<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, 2000 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, 10,000,003 shares as of July 31, 2000.
<PAGE>
MFN FINANCIAL CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS
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
Condensed Consolidated Average Balance Sheets............................................... 15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 30
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.............................................................................. 31
Item 2. Changes in Securities.......................................................................... 31
Item 3. Defaults Upon Senior Securities................................................................ 31
Item 4. Submission of Matters to a Vote of Security Holders............................................ 31
Item 5. Other Information.............................................................................. 31
Item 6. Exhibits and Reports on Form 8-K............................................................... 31
SIGNATURES................................................................................................ 32
INDEX OF EXHIBITS......................................................................................... 33
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 148,827 $ 123,635
Finance receivables, net of unearned income 505,185 520,012
Less: Allowance for finance credit losses 37,113 39,543
Less: Nonrefundable dealer reserves 33,164 34,062
---------- ----------
Finance receivables, net 434,908 446,407
Income taxes receivable 7,118 8,692
Furniture, fixtures and equipment, net 2,556 1,918
Other assets (including repossessions) 4,785 7,924
---------- ----------
TOTAL ASSETS $ 598,194 $ 588,576
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior secured debt $ 381,242 $ 381,242
Senior subordinated debt 22,500 22,500
Income taxes 22,254 19,289
Other liabilities 16,860 18,025
Excess of revalued net assets over liabilities
and stockholders' investment 37,050 41,991
---------- ----------
TOTAL LIABILITIES 479,906 483,047
---------- ----------
CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 50,000,000 shares authorized; 10,000,003
shares outstanding June 30, 2000; 10,000,000 shares outstanding December
31, 1999 100 100
Paid in capital 84,900 84,900
Retained earnings 33,288 20,529
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 118,288 105,529
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 598,194 $ 588,576
========== ==========
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------- -------
Three Three Six Three
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, Mar 31,
(Dollars in thousands, except per share data) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Finance charges and loan fees $ 29,942 $ 35,832 $ 59,740 $ 35,313
Investment income 2,373 1,986 4,464 414
-------- -------- -------- --------
Total interest income 32,315 37,818 64,204 35,727
INTEREST EXPENSE 10,079 11,276 20,164 474
-------- -------- -------- --------
Net interest income before provision for finance
credit losses 22,236 26,542 44,040 35,253
PROVISION FOR FINANCE CREDIT LOSSES 5,420 8,426 6,650 9,857
-------- -------- -------- --------
Net interest income after provision for finance
credit losses 16,816 18,116 37,390 25,396
-------- -------- -------- --------
OTHER OPERATING INCOME
Insurance premiums 2,739 1,097 5,888 815
Fees and insurance commissions 327 966 709 1,240
Other revenue 583 328 1,122 998
-------- -------- -------- --------
Total other operating income 3,649 2,391 7,719 3,053
-------- -------- -------- --------
OTHER OPERATING EXPENSES
Salaries and employee benefits 10,450 11,415 21,649 13,150
Occupancy expense 799 972 1,583 999
Equipment expense 498 352 941 767
Data processing expense 295 451 522 469
Insurance claims and other underwriting expense 1,651 (412) 3,687 (29)
Amortization (2,469) (2,469) (4,938) 215
Reorganization expenses, net -- -- -- 1,105
Restructuring charges -- 1,941 (158) --
Other expenses 3,879 4,087 7,719 4,389
-------- -------- -------- --------
Total other operating expenses 15,103 16,337 31,005 21,065
-------- -------- -------- --------
OPERATING INCOME 5,362 4,170 14,104 7,384
NON-OPERATING EXPENSES
Reorganization expenses -- -- -- 33,719
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY CREDITS 5,362 4,170 14,104 (26,335)
Income tax provision (benefit) (1,133) 671 1,345 (5,287)
-------- -------- -------- --------
Net income (loss) before extraordinary credits 6,495 3,499 12,759 (21,048)
Extraordinary credits:
Gain on discharge of indebtedness, net of taxes -- -- -- 45,570
-------- -------- -------- --------
NET INCOME $ 6,495 $ 3,499 $ 12,759 $ 24,522
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 10,000 10,000 10,000 **
Diluted 10,000 10,144 10,004 **
Earnings per common share
Basic $ 0.65 $ 0.35 $ 1.28 **
Diluted $ 0.65 $ 0.34 $ 1.28 **
Dividends per share declared -- -- -- **
</TABLE>
** Earnings per common share and dividends per common share amounts as they
relate to the Predecessor Company are not meaningful due to the Voluntary Case.
See notes 2 and 3.
