorable profit potential.
Allowance and Provision for Finance Credit Losses
MFN originates direct consumer loans and acquires individual retail sales
finance contracts from third party dealers. The Company maintains an allowance
for finance credit losses that are expected to be incurred on receivables that
have demonstrated a risk of loss based upon delinquency or bankruptcy status.
The sales finance contracts are generally acquired at a discount from the
principal amount. This discount is normally referred to as a non-refundable
dealer reserve. The amount of the discount is based upon the credit risk of the
borrower, the note rate of the contract and competitive factors. The dealer
reserve is available to absorb credit losses over the life of the pool of
receivables. The dealer reserve is not used to offset provision for finance
credit losses immediately, but rather is amortized over the life of the pool to
offset future losses. Management believes this method provides for an
appropriate matching of finance charge income and provision for finance credit
losses.
Each period, the provision for finance credit losses in the income statement
results from the combination of (a) an estimate by management of loan losses
that occurred during the current period and (b) the ongoing adjustment of prior
estimated losses. As the specific borrower and amount of a loan loss is
confirmed by gathering additional information, taking collateral in full or
partial settlement of the loan, bankruptcy of the borrower, etc., the loan is
charged off, reducing the allowance for finance credit losses. If, subsequent
to a charge off, the Company is able to collect additional amounts from the
borrower or obtain control of collateral worth more than earlier estimated, a
recovery is recorded. This recovery reduces the current period charge off
amounts.
In 1996, the Company adopted a loss reserving methodology commonly referred to
as "static pooling." The static pooling methodology provides that the Company
stratify the components of its sales finance receivable portfolio (i.e., dealer
reserve, principal loan balances and related charge-offs) into separately
identified pools based upon the period the loans were acquired. MFN defines a
pool as loans acquired within a given month.
Reserve requirements for sales finance and direct receivables are calculated
based on the estimated losses inherent in each category of delinquency (i.e. 30,
60, 90 and 120 days past due). These assumed losses are utilized to determine
the projected cash flows from each impaired category. The projected cash flow
is then discounted to estimate the net present value of the impaired loans. A
reserve is established in an amount sufficient to reduce the book value of the
-24-
<PAGE>
impaired receivable to its net present value. Repossessed collateral is valued
at an estimate of its net realizable value.
The following table sets forth a reconciliation of the changes in the allowance
for finance credit losses for the interim periods noted (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Month Ended
------------------------------- -------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at beginning of period $49,938 $ 88,191 $ 53,485 $102,204
Provision charged to expense 8,426 15,265 18,283 28,224
Finance receivables charged-off, net
of recoveries
(9,657) (24,641) (23,061) (51,613)
------- -------- -------- --------
Balance at end of period $48,707 $ 78,815 $ 48,707 $ 78,815
======= ======== ======== ========
Allowance as a percent of sales and direct finance
receivables outstanding at end of period 8.08% 10.87%
==== =====
</TABLE>
The amount of the provision for credit losses decreased in the second quarter of
1999 compared to one year ago due to the decrease in the size of the receivable
portfolio and an improvement in the relative delinquency of the remaining
portfolio. The overall reduction of the reserve as a percent of the receivable
portfolio occurred primarily in the second half of 1998 as delinquencies
declined and the expected losses inherent in the portfolio improved. The
improvement has continued into the current calendar year through June 30, 1999.
Nonrefundable Dealer Reserves
MFN acquires a majority of its sales finance contracts from dealers at a
discount. MFN negotiates the amount of the discounts with the dealers based
upon various criteria, one of which is the credit risk associated with the sales
finance contracts being acquired. The following table sets forth a
reconciliation of the changes in nonrefundable dealer reserves for the interim
periods ended June 30 (dollars in thousands):
-25-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $37,504 $ 43,667 $ 36,820 $ 52,731
Discounts acquired on new volume 7,490 6,043 15,919 11,373
Losses absorbed, net of recoveries (7,131) (10,862) (14,876) (25,256)
------- -------- -------- --------
Balance at June 30 $37,863 $ 38,848 $ 37,863 $ 38,848
======= ======== ======== ========
Reserves as a percentage of sales
finance receivables 5.71% 5.09%
======== ========
Discounts acquired as a percentage of sales
finance receivables originated 6.05% 6.13% 5.95% 6.25%
======= ======== ======== ========
</TABLE>
The increase in the discounts acquired in 1999 compared to the same period last
year is due to increased volume of contracts purchased.
