<PAGE>
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number: 1-10176
MFN FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 36-3627010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Field Drive, Suite 340, Lake Forest, Illinois 60045
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 295-8600
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of Each Class on which registered
------------------- ---------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of class)
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 requirements for the past 90 days. Yes X No
The aggregate market value of the Registrant's Common Stock held by non-
affiliates on March 3, 2000 totaled approximately $90,000,000 (based on the
closing price of the Registrant's Common Stock on the OTC Bulletin Board).
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 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
The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding at March 3, 2000, was 10,000,000.
The following documents are incorporated into this Form 10-K by reference:
Portions of the Proxy Statement for the Annual Meeting of Stockholders of
the Company to be held April 25, 2000 are incorporated by reference in Part II
and Part III of this Report. Such Proxy Statement, except for the parts
therein which have been specifically incorporated by reference, shall not be
deemed "filed" for the purposes of this report on Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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<PAGE>
MFN FINANCIAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 5
Item 3 Legal Proceedings........................................... 6
Item 4 Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5 Market for the Registrant's Common Equity Securities and
Related Stockholder Matters................................. 6
Item 6 Selected Consolidated Financial Data........................ 7
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 7A Quantitative and Qualitative Disclosures About Market Risk.. 22
Item 8 Consolidated Financial Statements and Supplementary Data.... 23
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 50
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 50
Item 11 Executive Compensation...................................... 50
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 50
Item 13 Certain Relationships and Related Transactions.............. 51
PART IV
Item 14 Exhibits, Consolidated Financial Statement Schedules, and
Reports on Form 8-K......................................... 51
Signatures.............................................................. 54
</TABLE>
<PAGE>
PART 1
Item 1--Business
General
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 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 direct loans generally have terms of 12 to 24 months with maximum
terms of 36 months; secured 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 42 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 physical location. DDMs are
responsible for developing new dealer relationships, maintaining existing
relationships, explaining the Company's underwriting criteria to the dealers,
maintaining current contractual dealer agreements between the Company and the
dealer, and ensuring that the dealer has sufficient retail automobile sales
finance contract forms available. 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 and
1999 originations as compared to older accounts.
Restructuring and Chapter 11 Proceedings
In January 1997, the Company announced the discovery of accounting
irregularities that caused an overstatement of the previously released
earnings for 1995 and 1996. As a result of the accounting irregularities, the
Company was in violation of certain covenants in its senior note and
subordinated debt agreements, and did not have access to commercial paper
markets, which historically provided a significant portion of the Company's
financing. Consequently, the Company was unable to repay maturing debt. The
Company was also named as a defendant in a variety of lawsuits generally
arising from the announcement on January 29, 1997, that it would restate its
earnings for certain prior periods as a result of the discovery of accounting
irregularities.
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.
1
<PAGE>
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 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 ("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% New 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 New Senior Secured Notes are comprised of (i) Series A Senior Secured
Notes Due March 23, 2001, (the "Series A Notes") which have a 10% annual fixed
rate of interest, payable quarterly and (ii) Series B Senior Secured Notes Due
March 23, 2001, (the "Series B Notes") which have a floating rate of interest
based on the three month LIBOR (London Interbank Offering Rate), payable
quarterly. The Company 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 New 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 December
31, 1999 was $202,829,482 and $178,412,263, respectively, for a total of
$381,241,745. Principal payments on the New Senior Secured Notes are not due
until maturity on March 23, 2001. The New Senior Subordinated Notes, with an
aggregate principal amount of $22.5 million, have an 11% annual fixed rate of
interest, payable quarterly and are due March 23, 2002.
The Plan provided (a) 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 the Company's previous auditors and (iii)
$250,000 in cash for fees and costs to be incurred in connection with the
Liquidating Trust and (b) for the holders of Securities Fraud Claims to
receive a share of the beneficial interests in the Liquidating Trust in
complete settlement, satisfaction and discharge of their claims. In addition,
the Plan provided for the Company to pay (i) $13.35 million into funds
established for the benefit of holders of certain indemnification claims
against the Company and (ii) up to an aggregate amount of $250,000, for costs
and expenses of certain officers, agents and employees who were no longer
employed by the Company as of the first day immediately following March 23,
1999, in connection with their participation in a government investigation.
The Company also agreed to pay a former employee $100,000 in connection with a
mutual release. All of these costs were fully provided for as of December 31,
1998 and all amounts were paid during 1999 with the exception of approximately
$221,000 which remains set aside 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 above summary of the Plan does not purport to be complete and is
qualified in its entirety by reference to the Plan which is filed as Exhibit 2
hereto.
2
<PAGE>
Branch Office Network/Operations
At December 31, 1999, the Company had 69 operating branches versus 158 at
December 31, 1998. During the second quarter of 1999, the Company announced it
would close 46 branches and exit certain non-profitable market areas. On July
29, 1999, the Company announced it had entered into a definitive agreement to
sell substantially all of the non-automotive loan accounts and certain other
assets of 47 direct loan offices of subsidiaries located in Texas, Louisiana,
Mississippi and Alabama to First Tower Corp. The sale was completed in
September, 1999 for targeted assets held at 39 of the 47 direct loan offices.
The sale of the remaining eight offices, all located in Texas, closed during
the first quarter of 2000 and the financial impact of this transaction was
immaterial.
The Company will continue to evaluate its optimal number of operating
branches. During the fourth quarter of 1999, one branch in Oklahoma was
reactivated and in the first quarter of 2000, two Texas branches were
reactivated and one Michigan branch was closed. After the sale of the eight
Texas branches, MFN expects to have 63 continuing operating branches.
A summary of the 69 continuing operating branches at December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
Office
State Locations
- ----- ---------
<S> <C>
Arizona................. 2
Delaware................ 1
Florida................. 7
Georgia................. 2
Illinois................ 9
Indiana................. 1
Kentucky................ 2
Louisiana............... 4
Michigan................ 3
Mississippi............. 1
Missouri................ 2
</TABLE>
<TABLE>
<CAPTION>
Office
State Locations
- ----- ---------
<S> <C>
Nevada...................... 2
New York.................... 1
North Carolina.............. 4
Ohio........................ 5
Oklahoma.................... 1
Pennsylvania................ 3
South Carolina.............. 3
Tennessee................... 2
Texas....................... 8
Virginia.................... 5
Wisconsin................... 1
---
TOTAL................... 69
===
</TABLE>
Included in the above operating branch total of 69 is the single operating
office of Midland Finance Company, a wholly-owned subsidiary of the Company
located in Chicago, Illinois.
Beginning in 1994, the Company began to experience a significant level of
turnover in its branch staff as a result of increased demand for experienced
personnel by competitors. After the announcement of the accounting
irregularities, the Company experienced further difficulty in retaining and
hiring qualified consumer lending professionals. However, since 1998, the rate
of turnover in management positions has declined significantly and management
believes that the turnover rate is a manageable level.
The business mix of MFN's gross finance receivables portfolio is 94% sales
finance receivables and 6% direct consumer loans. The sales finance
receivables are located throughout the Company's branch network. Of the sales
finance receivables at December 31, 1999, approximately 95% were automobile
retail sales finance contracts and the balance represented contracts on other
consumer goods. These other consumer goods contracts are serviced primarily at
two locations in the Chicago market.
The Company's strategy is to emphasize the purchase of retail automobile
sales finance contracts. As a result, direct consumer loans will continue to
decline as a percentage of the total receivable portfolio. At December 31,
1999, approximately 28% of the direct loan portfolio balance was serviced at
the Company's Midland Finance subsidiary in Chicago, while the remaining
balance was serviced in locations throughout the Company.
Beginning in 1998, the Company started consolidating the underwriting of
retail automobile sales finance contracts in its CPO's. This enabled the
Company to better control the underwriting of credit. In 1999, the Company
further reduced the number of CPO's to ten locations and began implementing a
new automated application processing and risk control system. When fully
implemented this new system will automatically credit score all applications
processed.
3
<PAGE>
With the CPO's serving as the centralized underwriter of credit for the
retail automobile sales finance business of the Company, the branches, with
minor exception, concentrate on the collection of receivables and not the
origination of direct loans or sales finance contracts.
Loan and Contract Origination and Marketing
Historically, MFN originated loans and acquired individual sales finance
contracts through its branch network based upon a decentralized approval
process tailored to the market in which its specific offices operated. All
credit extensions were reviewed and approved at the branch level with
extensions of credit in excess of preset limits requiring approval by a
regional director. In 1998, MFN initiated regional CPOs that review and
approve the origination of sales finance contracts for the Company. Through
this process, underwriting criteria are applied more consistently while still
allowing for flexibility to be responsive to local market conditions. In
addition, as discussed above, this realignment released branch personnel from
making credit decisions and allowed for greater emphasis to be placed on cash
collections.
Installment sales finance receivables which originate with local dealers
(household goods, appliance and automobile) are subjected to credit review and
credit worthiness policies such as, but not limited to, minimum monthly
income, mileage of vehicle, amount to be financed, term of the contract,
advance to book value of the vehicle, debt ratio of the borrower and time on
the job. A specific installment sales finance contract is acquired only after
objective investigations of the credit worthiness of the borrower and a
determination of the underlying value of the asset through use of industry
publications, combined with the subjective assessment by underwriters. Sales
finance contracts are reviewed individually and extensions of credit are made
based upon the credit worthiness of each contract.
Individual sales finance contracts are acquired pursuant to formal
agreements with local dealers. MFN acquires automobile sales finance contracts
from local franchised and independent used car dealers with which MFN has
established ongoing relationships. A relationship with a dealer begins only
after analysis of the soundness of their business is completed. 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.
MFN markets to dealers through use of DDMs which call on individual dealers
to explain product offerings of the Company. MFN does no national advertising.
The Company may advertise in local publications and attends automobile
industry conferences to market its products. MFN believes that client service
in the form of timely application processing results is the most cost
effective primary marketing tool.
Insurance Operations
In conjunction with their lending practices, the operating subsidiaries
through contractual arrangements with insurance companies, offer credit life,
accident and health, property and involuntary unemployment insurance to
borrowers, at the borrower's discretion. These borrowers may obtain financing
directly from the operating subsidiaries or under sales finance contracts and
financing contracts acquired from merchants and automobile dealers. Prior to
June, 1997, such insurance products were provided by Lyndon Property Insurance
Company and subsidiaries ("Lyndon"), a wholly-owned subsidiary.
Notwithstanding the disposition of Lyndon in the second quarter of 1997, MFN
continues to offer a variety of insurance and insurance related products
through third party carriers.
The policies insure the holder of a sales finance contract or other debt
instrument for the outstanding balance (or portion thereof as specified in the
policy) payable in the event of i) death or disability of the debtor ii)
damage to, or destruction of, property securing the account or iii) due to the
debtor's employment status. Premiums are earned over the life of the contracts
principally using pro-rata and sum-of-the-months digits methods or in relation
to anticipated benefits to the policy holder.
4
<PAGE>
Also, in conjunction with their lending practices, the Company purchases
insurance coverage and charges its customers who do not provide proof of
insurance coverage on automobiles that are collateral on the outstanding
retail sales contracts. During the second quarter of 1997, the Company formed
a captive insurance company, MFN Insurance Company, to reinsure coverage under
such policies. MFN Insurance Company provides aggregate coverage for incurred
losses in excess of targeted loss ratios through a reinsurance agreement with
the primary carrier.
Source of Funds
MFN funds its operations primarily through collections of principal and
interest from finance receivables and debt securities issued in connection
with the Plan of Reorganization. At December 31, 1999, MFN had total debt of
$403.7 million. Of this total, 50.2% was in fixed rate senior term notes,
44.2% was in variable rate senior term notes and 5.6% was in fixed rate
subordinated term notes.
The Company currently does not have a credit rating and consequently, the
Company does not have access to the commercial paper markets. Proceeds from
the collection of existing sales finance contracts and current cash on hand
have provided and are expected to continue to provide sufficient working
capital for operations during 2000.
Competition
The consumer finance business is intensely competitive. MFN competes with
other consumer finance companies, personal loan departments of commercial
banks, federally insured credit unions, industrial banks, credit card issuers
and companies which finance the sales of their own merchandise or the
merchandise of others.
In recent years, a number of MFN's competitors have announced that they
have exited the sub-prime sales finance industry, have no funds available to
acquire additional sales finance contracts or have tightened credit standards
resulting in lower volumes. While this may be a sign that competitive
pressures should be easing, there still appears to be no shortage of
alternatives for auto dealers attempting to sell sales finance contracts.
Employees
As of December 31, 1999, MFN had approximately 980 employees or 930 full-
time equivalents. None of the Company's employees are represented by a
collective bargaining agreement.
Government Regulation
All consumer finance operations are subject to federal and state
regulations. Personal loan lending laws generally require licensing of the
lender, limitations on the amount, duration and charges for various categories
of loans, adequate disclosure of certain contract terms and limitations on
certain collection policies and creditor remedies. Federal consumer credit
statutes primarily require disclosures of credit terms in consumer finance
transactions. In general, the business is conducted under licenses issued by
individual states. Each licensed office is subject to periodic examination by
state regulatory authorities. The state licenses are revocable for cause. MFN
believes that its current operations comply in all material respects with
these regulations. MFN is also subject to the provisions of the Federal
Consumer Credit Protection Act and its related regulations.
Credit insurance offered in connection with the direct lending and sales
finance activities of MFN and the premiums payable by credit customers and
commissions payable by insurers to the originators of such insurance are also
subject to state laws and regulations.
Item 2--Properties
The executive offices of MFN are located at 100 Field Drive, Lake Forest,
Illinois 60045, telephone number (847) 295-8600. MFN occupies approximately
11,750 square feet of a modern office building subject to a lease having a
term expiring on March 31, 2002. The Company also leases space for all its
branch offices. The leases for the branch offices are generally for terms from
3 to 5 years. Total rent expense for the Company approximated $3,160,000,
$3,667,000 and $4,571,000 in 1999, 1998 and 1997, respectively.
5
<PAGE>
Item 3--Legal Proceedings
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. See Item 1 "Business--Restructuring and Chapter
11 Proceedings" for a description of the resolution of certain claims asserted
in connection with the accounting irregularities.
The Securities and Exchange Commission is investigating the events giving
rise to the previously announced 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 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 above described litigation, no accrual has been
made for the majority of these lawsuits.
Item 4--Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5--Market for Registrant's Common Equity and Related Stockholder Matters
On March 23, 1999, pursuant to the Company's Plan of Reorganization, all of
the Company's common stock (the "Old Common Stock") was cancelled. Under the
Plan, the Company's senior lenders received 9,500,000 shares of the Company's
New Common Stock and the stockholders as of March 23, 1999, received 500,000
shares of the Company's New Common Stock and three series of warrants to
purchase New Common Stock. As such, the performance of the Company's Old
Common Stock is not meaningful. The New Common Stock of MFN Financial
Corporation has been trading on the OTC Bulletin Board under the symbol "MFNF"
since May 7, 1999. On March 3, 2000, MFN had approximately 1,389 holders of
record of New Common Stock, exclusive of holders of shares in "street" or
nominee names. The following table sets forth the high and low closing sale
prices of the New Common Stock as reported on the OTC Bulletin Board since May
7, 1999. The over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. No cash dividends were declared or paid by the
Company during the Company's two most recent fiscal years.
<TABLE>
<CAPTION>
1999
--------------
High Low
------- ------
<S> <C> <C>
Second Quarter............................................. $15.000 $5.000
Third Quarter.............................................. 10.000 7.875
Fourth Quarter............................................. 8.625 6.000
</TABLE>
Dividends may be paid on the Company's New Common Stock subject to certain
financial covenants contained in the Company's indentures governing its Senior
Secured Notes. At December 31, 1999, $10,264,500 was available for payment
under these restrictions. However, the Company does not anticipate the payment
of any dividends for the foreseeable future.
6
<PAGE>
Item 6--Selected Consolidated Financial Data
All financial information included herein reflects the adjustments to
correct for the irregularities described in Item 1, "Business--Restructuring
and Chapter 11 Proceedings". Due to the Company's emergence from the Voluntary
Case and implementation of Fresh Start Reporting, financial information as of
March 31, 1999 and for the periods subsequent to March 31, 1999, are not
comparable to those of the Company for the periods prior to March 31, 1999. See
Note 1 to the Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
----------- --------------------------------------------------------
9 Months 3 Months
Ended Ended Years Ended December 31
Dec 31 Mar 31 ----------------------------------------------
(Dollars in thousands, 1999 1999 1998 1997 1996 1995
except per share data) ----------- -------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $105,167 $ 35,727 $181,093 $ 235,621 $ 271,889 $ 255,066
Interest expense
(Note 1)............... 32,191 474 38,593 86,529 64,789 57,303
-------- -------- -------- --------- ---------- ----------
Net interest income
before provision for
finance credit losses.. 72,976 35,253 142,500 149,092 207,100 197,763
Provision for finance
credit losses.......... 23,071 9,857 56,790 106,374 215,171 32,641
-------- -------- -------- --------- ---------- ----------
Net interest income
after provision for
finance credit losses.. 49,905 25,396 85,710 42,718 (8,071) 165,122
Other operating income.. 16,825 3,053 13,191 47,080 101,985 58,349
Other operating
expenses............... 46,430 21,065 101,095 159,558 143,297 103,363
-------- -------- -------- --------- ---------- ----------
Operating income (loss)
before non-operating
expenses and income tax
provision (benefit).... 20,300 7,384 (2,194) (69,760) (49,383) 120,108
Non-operating expenses
(Note 3)............... -- 33,719 45,376 20,683 -- --
Income tax provision
(benefit).............. 1,291 (5,287) 6,000 (16,250) (20,415) 45,979
-------- -------- -------- --------- ---------- ----------
Net income (loss) before
extraordinary credits.. 19,009 (21,048) (53,570) (74,193) (28,968) 74,129
Extraordinary credits,
net of taxes........... 1,520 45,570 -- -- -- --
-------- -------- -------- --------- ---------- ----------
Net income (loss)....... $ 20,529 $ 24,522 $(53,570) $ (74,193) $ (28,968) $ 74,129
======== ======== ======== ========= ========== ==========
Weighted average common
shares outstanding
Basic.................. 10,000 ** ** ** ** **
Diluted................ 10,001 ** ** ** ** **
Earnings per common
share
Basic.................. $ 2.05 ** ** ** ** **
Diluted................ $ 2.05 ** ** ** ** **
Dividends per share
declared............... $ -- ** ** ** ** **
Selected Balances at
Period End (Note 2)
Total assets........... $588,576 $782,828 $798,683 $ 979,404 $1,543,360 $1,598,098
Total gross finance
receivables........... 651,005 775,539 792,435 1,174,287 1,396,081 1,441,288
Total finance
receivables, net of
unearned income....... 520,012 622,965 642,872 970,225 1,160,423 1,197,776
Allowance for finance
credit losses......... 39,543 49,938 53,485 102,204 97,762 46,366
Nonrefundable dealer
reserves.............. 34,062 37,504 36,820 52,731 89,378 61,961
Senior debt--commercial
paper and notes....... -- -- 339,340 416,731 525,051 489,990
Senior debt--term
notes................. 381,242 434,165 335,905 412,514 488,625 438,750
Subordinated debt...... 22,500 22,500 22,500 22,500 22,500 29,500
Stockholders' equity... 105,529 85,000 29,130 82,700 168,885 259,487
Selected Ratios
Annualized net income
(loss) to average
total assets.......... 4.48% 12.63% (6.30)% (5.94)% (1.88)% 6.01%
Annualized net income
(loss) to average
stockholders' equity.. 28.59% 398.63% (83.82)% (64.20)% (12.85)% 29.64%
Total stockholders'
equity to total
assets................ 17.93% 10.86% 3.65% 8.44% 10.94 % 16.24%
</TABLE>
- --------
Note 1. Pursuant to the Voluntary Case, no interest was accrued or paid on the
Predecessor Company's debt subsequent to July 15, 1998, the date the
Voluntary Case was filed, until March 23, 1999, the date the
Reorganized Company emerged from the Voluntary Case. This resulted in
the reduction of 1999 interest
7
<PAGE>
expense of approximately $11.473 million (calculated using a rate of ten
percent (10.0%) on the senior debt and at a rate of eleven percent
(11.0%) on the subordinated debt) and a reduction of 1998 interest
expense of $27.824 million (assuming default rates of interest), from
what the Company would have expected to incur had the Voluntary Case not
been filed.