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED 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 at January 1, 1999 $ 177,901 $ 8,244 $ (103,351) $ (53,664) $ 29,130
Net income for period January 1,
1999 through March 31, 1999 -- -- 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 at March 31, 1999 $ 100 $ 84,900 $ -- $ -- $ 85,000
=========== ======== ============= ============ ========
POST-EMERGENCE
REORGANIZED COMPANY
Balance at April 1, 1999 $ 100 $ 84,900 $ -- $ -- $ 85,000
Net income for period
April 1, 1999 through
June 30, 1999 -- -- 3,499 -- 3,499
----------- -------- ------------- ------------ --------
Balance at June 30, 1999 $ 100 $ 84,900 $ 3,499 $ -- $ 88,499
=========== ======== ============= ============ ========
Balance at January 1, 2000 $ 100 $ 84,900 $ 20,529 $ -- $105,529
Net income for period
January 1, 2000 through
March 31, 2000 -- -- 6,264 -- 6,264
----------- -------- ------------- ------------ --------
Balance at March 31, 2000 100 84,900 26,793 -- 111,793
Net income for period
April 1, 2000 through
June 30, 2000 -- -- 6,495 -- 6,495
----------- -------- ------------- ------------ --------
Balance at June 30, 2000 $ 100 $ 84,900 $ 33,288 $ -- $118,288
=========== ======== ============= ============ ========
</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>
Predecessor
Reorganized Company Company
-------------------------------------- -------
Three Three Six Three
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, Mar 31,
(Dollars in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,495 $ 3,499 $ 12,759 $ 24,522
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for finance credit losses 5,420 8,426 6,650 9,857
Gain on sale of finance receivables -- -- (77) --
Provision (benefit) for deferred income taxes -- -- -- (5,287)
Net (increase)/decrease in income tax receivable 654 - 1,573 (767)
Net increase in taxes payable 896 553 2,966 10,559
Net gain on discharge of indebtedness -- -- -- (68,228)
Extinguishment of dividend payable -- -- -- (12,937)
Write-off of goodwill and fixed assets, net -- -- -- 16,022
Depreciation and amortization (2,301) (2,470) (4,630) 607
Net (increase) decrease in other assets (582) 4,992 5,677 (367)
Net increase (decrease) in other liabilities (566) (45,156) (1,165) 26,432
-------- --------- --------- ---------
Net cash provided by (used in) operating activities 10,016 (30,156) 23,753 413
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance receivables 80,100 97,604 163,335 108,952
Finance receivables originated or acquired (82,321) (88,459) (163,020) (101,075)
Proceeds from sale of finance receivables -- -- 2,075 --
Proceeds from sale of credit card portfolio -- -- -- 22,414
Purchases of furniture, fixtures and equipment (453) (826) (951) (175)
-------- --------- --------- ---------
Net cash provided by (used in) investing activities (2,674) 8,319 1,439 30,116
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of senior debt and commercial paper -- (100,707) -- (774)
-------- --------- --------- ---------
Net cash used in financing activities -- (100,707) -- (774)
-------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 7,342 (122,544) 25,192 29,755
Cash and equivalents at beginning of period 141,485 216,105 123,635 186,350
-------- --------- --------- ---------
Cash and equivalents at end of period $148,827 $ 93,561 $ 148,827 $ 216,105
======== ========= ========= =========
SUPPLEMENTAL CASH DISCLOSURES
Income taxes paid to federal and state governments $ 201 $ 164 $ 610 $ 13,133
Net interest paid 9,912 31,822 19,831 44
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 the condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
Note 1 - Basis of Presentation
The accompanying (a) condensed consolidated balance sheet as of December 31,
1999, which has been derived from audited 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 accounting principles generally accepted
in the United States of America 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 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
Statements of Income, Changes in Stockholders' Equity and Cash Flows for the
three-month period ended March 31, 1999 and all subsequent periods to
distinguish between the Predecessor Company and the Reorganized Company.
The results of the interim periods shown for the Reorganized Company and
Predecessor Company are not to be considered as being indicative of the results
of operations that are expected for the full year. It is suggested that the
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, 1999.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and accompanying notes. The accounts which are
subject to such estimation techniques include the allowance for finance credit
losses. Actual results could differ from these estimates.
7
<PAGE>
Note 2 - Restructuring and 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
"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"), (i) $434.2 million principal amount of its 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 ("New Common Stock") for the benefit of holders
of Senior Debt Claims (as defined in the Plan), (ii) $22.5 million principal
amount of its 11.0% Senior Subordinated Notes due March 23, 2002 (the "Senior
Subordinated Notes") for the benefit of the holders of the Company's
subordinated debt and (iii), 500,000 shares of the New Common Stock and three
series of warrants (580,000 of each series) to purchase New Common Stock for the
benefit of former stockholders of record on March 22, 1999. 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. 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.
The 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 Offered Rate), payable quarterly. The
Company entered into an interest rate hedge effective March 31, 1999, the effect
of which was to cap the maximum rate of the Series B Notes at 10%. 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
second quarter of 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 Senior Secured Notes of
$434,165,043. During the third quarter of 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 both June 30, 2000 and December 31,
1999 was $202,829,482 and $178,412,263, respectively, for a total of
$381,241,745. Principal payments on the Senior Secured Notes are not due until
maturity on March 23, 2001. The 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.
The above summary of the Plan does not purport to be complete and is qualified
in its entirety by reference to the Plan.
8
<PAGE>
Note 3 - Fresh Start Reporting and Excess of Revalued Net Assets Over
Liabilities and Stockholders' Investment
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 the 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
Liabilities and Stockholders' Investment". This balance will be amortized over 5
years.
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 Start Reorganized
Company 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 31,200 - - 31,200
-------- ------- ---------- --------
Total Assets $782,828 $ - $ - $782,828
======== ======= ========== ========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Predecessor Fresh Start Reorganized
Company Adjustments Company
March 31, 1999 Debit Credit March 31, 1999
-------------- ----- ------ --------------
<S> <C> <C> <C> <C>
Liabilities
Senior Debt $ 674,471 $240,306(a) $ - $434,165
Excess cash payments to senior
debt holders - - 100,707(b) 100,707
Subordinated debt 22,500 - - 22,500
Interest payable 30,552 9,008(a) - 21,544
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
liabilities and 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 on April 1, 1999.
(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 liabilities and 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
=========
(f) To eliminate stockholders' equity of the Predecessor Company.
(g) To record 10,000,000 shares of New Common Stock at an assumed market value
of $8.50 per share.
10
<PAGE>
(h) To record the extraordinary gain resulting from discharge of indebtedness.
