<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarter Ended September 30, 2000 Commission File No. 1-10176
MFN Financial Corporation
---------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3627010
------------------------------------ ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
100 Field Drive, Suite 340, Lake Forest, Illinois 60045
------------------------------------------------------ -----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 295-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
Yes X No ___
---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No ___
---
Indicate the number of shares outstanding of each issuer's class of common
stock, as of the latest practicable date.
Common Stock - $.01 par value, 10,000,003 shares as of October 31, 2000.
<PAGE>
MFN FINANCIAL CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS
<S> <C>
Condensed Consolidated Balance Sheets.............................................................. 3
Condensed Consolidated Statements of Income........................................................ 4
Condensed Consolidated Statements of Changes in Stockholders' Equity............................... 5
Condensed Consolidated Statements of Cash Flows.................................................... 6
Notes to Condensed Consolidated Financial Statements............................................... 7
Condensed Consolidated Average Balance Sheets...................................................... 16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................... 17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................................................... 33
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.................................................................................. 34
Item 2. Changes in Securities.............................................................................. 34
Item 3. Defaults Upon Senior Securities.................................................................... 34
Item 4. Submission of Matters to a Vote of Security Holders................................................ 34
Item 5. Other Information.................................................................................. 34
Item 6. Exhibits and Reports on Form 8-K................................................................... 34
SIGNATURES..................................................................................................... 35
INDEX OF EXHIBITS.............................................................................................. 36
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
(In thousands) 2000 December 31,
(Unaudited) 1999
----------- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 138,003 $ 123,635
Finance receivables, net of unearned income 497,845 520,012
Less: Allowance for finance credit losses 38,362 39,543
Less: Nonrefundable dealer reserves 31,151 34,062
---------- -----------
Finance receivables, net 428,332 446,407
Income taxes receivable 6,779 8,692
Furniture, fixtures and equipment, net 2,594 1,918
Other assets (including repossessions) 5,437 7,924
---------- -----------
TOTAL ASSETS $ 581,145 $ 588,576
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior secured debt $ 359,792 $ 381,242
Senior subordinated debt 22,500 22,500
Income taxes 23,631 19,289
Other liabilities 18,036 18,025
Excess of revalued net assets over liabilities
and stockholders' investment 34,580 41,991
---------- -----------
TOTAL LIABILITIES 458,539 483,047
---------- -----------
CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 50,000,000 shares
authorized; 10,000,003 shares outstanding September 30,
2000; 10,000,000 shares outstanding December 31, 1999 100 100
Paid in capital 84,900 84,900
Retained earnings 37,606 20,529
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 122,606 105,529
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 581,145 $ 588,576
========== ===========
</TABLE>
The condensed consolidated balance sheet as of December 31, 1999 has been
derived from the audited consolidated financial statements for that date but
does not include all the information in the accompanying notes required for
complete financial statements.
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Predecessor
Reorganized Company Company
---------------------------------------------- --------
Three Three Nine Six Three
Months Months Months Months Months
Ended Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30, March 31,
(In thousands, except per share data) 2000 1999 2000 1999 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Finance charges and loan fees $29,519 $33,940 $89,259 $69,772 $ 35,313
Investment income 2,448 1,240 6,912 3,226 414
------- ------- ------- ------- --------
Total interest income 31,967 35,180 96,171 72,998 35,727
INTEREST EXPENSE 9,758 10,825 29,922 22,101 474
------- ------- ------- ------- --------
Net interest income before provision for finance
credit losses 22,209 24,355 66,249 50,897 35,253
PROVISION FOR FINANCE CREDIT LOSSES 5,900 9,232 12,550 17,658 9,857
------- ------- ------- ------- --------
Net interest income after provision for finance
credit losses 16,309 15,123 53,699 33,239 25,396
------- ------- ------- ------- --------
OTHER OPERATING INCOME
Insurance premiums 2,918 2,466 8,805 3,563 815
Fees and insurance commissions 203 737 913 1,703 1,240
Other revenue 295 333 1,340 661 998
Gain on sale of finance receivables and assets -- 7,058 77 7,058 --
------- ------- ------- ------- --------
Total other operating income 3,416 10,594 11,135 12,985 3,053
------- ------- ------- ------- --------
OTHER OPERATING EXPENSES
Salaries and employee benefits 9,920 10,774 31,569 22,189 13,150
Occupancy expense 787 896 2,370 1,868 999
Equipment expense 484 388 1,425 740 767
Data processing expense 228 251 750 702 469
Insurance claims and other underwriting expenses 1,774 1,328 5,461 916 (29)
Amortization (2,471) (2,470) (7,409) (4,939) 215
Reorganization expenses, net -- -- -- -- 1,105
Restructuring expenses (12) 9 (170) 1,950 --
Other operating expenses 3,833 3,247 11,552 7,333 4,389
------- ------- ------- ------- --------
Total other operating expenses 14,543 14,423 45,548 30,759 21,065
------- ------- ------- ------- --------
OPERATING INCOME 5,182 11,294 19,286 15,465 7,384
NON-OPERATING EXPENSES
Reorganization expenses -- -- -- -- 33,719
------- ------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY CREDIT 5,182 11,294 19,286 15,465 (26,335)
Income tax provision (benefit) 1,351 (314) 2,696 358 (5,287)
------- ------- ------- ------- --------
Net income (loss) before extraordinary credits 3,831 11,608 16,590 15,107 (21,048)
Extraordinary credits:
Gain on discharge of indebtedness, net of taxes -- -- -- -- 45,570
Gain on early retirement of debt, net of taxes 487 1,520 487 1,520 --
------- ------- ------- ------- --------
NET INCOME $ 4,318 $13,128 $17,077 $16,627 $ 24,522
======= ======= ======= ======= ========
Weighted average common shares outstanding:
Basic 10,000 10,000 10,000 10,000 **
Diluted 10,003 10,054 10,003 10,087 **
Earnings per common share:
Basic $0.43 $1.31 $1.71 $1.66 **
Diluted $0.43 $1.31 $1.71 $1.65 **
Dividends per share declared $0.00 $0.00 $0.00 $0.00 **
</TABLE>
** Earnings per common share and dividend per common share amounts as they
relate to the Predecessor Company are not meaningful due to the reorganization.