Note 2. Selected Balances at Period End for March 31, 1999 represent
Reorganized Company after Fresh Start Reporting.
Note 3. Non-operating expenses consist of a $18.95 million provision for
litigation and reorganization expenses recapped in Note 12 to the
Consolidated Financial Statements.
** Earnings per common share and dividend per common share amounts as they
relate to the Predecessor Company are not meaningful due to the
emergence from the Voluntary Case. See Note 7 to the Consolidated
Financial Statements.
Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations
"Safe Harbor" Statement under the Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-K for the year ended December 31, 1999, contains
certain forward-looking statements pertaining to the outcome of the Company's
Plan of Reorganization, branch closings, expected operating results, loan
originations, 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, the success of new business methods and systems 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.
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 "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"), (i) $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 ("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% New 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 Reporting by Entities in Reorganization
under the Bankruptcy Code" (SOP 90-7). Fresh Start Reporting resulted in
material changes to
8
<PAGE>
the 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, 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 1999 and 1998, 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 Consolidated Balance
Sheets as of December 31, 1999 and December 31, 1998 to distinguish between
the Reorganized Company and the Predecessor Company. Likewise, a black line
appears on the Consolidated Statements of Income and Cash Flows between the
nine-month period ended December 31, 1999 for the Reorganized Company and the
three-month period ended March 31, 1999 and the years ended 1998 and 1997 for
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 December 31, 1999 and the
Predecessor Company at December 31, 1998. Consolidated results of operations
are for the nine-month period ended December 31, 1999 for the Reorganized
Company and for the three-month period ended March 31, 1999 and years 1998 and
1997 for the Predecessor Company. Consolidated results of operations for the
year ended December 31, 1999 represent a combination of Reorganized Company
and the Predecessor Company and careful analysis should be used when
interpreting these results. This discussion should be read in conjunction with
the Company's consolidated financial statements and notes thereto appearing
elsewhere in this 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 Accountants'
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 Consolidated Balance Sheet. See Note 1 to the
Consolidated Financial Statements.
Assets and Finance Receivables
During 1999, total assets of the Company decreased to $588.6 million from
$798.7 million at December 31, 1998. The decline in total assets was primarily
attributable to a required payment under the Plan of accrued interest and
Excess Cash (as defined in the Plan) totaling $121.1 million and a decrease in
net finance receivables of $106.2 million.
The Company's offices in Illinois, Florida and Virginia managed
approximately 15%, 11%, and 8%, respectively, of all finance receivables
outstanding at December 31, 1999. The total number of operating branches at
December 31, 1999 was 69 compared to 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
9
<PAGE>
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 and employee 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 2 to the Consolidated
Financial Statements. The sale was completed in September, 1999 for $41.8
million of gross receivables held at 39 of the 47 direct loan offices
resulting in a gain of $7.1 million. The sale of the remaining eight offices,
all located in Texas, closed during the first quarter of 2000 and the
financial impact of this transaction was immaterial. The 47 direct loan
offices sold did not fit the strategic focus of the Company of purchasing
automobile retail installment contracts.
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
Consolidated Balance Sheet of the Predecessor Company.
The following table summarizes the composition of finance receivables, net
of unearned income at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Gross finance receivables
Direct loans......................................... $ 40,627 $117,136
Sales finance........................................ 610,378 675,299
-------- --------
Total gross finance receivables........................ 651,005 792,435
Less: Unearned finance charges......................... 130,584 146,978
Unearned commissions and other......................... 409 2,585
-------- --------
Finance receivables, net of unearned income............ $520,012 $642,872
======== ========
</TABLE>
Gross direct loans outstanding declined $76.5 million or 65.3% in 1999
compared to 1998. Direct loans totaling $36.3 million were sold during the
year. The remainder of the decline in direct loans is attributable to the
Company's strategic decision to place a greater emphasis on purchasing sales
finance contracts versus direct lending. Gross sales finance contracts
outstanding declined $64.9 million or 9.6% in 1999 compared to 1998 with $41.9
million of the total decline attributable to exiting seven targeted markets in
Oklahoma and Texas. Also, $5.5 million of the total decline was attributable
to non-automotive sales finance contracts sold during the year. See Note 2 to
the Consolidated Financial Statements.
The following sets forth a summary of gross originations and acquisitions,
excluding activity of the credit card portfolio, for the years ended December
31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Direct loans........................................... $ 72,184 $132,150
Sales finance receivables.............................. 473,500 397,816
-------- --------
Total originations and acquisitions.................. $545,684 $529,966
======== ========
</TABLE>
Purchases of sales finance receivables for 1999 showed a 19% increase over
1998 based on higher production levels during the first half of the year.
Originations for the second half of 1999 trended back to levels experienced in
1998 and are attributable to the closing and sale of the branches referenced
above during the second and third quarters. The Company also decided to stop
originating and purchasing installment contracts in
10
<PAGE>
Texas and Oklahoma during the second half of 1999 as the Company believed that
these market areas did not have sufficient profit potential at the time. The
offices in Texas and Oklahoma remained open during this period and the
Company, after further evaluation, reactivated one Oklahoma office in December
1999 and two Texas offices in January 2000. These reactivated offices will
service receivables acquired in these markets through the Company's DDMs and
CPOs.
The Company installed software at one CPO location during the third quarter
of 1999 that is expected to allow the CPOs to become more efficient in
processing transactions and managing dealer relationships. The Company will be
deploying this software at other CPO locations over the first two quarters of
2000. The Company intends to place a greater emphasis on purchasing sales
finance contracts versus direct lending.
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 nonrefundable
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 or account 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.
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. The Company 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 upon a pro rata
calculation over the term of each specific account. 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 finance 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.
11
<PAGE>
The following is a summary of the activity in the allowance for finance
credit losses for the years ended December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year............. $ 53,485 $ 102,204 $ 97,762
Reserves recaptured in conjunction with
sale of finance receivables............. (3,694) -- --
Provision for finance credit losses...... 32,928 56,790 106,374
Finance receivables charged-off, net of
recoveries.............................. (47,058) (103,402) (106,799)
Net amount transferred from reserve for
repossessed assets...................... 3,882 3,993 4,867
Transfer to credit card portfolio held
for sale................................ -- (6,100) --
-------- --------- ---------
Balance at end of year................... $ 39,543 $ 53,485 $ 102,204
======== ========= =========
Allowance for finance credit losses as a
percentage of sales and direct finance
receivables outstanding, net of unearned
income.................................. 7.60% 8.32% 10.53%
======== ========= =========
</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 deficiency is charged-off.
Reserves on sold repossessed assets are transferred back to the allowance for
finance credit losses. During 1999, 1998 and 1997, the increase in the
allowance for finance credit losses related to the transfer from the
repossessed asset reserve is due to the decline in repossessed assets.
The decrease in the provision for finance credit losses in 1999 and 1998 is
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 allowance for finance credit losses as a percentage of the receivable
portfolio occurred primarily in the second half of 1998 as delinquencies
declined and the expected losses inherent in the portfolio improved. For
further discussion, see Credit Losses and Delinquencies.
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.
A summary of the activity in nonrefundable dealer reserves for the years
ended December 31, was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year............... $ 36,820 $ 52,731 $ 89,378
Reserve adjustment in conjunction with sale
of finance receivables.................... 495 -- --
Discounts acquired on new volume........... 29,713 25,460 44,691
Net charge-offs absorbed................... (32,966) (41,371) (81,338)
-------- -------- --------
Balance at end of year..................... $ 34,062 $ 36,820 $ 52,731
======== ======== ========
Nonrefundable dealer reserves as a
percentage of sales finance receivables,
net of unearned income.................... 7.02% 6.73% 6.80%
======== ======== ========
Discounts acquired as a percentage of gross
sales finance receivables acquired........ 6.28% 6.40% 6.25%
======== ======== ========
</TABLE>
12
<PAGE>
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.
The fluctuation in the discounts acquired in 1999, 1998 and 1997 is
primarily due to the volume of contracts purchased as the discounts acquired
as a percentage of sales finance receivables acquired remained relatively
constant.
Income Tax Accounts
At December 31, 1999, the Company had recorded net income tax receivables
and prepayments of approximately $8.7 million and a deferred tax liability of
approximately $19.3 million.
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.
Debt
The following table presents the Company's debt instruments and the stated
interest rates on the debt at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
Balance Rate Balance Rate Balance Rate
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Senior debt:
Commercial paper and notes....... $ -- -- $339,340 5.7% $416,731 5.7%
Senior secured debt.............. 381,242 10.0% 335,905 7.0% 412,514 7.0%
Senior subordinated debt........... 22,500 11.0% 22,500 10.3% 22,500 10.3%
-------- ---- -------- ---- -------- ----
Total.......................... $403,742 10.0% $697,745 6.5% $851,745 6.5%
======== ==== ======== ==== ======== ====
</TABLE>
The Senior secured debt at December 31, 1999 was comprised of both fixed
and variable rate notes. Due to the purchase of an interest rate cap, the all-
inclusive cost on this debt at December 31, 1999 is 10.0% to the Company.
As a result of net losses incurred beginning in 1997, the Company violated
certain covenants permitting the holders of its Senior and Subordinated Debt
to accelerate all such debt. The Company entered into a forbearance agreement
beginning on July 12, 1997 with its lenders which, including extensions (the
"Forbearance Agreements"), expired July 15, 1998. In connection with the
execution in 1998 of an extension to a previous forbearance agreement, the
participating senior lenders received a fee of 2.25% of the outstanding
balance. The fee, aggregating $15.2 million, was paid in 1998 and recorded as
a component of reorganization expense.
Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum
rate of nine percent (9.0%) and subordinated note holders received interest at
a rate of five and one-half percent (5.5%). In addition, the agreements
required the periodic payment of excess cash to be applied as a reduction of
outstanding principal. Through May 5, 1998, approximately $307 million of
principal was paid to creditors under the Forbearance Agreements, of which
$154 million was paid during 1998.
Pursuant to the Voluntary Case, no interest was accrued or paid on the
Predecessor Company's debt subsequent to July 15, 1998, the date the Voluntary
Case was filed, until March 23, 1999, the date the Reorganized Company emerged
from the Voluntary Case. This resulted in the reduction of 1999 interest
expense of approximately $11.473 million (calculated using a rate of ten
percent (10.0%) on the senior debt and a rate of eleven percent (11.0%) on the
subordinated debt) and a reduction of 1998 interest expense of $27.824 million
(assuming default rates of interest), from what the Company would have
expected to incur had the Voluntary Case not been filed.
13
<PAGE>
On April 1, 1999, $100.7 million of outstanding principal and $20.4 million
of interest was paid to senior lenders pursuant to the Plan of Reorganization.
The interest payment covered the period from October 14, 1998 through March
23, 1999 at a rate of ten percent (10.0%) on the senior debt and at a rate of
eleven percent (11.0%) on the subordinated debt. This interest payment was
recorded as a non-operating expense in 1999.
As described in Note 5 to the Consolidated Financial Statements, all of the
Company's debt was subject to compromise under the Plan of Reorganization.
Therefore the entire amount of outstanding debt at December 31, 1998 of $697.7
million was identified as "Liabilities subject to compromise under
reorganization" in the Company's Consolidated Financial Statements.
In connection with the Plan of Reorganization, the Company issued New
Senior Secured Notes and New Senior Subordinated Notes. The New Senior Secured
Notes are comprised of (i) Series A Notes Due March 23, 2001, which have a 10%
annual fixed rate of interest, payable quarterly and (ii) Series B Notes Due
March 23, 2001, which have a floating rate of interest based on three month
LIBOR (London Interbank Offering Rate), payable quarterly. Principal payments
on the New Senior Secured Notes are not due until maturity on March 23, 2001.
The Company's senior lenders prior to the Effective Date were given the
option to receive either Series A Notes or Series B Notes in connection with
the Plan. During the 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 New 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 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 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.
Debt is used as the primary source for funding the Company's finance
receivables. 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 (as defined in the Plan of Reorganization). The Company also
cancelled its subordinated debt in exchange for Senior Subordinated Notes. At
December 31, 1999 the Company had total debt outstanding of $403.7 million.
See Note 4 to the Consolidated Financial Statements.
The Senior Secured Notes mature on March 23, 2001 and the Senior
Subordinated Notes mature on March 23, 2002. No principal payments are
required prior to maturity. During August, 1999, MFN retired debt with a face
value of $52.9 million prior to scheduled maturity. See Note 10 to the
Consolidated Financial Statements.
Liabilities Subject to Compromise Under Reorganization
The following table shows the liabilities subject to compromise under
reorganization as of December 31, 1998 (dollars in thousands). These
liabilities were recorded at amounts that the Court expected to allow as
claims rather than estimates of the amounts for which the claims may be
settled.
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Senior debt, commercial paper and notes......................... $339,340
Senior debt, term notes......................................... 335,905
Subordinated debt............................................... 22,500
Dividends payable............................................... 12,937
Pre-petition accrued interest................................... 8,393
Restructuring fee............................................... 695
--------
Total....................................................... $719,770
========
</TABLE>
14
<PAGE>
See Note 1 to the Consolidated Financial Statements for disposition of
these liabilities following the Company's emergence from the Voluntary Case
and the adoption of Fresh Start Reporting.
Litigation Accrual
The Plan of Reorganization provided for the settlement of all claims and
lawsuits against the Company arising out of the financial irregularities in
exchange for payments aggregating $18.95 million. The entire amount was paid
during 1999 with the exception of approximately $221,000 which remains accrued
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.
Excess of Revalued Net Assets Over Liabilities and Stockholders' Investment
See Note 1 to the Consolidated Financial Statements.
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 Consolidated Balance Sheet.
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 Note 1 to the
Consolidated Financial Statements. 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.
Total stockholders' equity at December 31, 1999 was $105.5 million or 17.9%
of total assets compared with $29.1 million or 3.7% of total assets at
December 31, 1998. During 1999, the Predecessor Company reported a $21.0
million net loss (before extraordinary credit of $45.6 million, net of taxes)
for the three month period ended March 31, 1999 and the Reorganized Company
reported net income of $19.0 million (before extraordinary credit of $1.5
million, net of taxes) for the nine month period ended December 31, 1999.
During 1998, the Predecessor Company reported a net loss of $53.6 million. The
Company did not declare any dividends or repurchase any shares of common stock
during 1999 or 1998.
RESULTS OF OPERATIONS
The results of operations shown in the accompanying 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 annual
operating performance in fiscal years 1999, 1998 and 1997, 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.
Net Income (Loss)
For the year ended December 31, 1999, MFN reported net income of $45.1
million compared to net losses of $53.6 million and $74.2 million for 1998 and
1997, respectfully. Results for 1999, 1998 and 1997 were negatively impacted
by non-operating expenses aggregating $33.7 million, $45.4 million and $20.7
million, respectfully. 1999 results include an extraordinary credit of $45.6
million representing the gain on discharge of indebtedness, net of taxes along
with an extraordinary credit of $1.5 million representing a gain on early
retirement of debt, net of taxes.
15
<PAGE>
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 year ended December 31, 1999, net interest
income was $108.2 million, which compares with $142.5 million and $149.1
million in 1998 and 1997, respectively. For the year ended December 31, 1999,
MFN's net interest margin, which is the ratio of net interest income divided
by average interest earning assets, was 15.08% compared to 15.87% and 12.69%
in 1998 and 1997, respectively. The net interest margin in 1999 and 1998 was
impacted by i) the accounting for interest expense during the Voluntary Case
as no interest was accrued or paid on the Predecessor Company's debt
subsequent to July 15, 1998, the date the Voluntary Case was filed, until
March 23, 1999, the date the Reorganized Company emerged from the Voluntary
Case and ii) an adjustment required by SOP 90-7 (see Note 13 to the
Consolidated Financial Statements). The second table below reflects the rates
paid and the net interest margin had interest expense been recorded during the
Voluntary Case and without the impact of the adjustment required by SOP 90-7.
The 1999 net interest margin was also impacted by the change in the mix of
earning assets as higher cash balances were carried during 1999 from run-off
of the higher yielding finance receivable portfolio. The 1997 net interest
margin was impacted as a result of an increase in interest expense to default
levels beginning in February, 1997 and the sale of Lyndon which had a
substantial amount of investments that earned a relatively low rate of
interest compared to the finance receivables. The following table summarizes
net interest income and the net interest margin for the three years ended
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ----------
<S> <C> <C> <C>
Average interest earning assets:
Cash, cash equivalents and investments.... $128,770 $ 90,911 $ 96,233
Finance receivables....................... 588,917 806,801 1,078,650
-------- -------- ----------
Total average earning assets............ 717,687 897,712 1,174,883
Average interest bearing liabilities........ 496,992 739,645 963,431
-------- -------- ----------
Net......................................... $220,695 $158,067 $ 211,452
======== ======== ==========
Interest income:
Cash, cash equivalents and investments.... $ 5,346 $ 2,196 $ 7,593
Finance receivables....................... 135,548 178,897 228,028
-------- -------- ----------
Total interest income................... 140,894 181,093 235,621
Interest expense............................ 32,665 38,593 86,529
-------- -------- ----------
Net interest income before provision for fi-
nance credit losses........................ $108,229 $142,500 $ 149,092
======== ======== ==========
Yield:
Cash, cash equivalents and investments.... 4.15% 2.42% 7.89%
Finance receivables....................... 23.02% 22.17% 21.14%
-------- -------- ----------
Earning assets.......................... 19.63% 20.17% 20.05%
Cost of funds............................... 6.57% 5.22% 8.98%
-------- -------- ----------
Net interest spread......................... 13.06% 14.95% 11.07%
======== ======== ==========
Net interest margin......................... 15.08% 15.87% 12.69%
======== ======== ==========
</TABLE>
16
<PAGE>
Had interest expense of $11.473 million in 1999 and $27.824 million in 1998
been recorded during the Voluntary Case and restating net interest income
$1.893 million in 1999 and $1.947 million in 1998 for the impact of the SOP
90-7 adjustment, the net rates and net interest margin would have been
restated as follows for the year ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Yield--restated:
Cash, cash equivalents and investments................... 5.62% 4.56% 7.89%
Finance receivables...................................... 23.02% 22.17% 21.14%
------ ------ ------
Earning assets......................................... 19.90% 20.39% 20.05%
Cost of funds--restated:................................... 8.88% 8.98% 8.98%
------ ------ ------
Net interest spread--restated:............................. 11.02% 11.41% 11.07%
====== ====== ======
Net interest margin--restated:............................. 13.75% 12.99% 12.69%
====== ====== ======
</TABLE>
Other Operating 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.
Other operating income increased $6.7 million or 50.8% from 1998 to 1999.
During 1999, the Company realized a $7.1 million gain on the sale of finance
receivables and certain assets. See Note 2 to the Company's Consolidated
Financial Statements. Other income generated by the credit card portfolio
decreased $1.8 million as the sale of the portfolio was finalized on March 2,
1999 and no credit card related revenue or expense was recorded in 1999.
Improved insurance claim experience on the sale of self-insured insurance
products resulted in a $3.1 million increase from 1998 to 1999 while insurance
commissions decreased $2.2 million during the same period reflecting a shift
away from the direct lending business. Other operating income decreased $33.9
million or 72.0% from 1997 to 1998 due primarily to the sale of Lyndon
Insurance Company ("Lyndon").