The extraordinary gain, net of taxes is calculated below:
<TABLE>
<S> <C>
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)
Senior secured notes (434,165)
Senior subordinated notes (22,500)
New common stock (9.5 million shares to creditors) (80,750)
Other 372
-----------
Extraordinary gain before tax 68,229
Tax provision (22,659)
-----------
Extraordinary gain $ 45,570
===========
</TABLE>
Note 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 based upon the weighted average
number of shares of common stock outstanding and the dilutive common share
equivalents outstanding during the period. Common stock equivalents include
options granted under the Company's stock option plan, options granted pursuant
to an employment agreement with the Company's Chief Executive Officer and
warrants outstanding convertible into shares of common stock of the Company
using the treasury stock method.
<TABLE>
<CAPTION>
Reorganized Company
---------------------------------------
Three Three Six
Months Months Months
Ended Ended Ended
June 30, June 30, June 30,
(Dollars in thousands, except per share data) 2000 1999 2000
--------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
BASIC
Net income $ 6,495 $ 3,499 $ 12,759
Average common shares outstanding 10,000,003 10,000,000 10,000,003
Earnings per common share $ 0.65 $ 0.35 $ 1.28
DILUTED
Net income $ 6,495 $ 3,499 $ 12,759
Average common shares outstanding and common
share equivalents outstanding 10,000,003 10,222,410 10,004,296
Earnings per common share $ 0.65 $ 0.34 $ 1.28
</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.
11
<PAGE>
Note 5 - Reclassifications
Certain data from the prior periods has been reclassified to conform to the
current period presentation.
Note 6 - Contingencies and Legal Matters
The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities announced by the Company in January, 1997.
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 (the "Consumer Finance
Cases"), including cases which have been brought as putative class actions, are
pending in the various states in which the Company's subsidiaries conduct
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 it
is not possible at this time to estimate the amount of damages or settlement
expenses that may be incurred, management is of the opinion that the resolution
of these proceedings will not have a material effect on the financial position
and results of operations of MFN.
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 Consumer Finance Cases, no accrual has been made for the
majority of these lawsuits.
Note 7 - Income Taxes
The 2000 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 liabilities and stockholders' investment and 2) state
income tax refunds totaling $2.2 million received during the second quarter of
2000. The state tax refunds decreased the income tax provision.
Note 8 - Debt
The following table presents the Company's debt instruments and the interest
rates on the debt for both June 30, 2000 and December 31, 1999 (dollars in
thousands):
Balance Rate
------- ----
Senior secured debt $381,242 10.00%
Senior subordinated debt 22,500 11.00%
-------- ------
Total $403,742 10.06%
======== ======
Debt is used as the primary source for funding the Company's finance
receivables.
The senior secured debt is 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 Offered Rate), payable quarterly.
Principal payments on the senior secured debt are not due until maturity on
March 23, 2001.
12
<PAGE>
The principal amount of Series A Notes and Series B Notes outstanding at both
June 30, 2000 and December 31, 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.
The Company's senior secured debt is 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 senior subordinated debt, with an aggregate principal amount of $22.5
million, has an 11% annual fixed rate of interest, payable quarterly and is due
March 23, 2002.
Note 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") and options to
purchase 1,000,000 shares were granted pursuant to an employment agreement with
the Company's Chief Executive Officer. Total options outstanding at June 30,
2000 were 1,685,000.
During the three-month period ended June 30, 2000, options to purchase 20,000
shares were granted to officers, effective April 27, 2000 ("Grant Date"), at an
exercise price of $6.50 per share (the market value per common share on the
Grant Date). These options to purchase shares vest 1/3 per year beginning on the
first anniversary of the Grant Date. During this same period, options to
purchase 20,000 shares were forfeited.
MFN applies APB Opinion 25 and its Interpretations in accounting for its options
granted, and accordingly, no compensation cost has been recognized for its stock
options in the condensed consolidated financial statements.
Note 10 - Warrants
According to the Plan of Reorganization which became effective March 23, 1999,
three series of warrants (580,000 of each series) to purchase the Company's
common stock were distributed to the Exchange Agent for the benefit of former
stockholders of record on March 22, 1999. 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. Warrants to purchase three
shares of the Company's stock have been exercised.
Note 11 - Restructuring Charges
During the second quarter of 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
13
<PAGE>
estimated severance, relocation costs and lease termination costs. These charges
(included in other operating expenses) and their utilization is summarized below
(dollars in thousands):
<TABLE>
<CAPTION>
Amounts Amounts Amounts Adjust- Balance
Charged Utilized Utilized ments June 30,
In 1999 In 1999 In 2000 In 2000 2000
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Lease buyouts and other expenses $ 998 $ 380 $ 301 $ 104 $ 213
Employee severance and retention 952 333 504 54 61
------ ------- ------- ------- -------
Total $1,950 $ 713 $ 805 $ 158 $ 274
====== ======= ======= ======= =======
</TABLE>
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.
A $158,000 credit was recorded to restructuring expense during the six-month
period ended June 30, 2000 to adjust previously recorded reserves for a change
in estimated reserve requirements.