See notes 2 and 3.
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained Total
(In thousands) Common Paid In Earnings Treasury Stockholders'
Stock Capital (Deficit) Stock Equity
--------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
Balance at January 1, 1999 $ 177,901 $ 8,244 $(103,351) $(53,664) $ 29,130
Net income for period January 1,
1999 through March 31, 1999 -- -- 24,522 -- 24,522
Effect of Reorganization and
Fresh Start Reporting:
Extinguishment of old stock (177,901) (8,244) 78,829 53,664 (53,652)
Issuance of new stock 100 84,900 -- -- 85,000
--------- ------- --------- -------- --------
Balance at March 31, 1999 $ 100 $84,900 $ -- $ -- $ 85,000
========= ======= ========= ======== ========
-----------------------------------------------------------------------------------------------
POST-EMERGENCE
REORGANIZED COMPANY
Balance at April 1, 1999 $ 100 $84,900 $ -- $ -- $ 85,000
Net income for period
April 1, 1999 through
September 30, 1999 -- -- 16,627 -- 16,627
--------- ------- --------- -------- --------
Balance at September 30, 1999 $ 100 $84,900 $ 16,627 $ -- $101,627
========= ======= ========= ======== ========
Balance at January 1, 2000 $ 100 $84,900 $ 20,529 $ -- $105,529
Net income for period
January 1, 2000 through
March 31, 2000 -- -- 6,264 -- 6,264
--------- ------- --------- -------- --------
Balance at March 31, 2000 100 84,900 26,793 -- 111,793
Net income for period
April 1, 2000 through
June 30, 2000 -- -- 6,495 -- 6,495
--------- ------- --------- -------- --------
Balance at June 30, 2000 100 84,900 33,288 -- 118,288
Net income for period
July 1, 2000 through
September 30, 2000 -- -- 4,318 -- 4,318
--------- ------- --------- -------- --------
Balance at September 30, 2000 $ 100 $84,900 $ 37,606 $ -- $122,606
========= ======= ========= ======== ========
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
----------------------------------------------------------- ---------
Three Three Nine Six Three
Months Months Months Months Months
Ended Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30, March 31,
(In thousands) 2000 1999 2000 1999 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,318 $ 13,128 $ 17,077 $ 16,627 $ 24,522
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for finance credit losses 5,900 9,232 12,550 17,658 9,857
Gain on sale of finance receivables -- (7,058) (77) (7,058) --
Gain on early retirement of debt (804) (2,513) (804) (2,513) --
Provision for deferred income taxes -- -- -- -- (5,287)
Net decrease (increase) in income taxes
receivable 339 166 1,912 166 (767)
Net increase in income taxes payable 1,377 476 4,343 1,029 10,559
Net gain on discharge of indebtedness -- -- -- -- (68,228)
Extinguishment of dividend payable -- -- -- -- (12,937)
Write-off of goodwill and fixed assets, net -- -- -- -- 16,022
Depreciation and amortization (2,278) (2,424) (6,908) (4,894) 607
Net (increase) decrease in other assets (965) (36) 4,712 4,956 (367)
Net increase (decrease)in other liabilities 1,439 1,601 274 (43,555) 26,432
-------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities 9,326 12,572 33,079 (17,584) 413
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance receivables 77,646 92,155 240,981 189,759 108,952
Finance receivables originated or acquired (76,657) (76,070) (239,677) (164,529) (101,075)
Proceeds from sale of finance receivables -- 35,214 2,075 35,214 --
Proceeds from sale of credit card portfolio -- -- -- -- 22,414
Purchases of furniture, fixtures and
equipment (230) (865) (1,181) (1,691) (175)
-------- --------- --------- --------- ---------
Net cash provided by investing activities 759 50,434 2,198 58,753 30,116
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of senior debt and
commercial paper (20,909) (51,114) (20,909) (151,821) (774)
-------- --------- --------- --------- ---------
Net cash used in financing activities (20,909) (51,114) (20,909) (151,821) (774)
-------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (10,824) 11,892 14,368 (110,652) 29,755
Cash and cash equivalents at beginning
of period 148,827 93,561 123,635 216,105 186,350
-------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $138,003 $ 105,453 $ 138,003 $ 105,453 $ 216,105
======== ========= ========= ========= =========
SUPPLEMENTAL CASH DISCLOSURES
Income taxes paid to federal and
state governments $ 825 $ 38 $ 1,427 $ 202 $ 13,133
Net interest paid 9,353 10,022 29,184 41,844 44
SUPPLEMENTAL NON-CASH DISCLOSURES
Cancellation of indebtedness $ -- $ -- $ -- $ -- $ 148,978
Extinguishment of old stock -- -- -- -- (53,652)
Issuance of new stock -- -- -- -- 85,000
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE>
MFN FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
Note 1 - Basis of Presentation
The accompanying (a) condensed consolidated balance sheet as of December 31,
1999, which has been derived from audited financial statements, and (b)
unaudited interim condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to those
rules and regulations, although MFN Financial Corporation, f/k/a Mercury Finance
Company ("MFN" or the "Company") believes that the disclosures made are adequate
to make the information presented not misleading. The condensed consolidated
financial statements of the Company, in the opinion of management, reflect all
necessary adjustments (consisting solely of normal recurring matters, except as
discussed in the following paragraph and except for the restructuring charge)
for a fair presentation of results as of the dates and for the periods covered
by the financial statements.