The following table summarizes the components of other operating income for
the three years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Insurance premiums............................ $ 7,101 $ 4,027 $35,660
Fees and insurance commissions................ 3,448 5,599 6,887
Credit card related revenue and other......... 2,271 3,565 4,533
Gain on sale of finance receivables........... 7,058 -- --
------- ------- -------
Total..................................... $19,878 $13,191 $47,080
======= ======= =======
Other operating income as a % of average
interest earning assets...................... 2.77% 1.47% 4.01%
======= ======= =======
</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.
Other operating expenses decreased $33.6 million or 33.2% from 1998 to
1999. In 1998, other operating expenses included a $15.8 million loss
resulting from the negotiated sale of the credit card portfolio. $8.1 million
of the decline from 1998 to 1999 is amortization expense. 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. Credit card related expenses declined $5.7 million as a result of the
aforementioned portfolio sale. Salary and benefits decreased $2.9 million
attributable to staff reductions. Other operating expenses decreased $58.5
million or 36.6% from 1997 to 1998 due primarily to the sale of Lyndon.
17
<PAGE>
The following table summarizes the components of other operating expenses
for the three years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Salaries and employee benefits............. $46,231 $ 49,142 $ 56,799
Insurance claims and other underwriting
expense................................... 2,812 1,121 20,466
Goodwill amortization...................... 215 859 859
Amortization of excess of revalued net
assets over liabilities and stockholders'
investment................................ (7,407) -- --
Reorganization expenses, net............... 1,105 3,259 --
Restructuring expenses..................... 1,950 (344) 3,725
Loss on sale of Lyndon..................... -- -- 29,528
Income from Lyndon due to buyer............ -- -- 2,025
Loss on credit card portfolio held for
sale...................................... -- 15,800 --
Other expenses............................. 22,589 31,258 46,156
------- -------- --------
Total.................................. $67,495 $101,095 $159,558
======= ======== ========
Other operating expense as a % of average
interest earning assets................... 9.40% 11.26% 13.58%
======= ======== ========
</TABLE>
Restructuring Charges
During 1997 and 1998, the Company closed a number of branches and
implemented a plan to close approximately 110 such 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. These
charges and their utilization are summarized in the following table (dollars
in thousands):
<TABLE>
<CAPTION>
Amounts Amounts Amounts Amounts Net
Charged Utilized Utilized Utilized Adjustments
In 1997 In 1997 In 1998 In 1999 In 1999
------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Asset and leasehold write-
offs........................ $1,200 $200 $1,079 $-- $ (79)
Lease buyouts and other
expenses.................... 1,025 101 799 318 (193)
Employee severance and
retention................... 1,500 -- 652 104 744
------ ---- ------ ---- -----
Total.................... $3,725 $301 $2,530 $422 $ 472
====== ==== ====== ==== =====
</TABLE>
During 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. These charges (included in other operating expenses) and
their utilization is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Amounts Amounts Amounts To
Charged Utilized Be Utilized
In 1999 In 1999 In 2000
------- -------- -----------
<S> <C> <C> <C>
Lease buyouts and other expenses............. $ 998 $380 $ 618
Employee severance and retention............. 952 333 619
------ ---- ------
Total.................................... $1,950 $713 $1,237
====== ==== ======
</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.
18
<PAGE>
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 Expenses
In accordance with SOP 90-7, expenses resulting from the Plan of
Reorganization are reported separately as reorganization expenses in the
Consolidated Statements of Income. These expenses were incurred by the
Predecessor Company and are summarized below for the years ended December 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Corporate counsel............................... $ 846 $ 2,056 $ 2,836
Investment banking.............................. -- 2,045 2,657
Creditor attorneys and advisors................. 1,193 2,235 2,584
Independent accountants......................... 550 1,059 2,469
Management consultants.......................... 6,933 2,336 2,399
Special investigation........................... -- -- 1,919
Bank line of credit fees........................ -- 121 1,650
Bank of Boston settlement....................... -- -- 1,600
Board of Directors representation............... 100 1,312 1,132
Forbearance fee................................. -- 15,176 --
Termination agreement with former CEO........... -- (1,965) --
Interest expense................................ 19,847 -- --
Adjustments of assets and liabilities to fair
value.......................................... 3,085 -- --
Other........................................... 1,165 2,051 1,437
------- ------- -------
Total....................................... $33,719 $26,426 $20,683
======= ======= =======
</TABLE>
Income Taxes
The effective tax rate for 1999 income was 30.4% tax; 1998 loss was 12.1%
tax; and the 1997 loss was 17.5% benefit.
The lower effective tax rate in 1999 reflected the effect of the
amortization of the excess of the revalued net assets over liabilities and
stockholders' investment and the elimination of the valuation allowance.
During 1999, the Company recorded an extraordinary gain from discharge of
indebtedness in connection with its March 23, 1999 emergence from the
Voluntary Case, aggregating approximately $68.2 million. This gain, as
adjusted for bankruptcy-related items and 1999 net operating loss for tax
purposes, will, under section 108 of the Internal Revenue Service Code, reduce
the tax basis of certain assets as of January 1, 2000. Deferred taxes have
been provided for estimated tax effect of future reversing timing differences
related to this tax basis reduction as well as other timing differences
existing at December 31, 1999. Current taxes were not significant.
The negative effective tax rate in 1998 is primarily due to a valuation
adjustment to finance receivables and certain expenses incurred in connection
with the restructuring which were not deductible for tax purposes. The lower
tax effective rate in 1997 is primarily due to the loss on the sale of Lyndon
which was not deductible for tax purposes.
Credit Losses and Delinquencies
The credit loss and delinquency information below are for both the
Reorganized Company and the Predecessor Company.
19
<PAGE>
Credit Losses
Finance receivable accounts which are contractually delinquent 120 days and
90 days on a recency basis, are charged off monthly before they become 150
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>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Provision for finance credit loss........... $32,928 $ 56,790 $106,374
Net charge-offs against allowance........... 47,058 103,402 106,799
Net charge-offs against nonrefundable dealer
reserves................................... 32,966 41,371 81,338
Allowance for finance credit losses at end
of year.................................... 39,543 53,485 102,204
Dealer reserves at end of year.............. 34,062 36,820 52,731
Ratios
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Net charge-offs against allowance to average
total finance receivables, net of unearned
income..................................... 7.99% 12.81% 9.90%
Net charge-offs against nonrefundable dealer
reserves to average total finance
receivables, net of unearned income........ 5.60% 5.12% 7.54%
Allowance for finance credit losses to total
finance receivables, net of unearned income
at end of year............................. 7.60% 8.32% 10.53%
Dealer reserves to gross sales finance
receivables at end of year................. 5.58% 5.45% 5.53%
</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 December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Delinquent non-bankrupt gross receivables............... $ 7,929 $19,938
Delinquent bankrupt accounts............................ 6,009 7,353
Repossessed assets, net of reserves..................... 2,542 3,836
------- -------
Total delinquent accounts and repossessed assets...... $16,480 $31,127
======= =======
Bankrupt accounts, not in delinquent status............. $ 7,688 $16,254
======= =======
Delinquent accounts and repossessed assets as a percent
of total finance receivables, net of unearned income... 3.17% 4.84%
======= =======
</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 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.
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 deficiency is charged-off.
Reserves on sold repossessed assets are transferred back to the allowance for
credit losses at the time of charge-off.
Delinquency and repossession numbers show significant improvement from
December 31, 1998 due to improved collections.
20
<PAGE>
Credit Card Program
The Company had a portfolio of approximately $50.6 million of credit card
receivables at December 31, 1998 that generated a 1998 loss (prior to the
allocation of interest expense) of $3.9 million. During 1998, the Company
negotiated a sale of the credit card portfolio for $27.9 million, net of
selling expenses. As a result, the Company reclassified these assets at
December 31, 1998 as "credit card portfolio held for sale" and recorded a
$15.8 million loss on the sale in 1998. The sale of the credit card portfolio
was consummated on March 2, 1999.
Disposition of Lyndon
On March 28, 1997, the Company executed a Stock Purchase Agreement for the
sale of Lyndon in the amount of approximately $92 million. The sale which
closed on June 3, 1997, resulted in a loss of approximately $29.5 million net
of earnings through the date of sale. This loss was reflected on the
Predecessor Company's 1997 consolidated statement of income.
The Company determined that it was in the best interest of the Company to
remain in the insurance business and formed a new captive insurance subsidiary
during 1997, MFN Insurance Company. As a result, the sale of Lyndon was not
considered the discontinuation of a business. The loss associated with the
sale of Lyndon was not tax deductible to the Company.
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 December 31, 1999 the
Company had $123.6 million in cash and cash equivalents, which can be used to
fund future growth of finance receivables and other corporate activities.
The Company has $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 Note 4 to
the 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.
The Plan provided (a) 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 the Company's previous auditors and (iii)
$250,000 in cash for fees and costs to be incurred in connection with the
Liquidating Trust and (b) for the holders of Securities Fraud Claims to
receive a share of the beneficial interests in the Liquidating Trust in
complete settlement, satisfaction and discharge of their claims. In addition,
the Plan provided for the Company to pay (i) $13.35 million into funds
established for the benefit of holders of certain indemnification claims
against the Company and (ii) up to an aggregate amount of $250,000, for costs
and expenses of certain officers, agents and employees who were no longer
employed by the Company as of the first day immediately following March 23,
1999, in connection with their participation in a government investigation.
The Company also agreed to pay a former employee $100,000 in connection with a
mutual release. All of these costs were fully provided for as of December 31,
1998 and all amounts were paid during 1999 with the exception of approximately
$221,000 which remains set aside 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 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.
21
<PAGE>
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.
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 Consumer Finance Cases, no accrual has been
made for the majority of these lawsuits.
YEAR 2000 COMPLIANCE
During 1999, the Company completed the process of preparing for the Year
2000 date change. To date, the Company has not experienced any material Year
2000 failures.
Although considered unlikely, unanticipated problems could still occur. The
Company will continue to monitor all business processes, including third
parties, throughout 2000 to address any issues and to ensure that all
processes continue to function properly.
Through 1999, the cost of the Year 2000 project was estimated to be below
$50,000 and was incurred in 1999. We anticipate no material costs to be
incurred in 2000 and beyond that are related to the Year 2000 project.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" is
effective for fiscal years beginning after June 15, 1999. During the second
quarter of 1999, the FASB voted to delay for one year the effective date of
SFAS 133 until 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 7a--Quantitative and Qualitative Disclosures About Market Risk.
MFN believes its market risk on financial instruments from changes in
interest rates to be low. The Company's financial instruments include cash and
cash equivalents consisting of marketable securities with purchased maturities
of three months or less, fixed-rate finance receivables and both fixed-rate
and variable-rate debt.
The maturities of the finance receivables generally range for periods from
12 months to 42 months at annual fixed rates of interest ranging, with minor
exceptions, from 18% to 40%. As these instruments are typically acquired or
originated at the maximum rate allowed in states that impose interest rate
limits, fluctuations in market interest rates do not generally impact the
fixed rate set on the contract.
Debt is used as the primary source for funding the Company's finance
receivables. The Company's debt is comprised of (i) Series A Senior Secured
Notes Due March 23, 2001, (the "Series A Notes") which have a 10% annual fixed
rate of interest, payable quarterly and (ii) Series B Senior Secured Notes Due
March 23, 2001, (the "Series B Notes") which have a floating rate of interest
based on the three month LIBOR (London Interbank Offering Rate), payable
quarterly and (iii) Senior Subordinated Notes Due March 23, 2002 which have an
11% annual fixed rate of interest, payable quarterly.
The Company entered into an interest rate hedge effective March 23, 1999,
the effect of which was to cap the maximum rate of the Series B Notes at
10.0%.
MFN does not use financial instruments for trading purposes.
22
<PAGE>
Item 8--Consolidated Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
MFN Financial Corporation (f/k/a Mercury Finance Company)
We have audited the accompanying consolidated balance sheet of MFN
Financial Corporation and subsidiaries (Reorganized Company) as of December
31, 1999 and the related consolidated statements of income, changes in
stockholders' equity and cash flows of MFN Financial Corporation for the nine-
month period from April 1, 1999 through December 31, 1999 and of Mercury
Finance Company (Predecessor Company) for the three-month period ended March
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MFN Financial
Corporation and subsidiaries as of December 31, 1999, and the consolidated
results of operations and cash flows of MFN Financial Corporation for the
nine-month period from April 1, 1999 through December 31, 1999 and of Mercury
Finance Company for the three-month period ended March 31, 1999, in conformity
with accounting principles generally accepted in the United States.
As more fully described in Note 1 to the consolidated financial statements,
the MFN Financial Corporation emerged from bankruptcy on March 23, 1999. In
accordance with Statement of Position 90-7 of the American Institute of
Certified Public Accountants', MFN Financial Corporation has adopted "fresh
start" reporting whereby its assets, liabilities and new capital structure
have been adjusted to reflect estimated fair values as of March 31, 1999. As a
result, the consolidated financial statements for periods subsequent to March
31, 1999, reflect this basis of reporting and are not necessarily comparable
to the Predecessor Company's consolidated financial statements.
/s/ Grant Thornton LLP
Chicago, Illinois
February 4, 2000
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Mercury Finance Company:
We have audited the accompanying consolidated balance sheet of Mercury
Finance Company and subsidiaries (the "Company") as of December 31, 1998 and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the each of the two years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mercury Finance Company
and subsidiaries as of December 31, 1998 and the results of their operations
and their cash flows for each of the two years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
The accompanying 1997 and 1998 financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 4
to the financial statements, the Company has incurred losses in 1997 and 1998
and is continuing to incur losses in 1999. Furthermore, as described in Notes
1 and 4, on July 15, 1998, the Company filed a voluntary petition in the
United States Bankruptcy Court for the Northern District of Illinois for
relief under Chapter 11 of Title 11 of the United States Code. Under the
Second Amended Plan of Reorganization (the "Plan"), which was confirmed by
order of the Court on March 10, 1999, a portion of the outstanding debt will
be converted to equity, the remaining debt will be restructured and the
litigation pending related to the financial irregularities will be settled.
Upon the effective date of the Plan, the Company will adopt fresh-start
accounting and continuation of the business thereafter is dependent on the
Company's ability to achieve sufficient cash flow to meet its restructured
debt obligations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The 1997 and 1998 financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 10, 1999
24
<PAGE>
MFN FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
1999 1998
(Dollars in thousands) ----------- -----------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents.............................. $123,635 $186,350
Finance receivables, net of unearned income............ 520,012 642,872
Less: Allowance for finance credit losses.............. 39,543 53,485
Less: Nonrefundable dealer reserves.................... 34,062 36,820
-------- --------
Finance receivables, net............................... 446,407 552,567
Income taxes receivable................................ 8,692 8,599
Furniture, fixtures and equipment, net................. 1,918 3,709
Goodwill, net of amortization.......................... -- 12,745
Credit card portfolio held for sale, at net realizable
value................................................. -- 27,894
Other assets (including repossessions)................. 7,924 6,819
-------- --------
Total Assets....................................... $588,576 $798,683
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities
Liabilities not subject to compromise under
reorganization...................................... $ -- $ 30,833
Liabilities subject to compromise under
reorganization...................................... -- 719,770
Senior secured debt.................................. 381,242 --
Senior subordinated debt............................. 22,500 --
Income taxes......................................... 19,289 --
Litigation accrual................................... 221 18,950
Other liabilities.................................... 17,804 --
Excess of revalued net assets over liabilities and
stockholders' investment............................ 41,991 --
-------- --------
Total Liabilities.................................. 483,047 769,553
-------- --------
Contingencies.......................................... -- --
Stockholders' Equity
Common stock--December 31, 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).......................... 20,529 (103,351)
Treasury stock--December 31, 1999--0 shares; December
31, 1998--5,402,957 shares at cost.................. -- (53,664)
-------- --------
Total Stockholders' Equity......................... 105,529 29,130
-------- --------
Total Liabilities and Stockholders' Equity......... $588,576 $798,683
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
25
<PAGE>
MFN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
----------- -------------------------------
Nine Months Three Months Year Ended
Ended Ended December 31,
Dec 31, Mar 31, ------------------
(Dollars in thousands, except per 1999 1999 1998 1997
share data) ----------- ------------ -------- --------
<S> <C> <C> <C> <C>
Interest income
Finance charges and loan fees.... $100,235 $ 35,313 $178,897 $228,028
Investment income................ 4,932 414 2,196 7,593
-------- -------- -------- --------
Total interest income.......... 105,167 35,727 181,093 235,621
Interest expense.................. 32,191 474 38,593 86,529
-------- -------- -------- --------
Net interest income before
provision for finance credit
losses.......................... 72,976 35,253 142,500 149,092
Provision for finance credit
losses........................... 23,071 9,857 56,790 106,374
-------- -------- -------- --------
Net interest income after
provision for finance credit
losses.......................... 49,905 25,396 85,710 42,718
-------- -------- -------- --------
Other operating income
Insurance premiums............... 6,286 815 4,027 35,660
Fees and insurance commissions... 2,208 1,240 5,599 6,887
Credit card related revenue and
other........................... 1,273 998 3,565 4,533
Gain on sale of finance
receivables..................... 7,058 -- -- --
-------- -------- -------- --------
Total other operating income... 16,825 3,053 13,191 47,080
-------- -------- -------- --------
Other operating expenses
Salaries and employee benefits... 33,081 13,150 49,142 56,799
Occupancy expense................ 2,617 999 4,592 5,897
Equipment expense................ 1,146 767 3,291 3,870
Data processing expense.......... 983 469 1,898 2,059
Insurance claims and other
underwriting expense............ 2,841 (29) 1,121 20,466
Amortization..................... (7,407) 215 859 859
Reorganization expenses, net..... -- 1,105 3,259 --
Restructuring charges............ 1,950 -- (344) 3,725
Loss on sale of Lyndon........... -- -- -- 29,528
Income from Lyndon due to buyer.. -- -- -- 2,025
Loss on credit card portfolio
held for sale................... -- -- 15,800 --
Other expenses................... 11,219 4,389 21,477 34,330
-------- -------- -------- --------
Total other operating expenses. 46,430 21,065 101,095 159,558
-------- -------- -------- --------
Operating income (loss)........... 20,300 7,384 (2,194) (69,760)
Non-operating expenses
Provision for litigation......... -- -- 18,950 --
Reorganization expenses.......... -- 33,719 26,426 20,683
-------- -------- -------- --------
Total non-operating expenses... -- 33,719 45,376 20,683
Income (loss) before income taxes
and extraordinary credits........ 20,300 (26,335) (47,570) (90,443)
Income tax provision (benefit).... 1,291 (5,287) 6,000 (16,250)
-------- -------- -------- --------
Net income (loss) before
extraordinary credits............ 19,009 (21,048) (53,570) (74,193)
Extraordinary credits:
Gain on discharge of
indebtedness, net of taxes...... -- 45,570 -- --
Gain on early retirement of
debt, net of taxes.............. 1,520 -- -- --
-------- -------- -------- --------
Net income (loss)................. $ 20,529 $ 24,522 $(53,570) $(74,193)
======== ======== ======== ========
Weighted average common shares
outstanding:
Basic............................ 10,000 ** ** **
Diluted.......................... 10,001 ** ** **
Earnings per common share:
Basic............................ $ 2.05 ** ** **
Diluted.......................... $ 2.05 ** ** **
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 1 and 7.