Note 12 - Reorganization Expenses
In accordance with SOP 90-7, expenses resulting from the Plan of Reorganization
are reported separately as reorganization expenses in the Condensed Consolidated
Statements of Income. These expenses were incurred by the Predecessor Company
and are summarized below for the three month period ended March 31, 1999
(dollars in thousands):
Interest expense $ 19,847
Management consultants 6,933
Adjustments of assets and liabilities to fair value 3,085
Creditor attorneys and advisors 1,193
Corporate counsel 846
Independent accountants 550
Board of Directors representation 100
Other 1,165
--------
Total $ 33,719
========
14
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED AVERAGE BALANCE SHEETS
PERIODS ENDED JUNE 30
(Unaudited)
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------------------------ -------
Three Three Six Three
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, Mar 31,
(Dollars in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 147,706 $ 101,030 $ 142,379 $ 202,091
Finance receivables, net of unearned income 507,245 614,867 509,500 631,075
Less: allowance for credit losses 38,083 49,312 38,490 53,547
Less: nonrefundable dealer reserves 33,005 37,745 33,187 34,064
---------- ---------- ---------- ----------
Finance receivables, net 436,157 527,810 437,823 543,464
Other assets 14,870 11,007 16,164 31,312
---------- ---------- ---------- ----------
TOTAL ASSETS $ 598,733 $ 639,847 $ 596,366 $ 776,867
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities $ 403,742 $ 456,665 $ 403,742 $ 697,358
Other liabilities 80,028 96,095 80,866 54,903
---------- ---------- ---------- ----------
TOTAL LIABILITIES 483,770 552,760 484,608 752,261
STOCKHOLDERS' EQUITY 114,963 87,087 111,758 24,606
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 598,733 $ 639,847 $ 596,366 $ 776,867
========== ========== ========== ==========
Ratios:
Net interest margin 13.58% 14.83% 13.51% **
Net income to average total assets 4.34% 2.19% 4.28% **
Net income to average stockholders' equity 22.60% 16.07% 22.83% **
</TABLE>
** Amounts as they relate to Predecessor Company are not meaningful due to the
Voluntary Case. See notes 2 and 3 of the condensed consolidated financial
statements.
15
<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 quarter ended June 30, 2000, contains
certain forward-looking statements pertaining to the success of the Company's
new technology to process sales finance applications, expected operating
results, loss provisions, refinancing debt 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,
the success of new business methods and systems, the Company's ability to
refinance its debt 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. Notwithstanding anything herein to the contrary, all
operations of the Company are conducted through its subsidiaries and all
references herein to offices (except the Company's home office) or branches
refer to the Company's operating subsidiaries only.
MFN was organized in 1988, as a wholly-owned subsidiary of First Illinois
Corporation (an Evanston, Illinois based bank holding company). On April 24,
1989, First Illinois Corporation distributed to its stockholders one share of
MFN for each two shares of First Illinois Corporation stock held.
Substantially all of MFN's borrowers are "non-prime" borrowers. These are
borrowers who 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 direct loans generally have terms of 12 to 24 months with maximum terms of
36 months; secured direct loans are generally collateralized by real or personal
property. Sales finance contracts are generally accounted for on a discount
basis and generally have terms of 18 to 48 months with maximum terms of 60
months. Annual interest rates on MFN's sales finance contracts and loans range,
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.
Currently, MFN's primary strategic focus is the purchasing of installment retail
sales finance contracts from automobile dealers. MFN does this through its
Centralized Purchasing Offices ("CPOs"), 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
16
<PAGE>
physical location. DDMs are responsible for developing new dealer relationships,
maintaining existing relationships, explaining the Company's underwriting
criteria to the dealers and maintaining current contractual dealer agreements
between the Company and the dealer. In addition, DDMs can help provide ideas to
the dealers on attracting customers to their dealerships. Prior to 1999, the
branches and their personnel were responsible for these activities.
Beginning in 1998, substantially all purchases of automobile retail installment
contracts are approved through CPOs which 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, 1999 and 2000
originations as compared to older accounts. In addition, during the second
quarter of 2000, the Company completed installation of new technology to process
sales finance applications. This technology incorporates additional risk
management features which the Company believes will help reduce risk in the
portfolio. Substantially all automobile retail installment sales applications
are now processed through the Company's new system. The system automatically
pulls in a credit bureau report on each applicant, checks values of the proposed
collateral and performs specific checks on the applicants. The system also
incorporates the Company's underwriting criteria and will reject applications
which fail to meet certain minimum standards. Applications which meet these
minimums are investigated further by an underwriter and investigator team before
they are approved for purchase.
Overview
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
"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"), (i) $434.2 million principal amount of its 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 ("New Common Stock") for the benefit of
holders of Senior Debt Claims (as defined in the Plan), (ii) $22.5 million
principal amount of its 11.0% Senior Subordinated Notes due March 23, 2002 (the
"Senior Subordinated Notes") for the benefit of the holders of the Company's
subordinated debt and (iii) 500,000 shares of the Common Stock and three series
of warrants (580,000 of each series) to purchase New Common Stock for the
benefit of former shareholders of record on March 22, 1999. 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. 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. The 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 Accountants' Statement of
Position 90-7 "Financial
17
<PAGE>
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 year-to-date operating performance
in fiscal years 2000 and 1999, the following discussion of certain consolidated
financial information may be presented on a traditional comparative basis for
all periods even though the accounting requirements for companies upon emergence
from bankruptcy calls for separate reporting for the reorganized company and the
predecessor company.
A black line has been drawn between the accompanying Condensed Consolidated
Statements of Income, Changes in Stockholders' Equity and Cash Flows between the
three-month period ended March 31, 1999 and all subsequent periods to
distinguish between the Predecessor Company and the Reorganized 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 condensed
consolidated financial condition of the Reorganized Company at June 30, 2000 and
December 31, 1999. Condensed consolidated results of operations are for the
three-month periods ended June 30, 2000 and June 30, 1999 and the six-month
period ended June 30, 2000 for the Reorganized Company and for the three-month
period ended March 31, 1999 for the Predecessor Company. This discussion should
be read in conjunction with the Company's condensed consolidated financial
statements and notes thereto appearing elsewhere in this report. Again, the
results of operations of the Predecessor Company 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. See Note 3 to the Condensed
Consolidated Financial Statements.