Debt
The primary source for funding the Company's finance receivables comes from the
issuance of debt. As a result of the Plan of Reorganization, the Company
cancelled all of its senior debt in exchange for Senior Secured Notes, New
Common Stock and Excess Cash. The Company also cancelled its subordinated debt
in exchange for Senior Subordinated Notes. At June 30, 1999 the Company had
total debt of $456.7 million. See Notes 2 and 8 to the Condensed Consolidated
Financial Statements.
The following table presents the Company's debt instruments and the stated
interest rates on the debt at the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999 December 31, 1998
---------------- ---------------- ------------------
Balance Rate Balance Rate Balance Rate
-------- ----- -------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Senior debt:
Commercial paper and short-term loans $ - - $ - - $339,340 5.7%
Senior secured debt 434,165 10.0% 434,165 10.0% 335,905 7.0%
Senior subordinated debt 22,500 11.0% 22,500 11.0% 22,500 10.3%
-------- ---- -------- ---- -------- ----
Total $456,665 10.0% $456,665 10.0% $697,745 6.5%
======== ==== ======== ==== ======== ====
</TABLE>
-26-
<PAGE>
The Senior Secured Debt is comprised of both fixed and variable rate notes. Due
to the purchase of an interest rate cap, the all-inclusive cost on this debt is
10.0% to the Company and is combined in this table.
Stockholders' Equity
As of March 31, 1999, the Company adopted Fresh Start Reporting in accordance
with SOP 90-7. Fresh Start Reporting resulted in material changes to the
Condensed Consolidated Balance Sheet.
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.
As a result of the Plan of Reorganization and the requirements of Fresh Start
Reporting, stockholders' equity at March 31, 1999 was established at the
Company's reorganization value of $85.0 million. See notes 2 and 3 of the
Condensed Consolidated Financial Statements.
At June 30, 1999, total stockholders' equity stood at $88.5 million and
represented 13.86% of total assets.
RESULTS OF OPERATIONS
The results of operations shown in the accompanying Financial Statements are for
both the Reorganized Company and the Predecessor Company. MFN adopted Fresh
Start Reporting in accordance with SOP 90-7 effective March 31, 1999. To
facilitate a meaningful comparison of the Company's quarterly and year-to-date
operating performance in fiscal years 1999 and 1998, the following discussion of
consolidated financial information may be presented on a traditional comparative
basis for all periods. Consequently, the current year's information presented
below on a year-to-date basis is not in accordance with accounting requirements
for companies upon emergence from bankruptcy which calls for separate reporting
for the reorganized company and the predecessor company.
Net Income
For the three months ended June 30, 1999 the Company had net income of $3.5
million.
-27-
<PAGE>
Interest Income and Interest Expense
The largest single component of net income is net interest income which is the
difference between interest earned on finance receivables and interest paid on
borrowings. For the three months ended June 30, 1999 the Company's net interest
income was $26.5 million compared to $29.5 million for the same period one year
ago.
The net interest margin is the ratio of net interest income before provision for
finance credit losses divided by average interest earning assets. The net
interest margin was 13.86% in the second quarter of 1999 compared with 14.38% in
the second quarter of 1998. The decline is attributable to the yield on
interest earning assets which are composed of a higher percentage of short-term
investments (classified as cash equivalents on the Condensed Consolidated
Average Balance Sheets) compared to the same period one year ago.
The following tables summarize the amount of the net interest margin for the
periods ended June 30 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 June 30, 1998
- - - ------------------ ------------- -------------
Annualized Annualized
Average Interest Rate Average Interest Rate
Out- Income/ Earned Out- Income/ Earned
standing Expense and Paid standing Expense and Paid
------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets $767,876 $37,818 19.75% $878,065 $45,979 21.00%
Interest bearing liabilities 507,019 11,276 8.92% 725,245 16,509 9.13%
-------- ------- ----- -------- ------- -----
Net interest income $260,857 $26,542 10.83% $152,820 $29,470 11.87%
======== ======= ===== ======== ======= =====
Net interest margin as a
percentage of average interest
earning assets (annualized) 13.86% 13.46%
===== =====
</TABLE>
-28-
<PAGE>
Other Income
In addition to finance charges and interest, the Company has other income from
the sale of other credit related products. These products include insurance
relating to the issuance of credit life, accident and health and other credit
insurance policies to borrowers of the Company.