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
26
<PAGE>
MFN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Total
Common Paid In Earnings Unrealized Treasury Stockholders'
Stock Capital (Deficit) Appreciation Stock Equity
(Dollars in thousands) --------- ------- --------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Predecessor Company
Balance at January 1,
1997................... $ 177,719 $ 6,539 $ 37,349 $ 942 $(53,664) $168,885
Other comprehensive loss
Net loss.............. -- -- (74,193) -- -- (74,193)
Unrealized
depreciation on
available-for-sale
securities, net of
tax.................. -- -- -- (942) -- (942)
--------- ------- --------- ----- -------- --------
Comprehensive loss.... (75,135)
Stock options exercised. 182 1,705 -- -- -- 1,887
Dividend declared
($0.075 per share)..... -- -- (12,937) -- -- (12,937)
--------- ------- --------- ----- -------- --------
Balance at December 31,
1997................... 177,901 8,244 (49,781) -- (53,664) 82,700
Net loss................ -- -- (53,570) -- -- (53,570)
--------- ------- --------- ----- -------- --------
Balance at December 31,
1998................... 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
Reorganized Company
Net income for period
April 1, 1999 through
December 31, 1999...... -- -- 20,529 -- -- 20,529
--------- ------- --------- ----- -------- --------
Balance at December 31,
1999................... $ 100 $84,900 $ 20,529 $ -- $ -- $105,529
========= ======= ========= ===== ======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
27
<PAGE>
MFN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
----------- -------------------------------
Three
Nine Months Months Year Ended December
Ended Ended 31,
Dec. 31, March 31, --------------------
1999 1999 1998 1997
(Dollars in thousands) ----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss)................ $ 20,529 $ 24,522 $ (53,570) $ (74,193)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Loss on sale of Lyndon.......... -- -- -- 29,528
Loss on credit card portfolio
held for sale.................. -- -- 15,800 --
Provision for litigation
settlement..................... -- -- 18,950 --
Provision for finance credit
losses......................... 23,071 9,857 56,790 106,374
Gain on sale of finance
receivables.................... (7,058) -- -- --
Gain on early retirement of
debt........................... (2,513) -- -- --
Net increase in reinsurance
receivable..................... -- -- -- (6,287)
Net increase in reinsurance
payable........................ -- -- -- 12,582
Net decrease in unearned
premium and claim reserves..... -- -- -- (12,388)
Net decrease in deferred
acquisition costs and present
value of future profits........ -- -- -- 15,473
Provision (benefit) for
deferred income taxes.......... 1,918 (5,287) -- 38,964
Net (increase)/decrease in
income tax receivable.......... (8,858) (15,913) 71,342 (26,177)
Net increase in taxes payable... 9,631 (7,528) 12,000 --
Net gain on discharge of
indebtedness................... -- (68,229) -- --
Extinguishment of dividend
payable........................ -- (12,937) -- --
Write-off of goodwill and fixed
assets, net.................... -- 16,022 -- --
Depreciation and amortization... (7,280) 607 2,537 2,842
Net (increase) decrease in
other assets................... 4,209 13,157 3,636 29,412
Net increase (decrease) in
other liabilities.............. (45,998) 43,752 (2,199) (45,526)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities......... (12,349) (1,977) 125,286 70,604
Cash flows from investing
activities
Principal collected on finance
receivables.................... 312,336 124,206 589,034 772,650
Finance receivables originated
or acquired.................... (274,638) (113,939) (427,299) (722,183)
Purchases of short-term and
available-for-sale investment
securities..................... -- -- -- (44,169)
Purchases of held-to-maturity
investment securities.......... -- -- -- (2,552)
Proceeds from sales and
maturities of short-term and
available-for-sale investment
securities..................... -- -- -- 46,786
Proceeds from maturities of
held-to-maturity investment
securities..................... -- -- -- 6,476
Proceeds from the sale of
Lyndon, net of cash sold....... -- -- -- 88,884
Proceeds from sale of finance
receivables.................... 35,214 -- -- --
Proceeds from sale of credit
card portfolio................. -- 22,414 -- --
Purchases of furniture,
fixtures and equipment......... (2,048) (175) (567) (616)
--------- --------- --------- ---------
Net cash provided by investing
activities................... 70,864 32,506 161,168 145,276
Cash flows from financing
activities
Repayments of senior debt and
commercial paper............... (150,985) (774) (77,391) (108,320)
Repayments of senior debt term
notes.......................... -- -- (76,609) (76,111)
Stock options exercised......... -- -- -- 1,490
--------- --------- --------- ---------
Net cash used in financing
activities................... (150,985) (774) (154,000) (182,941)
--------- --------- --------- ---------
Net increase (decrease) in
cash and cash equivalents.... (92,470) 29,755 132,454 32,939
Cash and equivalents at beginning
of period....................... 216,105 186,350 53,896 20,957
--------- --------- --------- ---------
Cash and equivalents at end of
period.......................... $ 123,635 $ 216,105 $ 186,350 $ 53,896
========= ========= ========= =========
Supplemental cash disclosures
Income taxes paid to federal
and state governments.......... $ 364 $ 13,133 $ 1,563 $ 5,138
Interest paid................... 51,999 44 36,874 84,118
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 consolidated financial statements are an integral
part of these statements.
28
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Note 1--Organization and Summary of Significant Accounting Policies
MFN Financial Corporation, f/k/a Mercury Finance Company ("MFN" or the
"Company") is a consumer finance company doing business in 22 states through
its subsidiaries (the "consumer finance subsidiaries"). The Company also
offered certain insurance services through its former subsidiary, Lyndon
Property Insurance Company and subsidiaries ("Lyndon") and now through MFN
Insurance Company ("MFN Insurance"), a subsidiary. The Company's borrowers
generally would not be expected to qualify for traditional financing, such as
that provided by commercial banks or automobile manufacturers' captive finance
companies.
Basis of Presentation
The accounting and reporting policies of MFN conform to generally accepted
accounting principles for the finance and insurance industries. The
consolidated financial statements include the accounts of the Company, the
consumer finance subsidiaries, Lyndon and MFN Insurance. All significant
intercompany accounts and transactions have been eliminated. Certain amounts
from prior years have been reclassified to conform to the 1999 presentation.
In addition, see Note 4 for information regarding the Company's 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 "Code"). The Voluntary Case was filed
with the Court by the Company on July 15, 1998. 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 (the "Effective Date"). 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.
The Plan provided (a) 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 the Company's previous auditors and (iii)
$250,000 in cash for fees and costs to be incurred in connection with the
Liquidating Trust and (b) for the holders of Securities Fraud Claims to
receive a share of the beneficial interests in the Liquidating Trust in
complete settlement, satisfaction and discharge of their claims. In addition,
the Plan provided for the Company to pay (i) $13.35 million into funds
established for the benefit of holders of certain indemnification claims
against the Company and (ii) up to an aggregate amount of $250,000, for costs
and expenses of certain officers, agents and employees who were no longer
employed by the Company as of the first day immediately following March 23,
1999, in connection with their participation in a government investigation.
The Company also agreed to pay a former employee $100,000 in connection with a
mutual release. All of these costs were fully provided for as of December 31,
1998 and all amounts were paid during 1999 with the exception of approximately
$221,000 which remains set aside 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.
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 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.
29
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 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
Consolidated Balance Sheet as of March 31, 1999:
<TABLE>
<CAPTION>
Predecessor Fresh Start Reorganized
Company Adjustments Company
March 31, -------------------- March 31,
1999 Debit Credit 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
========= ======== ======== ========
Liabilities and
Stockholders' Equity
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.
30
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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:
<TABLE>
<S> <C>
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
========
</TABLE>
(f) To eliminate stockholders' equity of the Predecessor Company.
(g) To record 10,000,000 shares of new common stock (par value $0.01) at an
assumed market value of $8.50 per share.
(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)
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
--------
Extraordinary gain before tax................................. 68,229
Tax provision................................................. (22,659)
--------
Extraordinary gain............................................ $ 45,570
========
</TABLE>
Revenue Recognition--Consumer Finance Subsidiaries
Finance charges on precomputed loans and sales finance contracts
(collectively referred to as "precompute accounts") are credited to unearned
finance charges at the time the loans and sales finance contracts are made or
acquired. Interest income is calculated using the effective interest method to
produce constant rates of interest (yields). If a precompute account becomes
greater than 60 days contractually delinquent and no full contractual payment
is received in the month the account attains such delinquency status, the
accrual of income is suspended until one or more full contractual monthly
payments are received. Interest on interest-bearing loans and sales finance
contracts is calculated on a 360-day or actual-day year basis depending upon
state law and recorded on the accrual basis; accrual is suspended when an
account is 60 or more days contractually delinquent. Late charges and
deferment charges on all contracts are taken into income as collected. Fees
and other income are derived from the sale of other products and services.
Insurance Operations
In conjunction with their lending practices, the operating subsidiaries
through contractual arrangements with insurance companies, offer credit life,
accident and health, property and involuntary unemployment insurance to
borrowers, at the borrower's discretion. These borrowers may obtain financing
directly from the operating subsidiaries or under sales finance contracts and
financing contracts acquired from merchants and automobile dealers. Prior to
June, 1997, such insurance products were provided by Lyndon Property Insurance
Company and subsidiaries ("Lyndon"), a wholly-owned subsidiary.
Notwithstanding the disposition of Lyndon in the second quarter of 1997, MFN
continues to offer a variety of insurance and insurance related products
through third party carriers.
31
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The policies insure the holder of a sales finance contract or other debt
instrument for the outstanding balance (or portion thereof as specified in the
policy) payable in the event of i) death or disability of the debtor ii)
damage to, or destruction of, property securing the account or iii) due to the
debtor's employment status. Premiums are earned over the life of the contracts
principally using pro-rata and sum-of-the-months digits methods or in relation
to anticipated benefits to the policy holder.
Also, in conjunction with their lending practices, the Company purchases
insurance coverage and charges its customers who do not provide proof of
insurance coverage on automobiles that are collateral on the outstanding
retail sales contracts. During the second quarter of 1997, the Company formed
a captive insurance company, MFN Insurance Company, to reinsure coverage under
such policies. MFN Insurance Company provides aggregate coverage for incurred
losses in excess of targeted loss ratios through a reinsurance agreement with
the primary carrier.
Finance Receivables, Allowance for Finance Credit Losses and Nonrefundable
Dealer Reserves
MFN originates direct consumer loans and acquires individual sales finance
contracts from third party dealers. Finance receivables consist of
contractually scheduled payments from sales finance contracts net of unearned
finance charges and direct finance receivables. The Company's borrowers
typically have limited access to traditional sources of consumer credit due to
past credit history or insufficient cash to make the required down payment on
an automobile. As a result, receivables originated or acquired by the Company
are generally considered to have a higher risk of default and loss than those
of other consumer financings.
Statement of Financial Accounting Standards ("SFAS") 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases," requires that loan origination and
commitment fees and certain direct loan origination and account purchase costs
be deferred and amortized as an adjustment to the related loan's yield. MFN
adopted the provisions of this statement during 1999 and the results did not
have a material effect on the Company's reported results of operations or
financial condition.
Unearned finance charges represent the balance of finance income (interest)
remaining from the capitalization of the total interest to be earned over the
original term of the related precompute account.
MFN acquires a majority of its sales finance contracts from dealers at a
discount. The level of discount is based on, among other things, the credit
risk of the borrower. The discount, which is the difference between the amount
financed and the acquisition cost, represents nonrefundable dealer reserves
which are available to absorb future credit losses over the life of the
acquired loan. Historical loss experience on the Company's sales finance
receivables has shown that the acquisition discount recorded as nonrefundable
dealer reserves is not adequate to cover potential losses over the life of the
loans. The Company uses a reserving methodology commonly referred to as
"static pooling" which stratifies the components of its sales finance
receivables portfolio (i.e., nonrefundable dealer reserves, 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.
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
estimates of losses.
The allowance for finance credit losses is maintained by direct charges to
operations in amounts that are intended to provide adequate reserves on the
Company's finance receivables portfolio to absorb possible credit losses
incurred on finance receivables that are considered to be impaired (in excess
of the available nonrefundable
32
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dealer reserves for sales finance accounts). Management evaluates the
allowance requirements by examining current delinquencies, the characteristics
of the accounts, the value of the underlying collateral, the availability of
the nonrefundable dealer reserves to absorb credit losses on impaired loans
and general economic conditions and trends.
As the specific borrower and amount of a loss is confirmed by gathering
additional information, taking collateral in full or partial settlement of the
loan or account, bankruptcy of the borrower, etc., the loan is charged off,
reducing the allowance for finance credit losses. If, subsequent to a
chargeoff, 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, increasing the allowance for finance credit losses.
The Company applies SFAS 114 and 118, which address the accounting by
creditors for impairment of a loan and related income recognition and
disclosures. In accordance with SFAS 114, the Company's approach for
estimating losses results in a measure of impairment based on discounting
expected future cash flows (including the anticipated proceeds from
repossessed collateral) at the loan's original yield. If the measure of the
impaired receivable is less than the net recorded investment in the
receivable, the Company recognizes an impairment by creating an additional
allowance for finance credit losses in excess of the nonrefundable dealer
reserves available to absorb losses, with a corresponding charge to provision
for finance credit losses. Generally, the Company considers receivables more
than 60 days contractually delinquent to be impaired.
Finance receivable accounts which are contractually delinquent 120 days and
90 days on a recency basis, are charged off monthly before they become 150
days contractually delinquent. Accounts which are deemed uncollectible prior
to the maximum charge-off period are charged off immediately. Management may
authorize a temporary extension of the charge-off period if collection appears
imminent during the next calendar month.
Cash and Cash Equivalents
Cash and cash equivalents includes marketable securities with purchased
maturities of three months or less.
Furniture, Fixtures and Equipment, Net
Furniture, fixtures and equipment are carried at cost, less accumulated
depreciation, and are depreciated on a straight-line basis over their
estimated useful lives.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return and individual state tax returns in most states.
MFN recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company evaluates deferred tax assets to determine whether they are
likely to be realized. In making its determination, management considers the
possible recovery of taxes already paid but does not assume the generation of
additional taxable income in the future.
33
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amortization
Prior to Fresh Start Reporting, the excess of the Predecessor Company's
cost of acquisitions over the fair value of net assets acquired ("Goodwill")
was being amortized on a straight-line basis over a period of 20 years. In
accordance with Fresh Start Reporting guidelines, the goodwill recorded on the
Company's Consolidated Balance Sheet at the Fresh Start Effective Date was
reduced to zero.
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 amortization.
Stock-Based Compensation
SFAS 123, "Accounting for Stock-based Compensation," ("SFAS 123") defines a
fair value based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of
accounting. The Company has elected, as permitted under SFAS 123, to continue
to measure compensation cost for its plan using the intrinsic value based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25. For additional information, see Note 8.
Business Segment Data
The Company has determined it has a single reportable segment in accordance
with the management approach specified in SFAS 131, "Disclosure About Segments
of an Enterprise and Related Information". Reportable segments are strategic
business units that differ and are managed separately because of the nature of
their businesses. The management approach designates the internal organization
that is used by management for making operating decisions and assessing
performance as the basis for determination of the Company's single reportable
segment.
Use of Estimates
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 consolidated financial
statements and accompanying notes. The accounts which are subject to such
estimation techniques include the allowance for finance credit losses as more
fully discussed in Note 3 and valuation allowance for deferred tax assets as
more fully discussed in Note 15. Actual results could differ from these
estimates.
Reclassifications
Certain data from the prior periods has been reclassified to conform to the
current period presentation.
Recent Accounting Pronouncements
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" is
effective for fiscal years beginning after June 15, 1999. During the second
quarter of 1999, the Financial Accounting Standards Board voted to delay for
one year the effective date of SFAS 133 until 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.
Note 2--Dispositions
On March 28, 1997, MFN executed a Stock Purchase Agreement with Frontier
Insurance Group, Inc. ("Frontier") for the sale of Lyndon to Frontier for $92
million. The sale, which closed on June 3, 1997, resulted in a loss to MFN of
approximately $30 million. In addition, the earnings of Lyndon from the date
of the agreement through the date of sale of approximately $2 million accrued
to the benefit of the buyer.
34
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management determined that it was in the best interest of the Company to
remain in the insurance business and formed a new captive insurance subsidiary
during 1997, MFN Insurance Company. As a result, the sale of Lyndon is not
considered the discontinuation of a business. The loss associated with the
sale of Lyndon was not tax deductible to the Company.
In December 1998, the Board of Directors approved the terms of a sale of
the credit card portfolio which was consummated on March 2, 1999. The sale
price was below the carrying value of the portfolio and accordingly the
Company recorded a $15.8 million charge in 1998 to reduce the portfolio to its
net realizable value. The portfolio was classified as assets held for sale at
December 31, 1998.
On July 29, 1999, the Company announced it had entered into a definitive
agreement to sell substantially all of the non-automotive loan accounts and
certain other assets of 47 direct loan offices of subsidiaries located in
Texas, Louisiana, Mississippi, and Alabama to First Tower Corp. of Jackson,
Mississippi. The sale was completed in September, 1999 for $41.8 million of
gross receivables held at 39 of the 47 direct loan offices resulting in a gain
of $7.1 million. The sale of the remaining eight offices, all located in
Texas, closed during the first quarter of 2000 and the financial impact of
this transaction was immaterial.
Note 3--Finance Receivables
Direct loans generally have terms of 12 to 24 months with maximum terms of
36 months; secured 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 42 months with maximum terms of 60
months. The Company's finance receivables are primarily with individuals
located in the southeastern, central and western United States. As of December
31, 1999, approximately 15%, 11% and 8% of gross sales and direct finance
receivables were serviced from branches located in Illinois, Florida and
Virginia, respectively. Finance receivables outstanding at December 31, 1999
and 1998 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Direct Finance Receivables
Interest bearing..................................... $ 9,961 $ 17,123
Precompute........................................... 30,666 100,013
-------- --------
Total direct finance receivables................... 40,627 117,136
Sales Finance Receivables
Interest-bearing..................................... 9,596 1,181
Precompute........................................... 600,782 674,118
-------- --------
Total sales finance receivables.................... 610,378 675,299
-------- --------
Gross Finance Receivables.............................. 651,005 792,435
Less: Unearned finance charges....................... 130,584 146,978
Unearned commissions and other....................... 409 2,585
-------- --------
Total finance receivables.......................... $520,012 $642,872
======== ========
</TABLE>
Included in finance receivables at December 31, 1999 and 1998 were $13.9
million and $27.3 million, respectively, of receivables for which interest
accrual had been suspended. Contractual maturities of the finance receivables
by year are not readily available at December 31, 1999 and 1998, but
experience has shown that such information is not an accurate forecast of the
timing of future cash collections due to the amount of renewals, conversions,
repossessions, or payoffs prior to actual maturity.
Repossessed assets, carried in other assets and reserved at 75% of the
outstanding balance owed, primarily consists of vehicles held for resale and
vehicles which have been sold for which payment has not been received. At
December 31, 1999 and 1998, repossessed assets totaled approximately $2.5
million and $3.8 million, respectively.
35
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth a summary of gross originations and acquisitions,
excluding activity of the credit card portfolio, for the years ended December
31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Direct finance receivables............................. $ 72,184 $132,150
Sales finance receivables.............................. 473,500 397,816
-------- --------
Total originations and acquisitions................ $545,684 $529,966
======== ========
</TABLE>
Principal cash collections (excluding activity of the credit card portfolio
and finance charges earned and proceeds from the sale of finance receivables)
for the years ended December 31, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Direct finance receivables
Principal cash collections.......................... $ 89,022 $122,192
Percentage of average net balances.................. 139% 109%
Sales finance receivables
Principal cash collections.......................... $350,264 $436,277
Percentage of average net balances.................. 69% 66%
</TABLE>
In addition, the Company realized $35.2 million in cash in connection with
the sale of certain receivables.
In 1998, principal cash collections on the credit card receivables totaled
$30.6 million or 51% of average net balances. Principal cash collections in
1999 on the credit card receivables, after reclassification of the portfolio
to held for sale as of December 31, 1998 and subsequent consummation of the
sale on March 2, 1999, totaled $26.5 million. In March, 2000 the Company
collected $1.3 million cash representing the remaining holdback provision of
the settlement that was classified as other assets at December 31, 1999.