<PAGE>
Assets and Finance Receivables
Total assets of the Company at June 30, 2000 increased 3.3% on an annualized
basis to $598.2 million compared to $588.6 million at December 31, 1999
primarily due to a $25.2 million increase in cash and cash equivalents offset
partially by a $14.8 million decrease in finance receivables, net of unearned
income.
The Company's offices in Illinois, Florida and Virginia accounted for
approximately 14%, 10%, and 8%, respectively, of all sales and direct finance
receivables outstanding at June 30, 2000.
The following table summarizes the composition of finance receivables at the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Direct Finance Receivables
Interest-bearing $ 5,951 $ 9,961
Precompute 19,157 30,666
--------- ---------
Total direct finance receivables 25,108 40,627
Sales Finance Receivables
Interest-bearing 31,081 9,596
Precompute 576,886 600,782
--------- ---------
Total sales finance receivables 607,967 610,378
--------- ---------
Gross Finance Receivables $ 633,075 $ 651,005
========= =========
Direct Finance Receivables
Interest-bearing $ 5,951 $ 9,961
Precompute, net of unearned income 15,111 24,886
--------- ---------
Total direct finance receivables, net of unearned income 21,062 34,847
Sales Finance Receivables
Interest-bearing 31,081 9,596
Precompute, net of unearned income 453,042 475,569
--------- ---------
Total sales finance receivables, net of unearned income 484,123 485,165
--------- ---------
Finance Receivables, Net of Unearned Income $ 505,185 $ 520,012
========= =========
</TABLE>
19
<PAGE>
The following sets forth a summary of originations net of unearned income for
the three-month and six-month periods ended June 30, (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Direct finance receivables $ 2,444 $ 11,378 $ 5,646 $ 20,878
Sales finance receivables 87,653 84,764 172,597 185,051
--------- --------- -------- ---------
Total originations and acquisitions $ 90,097 $ 96,142 $178,243 $205,929
========= ========= ======== =========
</TABLE>
Originations of direct finance receivables during the second quarter of 2000 are
down from the same period of last year attributable to the Company's strategic
decision to place a greater emphasis on purchasing sales finance contracts
versus direct lending. Originations of sales finance receivables during the
second quarter of 2000 are up 3.4% or $2.9 million from the same period of last
year and down approximately 6.7% or $12.5 million for the six month period ended
June 30, 2000 compared to the same period a year ago. During the second quarter
of 1999, the Company announced the decision to discontinue originations in
certain markets deemed not to have sufficient profit potential.
The Company completed the installation of new technology at its CPO locations
during the second quarter of 2000. This technology adds additional risk
management features and is expected to allow the CPOs to become more efficient
in processing sales finance applications and managing dealer relationships. The
Company intends to continue to place a greater emphasis on purchasing automobile
sales finance contracts versus direct lending.
Allowance and Provision for Finance Credit Losses
MFN originates direct consumer loans and acquires individual 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 made 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
20
<PAGE>
earlier estimated, a recovery is recorded. This recovery reduces the current
period charge off amounts.
The Company uses a loss reserving methodology commonly referred to as "static
pooling" which stratifies 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. A portion
of the dealer reserve is made available to cover estimated credit losses for
each identified monthly pool based on a pro rata calculation over the term of
each specific account.
Reserve requirements for sales finance and direct receivables are calculated
based on the estimated losses inherent in each category of delinquency (i.e. not
delinquent, 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 impaired receivable to its net present value. Repossessed collateral is
valued at an estimate of its net realizable value.
The following is a summary of the activity in the allowance for finance credit
losses for the three-month and six-month periods ended June 30 (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 37,961 $ 49,938 $ 39,543 $ 53,485
Reserves recaptured in conjunction
with sale of finance receivables -- -- (90) --
Provision for finance credit losses 5,420 8,426 6,650 18,283
Finance receivables charged-off, net of recoveries (5,447) (11,057) (11,530) (26,959)
Net amount transferred from (to) reserve for
repossessed assets (821) 1,400 2,540 3,898
-------- -------- -------- --------
Balance at end of period $ 37,113 $ 48,707 $ 37,113 $ 48,707
======== ======== ======== ========
Allowance for finance credit losses as a percent of total
finance receivables, net of unearned income 7.35% 8.08%
</TABLE>
Repossessed assets are carried in other assets and are reserved at 75% of the
outstanding balance owed. The repossessed asset reserve is established as a
transfer from the allowance for finance credit losses upon initiation of the
repossession proceedings when the finance receivable balance is reclassified to
other assets. Proceeds from the sale of repossessed assets are applied against
the outstanding balance owed and any outstanding balance deficiency is charged-
off. Reserves on sold repossessed assets are then transferred back to the
allowance for finance credit losses. The increase or decrease in the allowance
for finance credit losses related to the transfer from the repossessed asset
reserve is due to the decline or increase in repossessed assets.
The amount of the provision for credit losses decreased in the three-month and
six-month periods ended June 30, 2000 compared to the same periods in 1999 due
to an improvement in the relative
21
<PAGE>
delinquency of the remaining portfolio. The overall reduction of the reserve as
a percent of the receivable portfolio is due to improvement in the amount of
delinquencies at June 30, 2000 compared to the same period one year ago.
Nonrefundable Dealer Reserves
The Company acquires a majority of its sales finance contracts from dealers at a
discount. The amount of the discounts are negotiated with the dealers based upon
various criteria, one of which is the credit risk associated with the sales
finance contracts being acquired.