During the three month and six month periods ended June 30, 1999, other income
decreased $0.1 million or 4.2% and $0.2 million or 4.0%, respectively, versus
the same periods one year ago. Other income generated by the credit card
portfolio decreased $0.7 million and $1.3 million during these respective
periods. The sale of the portfolio was finalized on March 2, 1999 and no credit
card related revenue or expense was recorded in 1999. Excluding the impact of
the credit card related revenue, other income during the three month and six
month periods ended June 30, 1999 increased 24.7% and 21.5%, respectively,
versus the same periods one year ago primarily attributable to improved claim
experience on the sale of self-insured insurance products. The following table
summarizes the amounts earned from these products for the interim periods ended
June 30 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fees, insurance commissions and premiums $2,475 $2,365 $4,559 $3,954
Credit card related revenue and other 328 571 1,326 2,177
------ ------ ------ ------
Total $2,803 $2,936 $5,885 $6,131
====== ====== ====== ======
Other income as a % of average assets (annualized)
1.58% 1.41% 1.60% 1.40%
====== ====== ====== ======
</TABLE>
Other Expenses
In addition to interest expense and the provision for finance credit losses, the
Company incurs other operating expenses in the conduct of its business.
During the three month and six month periods ended June 30, 1999, other
operating expenses decreased $3.6 million or 17.8% and $3.6 million or 9.0%,
respectively, versus the same periods one year ago. Credit card related
expenses declined $1.3 million and $3.0 million, respectively, as a result of
the aforementioned portfolio sale. Salary and benefits decreased $0.9 million
and $0.8 million, respectively, attributable to staff reductions. Equipment
expense declined $0.5 million and $0.6 million, respectively, primarily
attributable to a decline in depreciation.
During the three month period ended June 30, 1999, the Company implemented a
plan to close a total of 46 branches. The Company recorded a provision against
earnings in the amount of $1.9 million to cover estimated severance, relocation
costs and lease termination costs. This cost is
-29-
<PAGE>
included in other operating expenses. Excluding this charge, total operating
expenses declined $5.6 million compared to the same period one year ago.
Annual operating expense savings of approximately $3.0 million are anticipated
as a result of this announcement.
The excess of revalued net assets over stockholders' investment totaling $49.4
million recorded on March 23, 1999 as a result of Fresh Start Reporting is being
amortized over a 60 month period resulting in a $2.5 million reduction in total
other operating expense for the three month period ended June 30, 1999.
The six month period ended June 30, 1998 included a reduction of other operating
expense of approximately $2.0 million related to the termination agreement with
a former chief executive officer.
The following table summarizes the components of other expenses for the interim
periods ended June 30 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries and employees benefits $11,415 $12,321 $24,565 $25,308
Other operating expenses 5,333 8,052 12,172 15,069
------- ------- ------- -------
Total $16,748 $20,373 $36,737 $40,377
======= ======= ======= =======
Other expense as a % of average assets
(annualized) 9.45% 9.81% 10.01% 9.24%
======= ======= ======= =======
</TABLE>
During 1997 and 1998, the Company closed a number of branches and implemented a
plan to close approximately 110 branches and to reduce branch personnel by
approximately 260 employees. The Company recorded a provision in 1997 for
restructuring in the amount of $3.7 million of which $3.5 million has been
utilized to date. These charges and their utilization through June 30, 1999 are
summarized in the following table (dollars in thousands):
<TABLE>
<CAPTION>
Net Adjustments Amounts to be
Amounts through June Utilized
Amounts Utilized Amounts 30, 1999 Subsequent
Charged 1997 and Utilized (Expense)/ to June 30,
In 1997 1998 In 1999 Income 1999
------- ---- ------- ------ ----
<S> <C> <C> <C> <C> <C>
Asset and leasehold write-offs $1,200 $1,279 $ 0 $ (79) $ -
Lease buyouts and other expenses 1,025 900 318 (193) -
Employee severance and retention 1,500 652 104 538 206
------ ------ ---- ----- ------
$3,725 $2,831 $422 $ 266 $ 206
====== ====== ==== ===== ======
</TABLE>
-30-
<PAGE>
The Company records restructuring charges against operations and provides a
reserve based on the best information available at the time the commitment is
made to undertake the restructuring action. The reserves are considered
utilized when specific restructuring criteria are met, indicating the planned
restructuring action has occurred. Work-force-related reserves are considered
utilized at payment for termination or acceptance of other contractual
arrangements.
The reserve for lease buyouts is utilized when the remaining lease obligations
are settled or the space has been vacated and made available for sublease. It
is the Company's policy to continue to charge depreciation, rental, and other
operating costs relating to excess space to ongoing operations while they remain
in business use. Salaries and benefits are charged to operations while the
employee is actively employed.
Reserves for asset and leasehold improvement write-offs are utilized at the date
of disposal or the final date of the lease.