A summary of the activity in the allowance for finance credit losses for
the years ended December 31, was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year............. $ 53,485 $ 102,204 $ 97,762
Reserves recaptured in conjunction with
sale of finance receivables............. (3,694) -- --
Provision for finance credit losses...... 32,928 56,790 106,374
Finance receivables charged-off, net of
recoveries.............................. (47,058) (103,402) (106,799)
Net amount transferred from reserve for
repossessed assets...................... 3,882 3,993 4,867
Transfer to credit card portfolio held
for sale................................ -- (6,100) --
-------- --------- ---------
Balance at end of year................... $ 39,543 $ 53,485 $ 102,204
======== ========= =========
</TABLE>
A summary of the activity in nonrefundable dealer reserves for the years
ended December 31, was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year............... $ 36,820 $ 52,731 $ 89,378
Reserve adjustment in conjunction with sale
of finance receivables.................... 495 -- --
Discounts acquired on new volume........... 29,713 25,460 44,691
Net charge-offs absorbed................... (32,966) (41,371) (81,338)
-------- -------- --------
Balance at end of year..................... $ 34,062 $ 36,820 $ 52,731
======== ======== ========
</TABLE>
36
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Note 4--Senior and Subordinated Debt
The following table presents the Company's debt instruments and the stated
interest rates on the debt at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- --------------
Balance Rate Balance Rate
-------- ---- -------- -----
<S> <C> <C> <C> <C>
Senior debt:
Commercial paper and notes................ $ -- -- $339,340 5.7%
Senior secured debt....................... 381,242 10.0% 335,905 7.0%
Senior subordinated debt.................... 22,500 11.0% 22,500 10.3%
-------- ---- -------- -----
Total................................... $403,742 10.0% $697,745 6.5%
======== ==== ======== =====
</TABLE>
The Senior secured debt at December 31, 1999 was comprised of both fixed
and variable rate notes. Due to the purchase of an interest rate cap, the all-
inclusive cost on this debt at December 31, 1999 is 10.0% to the Company and
is combined in the above table.
As a result of net losses incurred beginning in 1997, the Company violated
certain covenants permitting the holders of its senior and subordinated debt
to accelerate all such debt. The Company entered into a forbearance agreement
beginning on July 12, 1997 with its lenders which, including extensions (the
"Forbearance Agreements"), expired July 15, 1998. In connection with the
execution in 1998 of an extension to a previous forbearance agreement, the
participating senior lenders received a fee of 2.25% of the outstanding
balance. The fee, aggregating $15.2 million, was paid in 1998 and recorded as
a component of reorganization expense.
Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum
rate of nine percent (9.0%) and subordinated note holders received interest at
a rate of five and one-half percent (5.5%). In addition, the agreements
required the periodic payment of excess cash to be applied as reduction of
outstanding principal. Through May 5, 1998, approximately $307 million of
principal was paid to creditors under the Forbearance Agreements, of which
$154 million was paid during 1998.
Pursuant to the Voluntary Case, no interest was accrued or paid on the
Predecessor Company's debt subsequent to July 15, 1998, the date the Voluntary
Case was filed, until March 23, 1999, the date the Reorganized Company emerged
from the Voluntary Case. This resulted in the reduction of 1999 interest
expense of approximately $11.5 million (calculated using a rate of ten percent
(10.0%) on the senior debt and at a rate of eleven percent (11.0%) on the
subordinated debt) and a reduction of 1998 interest expense of $27.8 million
(assuming default rates of interest), from what the Company would have
expected to incur had the Voluntary Case not been filed.
On April 1, 1999, $100.7 million of outstanding principal and $20.4 million
of interest was paid to senior lenders pursuant to the Plan of Reorganization.
The interest payment covered the period from October 14, 1998 through March
23, 1999 at a rate of ten percent (10.0%) on the senior debt and at a rate of
eleven percent (11.0%) on the subordinated debt. This interest payment was
recorded as a non-operating expense in 1999.
As described in Note 5 to the Consolidated Financial Statements, all of the
Company's debt was subject to compromise under the Plan of Reorganization.
Therefore the entire amount of outstanding debt at December 31, 1998 of $697.7
million was identified as "Liabilities subject to compromise under
reorganization" in the Company's Consolidated Financial Statements.
37
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the Plan of Reorganization, the Company issued New
Senior Secured Notes and New Senior Subordinated Notes. The New Senior Secured
Notes are comprised of (i) Series A Notes Due March 23, 2001, which have a 10%
annual fixed rate of interest, payable quarterly and (ii) Series B Notes Due
March 23, 2001, which have a floating rate of interest based on three month
LIBOR (London Interbank Offering Rate), payable quarterly. Principal payments
on the New Senior Secured Notes are not due until maturity on March 23, 2001.
The Company's senior lenders prior to the Effective Date were given the
option to receive either Series A Notes or Series B Notes in connection with
the Plan. During the second quarter of 1999, holders of the old senior debt
elected to receive $232.8 million of the Series A Notes and $201.3 million of
the Series B Notes totaling an aggregate principal amount of the New Senior
Secured Notes of $434.2 million. During the third quarter of 1999, MFN retired
debt with a face value of $52.9 million prior to scheduled maturity. The
principal amount of Series A Notes and Series B Notes outstanding at December
31, 1999 was $202.8 million and $178.4 million, respectively, for a total of
$381.2 million. 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 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.
Debt is used as the primary source for funding the Company's finance
receivables. 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 (as defined in the Plan of Reorganization). The Company also
cancelled its subordinated debt in exchange for Senior Subordinated Notes. At
December 31, 1999 the Company had total debt outstanding of $403.7 million.
The Senior Secured Notes mature on March 23, 2001 and the Senior
Subordinated Notes mature on March 23, 2002. No principal payments are
required prior to maturity. During August, 1999, MFN retired debt with a face
value of $52.9 million prior to scheduled maturity. See Note 10 to the
Consolidated Financial Statements.
Note 5--Liabilities Subject to Compromise Under Reorganization
The following table shows the liabilities subject to compromise under
reorganization as of December 31, 1998 (dollars in thousands). These
liabilities were recorded at amounts that the Court expected to allow as
claims rather than estimates of the amounts for which the claims may be
settled.
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Senior debt, commercial paper and notes......................... $339,340
Senior debt, term notes......................................... 335,905
Subordinated debt............................................... 22,500
Dividends payable............................................... 12,937
Pre-petition accrued interest................................... 8,393
Restructuring fee............................................... 695
--------
Total....................................................... $719,770
========
</TABLE>
See Note 1 for disposition of these liabilities following the Company's
emergence from the Voluntary Case and the adoption of Fresh Start Reporting.
38
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Dividend Restrictions
On February 6, 1997, the Predecessor Company suspended payment of the
dividend previously declared on January 14, 1997 of $0.075 per share. The
Company was not permitted to pay dividends during the Voluntary Case. The
amount owing as a result of the declared but unpaid dividend is included under
liabilities subject to compromise in the December 31, 1998 Consolidated
Balance Sheet. See Note 1 for disposition of this balance under Fresh Start
Reporting.
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 December 31, 1999, $10.3 million was available
for payment under these restrictions. However, the Company does not anticipate
the payment of any dividends for the foreseeable future.
Note 7--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 outstanding during the period. Common stock
equivalents include options granted to executive officers and directors and
warrants outstanding convertible into shares of common stock of the Company
using the treasury stock method.
<TABLE>
<CAPTION>
Reorganized Company
Nine Months Ended
December 31, 1999
-------------------
(Dollars in thousands, except per share amounts)
<S> <C>
Basic
Net income.......................................... $ 20,529
Average common shares outstanding................... 10,000,000
Earnings before extraordinary credit................ $ 1.90
Extraordinary gain from early retirement of debt.... 0.15
-----------
Earnings per common share........................... $ 2.05
===========
Diluted
Net income.......................................... $ 20,529
Average common shares and common share equivalents
outstanding........................................ 10,000,661
Earnings before extraordinary credit................ $ 1.90
Extraordinary gain from early retirement of debt.... 0.15
-----------
Earnings per common share........................... $ 2.05
===========
</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.
Note 8--Stock Options
Under the Plan of Reorganization, options to purchase 950,000 shares of the
Company's authorized and unissued New Common Stock were reserved under the
Amended and Restated 1989 Stock Option Plan ("Stock Option Plan"). Under the
Stock Option Plan, options to purchase 500,000 shares were granted to officers
and
39
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
directors, effective March 23, 1999 ("First Grant Date"), at an exercise price
of $8.50 per share (the estimated reorganization value per common share). Of
the shares granted, fifty percent (50%) vested and became exercisable on the
First Grant Date, twenty-five percent (25%) vest and become exercisable in
twelve (12) equal monthly portions, beginning with the first anniversary of
the First Grant Date and twenty-five percent (25%) vest and become exercisable
in twelve (12) equal monthly portions, beginning with the second anniversary
of the First Grant Date. The options expire ten (10) years from the First
Grant Date.
Additional options to purchase 85,000 shares were granted to officers,
effective October 26, 1999 ("Second Grant Date"), at an exercise price of
$7.875 per share (the market value per common share on the Second Grant Date).
These shares vest 1/3 per year beginning the first anniversary of the Second
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 on March 23, 1999 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.
A summary of the status of the Reorganized Company's stock option plan as
of December 31, 1999 and changes from inception through December 31, 1999 is
presented below:
<TABLE>
<CAPTION>
Weighted-
Average
Shares Exercise
(000) Price
------ ---------
<S> <C> <C>
Fixed Options
Granted.......................................... 1,585 8.47
Exercised........................................ -- --
Forfeited........................................ -- --
----- ----
Outstanding at end of year..................... 1,585 8.47
===== ====
Options exercisable at year-end.................... 750
Weighted-average fair value of options granted
during the year................................... $8.50
Weighted-average remaining contractual life........ 9.3 years
</TABLE>
MFN applies APB Opinion 25 and its Interpretations in accounting for its
Plan, and accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Reorganized Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS 123, the Reorganized Company's net income and
earnings per share would have been decreased to the pro forma amounts
indicated below (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1999
-----------------
<S> <C>
Net income
As reported........................................... $20,529
Pro forma............................................. $16,040
Earnings per share--basic
As reported........................................... $ 2.05
Pro forma............................................. $ 1.49
Earnings per share--diluted
As reported........................................... $ 2.05
Pro forma............................................. $ 1.49
</TABLE>
40
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
Stock
Risk-Free Dividend Expected Price
Grant Date Interest Rate Yield Life Volatility
---------- ------------- -------- -------- ----------
<S> <C> <C> <C> <C>
March 23, 1999................ 5.19% - % 5 years 85%
October 26, 1999.............. 6.42% - % 5 years 75%
</TABLE>
Note 9--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.
No warrants have been executed.
Note 10--Extraordinary Credits
During 1999, MFN retired debt with a face value of $52.9 million prior to
scheduled maturity. The debt repurchases resulted in an extraordinary gain of
$2.51 million less taxes of $0.99 million. See Note 7 for the impact of the
extraordinary item on basic and diluted earnings per share.
See Note 1 for discussion of the gain on discharge of indebtedness
resulting from the Company's emergence from the Voluntary Case and adoption of
Fresh Start Reporting.
Note 11--Restructuring Charges
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. These charges and their
utilization are summarized in the following table (dollars in thousands):
<TABLE>
<CAPTION>
Amounts Amounts Amounts Amounts Net
Charged Utilized Utilized Utilized Adjustments
In 1997 In 1997 In 1998 In 1999 In 1999
------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Asset and leasehold write-
offs..................... $1,200 $200 $1,079 $ -- $ (79)
Lease buyouts and other
expenses................. 1,025 101 799 318 (193)
Employee severance and
retention................ 1,500 -- 652 104 744
------ ---- ------ ---- -----
Total................. $3,725 $301 $2,530 $422 $ 472
====== ==== ====== ==== =====
</TABLE>
During 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 included in other operating expenses and is
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Amounts
Amounts Amounts To Be
Charged Utilized Utilized
In 1999 In 1999 In 2000
------- -------- --------
<S> <C> <C> <C>
Lease buyouts and other expenses................ $ 998 $380 $ 618
Employee severance and retention................ 952 333 619
------ ---- ------
Total....................................... $1,950 $713 $1,237
====== ==== ======
</TABLE>
41
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 assets and leasehold improvements written-off are utilized at
the date of disposal or the final date of the lease.
Note 12--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
Consolidated Statements of Income. These expenses were incurred by the
Predecessor Company and are summarized below for the years ended December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Corporate counsel............................... $ 846 $ 2,056 $ 2,836
Investment banking.............................. -- 2,045 2,657
Creditor attorneys and advisors................. 1,193 2,235 2,584
Independent accountants......................... 550 1,059 2,469
Management consultants.......................... 6,933 2,336 2,399
Special investigation........................... -- -- 1,919
Bank line of credit fees........................ -- 121 1,650
Bank of Boston settlement....................... -- -- 1,600
Board of Directors representation............... 100 1,312 1,132
Forbearance fee................................. -- 15,176 --
Termination agreement with former CEO........... -- (1,965) --
Interest expense................................ 19,847 -- --
Adjustments of assets and liabilities to fair
value.......................................... 3,085 -- --
Other........................................... 1,165 2,051 1,437
------- ------- -------
Total....................................... $33,719 $26,426 $20,683
======= ======= =======
</TABLE>
Note 13--Reorganization Expenses
Reorganization expenses for the respective periods indicated (dollars in
thousands) are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999 1998
------------------ ------
<S> <C> <C>
Professional fees.............................. $2,998 $5,206
Interest income................................ (1,893) (1,947)
------ ------
Total...................................... $1,105 $3,259
====== ======
</TABLE>
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.
42
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14--Pension Plans and Other Employee Benefits
Substantially all employees of MFN are covered by a non-contributory
defined benefit pension plan.
The following table sets forth the funded status of MFN's qualified plans
and amounts recognized in the 1999 and 1998 consolidated financial statements
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year...... $16,728 $14,098
Service cost......................................... 1,797 1,738
Interest cost........................................ 1,118 1,019
Curtailments......................................... -- (187)
Actuarial gain (loss)................................ (3,311) 400
Benefits paid........................................ (2,046) (340)
------- -------
Projected benefit obligation, end of year.......... $14,286 $16,728
======= =======
Change in Plan Assets
Plan assets at fair value, beginning of year......... $17,011 $16,667
Actual return on plan assets......................... 690 684
Benefits paid........................................ (2,046) (340)
------- -------
Plan assets at fair value, end of year............. $15,655 $17,011
======= =======
Reconciliation of Accrued Pension Cost and Total
Amount Recognized
Funded status of the plan............................ $ 1,369 $ 283
Unrecognized net gain................................ (5,111) (2,592)
Unrecognized prior service cost...................... 74 79
Unrecognized net transition asset.................... (239) (289)
------- -------
Accrued pension cost............................... $(3,907) $(2,519)
======= =======
Weighted Average Assumptions
Discount rate........................................ 7.75% 6.75%
Expected return on plan assets....................... 9.00% 8.50%
Rate of compensation increase........................ 5.00% 5.50%
Total cost
Service cost......................................... $ 1,797 $ 1,738
Interest cost........................................ 1,118 1,019
Expected return on plan assets....................... (1,399) (1,395)
Amortization of transition assets.................... (51) (51)
Amortization of prior service cost................... 5 5
Recognized actuarial gain............................ (97) (131)
------- -------
Net periodic pension cost.......................... $ 1,373 $ 1,185
Amount recognized due to curtailment or adjustment..... 15 (178)
------- -------
Total benefit cost................................. $ 1,388 $ 1,007
======= =======
</TABLE>
The Company also maintains a defined contribution plan. All employees are
eligible to participate in this plan after having attained six consecutive
months of service. Employer contributions to this plan were $879,000 in 1999
and $1,199,000 in 1998.
43
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Both the non-contributory defined benefit pension plan and the defined
contribution plan cover substantially all full time employees of MFN and
provide for employee contributions and partial matching contributions by MFN.
Note 15--Income Taxes
Income taxes on income (loss) before extraordinary credits for the
respective periods are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
----------- -------------------------
Three
Nine Months Months Year Ended
Ended Ended December 31,
Dec. 31, March 31, ---------------
1999 1999 1998 1997
(Dollars in thousands) ----------- --------- ------ --------
<S> <C> <C> <C> <C>
Current income tax expense
Federal......................... $ (993) $ -- $4,100 $(55,214)
State........................... 366 -- 1,900 --
------ ------- ------ --------
Total current income tax
expense...................... $ (627) $ -- $6,000 $(55,214)
====== ======= ====== ========
Deferred income tax expense....... $1,918 $(5,287) $ -- $ 38,964
====== ======= ====== ========
</TABLE>
The change in the deferred tax valuation allowance included in the 1999,
1998 and 1997 deferred tax expense was $(6,750), $6,093 and $657,
respectively.
Income taxes on extraordinary credits for the years ended December 31,
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
----------- ------------------------
Three
Nine Months Months Year Ended
Ended Ended December 31,
Dec. 31, March 31, --------------
1999 1999 1998 1997
----------- --------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current tax expense.................. $993 $ -- $ -- $ --
Deferred tax expense................. -- 22,659 -- --
---- ------- ------ ------
Total current taxes.............. $993 $22,659 $ -- $ --
==== ======= ====== ======
</TABLE>
The Company recorded an extraordinary gain from discharge of indebtedness
in connection with its March 23, 1999 emergence from the Voluntary Case,
aggregating approximately $68.2 million. This gain, as adjusted for bankruptcy
related items and the 1999 net operating loss for tax purposes, will, under
section 108 of the Internal Revenue Code, reduce the tax basis of certain
Company assets as of January 1, 2000. Deferred taxes have been provided for
the estimated tax effect of future reversing timing differences related to
this tax basis reduction. The Company also recorded an extraordinary gain of
$1.5 million, net of taxes, during the nine months ended December 31, 1999 on
early retirement of debt.
44
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences between the U.S. federal statutory income tax rate and the
Company's effective rate are:
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- -----
<S> <C> <C> <C>
Statutory federal income tax (benefit).............. 35.0% (35.0)% (35.0)%
Amortization of negative goodwill................... (3.9) -- --
Tax difference on gain on debt forgiveness.......... 4.6 -- --
Loss on sale of Lyndon.............................. -- -- 11.4
Income from Lyndon due buyer........................ -- -- 0.8
Valuation of finance receivables.................... -- 24.1 --
Deferred tax valuation allowance.................... (5.9) 12.8 0.7
Restructuring expense............................... (0.2) 4.5 --
State income taxes, net of federal tax benefit...... 0.4 2.1 2.6
Other, net.......................................... 0.4 3.6 2.0
---- ----- -----
Company's effective tax rate........................ 30.4% 12.1% (17.5)%
==== ===== =====
</TABLE>
The total income tax benefit reflected in stockholders' equity for stock
options exercised was $397 in 1997. No stock options were exercised in 1999 or
1998.
Temporary differences between the amounts reported in the financial
statements and the tax basis of assets and liabilities result in deferred
taxes. A full valuation allowance was recorded against the deferred tax asset
balances at December 31, 1998 and 1997 because there was no assurance that
such assets could be realized as reductions against future taxable income.