Due to the Company's emergence from the Voluntary Case (as hereinafter defined)
and implementation of Fresh Start Reporting, Condensed Consolidated Financial
Statements for the Reorganized Company as of March 31, 1999 and for the periods
subsequent to March 31, 1999 (the "Reorganized Company") are not comparable to
those of the Company for the periods prior to March 31, 1999 (the "Predecessor
Company"). For financial reporting purposes, the effective date (the "Fresh
Start Effective Date") of the Plan of Reorganization (as hereinafter defined) is
considered to be the close of business on March 31, 1999. The effective date of
the Plan of Reorganization was March 23, 1999. The results of operations for
the period from March 23, 1999 through March 31, 1999 were not material.
A black line has been drawn between the accompanying Condensed Consolidated
Statements of Income, Changes in Stockholders' Equity and Cash Flows for the
three-month period ended March 31, 1999 and all subsequent periods to
distinguish between the Predecessor Company and the Reorganized Company.
The results of the interim periods shown for the Reorganized Company and
Predecessor Company are not to be considered as being indicative of the results
of operations that are expected for the full year. It is suggested that the
unaudited interim condensed consolidated financial statements contained herein
be used in conjunction with the financial statements and the accompanying notes
to the financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and accompanying notes. The accounts that are
subject to such estimation techniques include the allowance for finance credit
losses. Actual results could differ from these estimates.
7
<PAGE>
Note 2 - Restructuring and Chapter 11 Proceedings
On July 15, 1998, the Company filed a voluntary petition (the "Voluntary Case")
in the United States Bankruptcy Court for the Northern District of Illinois (the
"Court") for relief under chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") along with a plan of reorganization. On March 10, 1999, the
Court entered an order confirming the Company's Second Amended Plan of
Reorganization (the "Plan" or "Plan of Reorganization"). The effective date of
the Plan was March 23, 1999 (the "Effective Date").
On the Effective Date, the Company cancelled its existing senior and
subordinated debt, and its equity securities, including common stock and options
to purchase common stock, and distributed to its exchange agent (the "Exchange
Agent"), (i) $434.2 million principal amount of its Senior Secured Notes due
March 23, 2001 (the "Senior Secured Notes") and 9.5 million shares of new common
stock, par value $0.01 per share ("New Common Stock") for the benefit of holders
of Senior Debt Claims (as defined in the Plan), (ii) $22.5 million principal
amount of its 11.0% Senior Subordinated Notes due March 23, 2002 (the "Senior
Subordinated Notes") for the benefit of the holders of the Company's
subordinated debt and (iii), 500,000 shares of the New Common Stock and three
series of warrants (580,000 of each series) to purchase New Common Stock for the
benefit of former stockholders of record on March 22, 1999. The Series A
Warrants expire March 23, 2002 and have an exercise price of $15.34, the Series
B Warrants expire March 23, 2003 and have an exercise price of $21.81 and the
Series C Warrants expire March 23, 2004 and have an exercise price of $28.27.
In addition, the Company distributed to the Exchange Agent $121.1 million in
cash on April 1, 1999 for the benefit of holders of Senior Debt Claims.
The Senior Secured Notes are comprised of (i) Series A Senior Secured Notes Due
March 23, 2001, (the "Series A Notes") which have a 10% annual fixed rate of
interest, payable quarterly and (ii) Series B Senior Secured Notes Due March
23, 2001, (the "Series B Notes") which have a floating rate of interest based on
the three month LIBOR (London Interbank Offered Rate), payable quarterly. The
Company entered into an interest rate hedge effective March 31, 1999, the effect
of which was to cap the maximum rate of the Series B Notes at 10%. The
Company's senior lenders prior to the Effective Date were given the option to
receive either Series A Notes or Series B Notes in connection with the Plan.
During the second quarter of 1999, holders of the old senior debt elected to
receive $232,829,482 of the Series A Notes and $201,335,561 of the Series B
Notes totaling an aggregate principal amount of the Senior Secured Notes of
$434,165,043. Principal payments on the Senior Secured Notes are not due until
maturity on March 23, 2001. The Senior Subordinated Notes, with an aggregate
principal amount of $22.5 million, have an 11% annual fixed rate of interest,
payable quarterly and are due March 23, 2002.
The above summary of the Plan does not purport to be complete and is qualified
in its entirety by reference to the Plan.
8
<PAGE>
Note 3 - Fresh Start Reporting and Excess of Revalued Net Assets Over
Liabilities and Stockholders' Investment
As of March 31, 1999, the Company adopted Fresh Start Reporting in accordance
with the American Institute of Certified Public Accountants' Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7). The adoption of Fresh Start Reporting resulted in
material changes to the Condensed Consolidated Balance Sheet, including
valuation of assets at fair value in accordance with principles of the purchase
method of accounting, valuation of liabilities pursuant to provisions of the
Plan and valuation of equity based on the appraised reorganization value of the
ongoing business.