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:
<TABLE>
<CAPTION>
Three Months Three Months Six Months
Ended Ended Ended
March 31, 1999 June 30, 1998 June 30, 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Forbearance fee $ - $14,480 $14,480
Adjustments of assets and
liabilities to fair value 3,085 - -
Interest expense 19,847 - -
Other including professional fees 13,785 4,354 8,608
------- ------- -------
$36,717 $18,834 $23,088
======= ======= =======
</TABLE>
Income Taxes
The provision for income taxes recorded in the three month period ended June 30,
1999 was calculated using a 39.5% tax rate on earnings before income taxes,
adjusted for the amortization of the excess of revalued net assets over
stockholders' investment, which is a permanent difference between book and tax
income.
-31-
<PAGE>
During the first quarter of 1999, a tax credit of $5.3 million was recorded
(39.5% of $13.4 million) before extraordinary credit. This was the amount of
tax benefit that could be offset for tax purposes during this period. The
remainder of the current period book loss before extraordinary credit received a
full valuation allowance.
The Company recorded a full valuation allowance related to the tax benefit for
the loss recorded during the first six months of 1998. At that time, the
Company was unable to carryback the losses to prior periods of taxable income.
CREDIT LOSSES AND DELINQUENCIES
The credit loss and delinquency information below are for both the Reorganized
Company and the Predecessor Company.
Credit Losses
Direct finance receivables on which no payment is received within 149 days, on a
recency basis, are charged off. Sales finance receivable accounts which are
contractually delinquent 150 days are charged off monthly before they become 180
days delinquent. Accounts which are deemed uncollectible prior to the maximum
charge off period are charged off immediately. Management may authorize an
extension if collection appears imminent during the next calendar month. The
following table sets forth information relating to charge-offs, the allowance
for finance credit losses and dealer reserves:
-32-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss provision charged to income $8,426 $15,265 $18,283 $28,224
Net charge-offs against allowance 9,657 24,641 23,061 51,613
Net charge offs against nonrefundable dealer reserves 7,131 10,862 14,876 25,256
Allowance for finance credit losses at end of period 48,707 78,815
Dealer reserves at end of period 37,863 38,848
Net charge offs annualized against allowance
to average total finance receivables 6.32% 12.02% 7.46% 11.94%
Net charge offs annualized against nonrefundable dealer
reserves to average total finance receivables 4.67% 5.30% 4.81% 5.84%
Allowance for finance credit losses to total gross finance
receivables at end of period 6.45% 8.88%
Dealer reserves to gross sales finance receivables
at end of period 5.71% 5.10%
</TABLE>
Delinquencies and Repossessions
If a borrower has filed for bankruptcy protection or if an account becomes 60 or
more days contractually delinquent and no full contractual payment is received
in the month the account attains such delinquency status, it is classified as
delinquent. The following table sets forth certain information regarding
contractually delinquent accounts at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
June 30, March 31, December 31,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
Delinquent gross receivables $12,569 $13,761 $19,938
Bankrupt accounts 18,643 20,788 23,607
Repossessed assets 2,544 3,003 3,836
------- ------- -------
Total $33,756 $37,552 $47,381
======= ======= =======
Delinquent gross receivables and bankrupt accounts to gross
finance receivables 4.14% 4.45% 5.49%
Delinquent gross receivables, bankrupt accounts and
repossessed assets to gross finance receivables plus
repossessed asset 4.46% 4.82% 5.95%
</TABLE>
Repossession of collateral generally occurs when debtors are 60 to 90 days late
on payments. Repossession activities have been consolidated within the Company
and many of the activities
-33-
<PAGE>
have been outsourced to another party, which handles the pickup of collateral
and delivery to auction. Automobiles are generally sold within 60 days at
auction.
While delinquency and repossession numbers show improvement at June 30, 1999
compared to prior periods, the impact of closing or exiting 46 branch locations
may impact negatively on the trend which has been experienced over the past
several quarters.
LIQUIDITY AND FINANCIAL RESOURCES
The Company has sufficient cash flow from cash collections on finance
receivables to meet the current funding requirements of new originations and
purchases of finance receivables. In addition, at June 30, 1999 the Company had
$93.6 million in cash and short-term investments, which can be used to fund
future growth of finance receivables and other corporate activities.
The Company has $434.2 million of funding through March 23, 2001 in the form of
Senior Secured Notes and an additional $22.5 million of funding through March
23, 2002 in the form of Senior Subordinated Notes. See Notes 2 and 8 to the
Condensed Consolidated Financial Statements.
The Senior Secured Notes allow for a subordination of their position for a $40
million credit facility. This credit facility, if established, can be used to
fund future growth of the finance receivable portfolio of the Company beyond
current cash flow and cash resources.
The Company 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. See Note
11 to the Condensed Consolidated Financial Statements.