Deferred tax assets and liabilities at December 31, were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for finance receivables........... $ 4,712 $ 1,402 $ --
Accrued non-operating expenses.............. 87 6,826 1,758
Capitalized restructuring expense........... 489 858 --
Other....................................... 1,780 1,012 1,095
-------- ------- ------
Deferred tax assets......................... 7,068 10,098 2,853
Deferred tax liabilities:
Debt forgiveness............................ 26,263 -- --
Allowance for finance receivables........... -- -- 2,196
Imputed interest during bankruptcy
proceedings................................ -- 3,348 --
Other....................................... 94 -- --
-------- ------- ------
Deferred tax liabilities.................... 26,357 3,348 2,196
-------- ------- ------
Net deferred tax assets (liabilities) before
valuation allowance........................ (19,289) 6,750 657
Less: valuation allowance................... -- (6,750) (657)
-------- ------- ------
Net deferred tax liability.................. $(19,289) $ -- $ --
======== ======= ======
</TABLE>
MFN has elected to be treated as a dealer in securities under Section 475
of the Internal Revenue Code. Pursuant to this election, MFN must recognize as
taxable income or loss the difference between the fair market value of its
securities and the income tax basis of its securities. This election has no
impact on the recognition of pre-tax income for financial reporting purposes.
45
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16--Commitments and Contingencies
Leases
MFN and its subsidiaries lease office space generally under cancelable
operating leases expiring in various years through 2005. Most of these leases
are renewable for periods ranging from three to five years. Future minimum
payments, by year and in the aggregate, under operating leases with initial or
remaining terms of one year or more consisted of the following at December 31,
1999 (dollars in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
2000............................................................... $2,217
2001............................................................... 1,783
2002............................................................... 1,079
2003............................................................... 620
2004 and after..................................................... 440
------
Total.......................................................... $6,139
======
</TABLE>
It is expected that in the normal course of business, office leases that
expire will be renewed or replaced by leases on other properties. Total rent
expense (dollars in thousands) approximated $3,160, $3,667 and $4,571 in 1999,
1998 and 1997, respectively.
Litigation
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.
The Plan provided (a) 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 the Company's previous auditors and (iii)
$250,000 in cash for fees and costs to be incurred in connection with the
Liquidating Trust and (b) for the holders of Securities Fraud Claims to
receive a share of the beneficial interests in the Liquidating Trust in
complete settlement, satisfaction and discharge of their claims. In addition,
the Plan provided for the Company to pay (i) $13.35 million into funds
established for the benefit of holders of certain indemnification claims
against the Company and (ii) up to an aggregate amount of $250,000, for costs
and expenses of certain officers, agents and employees who were no longer
employed by the Company as of the first day immediately following March 23,
1999, in connection with their participation in a government investigation.
The Company also agreed to pay a former employee $100,000 in connection with a
mutual release. All of these costs were fully provided for as of December 31,
1998 and all amounts were paid during 1999 with the exception of approximately
$221,000 which remains set aside 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 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 (the "Consumer
Finance Cases"), including cases which have been brought as putative class
actions, are pending in the various states in which subsidiaries of MFN
conducts 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.
46
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 17--Disclosures of Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value. Fair value estimates are made at a specific point in time for
MFN's financial instruments; they are subjective in nature and involve
uncertainties, and matters of significant judgment and, therefore, cannot be
determined with precision.
Cash and Cash Equivalents
Due to the short term nature of these items, management believes that the
carrying amount is a reasonable estimate of fair value.
Finance Receivables, net
Finance receivables, net have been valued based upon an estimate of the
future cash flows discounted at imputed weighted average cost of capital.
Senior Debt--Commercial Paper and Notes
The fair value has been computed based upon indicated pricing from brokers.
Senior Debt--Term Notes
The fair value has been computed for the term notes and interest rate hedge
based upon indicated pricing from brokers.
Subordinated Debt
The fair value has been computed based upon indicated pricing from brokers.
The carrying amount and estimated fair values of MFN's financial
instruments at December 31, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents.............. $123,635 $123,635 $186,350 $186,350
Finance receivables, net............... 446,407 458,331 552,567 552,891
Financial Liabilities:
Senior debt--commercial paper and
notes................................. -- -- (339,340) (305,406)
Senior debt--term notes................ (381,242) (371,711) (335,905) (302,315)
Subordinated debt...................... (22,500) (21,431) (22,500) (16,875)
</TABLE>
47
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
CONSOLIDATED AVERAGE BALANCE SHEETS FOR THE QUARTER 1999
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
---------------------------- -----------
(Dollars in thousands, except per 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
share data) -------- -------- -------- -----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents.......... $118,908 $ 93,049 $101,030 $202,091
Finance receivables, net of
unearned income................... 528,895 580,834 614,867 631,075
Less: allowance for finance credit
losses............................ 40,368 46,787 49,312 53,547
Less: nonrefundable dealer
reserves.......................... 35,436 37,195 37,745 34,064
-------- -------- -------- --------
Finance receivables, net........... 453,091 496,852 527,810 543,464
Other assets....................... 19,167 12,211 11,007 31,312
-------- -------- -------- --------
Total Assets..................... $591,166 $602,112 $639,847 $776,867
======== ======== ======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities....... 403,742 430,204 456,665 697,358
Other liabilities.................. 83,823 78,969 96,095 54,903
-------- -------- -------- --------
Total Liabilities................ 487,565 509,173 552,760 752,261
Stockholders' Equity................. 103,601 92,939 87,087 24,606
-------- -------- -------- --------
Total Liabilities and
Stockholders' Equity............ $591,166 $602,112 $639,847 $776,867
======== ======== ======== ========
Income Statement
Interest income.................... $ 32,169 $ 35,180 $ 37,818 $ 35,727
Interest expense................... 10,090 10,825 11,276 474
-------- -------- -------- --------
Net interest income before credit
losses............................ 22,079 24,355 26,542 35,253
Provision for finance credit
losses............................ 5,413 9,232 8,426 9,857
-------- -------- -------- --------
Net interest income after credit
losses............................ 16,666 15,123 18,116 25,396
Other operating income............. 3,840 10,594 2,391 3,053
Other operating expenses........... 15,670 14,423 16,337 21,065
Non-operating expenses, net........ -- -- -- 33,719
-------- -------- -------- --------
Income (loss) before income taxes
and
extraordinary credits............. 4,836 11,294 4,170 (26,335)
Applicable income taxes............ 934 (314) 671 (5,287)
-------- -------- -------- --------
Net income (loss) before
extraordinary credits............. 3,902 11,608 3,499 (21,048)
Extraordinary credits.............. -- 1,520 -- 45,570
-------- -------- -------- --------
Net income......................... $ 3,902 $ 13,128 $ 3,499 $ 24,522
======== ======== ======== ========
Average common and equivalent shares
outstanding--basic *................ 10,000 10,000 10,000
Earnings per common share--basic *... $ 0.39 $ 1.31 $ 0.35
Cash dividend declared per share *... $ 0.00 $ 0.00 $ 0.00
Market price (per share)*:
High............................... 8.625 10.000 15.000
Low................................ 6.000 7.875 5.000
Close at end of period............. 6.500 8.500 10.125
Ratios
Net interest margin................ 13.52% 14.34% 14.87% 18.08%
Net income to average total assets. 2.64 8.72 2.19 12.63
Net income to average stockholders'
equity............................ 15.07 56.50 16.07 398.66
</TABLE>
48
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
CONSOLIDATED AVERAGE BALANCE SHEETS
FOR THE QUARTER 1998
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
(Dollars in thousands) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents............ $144,189 $ 74,507 $ 56,141 $ 59,596
Finance receivables, net of unearned
income.............................. 685,639 756,329 822,183 915,170
Less: allowance for finance credit
losses.............................. 60,287 72,952 83,503 95,198
Less: nonrefundable dealer reserves.. 36,691 37,705 41,258 48,199
-------- -------- -------- --------
Finance receivables, net............. 588,661 645,672 697,422 771,773
Other assets......................... 68,966 78,862 79,208 94,537
-------- -------- -------- --------
Total assets....................... $801,816 $799,041 $832,771 $925,906
======== ======== ======== ========
Liabilities and Stockholders' Equity
Liabilities not subject to compromise
under reorganization................ $ 34,153 $ 20,908 $ 24,400 $ 28,764
Liabilities subject to compromise
under reorganization................ 719,422 714,879 738,182 815,182
-------- -------- -------- --------
Total Liabilities.................. 753,575 735,787 762,582 843,946
Stockholders' Equity................... 48,241 63,254 70,189 81,960
-------- -------- -------- --------
Total Liabilities and Stockholders'
Equity............................ $801,816 $799,041 $832,771 $925,906
======== ======== ======== ========
Income Statement
Interest income...................... $ 40,820 $ 43,153 $ 45,979 $ 51,141
Interest expense..................... 721 2,766 16,509 18,597
-------- -------- -------- --------
Net interest income before credit
losses.............................. 40,099 40,387 29,470 32,544
Provision for finance credit losses.. 17,099 11,467 15,265 12,959
-------- -------- -------- --------
Net interest income after credit
losses.............................. 23,000 28,920 14,205 19,585
Other operating income............... 3,260 3,095 2,910 3,926
Other operating expenses............. 20,160 22,089 20,347 22,699
Non-operating expenses, net.......... 38,321 1,731 18,834 2,290
-------- -------- -------- --------
Income (loss) before income taxes.... (32,221) 8,195 (22,066) (1,478)
Applicable income taxes.............. 6,000 -- -- --
-------- -------- -------- --------
Net income (loss).................... $(38,221) $ 8,195 $(22,066) $ (1,478)
======== ======== ======== ========
Ratios
Net interest margin.................. 19.17% 19.29% 13.46% 13.54%
Net income (loss) to average total
assets.............................. (4.77) 1.03 (2.65) (0.16)
Net income (loss) to average
stockholders' equity................ (79.23) 12.96 (31.44) (1.80)
</TABLE>
Average common and equivalent shares outstanding, earnings per common
share, dividend per common share and market price amounts as they relate to
the Predecessor Company are not meaningful due to the reorganization. See Note
7.
49
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 25, 2000,
under the caption "Accounting Information," which information is incorporated
herein by reference.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 25, 2000,
under the caption "Election of Directors," which information is incorporated
herein by reference.
(b) Executive Officers
The executive officers of the Company, all of whose terms of office expire
on April 25, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Present Position with Company
---- --- -----------------------------
<S> <C> <C>
Edward G. Harshfield 63 Chairman of the Board and Chief Executive Officer
Jeffrey B. Weeden 43 President and Chief Operating Officer
Mark E. Dapier 52 Executive Vice President, General Counsel and Secretary
Mark D. Whitham 39 Chief Accounting Officer
</TABLE>
Edward G. Harshfield has been with the Company since March, 1999. Prior to
March, 1999 he served as Chief Executive Officer of California Federal Bank
from October 1993 until January 1997 and Vice Chairman from January 1997 until
January 1999.
Jeffrey B. Weeden has been with the Company since March, 1999. From 1996
through 1998 he served as Senior Vice President and Chief Financial Officer of
Firstar Corporation and in 1995 as Senior Vice President and Controller of
Firstar Bank Milwaukee.
Mark E. Dapier has been General Counsel of the Company since 1992.
Mark D. Whitham has been with the Company since March, 1999. Prior to
March, 1999 he served as Vice President of Firstar Corporation since May,
1997. From August, 1996 to May, 1997 he served as Vice President of Marshall
and Ilsley Corporation and since 1995, as Vice President of Firstar Bank Iowa.
Item 11. Executive Compensation
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting to be held on April 25, 2000, under the
caption "Compensation," which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting to be held on April 25, 2000, under the
caption "Stock Ownership Information," which information is incorporated
herein by reference.
50
<PAGE>
Item 13. Certain Relationships and Related Transactions
Robert Stucker, a director of the Company, is a partner in the law firm of
Vedder, Price, Kaufman & Kammolz, which firm provides legal services to the
Company.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements Filed in this Annual Report on Form 10-K
Report of Grant Thornton LLP.
Report of Arthur Andersen LLP.
Consolidated Balance Sheets as of December 31, 1999, and December 31,
1998.
Consolidated Statements of Income for the years ended December 31,
1999, 1998, and 1997.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997.
Notes to Consolidated Financial Statements for the years ended December
31, 1999, 1998, and 1997.
Quarterly Financial Data for 1999 and 1998 (unaudited).
(a)(2) Financial Statement Schedules
None
(a)(3) Exhibits
<TABLE>
<C> <S> <C>
2 Mercury Finance Company's Second Amended Plan of
Reorganization, incorporated by reference to Exhibit 2 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
3A Amended and Restated Certificate of Incorporation, as
amended, incorporated herein by reference to Exhibit
Number 1.1 to the Company's Registration Statement on Form
8-A filed by the Company on March 22, 1999.
3B Amended and Restated Bylaws, incorporated herein by
reference to Exhibit Number 3.2 to the Company's Current
Report on Form 8-K filed by the Company on December 3,
1999.
4A Indenture dated as of March 23, 1999, between the Company
and Norwest Bank Minnesota, National Association with
respect to Senior Secured Notes, incorporated herein by
reference to Exhibit Number 4(A) to the Company's Current
Report on Form 8-K filed by the Company on March 25, 1999.
4B First Supplemental Trust Indenture dated as of March 23,
1999, between the Company and Norwest Bank Minnesota,
National Association with respect to 10% Senior Secured
Notes Due 2001, Series A, incorporated herein by reference
to Exhibit 4(B) to the Company's Current Report on Form 8-
K filed by the Company on March 25, 1999.
4C Second Supplemental Trust Indenture dated as of March 23,
1999, between the Company and Norwest Bank Minnesota,
National Association with respect to Senior Secured Notes
Due 2001, Series B, incorporated herein by reference to
Exhibit 4(C) to the Company's Current Report on Form 8-K
filed by the Company on March 25, 1999.
4D Company Security Agreement dated as of March 23, 1999,
between the Company and Norwest Bank Minnesota, National
Association, incorporated herein by reference to Exhibit
4(D) to the Company's Current Report on Form 8-K filed by
the Company on March 25, 1999.
</TABLE>
51
<PAGE>
<TABLE>
<C> <S> <C>
4E Company Pledge Agreement dated as of March 23, 1999,
between the Company and Norwest Bank Minnesota, National
Association, incorporated herein by reference to Exhibit
4(E) to the Company's Current Report on Form 8-K filed by
the Company on March 25, 1999.
4F Subsidiaries Guaranty Agreement dated as of March 23,
1999, between each of the corporations listed on Annex I
thereto and Norwest Bank Minnesota, National Association,
incorporated herein by reference to Exhibit 4(F) to the
Company's Current Report on Form 8-K filed by the Company
on March 25, 1999.
4G Subsidiaries Security Agreement dated as of March 23,
1999, between each of the corporations listed on Annex I
thereto and Norwest Bank Minnesota, National Association,
incorporated herein by reference to Exhibit 4(G) to the
Company's Current Report on Form 8-K filed by the Company
on March 25, 1999.
4H Indenture dated as of March 23, 1999, between the Company
and Norwest Bank Minnesota, National Association with
respect to Senior Subordinated Notes, incorporated herein
by reference to Exhibit 4(H) to the Company's Current
Report on Form 8-K filed by the Company on March 25, 1999.
4I First Supplemental Indenture dated as of March 23, 1999,
between the Company and Norwest Bank Minnesota, National
Association with respect to 100% Senior Subordinated Notes
due 2002, incorporated herein by reference to Exhibit 4(I)
to the Company's Current Report on Form 8-K filed by the
Company on March 25, 1999.
4J Warrant Agreement dated as of March 23, 1999, between the
Company and Harris Trust and Savings Bank, as warrant
agent, incorporated herein by reference to Exhibit 4(J) to
the Company's Current Report on Form 8-K filed by the
Company on March 25, 1999.
10A Registration Rights Agreement dated as of March 23, 1999,
between the Company and the persons identified on Schedule
1 thereto, incorporated herein by reference to Exhibit 10
to the Company's Current Report on Form 8-K filed by the
Company on March 25, 1999.
10B Employment Agreement dated March 23, 1999, between Jeffrey
B. Weeden and the Company, incorporated herein by
reference to Exhibit 10A to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999.
10C Employment Agreement dated March 23, 1999, between Mark E.
Dapier and the Company, incorporated herein by reference
to Exhibit 10B to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
10D MFN Financial Corporation Amended and Restated 1989 Stock
Option and Incentive Compensation Plan, incorporated
herein by reference to Exhibit 10C to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
10E Exchange Agent Agreement dated March 29, 1999, between
Norwest Bank Minnesota and the Company, incorporated
herein by reference to Exhibit 10D to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.
10F Form of Indemnification Agreement between the Company and
certain directors and officers of the Company,
incorporated herein by reference to Exhibit 10E to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
10G Change of Control Agreement dated March 23, 1999, between
the Company and Edward G. Harshfield, incorporated herein
by reference to Exhibit 10F to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
10H Change of Control Agreement dated March 23, 1999, between
the Company and Jeffrey B. Weeden, incorporated herein by
reference to Exhibit 10G to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999.
10I Change of Control Agreement dated March 23, 1999, between
the Company and Mark E. Dapier, incorporated herein by
reference to Exhibit 10H to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999.
</TABLE>
52
<PAGE>
<TABLE>
<C> <S> <C>
10J Change of Control Agreement dated March 23, 1999, between
the Company and Mark D. Whitham, incorporated herein by
reference to Exhibit 10I to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999.
10K Employment Agreement dated March 23, 1999, between the
Company and Edward G. Harshfield.
11 Computation of Earnings Per Share
16 Letter dated March 26, 1999, from Arthur Andersen LLP to
the SEC, incorporated herein by reference to Exhibit 16 to
the Company's Current Report on Form 8-K dated March 26,
1999.
21 Subsidiaries of MFN Financial Corporation
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the
fourth quarter of 1999:
Item 5 and Item 7 8-K dated December 3, 1999
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
/s/ Edward G. Harshfield
By: _________________________________
Edward G. Harshfield,
Chairman and Chief Executive
Officer
Date: March 9, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Edward G. Harshfield Chairman, Chief Executive March 9, 2000
____________________________________ Officer and Director
Edward G. Harshfield
/s/ Jeffrey B. Weeden President and Chief March 9, 2000
____________________________________ Operating Officer
Jeffrey B. Weeden
/s/ Mark E. Dapier Executive Vice President, March 9, 2000
____________________________________ General Counsel and
Mark E. Dapier Secretary
/s/ Mark D. Whitham Principal Financial and March 9, 2000
____________________________________ Accounting Officer
Mark D. Whitham
/s/ Thomas L. Gooding Director March 9, 2000
____________________________________
Thomas L. Gooding
/s/ Andrew C. Halvorsen Director March 9, 2000
____________________________________
Andrew C. Halvorsen
/s/ Michael A. Kramer Director March 9, 2000
____________________________________
Michael A. Kramer
/s/ Martin L. Solomon Director March 9, 2000
____________________________________
Martin L. Solomon
/s/ Robert Stucker Director March 9, 2000
____________________________________
Robert Stucker
/s/ George R. Zoffinger Director March 9, 2000
____________________________________
George R. Zoffinger
</TABLE>
54
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S> <C>
2 Mercury Finance Company's Second Amended Plan of
Reorganization, incorporated by reference to Exhibit 2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
3A Amended and Restated Certificate of Incorporation, as amended,
incorporated herein by reference to Exhibit Number 1.1 to the
Company's Registration Statement on Form 8-A filed by the
Company on March 22, 1999.
3B Amended and Restated Bylaws, incorporated herein by reference
to Exhibit Number 3.2 to the Company's Current Report on Form
8-K filed by the Company on December 3, 1999.
4A Indenture dated as of March 23, 1999, between the Company and
Norwest Bank Minnesota, National Association with respect to
Senior Secured Notes, incorporated herein by reference to
Exhibit Number 4(A) to the Company's Current Report on Form 8-
K filed by the Company on March 25, 1999.
4B First Supplemental Trust Indenture dated as of March 23, 1999,
between the Company and Norwest Bank Minnesota, National
Association with respect to 10% Senior Secured Notes Due 2001,
Series A, incorporated herein by reference to Exhibit 4(B) to
the Company's Current Report on Form 8-K filed by the Company
on March 25, 1999.