The reorganization value of $85.0 million (the approximate fair value) was based
on the consideration of many factors and various valuation methods, including
discounted cash flows, selected publicly traded company market multiples and
other applicable ratios and valuation techniques believed by the Company and its
financial advisors to be representative of the Company's business and industry.
The Predecessor Company's equity was eliminated in Fresh Start Reporting.
In accordance with Fresh Start Reporting guidelines, certain noncurrent assets,
including goodwill, recorded on the Company's Condensed Consolidated Balance
Sheet at the Fresh Start Effective Date aggregating $16.0 million were reduced
to zero as a result of the fair value of the Company's assets exceeding the fair
value of its liabilities and stockholders' investment. In addition, as a result
of the reorganization, the dividends payable liability in the amount of $12.9
million was extinguished. The net result of the adjustment of assets and
liabilities to fair value was a charge to earnings of $3.1 million during the
period ended March 31, 1999. After reducing the fair value of certain
noncurrent assets to zero, the excess of the fair value of the remaining assets
over the fair value of liabilities and stockholders' investment, totaling $49.4
million, was recorded as a deferred credit, "Excess of Revalued Net Assets Over
Liabilities and Stockholders' Investment". This balance will be amortized over
5 years.
The Company's emergence from the Voluntary Case and the adoption of Fresh Start
Reporting resulted in the following adjustments to the Company's Condensed
Consolidated Balance Sheet as of March 31, 1999:
<TABLE>
<CAPTION>
Predecessor Fresh Start Reorganized
Company Adjustments Company
March 31, 1999 Debit Credit March 31, 1999
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $216,105 $ - $ - $216,105
Finance receivables, net 535,523 - - 535,523
Other assets 31,200 - - 31,200
-------- ----------- ----------- --------
Total Assets $782,828 $ - $ - $782,828
======== =========== =========== ========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Predecessor Fresh Start Reorganized
Company Adjustments Company
March 31, 1999 Debit Credit March 31, 1999
--------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Liabilities
Senior Debt $ 674,471 $240,306(a) $ - $434,165
Excess cash payments to senior
debt holders - - 100,707(b) 100,707
Subordinated debt 22,500 - - 22,500
Interest payable 30,552 9,008(a) - 21,544
Other liabilities 23,801 371(c) - 23,430
Income taxes 4,472 - 22,659(d) 27,131
Litigation accrual 18,950 - - 18,950
Excess of revalued net assets over
liabilities and stockholders' investment - - 49,401(e) 49,401
--------- -------- -------- --------
Total Liabilities 774,746 249,685 172,767 697,828
Stockholders' Equity
Common stock 177,901 177,901(f) 100(g) 100
Paid-in capital 8,244 8,244(f) 84,900(g) 84,900
Accumulated deficit (124,399) - 78,829(f) -
45,570(h) -
Treasury stock (53,664) - 53,664(f) -
--------- -------- -------- --------
Total Stockholders' Equity 8,082 186,145 263,063 85,000
--------- -------- -------- --------
Total Liabilities and Stockholders' Equity $ 782,828 $435,830 $435,830 $782,828
========= ======== ======== ========
</TABLE>
(a) To reflect the cancellation of the old debt and related accrued interest.
(b) To setup a payable of Excess Cash to Senior Debt Holders in accordance with
the Plan of Reorganization. Payment occurred on April 1, 1999.
(c) To write-off cancelled liabilities of the Company.
(d) To establish deferred income tax liability on the cancellation of
indebtedness.
(e) The excess of revalued net assets over liabilities and stockholders'
investment is calculated below:
Fair value of identifiable assets $782,828
Less: reorganized value of new debt 456,665
Less: reorganized value of new equity 85,000
Less: fair value of identifiable liabilities 191,762
--------
$ 49,401
========
(f) To eliminate stockholders' equity of the Predecessor Company.
(g) To record 10,000,000 shares of New Common Stock at an assumed market value
of $8.50 per share.
10
<PAGE>
(h) To record the extraordinary gain resulting from discharge of indebtedness.
The extraordinary gain, net of taxes is calculated below:
Historical carrying value of old debt securities $ 696,971
Historical carrying value of related accrued interest 29,405
Value exchanged for old debt:
Excess cash payment, including interest (121,104)
Senior secured notes (434,165)
Senior subordinated notes (22,500)
New common stock (9.5 million shares to creditors) (80,750)
Other 372
---------
Extraordinary gain before tax 68,229
Tax provision (22,659)
---------
Extraordinary gain $ 45,570
=========
Note 4 - Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of the Company's common stock outstanding during the
period. Diluted earnings per share is computed based upon the weighted average
number of shares of common stock outstanding and the dilutive common share
equivalents outstanding during the period. Common stock equivalents include
options granted under the Company's stock option plan, options granted pursuant
to an employment agreement with the Company's Chief Executive Officer and
warrants outstanding convertible into shares of common stock of the Company
using the treasury stock method.