CONTINGENCIES AND LEGAL MATTERS
On July 15, 1998, the Company filed a voluntary petition (the "Voluntary Case")
in the United States Bankruptcy Court (the "Court") for the Northern District of
Illinois for relief under Chapter 11 of title 11 of the United States Code. The
Company's Second Amended Plan of Reorganization (the "Plan") was confirmed by
order of the Court on March 10, 1999. The effective date of the Plan was March
23, 1999.
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 the Company's previous auditors and (iii)
$250,000 in cash for
-34-
<PAGE>
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.
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, however, 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.
YEAR 2000 COMPLIANCE
The Company has undertaken a review of its exposure to computer malfunctions
relating to the year 2000 ("Y2K"). The Y2K issue exists because many computer
systems and applications currently use two digit date fields to designate a
year. As the century date change occurs, date sensitive systems may recognize
the year 2000 as 1900 or not at all. This inability to recognize or properly
treat the Y2K issue may cause systems to process critical financial and
operational information incorrectly.
The Company has several systems that it considers critical to operations
including the branch loan system, the operating systems, and the financial
accounting systems. In addition, MFN has other less significant systems in use
by the human resources and legal departments. MFN has evaluated all of these
systems to determine the specific risks related to the year 2000 and has
implemented changes to all of these systems to address risks. As a result of
these efforts, all of the Company's systems are currently Y2K compliant. MFN
also utilizes computer software maintained by external vendors and has received
written assurances from these vendors that Y2K
-35-
<PAGE>
compliant upgrades are or will be available to the Company in sufficient time
for an orderly transition.
To date, the costs associated with becoming Y2K compliant have been minimal
(i.e., less than $50,000). These costs have been expensed as incurred, while
the costs of new software is capitalized and amortized over the software's
useful life.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS 133 and 134, "Accounting for Derivative
Instruments and Hedging Activities" and "Accounting for Mortgage-Backed
Derivative Securities Retained After the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise", effective for fiscal years beginning
after June 15, 1999 and December 15, 1998, respectively. During the second
quarter of 1999, the FASB voted to delay for one year the effective date of
SFAS133 until June 15, 2000. Management does not expect these statements to have
a material impact on either the financial position, results for operations or
financial statement disclosures of the Company.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
-36-
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings - See "Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations - Contingencies and
Legal Matters" which is incorporated herein by reference.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index following the signature page
(b) Reports on Form 8-K - The following Current Reports on Form 8-K
were filed during the second quarter of 1999:
(i) Item 4 Current Report on Form 8-K filed May 4, 1999.
(ii) Item 4 and Item 7 Current Report on Form 8-K/A filed June
29, 1999.
-37-
<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: August 12, 1999 /s/ Edward G. Harshfield
------------------------
Edward G. Harshfield
Chairman, President and
Chief Executive Officer
Date: August 12, 1999 /s/ Jeffrey B. Weeden
---------------------
Jeffrey B. Weeden
Executive Vice President, Chief
Financial Officer and Principal Accounting Officer
-38-
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Description
----------- -----------
11. Computation of Net Income Per Share
27. Financial Data Schedule
-39-
<PAGE>
MFN FINANCIAL CORPORATION
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
PERIOD ENDED JUNE 30, 1999
Basic earnings per share is computed based upon the weighted average number of
shares of the Company's common stock outstanding during the period. Diluted
earnings per share is computed based upon 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 under the Company's
stock option plan 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
June 30, 1999
-------------
<S> <C>
BASIC
Net income $ 3,499
Average common shares outstanding 10,000,000
Net income per common share - basic $ 0.35
DILUTED
Net income $ 3,499
Average common shares outstanding 10,144,293
Net income per common share - diluted $ 0.34
</TABLE>
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 93,561
<SECURITIES> 0
<RECEIVABLES> 603,122
<ALLOWANCES> (86,570)
<INVENTORY> 0
<CURRENT-ASSETS> 27,608
<PP&E> 826
<DEPRECIATION> 0
<TOTAL-ASSETS> 638,547
<CURRENT-LIABILITIES> 93,383
<BONDS> 456,665
0
0
<COMMON> 100
<OTHER-SE> 88,399
<TOTAL-LIABILITY-AND-EQUITY> 638,547
<SALES> 0
<TOTAL-REVENUES> 40,621
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,748
<LOSS-PROVISION> 8,426
<INTEREST-EXPENSE> 11,276
<INCOME-PRETAX> 4,171
<INCOME-TAX> 672
<INCOME-CONTINUING> 3,499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,499
<EPS-BASIC> $0.35
<EPS-DILUTED> $0.34
</TABLE>