4C Second Supplemental Trust Indenture dated as of March 23,
1999, between the Company and Norwest Bank Minnesota, National
Association with respect to Senior Secured Notes Due 2001,
Series B, incorporated herein by reference to Exhibit 4(C) to
the Company's Current Report on Form 8-K filed by the Company
on March 25, 1999.
4D Company Security Agreement dated as of March 23, 1999, between
the Company and Norwest Bank Minnesota, National Association,
incorporated herein by reference to Exhibit 4(D) to the
Company's Current Report on Form 8-K filed by the Company on
March 25, 1999.
4E Company Pledge Agreement dated as of March 23, 1999, between
the Company and Norwest Bank Minnesota, National Association,
incorporated herein by reference to Exhibit 4(E) to the
Company's Current Report on Form 8-K filed by the Company on
March 25, 1999.
4F Subsidiaries Guaranty Agreement dated as of March 23, 1999,
between each of the corporations listed on Annex I thereto and
Norwest Bank Minnesota, National Association, incorporated
herein by reference to Exhibit 4(F) to the Company's Current
Report on Form 8-K filed by the Company on March 25, 1999.
4G Subsidiaries Security Agreement dated as of March 23, 1999,
between each of the corporations listed on Annex I thereto and
Norwest Bank Minnesota, National Association, incorporated
herein by reference to Exhibit 4(G) to the Company's Current
Report on Form 8-K filed by the Company on March 25, 1999.
4H Indenture dated as of March 23, 1999, between the Company and
Norwest Bank Minnesota, National Association with respect to
Senior Subordinated Notes, incorporated herein by reference to
Exhibit 4(H) to the Company's Current Report on Form 8-K filed
by the Company on March 25, 1999.
4I First Supplemental Indenture dated as of March 23, 1999,
between the Company and Norwest Bank Minnesota, National
Association with respect to 100% Senior Subordinated Notes due
2002, incorporated herein by reference to Exhibit 4(I) to the
Company's Current Report on Form 8-K filed by the Company on
March 25, 1999.
4J Warrant Agreement dated as of March 23, 1999, between the
Company and Harris Trust and Savings Bank, as warrant agent,
incorporated herein by reference to Exhibit 4(J) to the
Company's Current Report on Form 8-K filed by the Company on
March 25, 1999.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S> <C>
10A Registration Rights Agreement dated as of March 23, 1999,
between the Company and the persons identified on Schedule 1
thereto, incorporated herein by reference to Exhibit 10 to the
Company's Current Report on Form 8-K filed by the Company on
March 25, 1999.
10B Employment Agreement dated March 23, 1999, between Jeffrey B.
Weeden and the Company, incorporated herein by reference to
Exhibit 10A to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999.
10C Employment Agreement dated March 23, 1999, between Mark E.
Dapier and the Company, incorporated herein by reference to
Exhibit 10B to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999.
10D MFN Financial Corporation Amended and Restated 1989 Stock
Option and Incentive Compensation Plan, incorporated herein by
reference to Exhibit 10C to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10E Exchange Agent Agreement dated March 29, 1999, between Norwest
Bank Minnesota and the Company, incorporated herein by
reference to Exhibit 10D to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10F Form of Indemnification Agreement between the Company and
certain directors and officers of the Company, incorporated
herein by reference to Exhibit 10E to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
10G Change of Control Agreement dated March 23, 1999, between the
Company and Edward G. Harshfield, incorporated herein by
reference to Exhibit 10F to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10H Change of Control Agreement dated March 23, 1999, between the
Company and Jeffrey B. Weeden, incorporated herein by
reference to Exhibit 10G to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10I Change of Control Agreement dated March 23, 1999, between the
Company and Mark E. Dapier, incorporated herein by reference
to Exhibit 10H to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
10J Change of Control Agreement dated March 23, 1999, between the
Company and Mark D. Whitham, incorporated herein by reference
to Exhibit 10I to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
10K Employment Agreement dated March 23, 1999, between the Company
and Edward G. Harshfield.
11 Computation of Earnings Per Share
16 Letter dated March 26, 1999, from Arthur Andersen LLP to the
SEC, incorporated herein by reference to Exhibit 16 to the
Company's Current Report on Form 8-K dated March 26, 1999.
21 Subsidiaries of MFN Financial Corporation
27 Financial Data Schedule
</TABLE>
56
<PAGE>
EXHIBIT 10K
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), made as of the 23rd day of March, 1999
by and between MFN Financial Corporation, a Delaware corporation ("Company"),
and Edward G. Harshfield ("Executive").
WITNESSETH THAT:
WHEREAS, the Company desires to employ the Executive, and the
Executive desires to be employed by the Company, in accordance with the terms
and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, the Company and the Executive hereby agree as follows:
1. Employment. The Company hereby agrees to employ the Executive, and
the Executive agrees to serve the Company, in the capacities described herein
during the Period of Employment (as defined in Section 2 of this Agreement), in
accordance with the terms and conditions of this Agreement.
2. Period of Employment. The term "Period of Employment" shall mean
the period which commences on the effective date of a plan of reorganization for
the Company which is confirmed by the bankruptcy court pursuant to a final order
which is no longer subject to appeal (the "Effective Date") and, unless earlier
terminated pursuant to Section 6, ends on the third anniversary of the Effective
Date.
3. Duties During the Period of Employment.
(a) Duties. During the Period of Employment, the Executive shall be employed as
the President and Chief Executive officer of the Company with overall
charge and responsibility for the business and affairs of the Company, and
shall perform such appropriate duties as the Executive shall reasonably be
directed to perform by the Company's Board of Directors (the "Board"). The
Company shall also elect the Executive as a member and Chairman of the
Company's Board. In addition, in connection with each election of
directors, the Executive may nominate two (2) other individuals to serve as
outside members of the Board, who shall be included in the slate of
nominees presented to the shareholders by the Board.
(b) Scope. During the Period of Employment, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive
shall devote substantially all of his business time and attention to the
business and affairs of the Company. It shall not be a violation of this
Agreement for the Executive to (i) serve corporate, civic or charitable
boards or committees, (ii) deliver lectures, fulfill speaking engagements
or teach at educational institutions, or (iii) manage personal investments,
so long as such activities under clauses (i), (ii) and (iii) do not
interfere, in any substantial respect, with the Executive's
responsibilities hereunder.
<PAGE>
4. Compensation and Other Payments.
(a) Salary. During the Period of Employment the Company shall pay the Executive
an annual base salary ("Base Salary") of one million dollars ($1,000,000)
per year. The Executive's Base Salary shall be paid in advance, in equal
monthly installments. The Base Salary shall be reviewed annually as of the
end of each fiscal year of the Company (the "Applicable Year") during the
Period of Employment by the Compensation Committee of the Board (the
"Committee"). Each annual review shall be completed by January 1 following
the Applicable Year. Based upon such reviews, the Committee may increase,
but shall not decrease the Base Salary. Any increase in Base Salary shall
not serve to limit or reduce any other obligation to the Executive under
this Agreement.
(b) Annual Bonuses. The Committee or the Board shall at least annually review
the Executive's performance under this Agreement. The Executive shall be
awarded annual bonuses at the discretion of the Board or the Committee;
provided, however, that for each of the second and third years of the
Period of Employment the Executive's minimum annual bonus shall be five
hundred thousand dollars ($500,000), subject to achieving such reasonable
minimum performance levels as shall be agreed upon in writing by the
Executive and the Company.
(c) Signing Bonus. As an incentive to join the Company and as compensation for
terminating his present employment and foregoing other opportunities, the
Executive shall be paid a cash signing bonus in the amount of four million
dollars ($4,000,000) ("Signing Bonus"), which shall be due and payable on
the Effective Date. The payment of the Signing Bonus is contingent on the
Executive signing this Agreement but is not contingent on the performance
of services for the Company and does not represent compensation for
services rendered.
(d) Initial Stock Options. On the Effective Date, the Company shall grant the
Executive the following options to purchase stock of the Company, which
options shall be transferable by the Executive to members of his immediate
family or to trusts or partnerships formed for the benefit of the Executive
or members of his immediate family:
(i) A ten (10)-year option, exercisable from and after the date of grant, to
purchase a number of shares equal to five percent (5%) of the Company's
stock outstanding as of the Effective Date (the "First Installment"), for
an aggregate exercise price equal to five percent (5%) of the total deemed
equity value of the Company as of the Effective Date (referred to
hereinafter as the "Reorganization Equity Value"), which for purposes of
this Agreement shall be eighty-five million dollars ($85,000,000);
provided, however, that if the post-reorganization capital structure of the
Company or any other economic feature of the plan of reorganization
referred to in Section 2, above, differs materially from those described in
the Disclosure Statement approved by the bankruptcy court on October 15,
1998, the Reorganization Equity Value shall be adjusted appropriately;
(ii) A ten (10)-year option to purchase a number of shares equal to two and
one-half percent (2.5%) of the Company's stock outstanding as of the
Effective Date (the "Second Installment"), for an aggregate exercise price
equal to two and seven-eighths
<PAGE>
percent (2.875%) of the Reorganization Equity Value (i.e., a premium of
fifteen percent (15%) over the pro rata Reorganization Equity Value), which
option shall vest in twelve (12) equal monthly portions, beginning with the
first anniversary of the date of grant, with one-twelfth (1/12) vesting on
such first anniversary and an additional one-twelfth (1/12) vesting on the
first day of each of the next eleven (11) calendar months thereafter; and
(iii) A ten (10)-year option to purchase a number of shares equal to two and
one-half percent (2.5%) of the Company's stock outstanding as of the
Effective Date (the "Third Installment"), for an aggregate exercise price
equal to three and one-fourth percent (3.25%) of the Reorganization Equity
Value (i.e., a premium of thirty percent (30%) over the pro rata
Reorganization Equity Value), which option shall vest in twelve (12) equal
monthly portions, beginning with the second anniversary of the date of
grant, with one-twelfth (1/12) vesting on such second anniversary and an
additional one-twelfth (1/12) vesting on the first day of each of the next
eleven (11) calendar months thereafter.
The Company shall take such reasonable efforts as may be
necessary to cause any shares to be issued in connection with such
option awards to be registered under the Federal Securities Act of
1933, as amended, or under applicable state securities laws, or to
secure an appropriate exemption from such registration. The terms and
conditions of the said option awards are to be included in a Stock
Option Agreement in the form attached hereto as Exhibit A. Options
included in the Second and Third Installments shall become exercisable
immediately upon vesting and shall remain exercisable until they
expire or otherwise terminate in accordance with this Agreement or the
terms and conditions set forth in Exhibit A. To the extent the Company
is unable to provide sufficient shares to comply with this Section
4(d), the Company shall provide the Executive with the economic
equivalent of the value of the option award(s) described in this
Section 4(d) in the form of a stock appreciation right based upon
substantially the same terms and conditions as set forth in Exhibit A.
(e) Future Awards and Option Grants. The Company shall make available a pool of
stock representing Five percent (5%) of the Company's stock, on a fully
diluted basis, for option awards to other employees of the Company, and the
Executive shall not be eligible to receive additional option awards from
that pool.
(f) Reimbursement of Professional Fees. The Company shall pay on the
Executive's behalf all reasonable fees and expenses shown on statements
submitted to the Executive by the Executive's attorneys, accountants and
other advisors in connection with the negotiation and execution of this
Agreement and in connection with the provision of advice regarding this
Agreement after its execution.
(g) Travel and Housing. The Company shall pay all reasonable local housing,
transportation and commutation expenses for the Executive and his spouse
incurred in connection with the Executive rendering services to the
Company. Reasonable commutation and transportation
<PAGE>
expenses include, but are not limited to, air travel between California and
Chicago and an appropriate automobile for local transportation in the
Chicago area. The Company shall reimburse the Executive for all taxes
payable by the Executive because of travel and housing payments by the
Company, including tax reimbursement payments.
5. Other Executive Benefits.
(a) Regular Reimbursed Business Expenses. The Company shall promptly reimburse
the Executive for all expenses and disbursements reasonably incurred by the
Executive in the performance of his duties hereunder during the Period of
Employment.
(b) Benefit Plans. The Executive and his eligible family members shall be
entitled to participate, on terms no less favorable to the Executive and
his eligible family members than the terms offered to other senior
executives of the Company, in any group and/or executive life,
hospitalization or disability insurance plan, health program, vacation
policy, pension, profit sharing, ESOP, 401(k) and similar benefit plans
(qualified, non-qualified and supplemental) or other fringe benefits of the
Company, including an automobile allowance, club memberships and dues, and
similar programs (collectively referred to as the "Benefits"). In the event
that any health programs or insurance policies applicable to the Benefits
provided hereunder contain a preexisting conditions clause, the Company
shall either obtain a waiver from such clause with respect to the Executive
and/or his eligible family members or self-insure the Executive and/or his
eligible family members with respect to such conditions. Anything contained
herein to the contrary notwithstanding, the benefits described herein shall
not duplicate benefits made available to the Executive pursuant to any
other provision of this Agreement. In the event that any benefits coverage
requires an interim waiting period, the Company shall pay all interim
premiums on behalf of the Executive and his family for such coverage. The
Company shall reimburse the Executive for all taxes payable by the
Executive due to payments made by the Company pursuant to this paragraph
(b), including tax reimbursement payments; provided however, that such tax
reimbursement shall not apply to payments which constitute vacation pay or
pension, profit-sharing or similar retirement or deferred compensation
benefits normally taxable to recipients.
(c) Perquisites. The Company shall provide the Executive such perquisites of
employment as are commonly provided to other senior executives of the
Company.
6. Termination.
(a) Death or Disability. This Agreement and the Period of Employment shall
terminate automatically upon the Executive's death. If the Company
determines in good faith that the Disability of the Executive has occurred
(pursuant to the definition of "Disability" set forth below), it may give
to the Executive written notice of its intention to terminate the
Executive's employment. In such event, the Executive's employment with the
Company shall terminate effective on the thirtieth day after receipt by the
Executive of such notice given at any time after a period of one hundred
twenty (120) consecutive days of Disability or a period of one hundred
eighty (180) days of Disability within any twelve (12) consecutive months,
and, in either case, while such Disability is continuing ("Disability
Effective Date"),
<PAGE>
provided that, within the thirty (30) days after such receipt, the
Executive shall not have returned to full-time performance of the
Executive's duties. For purposes of this Agreement, "Disability" means the
Executive's inability to substantially perform his duties hereunder, with
reasonable accommodation, as evidenced by a certificate signed either by a
physician mutually acceptable to the Company and the Executive or, if the
Company and the Executive cannot agree upon a physician, by a physician
selected by agreement of a physician designated by the Company and a
physician designated by the Executive. Until the Disability Effective Date,
the Executive shall be entitled to all compensation and benefits provided
for under Section 4 and Section 5 hereof. It is understood that nothing in
this Section 6(a) shall serve to limit the Company's obligations under
Section 7(b) hereof.
(b) By the Company for Cause. The Company may terminate the Executive's
employment hereunder for "Cause" upon five (5) days' written notice. For
purposes of this Agreement, "Cause" shall mean (i) Executive's commission
of an act materially and demonstrably detrimental to the Company, which act
constitutes gross negligence or willful misconduct by Executive in the
performance of his material duties to the Company or (ii) Executive's
commission of any material act of dishonesty or breach of trust resulting
or intended to result in material personal gain or enrichment of Executive
at the expense of the Company, or (iii) Executive's conviction of a felony
involving theft or moral turpitude, but specifically excluding any
conviction based entirely on vicarious liability. Notwithstanding the
foregoing, the Company may not terminate the Executive's employment for
Cause unless (i) a determination that Cause exists is made and approved by
a majority of the Board, (ii) the Executive is given at least five (5) days
written notice of the Board meeting called to make such determination, and
(iii) the Executive is given the opportunity to address such meeting.
(c) By Executive for Good Reason. The Executive's employment hereunder may be
terminated by the Executive for Good Reason upon five (5) days' written
notice. For purposes of this Agreement, "Good Reason" shall mean:
(i) The assignment to the Executive of any duties inconsistent in any respect
with the Executive's position (including status, offices, titles and
reporting relationships), authority, duties or responsibilities as
contemplated by Section 3 of this Agreement, or any other action by the
Company which results in a significant diminution in such position,
authority, duties or responsibilities, excluding for this Section 6(c) any
isolated, immaterial and inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice thereof
given by the Executive;
(ii) Any failure by the Company to comply with any of the provisions of this
Agreement, other than an isolated, immaterial and inadvertent failure not
taken in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive;
(iii) The filing of any bankruptcy petition against the Company which is not
dismissed within sixty (60) days of the filing of the petition;
<PAGE>
(iv) The revocation of any significant business license of the Company by any
state, except such a revocation which does not have a material adverse
business or prospects of the Company taken as a whole; or
(v) Any criminal indictment of the Company, except for any such indictment (A)
which (1) is based upon the investigation by the federal Securities and
Exchange Commission into actions of the Company which preceded the July 15,
1998 filing date of the bankruptcy petition of the Company and (2) does not
have a material adverse effect on the business or prospects of the Company
taken as a whole or (B) which is based primarily upon the Executive's own
actions, but excluding any indictment based upon an allegation of vicarious
liability on the part of the Executive, with vicarious liability meaning
liability which is based on actions of the Company for which the Executive
is alleged to be responsible solely as a result of his offices with the
Company and in which he was not directly involved and of which he did not
have prior knowledge.
(d) By Executive Other Than for Good Reason. The Executive may, without
liability to the Company, terminate his employment hereunder at any time
other than for Good Reason, upon thirty (30) days' written notice to the
Company.
(e) By the Company Without Cause. The Company may, subject to Section 7(d)
hereof, terminate the Executive's employment hereunder at any time upon
thirty (30) days' written notice to the Executive.
(f) Notice of Termination. Any termination of employment under this Agreement
by the Company or by the Executive shall be communicated by Notice of
Termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets
forth in reasonable detail, if applicable, the facts and circumstances
claimed to provide a basis for termination of the Executive's employment
under the provision so indicated, and (iii) specifies, the Date of
Termination (as defined below). The failure by the Executive or Company to
set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of the basis for termination shall not waive any
right of such party hereunder or preclude such party from asserting such
fact or circumstance in enforcing his or its rights hereunder.
(g) Date of Termination. "Date of Termination" means the date specified in the
Notice of Termination; provided, however, that if the Executive's
employment is terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be.
7. Obligations of the Company Upon Termination or a Change in Control.
(a) Death. If the Executive's employment is terminated by reason of the
Executive's death, this Agreement shall terminate without further
obligations to the Executive's legal representatives under this Agreement,
other than those obligations accrued or earned and vested (if
<PAGE>
applicable) by the Executive as of the Date of Termination, including, but
not limited to, (i) the Executive's Base Salary through the Date of
Termination at the rate in effect on the Date of Termination disregarding
any reduction in Base Salary in violation of this Agreement, (ii) any other
rights and benefits (including, without limitation, payments due pursuant
to Section 5(a) or Section 5(b) of this Agreement) available to the
Executive under employee compensation and benefit arrangements of the
Company (without duplication) in which the Executive was a participant on
the Date of Termination, determined in accordance with the applicable terms
and provisions of such arrangements (such amounts specified in clauses (i)
and (ii) being hereinafter referred to as "Accrued Obligations"); and (iii)
any amounts that remain unpaid pursuant to Section 4(c).
(b) Disability. If the Executive's employment is terminated by reason of the
Executive's Disability, this Agreement shall terminate without further
obligations to the Executive, other than those obligations accrued or
earned and vested (if applicable) by the Executive as of the Date of
Termination, including, but not limited to, all Accrued Obligations and any
amounts that remain unpaid pursuant to Section 4(c).