11
<PAGE>
<TABLE>
<CAPTION>
Reorganized Company
--------------------------------------------------
Three Three Nine Six
Months Months Months Months
Ended Ended Ended Ended
(Dollars in thousands, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
except per share data) 2000 1999 2000 1999
------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC
Net Income $ 4,318 $ 13,128 $ 17,077 $ 16,627
Average common shares outstanding 10,000,003 10,000,000 10,000,002 10,000,000
Earnings before extraordinary credit $ 0.38 $ 1.16 $ 1.66 $ 1.51
Extraordinary gain from early
retirement of debt 0.05 0.15 0.05 0.15
----------- ----------- ----------- -----------
Earnings per common share $ 0.43 $ 1.31 $ 1.71 $ 1.66
=========== =========== =========== ===========
DILUTED
Net Income $ 4,318 $ 13,128 $ 17,077 $ 16,627
Average common shares outstanding and
share equivalents outstanding 10,002,908 10,054,269 10,003,192 10,087,248
Earnings before extraordinary credit $ 0.38 $ 1.16 $ 1.66 $ 1.50
Extraordinary gain from early
retirement of debt 0.05 0.15 0.05 0.15
----------- ----------- ----------- -----------
Earnings per common share $ 0.43 $ 1.31 $ 1.71 $ 1.65
=========== =========== =========== ===========
</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 5 - Reclassifications
Certain data from the prior periods has been reclassified to conform to the
current period presentation.
Note 6 - Contingencies and Legal Matters
The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities announced by the Company in January, 1997.
Those events are also under investigation by the United States Attorney for the
Northern District of Illinois and the Federal Bureau of Investigation. The
Company is cooperating fully in these investigations.
In the normal course of its business, MFN and its subsidiaries are named as
defendants in legal proceedings. A number of such actions (the "Consumer
Finance Cases"), including cases which have been brought as putative class
actions, are pending in the various states in which the Company's subsidiaries
conduct business. It is the policy of MFN and its subsidiaries to vigorously
defend litigation, however, MFN and (or) its subsidiaries have and may in the
future enter into settlements of claims where management deems appropriate.
Although it is not possible at this time to estimate the amount of damages or
settlement expenses that may be incurred, management is of the opinion that the
resolution of these proceedings will not have a material effect on the financial
position and results of operations of MFN.
12
<PAGE>
The Company recognizes the expense for litigation when the incurrence of loss is
probable and the amount of such loss is estimable. Because of the uncertainty
that surrounds the Consumer Finance Cases, no accrual has been made for the
majority of these lawsuits.
Note 7 - Income Taxes
The 2000 provision for income taxes was calculated using a 39.5% tax rate on
earnings before income taxes adjusted for (1) the amortization of the excess of
revalued net assets over liabilities and stockholders' investment and (2) state
income tax refunds totaling $3.1 million received during the second and third
quarters of 2000.
Note 8 - Debt
The following table presents the Company's debt instruments and the interest
rates on the debt for both September 30, 2000 and December 31, 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ ------------------
Balance Rate Balance Rate
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Senior secured debt $359,792 10.00% $381,242 10.00%
Senior subordinated debt 22,500 11.00% 22,500 11.00%
-------- -------- -------- --------
Total $382,292 10.06% $403,742 10.06%
======== ======== ======== ========
</TABLE>
Debt is used as the primary source for funding the Company's finance
receivables.
The senior secured debt is comprised of (i) Series A Notes Due March 23, 2001,
which have a 10% annual fixed rate of interest, payable quarterly and (ii)
Series B Notes Due March 23, 2001, which have a floating rate of interest based
on three month LIBOR (London Interbank Offered Rate), payable quarterly.
Principal payments on the senior secured debt are due at maturity on March 23,
2001.
The principal amounts of Series A Notes and Series B Notes outstanding at
September 30, 2000 were $181,379,482 and $178,412,263, respectively, for a total
of $359,791,745. The principal amounts of Series A Notes and Series B Notes
outstanding at December 31, 1999 were $202,829,482 and $178,412,263,
respectively, for a total of $381,241,745. While the Series B Notes bear a
variable rate of interest, the Company has purchased interest rate protection to
cap the annual rate of interest at 10.0%, the cost of which is amortized in
determining the spread to LIBOR. The total interest cost of either series of
senior secured notes will not exceed a 10.0% annual rate to the Company.
The Company's senior secured debt is secured by substantially all of the assets
of the Company and its domestic subsidiaries, which have guaranteed the
Company's obligations under the senior secured notes.
The senior subordinated debt, with an aggregate principal amount of $22.5
million, has an 11% annual fixed rate of interest, payable quarterly and is due
March 23, 2002.
13
<PAGE>
Note 9 - Stock Options
Under the Plan of Reorganization, options to purchase 950,000 shares of the
Company's authorized and unissued New Common Stock were reserved under the
Amended and Restated 1989 Stock Option Plan ("Stock Option Plan") and options to
purchase 1,000,000 shares were granted pursuant to an employment agreement with
the Company's Chief Executive Officer. Total options outstanding at September
30, 2000 were 1,685,000. There were no options granted, exercised or forfeited
during the three months ended September 30, 2000.
MFN applies APB Opinion 25 and its Interpretations in accounting for its options
granted, and accordingly, no compensation cost has been recognized for its stock
options in the condensed consolidated financial statements.
Note 10 - Warrants
In accordance with the Plan of Reorganization which became effective March 23,
1999, three series of warrants (580,000 of each series) to purchase the
Company's common stock were distributed to the Exchange Agent for the benefit of
former stockholders of record on March 22, 1999. The Series A Warrants expire
March 23, 2002 and have an exercise price of $15.34, the Series B Warrants
expire March 23, 2003 and have an exercise price of $21.81 and the Series C
Warrants expire March 23, 2004 and have an exercise price of $28.27. Warrants
to purchase three shares of the Company's stock have been exercised.