The following is a summary of the activity in the nonrefundable dealer reserves
for the three-month and six-month periods ended June 30 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 33,113 $ 37,503 $ 34,062 $ 36,820
Discounts acquired on new volume 7,776 7,685 15,223 16,397
Net charge-offs absorbed (7,725) (7,325) (16,121) (15,354)
-------- -------- -------- --------
Balance at end of period $ 33,164 $ 37,863 $ 33,164 $ 37,863
======== ======== ======== ========
Nonrefundable dealer reserves as a percent of sales
finance receivables, net of unearned income 6.85% 7.18%
==== ====
Discounts acquired as a percent of sales finance
receivable originations, net of unearned income 8.87% 9.07% 8.82% 8.86%
==== ==== ==== ====
</TABLE>
Under the static pooling methodology, the total balances of nonrefundable dealer
reserves are not available to offset current finance credit losses, but instead
are amortized and made available to absorb credit losses over the life of the
corresponding pool of receivables.
Income Tax Accounts
At June 30, 2000, the Company had recorded net income tax receivables and
prepayments of approximately $7.1 million and a $22.3 million tax liability
consisting primarily of deferred taxes.
MFN elected to be treated as a dealer in securities under Section 475 of the
Internal Revenue Code effective for the year ended December 31, 1996. Pursuant
to this election, MFN must annually recognize as taxable income or taxable loss
the difference between the fair market value of its securities and the income
tax basis of the securities for the year ended December 31, 1996 and
prospectively. This election has no impact on the recognition of pre-tax income
for financial reporting purposes.
22
<PAGE>
Debt
The following table presents the Company's debt instruments and the interest
rates on the debt at both June 30, 2000 and December 31, 1999 (dollars in
thousands):
Balance Rate
------- ----
Senior secured debt $381,242 10.00%
Senior subordinated debt 22,500 11.00%
-------- -----
Total $403,742 10.06%
======== =====
Debt is used as the primary source for funding the Company's finance
receivables.
The senior secured debt is 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 Offered Rate), payable quarterly.
Principal payments on the senior secured debt are not due until maturity on
March 23, 2001.
The principal amount of Series A Notes and Series B Notes outstanding for both
June 30, 2000 and December 31, 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.
The Company's senior secured debt is 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 senior subordinated debt, with an aggregate principal amount of $22.5
million, has an 11% annual fixed rate of interest, payable quarterly and is due
March 23, 2002.
Stockholders' Equity
Total stockholders' equity at June 30, 2000 was $118.3 million or 19.8% of total
assets compared with $105.5 million or 17.9% of total assets at December 31,
1999. During the three-month and six-month periods ended June 30, 2000, the
Reorganized Company reported net income of $6.5 million and $12.8 million,
respectively, and did not declare any dividends or repurchase any shares of
common stock.
RESULTS OF OPERATIONS
The results of operations shown in the accompanying Condensed Consolidated
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 operating
performance, the following discussion of certain consolidated financial
information may be presented on a traditional comparative basis for all periods
even though the accounting requirements for companies upon emergence from
bankruptcy calls for separate reporting for the Reorganized Company and the
Predecessor Company.
23
<PAGE>
Net Income
During the three-month periods ended June 30, 2000 and June 30, 1999 and during
the six-month period ended June 30, 2000, the Reorganized Company reported net
income of $6.5 million, $3.5 million and $12.8 million, respectively. Six-month
results are not comparable to last year due to adoption of Fresh Start Reporting
as of March 31, 1999 and reorganization expenses related to the Voluntary Case.
Interest Income and Interest Expense
The largest single component of net income is net interest income which is the
difference between interest income and interest expense before provision for
finance credit losses. For the three-month period ended June 30, 2000, net
interest income was $22.2 million compared to $26.5 million one year ago. The
decline in net interest income is due primarily to lower finance receivable
balances. The net interest margin, which is the ratio of net interest income
divided by average interest earning assets, was 13.58% for the three-month
period ended June 30, 2000 compared to 14.83% one year ago. The decline in the
net interest margin is attributable to a change in the mix of earning assets. In
2000, 22.5% of earning assets were in cash and cash equivalents compared to
14.1% for the same period one year ago. This had a negative impact on the
overall yield of earning assets.
For the six-month period ended June 30, 2000, net interest income was $44.0
million compared to $52.2 million one year ago. 1999 net interest income of
$52.2 million has been adjusted to remove the impact of SOP 90-7. This
adjustment reduces reported interest expense and interest income by $11.473
million and $1.893 million, respectively. For the six-month period ended June
30, 2000, the net interest margin was 13.51% compared to 13.48% one year ago,
adjusted to remove the impact of SOP 90-7.
The following table summarizes net interest income and the net interest margin
for the three-month and six-month periods ended June 30 (dollars in thousands)
after taking into consideration the adjustments noted to the 1999 six-month
amounts:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average interest earning assets:
Cash and cash equivalents $147,706 $101,030 $142,379 $151,561
Finance receivables 507,245 614,867 509,500 622,971
-------- -------- -------- --------
Total average earning assets 654,951 715,897 651,879 774,532
Average interest bearing liabilities 403,742 456,665 403,742 577,012
-------- -------- -------- --------
Net $251,209 $259,232 $248,137 $197,520
======== ======== ======== ========
Interest income:
Cash and cash equivalents $ 2,373 $ 1,986 $ 4,464 $ 4,293
Finance receivables 29,942 35,832 59,740 71,145
-------- -------- -------- --------
Total interest income 32,315 37,818 64,204 75,438
Interest expense 10,079 11,276 20,164 23,223
-------- -------- -------- --------
Net interest income before provision
for finance credit losses $ 22,236 $ 26,542 $ 44,040 $ 52,215
======== ======== ======== ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Yield:
Cash and cash equivalents 6.46% 7.89% 6.31% 5.71%
Finance receivables 23.61% 23.31% 23.45% 22.84%
----- ----- ----- -----
Earning assets 19.74% 21.13% 19.70% 19.48%
Cost of funds 9.99% 9.88% 9.99% 8.05%
----- ----- ----- -----
Net interest spread 9.75% 11.25% 9.71% 11.43%
===== ===== ===== =====
Net interest margin 13.58% 14.83% 13.51% 13.48%
===== ===== ===== =====
</TABLE>
Yields on finance receivables in the three-month and six-month periods of 2000
improved 30 basis points and 61 basis points, respectively, compared to the same
periods one year ago. This was the result of lower levels of nonaccrual loans
and a change in the mix of finance receivables.