(c) Cause; Other Than Good Reason. If the Executive's employment shall be
terminated by the Company for Cause or by the Executive other than for Good
Reason, this Agreement shall terminate without further obligations to the
Executive, other than those obligations accrued or earned and vested (if
applicable) by the Executive through the Date of Termination, including,
but not limited to, all Accrued Obligations. In addition, Executive will
forfeit any unpaid amounts that he is entitled to pursuant to Section
7(d)(i) if he terminates his employment other than for Good Reason prior to
January 1, 2000.
(d) Good Reason; Change in Control; Other Than for Cause or Disability. If the
Company shall terminate the Executive's employment other than for Cause or
Disability, or if the Executive shall terminate his employment for Good
Reason, or if a Change in Control shall occur while Executive is employed
by the Company:
(i) Subject to the limitation set forth in Section 7(c), the Company shall
cause the Executive to receive the aggregate of the following amounts:
(A) Continuation of Base Salary through the third anniversary of the Effective
Date;
(B) Any options or stock awards previously granted and not yet vested as of
the Date of Termination or date of Change in Control shall be fully vested
immediately, and all options shall remain exercisable through the end of
their original term;
(C) All unpaid and vested compensation and Benefits accrued or earned by the
Executive as of the Date of Termination or date of Change in Control,
including, but not limited to, all Accrued Obligations;
(D) Any amounts that remain unpaid pursuant to Section 4(c); and
<PAGE>
(E) Any additional compensation to which the Executive may become entitled
pursuant to this Agreement because of continued employment after a Change
in Control.
(ii) Through the third anniversary of the Effective Date, or such longer period
as any plan, program, practice or policy may provide, the Company shall
continue benefits to the Executive and/or the Executive's family at least
equal to those which would have been provided to them in accordance with
Section 5(b) of this Agreement if the Executive's employment had not been
terminated, including health insurance and life insurance. Thereafter, the
Executive shall be treated as a retired senior executive of the Company for
purposes of Benefits provided by the Company to such retirees.
(iii) For purposes of this Agreement, a "Change in Control" shall mean:
(A) The acquisition by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") (excluding any of the Holders
(as defined in paragraph (iv), below) and their affiliates) of beneficial
ownership (within the meaning of Rule l3d-3 promulgated under the Exchange
Act) of more than 50% of either (i) the then outstanding shares of capital
stock of the Company (the "Outstanding Company Capital Stock") or (ii) the
combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Company Voting Securities"); provided, however, that if the Holders cease
to be, in the aggregate, beneficial owners of at least 20% of both the
Outstanding Company Capital Stock and the Company Voting Securities, a
Change in Control shall mean the acquisition by any individual, entity or
group (other than any of the Holders and their affiliates) of beneficial
ownership of 30% or more of either the Outstanding Company Capital Stock or
the Company Voting Securities; provided further that (X) any acquisition by
or from the Company or any of its subsidiaries which is recommended or
approved by the Executive, (Y) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any of its
subsidiaries or (Z) any acquisition by any entity with respect to which,
following such acquisition, more than 80% of, respectively, the then
outstanding shares of capital stock of such entity and the combined voting
power of the then outstanding voting securities of such entity entitled to
vote generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Capital Stock and Company Voting Securities immediately prior to
such acquisition, in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the Outstanding Company Capital
Stock and Company Voting Securities, as the case may be, shall not
constitute a Change in Control; or
<PAGE>
(B) A change in the composition of the Board such that individuals who, as of
the date hereof, constitute the Board (the "Incumbent Board") cease for any
reason to constitute a simple majority of the Board, provided that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders, was
approved by the Executive and by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of the Company; or
(C) Approval by the shareholders of the Company of a reorganization, merger or
consolidation (a "Business Combination") with respect to which all or
substantially all of the individuals and entities who were the respective
beneficial owners of the Outstanding Company Capital Stock and Company
Voting Securities immediately prior to such Business Combination do not,
following such Business Combination, beneficially own, directly or
indirectly, more than 80% of, respectively, the then outstanding shares of
capital stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the entity resulting from the Business Combination, in
substantially the same proportion as their ownership immediately prior to
such Business Combination of the Outstanding Company Capital Stock and
Company Voting Securities, as the case may be; or
(D) (1) A complete liquidation or dissolution of the Company or (2) a sale or
other disposition of all or substantially all of the assets of the Company
other than to an entity with respect to which, following such sale or
disposition, more than 80% of, respectively, the then outstanding shares
of capital stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors
is then owned beneficially, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Capital Stock and Company Voting
Securities immediately prior to such sale or disposition, in substantially
the same proportion as their ownership Of the Outstanding Company Capital
Stock and Company Voting Securities, as the case may be, immediately prior
to such sale or disposition.
(iv) For purposes of this Agreement, "Holder" means each shareholder of the
Company who, as of the Effective Date, owns ten percent (10%) or more of
the Company's stock outstanding as of the Effective Date.
It is understood that the Executive's rights under this Section 7 are in lieu of
all other rights which the Executive may otherwise have had upon termination of
this Agreement; provided,
<PAGE>
however, that no provision of this Agreement is intended to adversely affect the
Executive's rights under the Consolidated Omnibus Budget Reconciliation Act of
1985.
8. Mitigation. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement, and such
amounts shall not be reduced whether or not the Executive obtains other
employment.
9. Indemnification. The Company shall maintain, for the benefit of the
Executive and all of the Executive's nominees to the Board, director and officer
liability insurance in form at least as comprehensive as, and in an amount that
is at least equal to, that maintained by the Company on October 1, 1998. The
Executive's rights to such insurance shall continue so long as the Company
maintains director and office liability insurance for any then current director
or officer; provided that such insurance shall in any event be maintained
through December 31, 2003. In addition, the Executive shall be indemnified by
the Company against liability as an officer and director of the Company or any
subsidiary or affiliate of the Company to the maximum extent permitted by
applicable law.
10. Confidential Information and Noncompetition.
(a) The Executive shall hold a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating
to the Company, or any of its subsidiaries, affiliates and businesses,
which shall have been obtained by the Executive pursuant to his employment
by the Company or any of its subsidiaries and affiliates and which shall
not have become public knowledge (other than by acts by the Executive or
his representatives in violation of this Agreement). After termination of
the Executive's employment with the Company, the Executive shall not,
without the prior written consent of the Company, communicate or divulge
any such information, knowledge or data to anyone other than the Company
and those designated by it, However, in no event shall an asserted
violation of the provisions of this Section 10 constitute a basis for
deferring or withholding amounts otherwise payable to the Executive under
this Agreement.
(b) During the Period of Employment and during the one (1)-year period
immediately following (i) the Company's termination of the Executive's
employment for Cause or (ii) the Executive's termination of his employment
other than for Good Reason, The Executive shall not, directly or
indirectly, engage in, be employed by, act as a consultant to, or be a
director, officer, owner or partner of, any business activity or entity
which competes significantly and directly with the Company or any of its
subsidiaries in lines of business conducted by the Company or its
subsidiaries during the Period of Employment or, for purposes of applying
this noncompetition restriction after the Period of Employment, in lines of
business conducted by the Company or its subsidiaries as of the Date of
Termination and, in either event, in any geographic area in which the
Company or its subsidiaries engage in such business; provided, however,
that it shall not be a violation of this paragraph (b) for the Executive to
continue to serve in those current directorships which are disclosed to the
Company by the Executive in writing at the time of his execution of this
Agreement; and provided further that it shall not be a violation of this
Agreement for the Executive to own an
<PAGE>
interest of less than five percent (5%) in any entity whose ownership
interests are publicly traded.
11. Remedy for Violation of Section 10. The Executive acknowledges
that the Company has no adequate remedy at law and will be irreparably harmed if
the Executive breaches or threatens to breach the provisions of Section 10 of
this Agreement and, therefore, agrees that the Company shall be entitled to
injunctive relief to prevent any breach or threatened breach of such section and
that the Company shall be entitled to specific performance of the terms of such
section in addition to any other legal or equitable remedy it may have. Nothing
in this Agreement shall be construed as prohibiting the Company from pursuing
any other remedies at law or in equity that it may have or any other rights that
it may have under any other agreement.
12. Withholding. Anything in this Agreement to the contrary
notwithstanding, all payments required to be made by the Company hereunder to
the Executive shall be subject to withholding of such amounts, at the time
payments are actually made to the Executive and received by him, relating to
taxes as the Company may reasonably determine it should withhold pursuant to any
applicable law or regulation. In lieu of withholding such amounts, in whole or
in part, the Company may, in its sole discretion, accept other provision for
payment of taxes as required by law, provided that it is satisfied that all
requirements of law affecting its responsibilities to withhold such taxes have
been satisfied.
13. Arbitration. Any dispute or controversy between the Company and
the Executive, whether arising out of or relating to this Agreement, the breach
of this Agreement, or otherwise, shall be settled by arbitration administered in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA") then in effect, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction. Any arbitration
shall be held before a single arbitrator who shall be selected by the mutual
agreement of the Company and the Executive, unless the parties are unable to
agree to an arbitrator, in which case, the arbitrator will be selected by the
then President of the Chicago Bar Association. The arbitrator shall have the
authority to award any remedy or relief that a court of competent jurisdiction
could order or grant, including, without limitation, the issuance of an
injunction. However, either party may, without inconsistency with this
arbitration provision, apply to any court having jurisdiction over such dispute
or controversy and seek interim provisional, injunctive or other equitable
relief until the arbitration award is rendered or the controversy is otherwise
resolved. Except as necessary in court proceedings to enforce this arbitration
provision or an award rendered hereunder, or to obtain interim relief, or as
required by law, neither a party nor an arbitrator may disclose the existence,
content or results of any arbitration hereunder without the prior written
consent of the Company and the Executive. The Company and the Executive
acknowledge that this Agreement evidences a transaction involving interstate
commerce. Notwithstanding any choice of law provision included in this Agreement
the United States Federal Arbitration Act shall govern the interpretation and
enforcement of this arbitration provision. The arbitration proceeding shall be
conducted in Chicago, Illinois or such other location to which the parties may
agree. The Company shall pay the costs of any arbitrator appointed hereunder.
<PAGE>
14. Reimbursement of Legal Expenses. In the event that the Executive
is the prevailing party, or is successful to a material degree, in pursuing or
defending, whether in arbitration or litigation, any claim or dispute involving
the Executive's employment with the Company, including any claim or dispute
relating to (a) this Agreement, (b) termination of the Executive's employment
with the Company or (c) the failure or refusal of the Company to perform fully
in accordance with the terms hereof, the Company shall promptly reimburse the
Executive for all reasonable costs and expenses (including, without limitation,
attorneys' fees) relating solely, or allocable, to such claim. In any other
case, the Executive and the Company shall each bear all their own costs and
attorneys' fees.
15. Taxes. In the event that the aggregate of all payments or benefits
made or provided to, or that may be made or provided to, the Executive under
this Agreement and under all other plans, programs and arrangements of the
Company (the "Aggregate Payment") is determined to constitute an "excess
parachute payment," as such term is defined in Section 280G(b) of the Internal
Revenue Code, the Company shall pay to the Executive prior to the time any
excise tax imposed by Section 4999 of the Internal Revenue Code ("Excise Tax")
is payable with respect to such Aggregate Payment, an additional amount which,
after the imposition of all income and excise taxes thereon, is equal to the
Excise Tax on the Aggregate Payment. The determination of whether the Aggregate
Payment constitutes an excess parachute payment and, if so, the amount to be
provided to the Executive and the time of payment pursuant to this Section 15
shall be made by an independent auditor (the "Auditor") jointly selected by the
Company and the Executive and paid by the Company. The Auditor shall be a
nationally recognized United States public accounting firm which has not, during
the two (2) years preceding the date of its selection, acted in any way on
behalf of the Company or any affiliate thereof. If the Executive and the Company
cannot agree an the firm to serve as the Auditor, then the Executive and the
Company shall each select one accounting firm and those two firms shall jointly
select the accounting firm to serve as the Auditor. Notwithstanding the
foregoing, in the event that the amount of the Executive's Excise Tax liability
is subsequently determined to be greater than the Excise Tax liability with
respect to which any initial payment to the Executive under this Section 15 has
been made, the Company shall pay to the Executive an additional amount (grossed
up for all taxes), with respect to such additional Excise Tax (and any interest
and penalties thereon) at the time and in the amount reasonably determined by
the Auditor. Similarly, if the amount of the Executive's Excise Tax liability is
subsequently determined to be less than the Excise Tax liability with respect to
which any prior payment to the Executive has been made under this Section 15,
the Executive shall refund to the Company the excess amount received, after
reduction for any nonrefundable tax, penalties and/or interest incurred by the
Executive in connection with the receipt of such excess, and such refund shall
be paid promptly after the Executive has received any corresponding refund of
excess Excise Tax paid to the Internal Revenue Service. The Executive and the
Company shall cooperate with each other in connection with any proceeding or
claim relating to the existence or amount of liability for Excise Tax, and all
expenses incurred by the Executive in connection therewith shall be paid by the
Company promptly upon notice of demand from the Executive.
<PAGE>
16. Successors.
(a) This Agreement is personal to the Executive and, without the prior written
consent of the Company, the Executive's rights hereunder shall not be
assignable by the Executive otherwise than by will or the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's heirs and legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) As used in this Agreement the term, "Company" shall include any successor
to the Company's business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise. The
Company shall require any successor (whether direct or indirect, by
purchase, merger, reorganization, consolidation, acquisition of property or
stock, liquidation, or otherwise) to all or a substantial portion of its
assets, by agreement in form and substance reasonably satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform this Agreement if no such succession had taken place.
17. Representations.
(a) The Company represents and warrants that (i) the execution of this
Agreement has been duly authorized by the Company, including action of the
Board, (ii) the execution, delivery and performance of this Agreement by
the Company does not and will not violate any law, regulation, order,
judgment or decree or any agreement, plan or corporate governance document
of the Company and (iii) upon the execution and delivery of this Agreement
by the Executive, this Agreement shall be the valid and binding obligation
of the Company, enforceable in accordance with its terms (subject to entry
of a confirmation order regarding the plan of reorganization referred to in
Section 2, above), except to the extent enforceability may be limited by
applicable bankruptcy, insolvency or similar laws affecting the enforcement
of creditors' rights generally and by the effect of general principles of
equity (regardless of whether enforceability is considered in a proceeding
in equity or at law).
(b) The Executive represents and warrants to the Company that (i) the
execution, delivery and performance of this Agreement by the Executive does
not and will not violate any law, regulation, order, judgment or decree or
any agreement to which the Executive is a party or by which he is bound;
(ii) the Executive is not a party to or bound by any employment agreement,
noncompetition agreement or confidentiality agreement with any other person
or entity that would interfere with this Agreement or his performance of
services hereunder; and (iii) upon the execution and delivery of this
Agreement by the Company, this Agreement shall be the valid and binding
obligation of the Executive, enforceable in accordance with its terms,
except to the extent enforceability may be limited by applicable
bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally and by the effect of general principles of
equity (regardless of whether enforceability is considered in a proceeding
in equity or at law).
<PAGE>
18. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance with the
laws of the State of Illinois, without reference to principles of choice of
law. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party, by overnight courier,
or by registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive:
Mr. Edward G. Harshfield
132 East Delaware Place
Apartment 5506
Chicago, IL 60611
with a copy to:
Robert J. Stucker, Esq.
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street, Suite 2600
Chicago, IL 60601
If to the Company:
MFN Financial Corporation
100 Field Drive, Suite 340
Lake Forest, Illinois 60045
Attn: General Counsel
with a copy to:
Lewis S. Rosenbloom, Esq.
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606
or to such other addresses as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be effective
when actually received by the addressee, as evidenced by a delivery receipt.
(c) None of the provisions of this Agreement shall be deemed to be a penalty.
<PAGE>
(d) The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or unenforceability of any other provision of this
Agreement.
(e) Either party's failure to insist upon strict compliance with any provision
hereof shall not be deemed to be a waiver of such provision or any other
provision hereof.
(f) This Agreement supersedes any prior agreements or understandings, written
or oral, between the Company and the Executive and contains the entire
understanding of the Company and the Executive with respect to the subject
matter hereof.
(g) This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS HEREOF, the parties have executed this Agreement all as of the
day and year first above written.
MFN FINANCIAL CORPORATION
-----------------------------------------
Mark E. Dapier, General Counsel
EDWARD G. HARSHFIELD
-----------------------------------------
<PAGE>
EXHIBIT 11
MFN FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1999
-----------------
<S> <C>
BASIC
Net income................................................. $ 20,529
Average common shares outstanding.......................... 10,000,000
Earnings before extraordinary credit....................... $ 1.90
Extraordinary gain from early retirement of debt........... 0.15
-----------
Earnings per common share.................................. $ 2.05
===========
DILUTED
Net income................................................. $ 20,529
Average common shares and common share equivalents
outstanding............................................... 10,000,661
Earnings before extraordinary credit....................... $ 1.90
Extraordinary gain from early retirement of debt........... 0.15
-----------
Earnings per common share.................................. $ 2.05
===========
</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.
<PAGE>
EXHIBIT 21
MERCURY FINANCE COMPANY SUBSIDIARIES
Mercury Finance Corporation of Alabama (Ala)
Mercury Finance Company of Arizona (Ariz)
Merc Finance Company of California (Cal)
Mercury Finance Company of Colorado (Del)
Mercury Finance Company of Delaware (Del)
Mercury Finance Company of Florida (Del)
Mercury Finance Company of Georgia (Del)
Mercury Finance Company of Illinois (Del)
Mercury Finance Company of Idaho (Del)
Mercury Finance Company of Iowa (Del)
Mercury Finance Company of Indiana (Del)
Mercury Finance Company of Kansas (Del)
Mercury Finance Company of Kentucky (Del)
Mercury Finance Company of Louisiana (Del)
Mercury Finance Company of Michigan (Del)
Mercury Finance Company of Mississippi (Del)
Mercury Finance Company of Missouri (MO)
Mercury Finance Company of Nevada (Nev)
Mercury Finance Company of New Mexico (Del)
Mercury Finance Company of New York (Del)
Mercury Finance Company of North Carolina (Del)
Mercury Finance Company of Ohio (Del)
MFC Finance Company of Oklahoma (Del)
Mercury Finance Company of Oregon (Del)
Mercury Finance Company of Pennsylvania (Del)
Mercury Finance Company of South Carolina (Del)
Mercury Finance Company of Tennessee (Tenn)
MFC Finance Company of Texas (Del)
Mercury Finance Company of Utah (Del)
Mercury Finance Company of Virginia (Del)
Mercury Finance Company of Washington (Del)
Mercury Finance Company of Wisconsin (Del)
MFC Financial Services, Inc. (Fla)
Filco Marketing Company (Del)
Gulfco Investment Inc. (La)
Gulfco Finance Company (La)
Midland Finance Co. (IL)
MFN Insurance Company (Turks and Caicos)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 123,635
<SECURITIES> 0
<RECEIVABLES> 520,012
<ALLOWANCES> (73,605)
<INVENTORY> 0
<CURRENT-ASSETS> 16,607
<PP&E> 2,048
<DEPRECIATION> (130)
<TOTAL-ASSETS> 588,576
<CURRENT-LIABILITIES> 79,296
<BONDS> 403,742
0
0
<COMMON> 100
<OTHER-SE> 105,429
<TOTAL-LIABILITY-AND-EQUITY> 588,576
<SALES> 0
<TOTAL-REVENUES> 121,992
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 46,430
<LOSS-PROVISION> 23,071
<INTEREST-EXPENSE> 32,191
<INCOME-PRETAX> 20,300
<INCOME-TAX> 1,291
<INCOME-CONTINUING> 19,009
<DISCONTINUED> 0
<EXTRAORDINARY> 1,520
<CHANGES> 0
<NET-INCOME> 20,259
<EPS-BASIC> 2.05
<EPS-DILUTED> 2.05
</TABLE>