Note 11 - Restructuring Charges
During the second quarter of 1999, the Company implemented a plan to close a
total of 46 branches. The Company recorded a provision against earnings in the
amount of $1.9 million to cover estimated severance, relocation costs and lease
termination costs. These charges (included in other operating expenses) and
their utilization is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Amounts Amounts Amounts Adjust- Balance
Charged Utilized Utilized ments Sept. 30,
In 1999 In 1999 In 2000 In 2000 2000
------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Lease buyouts and other expenses $ 998 $380 $373 $ 81 $ 164
Employee severance and retention 952 333 504 89 26
------- -------- -------- ------- ---------
Total $1,950 $713 $877 $170 $ 190
======= ======== ======== ======= =========
</TABLE>
The Company records restructuring charges against operations and provides a
reserve based on the best information available at the time the commitment is
made to undertake the restructuring action. The reserves are considered
utilized when specific restructuring criteria are met, indicating the planned
restructuring action has occurred. Work-force-related reserves are considered
utilized at payment for termination or acceptance of other contractual
arrangements.
The reserve for lease buyouts is utilized when the remaining lease obligations
are settled or the space has been vacated and made available for sublease. It
is the Company's policy to continue to
14
<PAGE>
charge depreciation, rental and other operating costs relating to excess space
to ongoing operations while they remain in business use. Salaries and benefits
are charged to operations while the employee is actively employed.
A $170,000 credit was recorded to restructuring expense during the nine-month
period ended September 30, 2000 to adjust previously recorded reserves for a
change in estimated reserve requirements.
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 Condensed Consolidated
Statements of Income. These expenses were incurred by the Predecessor Company
and are summarized below for the three month period ended March 31, 1999
(dollars in thousands):
<TABLE>
<S> <C>
Interest expense $19,847
Management consultants 6,933
Adjustments of assets and liabilities to fair value 3,085
Creditor attorneys and advisors 1,193
Corporate counsel 846
Independent accountants 550
Board of Directors representation 100
Other 1,165
-------
Total $33,719
=======
</TABLE>
Note 13 - Extraordinary Item
During the third quarter of 2000, MFN retired debt with a face value of $21.45
million prior to scheduled maturity. The debt repurchases resulted in an after-
tax extraordinary gain of $0.49 million. During the third quarter of 1999, MFN
retired debt with a face value of $52.92 million prior to scheduled maturity,
which resulted in an after-tax extraordinary gain of $1.52 million.
Note 14 - Subsequent Event
Subsequent to September 30, 2000, MFN retired debt with a face value of $16.46
million prior to scheduled maturity.
15
<PAGE>
MFN FINANCIAL CORPORATION
CONDENSED CONSOLIDATED AVERAGE BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
---------------------------------------------- -----------
Three Three Nine Six Three
Months Months Months Months Months
Ended Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30, March 31,
(Dollars in thousands) 2000 1999 2000 1999 1999
-------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $143,855 $ 93,049 $142,324 $ 97,040 $202,091
Finance receivables, net of unearned income 501,086 580,834 506,566 597,851 631,075
Less: allowance for credit losses 37,794 46,787 38,349 48,050 53,547
Less: nonrefundable dealer reserves 32,286 37,195 32,829 37,470 34,064
-------- -------- -------- -------- --------
Finance receivables, net 431,006 496,852 435,388 512,331 543,464
Other assets 14,767 12,211 15,776 11,609 31,312
-------- -------- -------- -------- --------
TOTAL ASSETS $589,628 $602,112 $593,488 $620,980 $776,867
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities $390,517 $430,204 $398,452 $443,435 $697,358
Other liabilities 78,686 78,969 80,465 87,532 54,903
-------- -------- -------- -------- --------
TOTAL LIABILITIES 469,203 509,173 478,917 530,967 752,261
STOCKHOLDERS' EQUITY 120,425 92,939 114,571 90,013 24,606
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $589,628 $602,112 $593,488 $620,980 $776,867
======== ======== ======== ======== ========
Ratios:
Net interest margin 13.77% 14.46% 13.61% 14.65% **
Net income to average total assets 2.93% 8.72% 3.84% 5.36% **
Net income to average stockholders' equity 14.34% 56.50% 19.87% 36.94% **
</TABLE>
** Amounts as they relate to Predecessor Company are not meaningful due to the
Voluntary Case. See notes 2 and 3 of the condensed consolidated financial
statements.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2000,
contains certain forward-looking statements pertaining to the success of the
Company's new technology to process sales finance applications, expected
operating results, loss provisions, other operating income and expenses, debt
refinancing 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 including centralized lock-box operations, the Company's ability to
refinance its debt, the impact of eliminating collateral protection insurance on
certain receivables and general economic conditions. The Company undertakes no
obligation to update any such factor or to publicly announce the results of any
revisions to any forward-looking statements contained herein to reflect future
events or developments.
Background
MFN Financial Corporation, f/k/a Mercury Finance Company ("MFN" or the
"Company") is a consumer finance concern engaged, through its operating
subsidiaries, in the business of acquiring individual installment sales finance
contracts from automobile dealers and retail vendors, extending short-term
installment loans directly to consumers and selling credit insurance and other
related products. Notwithstanding anything herein to the contrary, all
operations of the Company are conducted through its subsidiaries and all
references herein to offices (except the Company's home office) or branches
refer to the Company's operating subsidiaries only.