Other Operating Income
In addition to finance charges and interest, the Company has other operating
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.
Other operating income for the three-month and six-month periods ended June 30,
2000 increased $1.3 million and $2.2 million, respectively, compared to the same
periods one year ago. A new revenue sharing program on collateral protection
insurance resulted in insurance premium income increases during the same periods
of $1.6 million and $4.0 million, respectively. Commissions earned on credit
life, accident and health, property and involuntary unemployment insurance
decreased $639,000 and $1.5 million, respectively, during the same periods
reflecting a shift away from the direct lending business.
The following table summarizes the components of other operating income for the
three-month and six-month periods ended June 30 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance premiums $ 2,739 $ 1,097 $ 5,888 $ 1,912
Fees and insurance commissions 327 966 709 2,206
Other income 583 328 1,122 1,326
------- ------- ------- -------
Total $ 3,649 $ 2,391 $ 7,719 $ 5,444
======= ======= ======= =======
Other operating income as a percent of
average interest bearing assets 2.23% 1.34% 2.37% 1.41%
======= ======= ======= =======
</TABLE>
Other Operating 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.
25
<PAGE>
Other operating expense for the three-month and six-month periods ended June 30,
2000 decreased $1.2 million and $6.5 million, respectively, compared to the same
periods one year ago. $2.7 million of the decline for the six-month comparable
period is amortization of the excess of revalued net assets over liabilities and
stockholders' equity. The excess of revalued net assets over liabilities and
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 and
appears as a credit to operating expense. Salaries and benefits decreased $1.0
million and $2.9 million during the same periods, respectively, attributable to
staff reductions. Insurance claims and underwriting expenses associated with the
collateral protection insurance program increased $2.1 million and $4.1 million,
respectively, during the same periods. The six-month period of 1999 was
positively impacted by reserve adjustments resulting from favorable claims
experience.
The following table summarizes the components of other operating expenses for
the three-month and six-month periods ended June 30 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 10,450 $ 11,415 $ 21,649 $ 24,565
Insurance claims and other underwriting expense 1,651 (412) 3,687 (441)
Goodwill amortization -- -- -- 215
Amortization of excess of revalued net assets
over liabilities and stockholders' equity (2,469) (2,469) (4,938) (2,469)
Reorganization expenses, net -- -- -- 1,105
Restructuring expenses -- 1,941 (158) 1,941
Other expenses 5,471 5,862 10,765 12,486
-------- --------- -------- --------
Total $ 15,103 $ 16,337 $ 31,005 $ 37,402
======== ======== ======== ========
Other operating expense as a percent of
average interest bearing assets 9.22% 9.13% 9.51% 9.66%
==== ==== ==== ====
</TABLE>
Reorganization Expenses
Reorganization expenses for the six-month period ended June 30, 1999 (dollars in
thousands) are as follows:
Professional fees $ 2,998
Interest income (1,893)
---------
Total $ 1,105
=========
The Company estimated the amount of professional fees which related specifically
to the Voluntary Case. In accordance with Fresh Start Reporting, interest earned
on funds held for deposit that would have been paid to senior debt holders if
the Company had not filed the Voluntary Case, is off-set against expenses
related to the Voluntary Case.
Restructuring Charges
During the second quarter of 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
26
<PAGE>
cover estimated severance, relocation costs and lease termination costs. These
charges (included in other operating expenses) and their utilization is
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Amounts Amounts Amounts Adjust- Balance
Charged Utilized Utilized ments June 30,
In 1999 In 1999 In 2000 In 2000 2000
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Lease buyouts and other expenses $ 998 $ 380 $ 301 $ 104 $ 213
Employee severance and retention 952 333 504 54 61
-------- ------- ------- ------- -------
Total $ 1,950 $ 713 $ 805 $ 158 $ 274
======== ======= ======= ======= =======
</TABLE>
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.
A $158,000 credit was recorded to restructuring expense during the six-month
period ended June 30, 2000 to adjust previously recorded reserves for a change
in estimated reserve requirements.
Non-Operating Reorganization Expenses
In accordance with SOP 90-7, expenses resulting from the Plan of Reorganization
are reported separately as reorganization expenses in the Condensed Consolidated
Statements of Income. These expenses were incurred by the Predecessor Company
and are summarized below for the three month period ended March 31, 1999
(dollars in thousands):
Interest expense $ 19,847
Management consultants 6,933
Adjustments of assets and liabilities to fair value 3,085
Creditor attorneys and advisors 1,193
Corporate counsel 846
Independent accountants 550
Board of Directors representation 100
Other 1,165
--------
Total $ 33,719
========
CREDIT LOSSES AND DELINQUENCIES
The credit loss and delinquency information below are for both the Reorganized
Company and the Predecessor Company.
27
<PAGE>
Credit Losses
Finance receivable accounts which are contractually delinquent 90 days are
charged off monthly before they become 120 days contractually delinquent.