MFN was organized in 1988, as a wholly-owned subsidiary of First Illinois
Corporation (an Evanston, Illinois based bank holding company). On April 24,
1989, First Illinois Corporation distributed to its stockholders one share of
MFN for each two shares of First Illinois Corporation stock held.
Substantially all of MFN's borrowers are "non-prime" borrowers. These are
borrowers who generally would not be expected to qualify for traditional
financing such as that provided by commercial banks or automobile manufacturers'
captive finance companies.
MFN's direct loans generally have terms of 12 to 24 months with maximum terms of
36 months. Secured direct loans are generally collateralized by real or
personal property. Sales finance contracts are generally accounted for on a
discount basis and generally have terms of 18 to 48 months with maximum terms of
60 months. Annual interest rates on MFN's sales finance contracts and loans
range, with minor exception, from 18% to 45%. Generally all sales finance
contracts and loans are repayable in monthly installments. Late payment fees on
pre-compute
17
<PAGE>
contracts generally are assessed to accounts which fail to make their scheduled
payments within 10 days of the scheduled due date.
MFN's primary strategic focus for the past eighteen months has been purchasing
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 and maintaining current contractual dealer agreements
between the Company and the dealer. In addition, DDMs can help provide ideas to
the dealers on attracting customers to their dealerships. Prior to 1999 the
branches and their personnel were responsible for these activities.
Beginning in 1998, substantially all purchases of automobile retail installment
contracts are approved through CPOs which serve as the centralized underwriter
of credit. The CPOs have helped the Company apply consistent underwriting
standards, resulting in reduced charge offs on 1998, 1999 and 2000 originations
as compared to older accounts. In addition, during the second quarter of 2000,
the Company completed installation of new technology to process sales finance
applications. This technology incorporates additional risk management features
which the Company believes will help reduce risk in the portfolio.
Substantially all automobile retail installment sales applications are now
processed through the Company's new system. The system automatically accesses a
credit bureau report on each applicant, checks values of the proposed collateral
and performs specific checks on the applicants. The system also incorporates
the Company's underwriting criteria and will reject applications which fail to
meet certain minimum standards. Applications which meet these minimums are
investigated further by an underwriter and investigator team before they are
approved for purchase.
Overview
On July 15, 1998, the Company filed a voluntary petition (the "Voluntary Case")
in the United States Bankruptcy Court for the Northern District of Illinois (the
"Court") for relief under chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") along with a plan of reorganization. On March 10, 1999, the
Court entered an order confirming the Company's Second Amended Plan of
Reorganization (the "Plan" or "Plan of Reorganization"). The effective date of
the Plan was March 23, 1999 (the "Effective Date").
On the Effective Date, the Company cancelled its existing senior and
subordinated debt, and its equity securities, including common stock and options
to purchase common stock and distributed to its exchange agent (the "Exchange
Agent") (i) $434.2 million principal amount of its Senior Secured Notes due
March 23, 2001 (the "Senior Secured Notes") and 9.5 million shares of new common
stock, par value $0.01 per share ("New Common Stock") for the benefit of holders
of Senior Debt Claims (as defined in the Plan), (ii) $22.5 million principal
amount of its 11.0% Senior Subordinated Notes due March 23, 2002 (the "Senior
Subordinated Notes") for the benefit of the holders of the Company's
subordinated debt and (iii) 500,000 shares of the Common Stock and three series
of warrants (580,000 of each series) to purchase New Common Stock for the
benefit of former shareholders of record on March 22, 1999. The Series A
Warrants expire
18
<PAGE>
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 the Condensed Consolidated Balance Sheet, including valuation of assets at
fair value in accordance with principles of the purchase method of accounting,
valuation of liabilities pursuant to provisions of the Plan and valuation of
equity based on the appraised reorganization value of the ongoing business.
Due to the Company's emergence from the Voluntary Case and implementation of
Fresh Start Reporting, Condensed Consolidated Financial Statements for the
Reorganized Company as of March 31, 1999 and for the periods subsequent to March
31, 1999 (the "Reorganized Company") are not comparable to those of the Company
for the periods prior to March 31, 1999 (the "Predecessor Company"). For
financial reporting purposes, the effective date (the "Fresh Start Effective
Date") of the Plan of Reorganization is considered to be the close of business
on March 31, 1999. The results of operations for the period from March 23, 1999
through March 31, 1999 were not material.
To facilitate a comparison of the Company's year-to-date operating performance
in fiscal years 2000 and 1999, the following discussion of certain consolidated
financial information may be presented on a traditional comparative basis for
all periods even though the accounting requirements for companies upon emergence
from bankruptcy calls for separate reporting for the Reorganized Company and the
Predecessor Company.
A black line has been drawn between the accompanying Condensed Consolidated
Statements of Income, Changes in Stockholders' Equity and Cash Flows between the
three-month period ended March 31, 1999 and all subsequent periods to
distinguish between the Predecessor Company and the Reorganized Company.
The results for the interim periods shown for the Reorganized Company and the
Predecessor Company are not to be considered as being indicative of the results
that are expected for the full year.