Accounts which are deemed uncollectible prior to the maximum charge-off period
are charged off immediately. Management may authorize an extension of the
charge-off period 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 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Provision for finance credit losses $ 5,420 $ 8,426 $ 6,650 $ 18,283
Net charge-offs:
Absorbed by allowance for credit losses 5,447 11,057 11,530 26,959
Absorbed by nonrefundable dealer reserves 7,725 7,325 16,121 15,354
Allowance for finance credit losses at end of period 37,113 48,707
Nonrefundable dealer reserves at end of period 33,164 37,863
Ratios
------
Net charge-offs as a percent of average total
finance receivables, net of unearned income
Absorbed by allowance for credit losses 4.30% 7.19% 4.53% 8.65%
Absorbed by nonrefundable dealer reserves 6.09% 4.77% 6.33% 4.93%
----- ----- ----- -----
Total 10.39% 11.96% 10.86% 13.58%
Allowance for finance credit losses as a percent of
total finance receivables, net of unearned income 7.35% 8.08%
Nonrefundable dealer reserves as a percent of sales
finance receivables, net of unearned income 6.85% 7.18%
</TABLE>
Delinquencies and Repossessions
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 and
repossessed assets at June 30 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Delinquent non-bankrupt receivables, net of unearned income $ 4,192 $ 11,481
Delinquent bankrupt accounts, net of unearned income 2,033 6,311
Repossessed assets, net of reserves 1,696 2,544
------- --------
Total delinquent accounts, net of unearned
income and repossessed assets, net of reserves $ 7,921 $ 20,336
======= ========
Bankrupt accounts, net of unearned income not in delinquent status $ 6,569 $ 10,082
======= ========
Delinquent accounts, net of unearned income and
repossessed assets, net of reserves as a percent of
total finance receivables, net of unearned income 1.57% 3.37%
==== ====
</TABLE>
28
<PAGE>
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 have been outsourced to other parties, which handles
the pickup of collateral and delivery to auction. Automobiles are generally sold
within 60 days at auction.
Repossessed assets are carried in other assets and are reserved at 75% of the
outstanding balance owed. The repossessed asset reserve is established as a
transfer from the allowance for credit losses upon initiation of the
repossession proceedings when the finance receivable balance is reclassified to
other assets. Proceeds from the sale of repossessed assets are applied against
the outstanding balance owed and any outstanding balance deficiency is charged-
off. Reserves on sold repossessed assets are then transferred back to the
allowance for credit losses at the time of charge-off.
Delinquency and repossession numbers show significant improvement from June 30,
1999 due to improved collections. The Company believes this is due to focusing
branch activities on collections, placing less emphasis on direct lending
efforts, the impact of seasonal paydowns attributable to tax refunds and
favorable general economic conditions. The Company does not anticipate further
improvement in the delinquency results and may experience an increase in
delinquencies in future periods.
LIQUIDITY AND FINANCIAL RESOURCES
At June 30, 2000, the Company had 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, 2000 the Company
had $148.8 million in cash and cash equivalents, which can be used to fund
future growth of finance receivables and other corporate activities.
At June 30, 2000, the Company had $381.2 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 Company has installed new technology for underwriting sales finance
receivables and to track portfolio performance. These systems will enable the
Company to respond to information requests from potential funding sources as the
time to refinance the existing debt approaches. The Company is currently seeking
funding alternatives to refinance its debt. Until funding is secured, there can
be no assurance as to the Company's ability to refinance its debt prior to
maturity or the terms of any such refinancing.
Dividends may be paid on the Reorganized Company's Common Stock subject to
certain financial conditions contained in the Company's indentures governing its
Senior Secured Notes. At June 30, 2000, $16.6 million was available for payment
under these restrictions. However, the Company does not anticipate payment of
any dividends for the foreseeable future.
29
<PAGE>
CONTINGENCIES AND LEGAL MATTERS
The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities announced by the Predecessor Company in
January, 1997. 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 (the "Consumer Finance
Cases"), including cases which have been brought as putative class actions, are
pending in the various states in which the Company's subsidiaries conduct
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 it
is not possible at this time to estimate the amount of damages or settlement
expenses that may be incurred, management is of the opinion that the resolution
of these proceedings will not have a material effect on the financial position
and results of operations of MFN.
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 Consumer Finance Cases, no accrual has been made for the
majority of these lawsuits.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS 138, is
effective for fiscal years beginning after June 15, 2000. Management does not
expect this statement to have a material impact on either the financial
position, results of operations or financial statement disclosures of the
Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no significant changes in market risk since December 31, 1999.
30
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings - See "Part I, 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
(a) The annual meeting of stockholders of MFN Financial Corporation
was held on April 25, 2000.
(b) Not Applicable
(c) Set forth below is the tabulation of the votes for each nominee
for election as director:
For Withheld Authority
--- ------------------
Thomas L. Gooding 8,945,345 10,340
Andrew C. Halvorsen 8,945,336 10,349
Edward G. Harshfield 8,945,155 10,530
Michael A. Kramer 8,945,380 10,305
Martin L. Solomon 8,945,311 10,374
Robert J. Stucker 8,945,305 10,380
George R. Zoffinger 8,945,213 10,472
Set forth below is the tabulation of the votes for approval of
the MFN Financial Corporation Annual Executive Incentive Bonus
Plan.
For Against
--- -------
8,783,706 171,979
(d) Not Applicable
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 Company did not file any Current
Reports on Form 8-K during the quarter ended June 30, 2000.
31
<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 4, 2000 /s/ Edward G. Harshfield
------------------------
Edward G. Harshfield
Chairman and Chief Executive Officer
Date: August 4, 2000 /s/ Jeffrey B. Weeden
---------------------
Jeffrey B. Weeden
President and Chief Operating Officer
Date: August 4, 2000 /s/ Mark D. Whitham
-------------------
Mark D. Whitham
Chief Financial Officer (Principal Accounting
Officer)
32
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Description
----------- -----------
11. Computation of Earnings Per Share
27. Financial Data Schedule
33