The following is management's discussion and analysis of the condensed
consolidated financial condition of the Reorganized Company at September 30,
2000 and December 31, 1999. Condensed consolidated results of operations are for
the three-month periods ended September 30, 2000 and September 30, 1999, the
six-month period ended September 30, 1999 and the nine-month period ended
September 30, 2000 for the Reorganized Company and for the three-month period
ended March 31, 1999 for the Predecessor Company. This discussion should be read
in conjunction with the Company's condensed consolidated financial statements
and notes thereto appearing elsewhere in this report. Again, the results of
operations of the Predecessor Company are not necessarily indicative of future
results of the Reorganized Company.
19
<PAGE>
FINANCIAL CONDITION
As of March 31, 1999, the Company adopted Fresh Start Reporting in accordance
with the American Institute of Certified Public Accountant's Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code", (SOP 90-7). Fresh Start Reporting resulted in material changes
to the Condensed Consolidated Balance Sheet. See Note 3 to the Condensed
Consolidated Financial Statements.
Assets and Finance Receivables
Total assets of the Company at September 30, 2000 decreased 1.7% on an
annualized basis to $581.1 million compared to $588.6 million at December 31,
1999. The decrease was primarily due to debt retirement of $21.5 million, offset
by increases in cash balances due to operational profitability.
The Company's offices in Illinois, Florida and Virginia accounted for
approximately 14%, 9%, and 8%, respectively, of all sales finance receivables
and direct loans outstanding at September 30, 2000.
Finance receivables are presented net of unearned income which amounted to
$121.5 million and $131.0 million at September 30, 2000 and December 31, 1999,
respectively. The following table summarizes the composition of finance
receivables net of unearned income at the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Direct Loans
Interest-bearing $ 3,078 $ 9,961
Precompute, net of unearned income 12,923 24,886
-------- --------
Total direct loans, net of unearned income 16,001 34,847
Sales Finance Receivables
Interest-bearing 48,214 9,596
Precompute, net of unearned income 433,630 475,569
-------- --------
Total sales finance receivables, net of unearned income 481,844 485,165
-------- --------
Finance Receivables, Net of Unearned Income $497,845 $520,012
======== ========
</TABLE>
The following sets forth a summary of originations net of unearned income for
the three-month and nine-month periods ended September 30, (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Direct loans $ 1,868 $ 7,631 $ 7,514 $ 28,509
Sales finance receivables 81,747 74,964 254,344 260,015
------- ------- -------- --------
Total originations and acquisitions $83,615 $82,595 $261,858 $288,524
======= ======= ======== ========
</TABLE>
20
<PAGE>
Originations of total finance receivables during the third quarter of 2000 are
up 1.2% from the same period of last year. Originations of sales finance
receivables during the same period are up 9.0% or $6.8 million, while direct
loan originations declined $5.6 million as a result of the Company's strategic
decision to place a greater emphasis on purchasing sales finance contracts
versus direct lending. Originations of total finance receivables are down 9.2%
for the nine month period ended September 30, 2000 compared to the same period
one year ago due primarily to a $21.0 million decline in direct loan
originations.
The Company completed the installation of new technology at its CPO locations
during the second quarter of 2000. This technology adds additional risk
management features and is expected to allow the CPOs to become more efficient
in processing sales finance applications and managing dealer relationships. The
Company intends to continue to place a greater emphasis on purchasing automobile
sales finance contracts versus direct lending.
Allowance and Provision for Finance Credit Losses
MFN originates direct consumer loans and acquires individual sales finance
contracts from third party dealers. The Company maintains an allowance for
finance credit losses that are expected to be incurred on receivables that have
demonstrated a risk of loss based upon delinquency or bankruptcy status.
The sales finance contracts are generally acquired at a discount from the
principal amount. This discount is normally referred to as a non-refundable
dealer reserve. The amount of the discount is based upon the credit risk of the
borrower, the note rate of the contract and competitive factors. The dealer
reserve is made available to absorb credit losses over the life of the pool of
receivables. The dealer reserve is not used to offset the 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
period estimated losses. As the specific borrower and amount of a loan loss is
confirmed by gathering additional information, taking collateral in full or
partial settlement of the loan, bankruptcy of the borrower, etc., the loan is
charged off, reducing the allowance for finance credit losses. If, subsequent to
a charge off, the Company is able to collect additional amounts from the
borrower or obtain control of collateral worth more than earlier estimated, a
recovery is recorded. This recovery reduces the current period charge off
amounts.
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
and recoveries) into separately identified pools based upon the period (month)
the loans were acquired. 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.
21
<PAGE>
Reserve requirements for sales finance and direct receivables are calculated
based on the estimated losses inherent in each category of delinquency (i.e.-not
delinquent, 30, 60, 90 and 120 days past due). Repossessed collateral is valued
at an estimate of its net realizable value.
The following is a summary of the activity in the allowance for finance credit
losses for the three-month and nine-month periods ended September 30 (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period $37,113 $ 48,707 $ 39,543 $ 53,485
Reserves recaptured in conjunction
with sale of finance receivables -- (3,694) (90) (3,694)
Provision for finance credit losses 5,900 9,232 12,550 27,515
Finance receivables charged-off, net of recoveries (4,338) (10,913) (15,868) (37,872)
Net amount transferred from (to) reserve for
repossessed assets (313) (1,174) 2,227 2,724
------- -------- -------- --------
Balance at end of period $38,362 $ 42,158 $ 38,362 $ 42,158
======= ======== ======== ========
Allowance for finance credit losses as a percent of total
finance receivables, net of unearned income 7.71% 7.79%
</TABLE>
Repossessed assets at September 30, 2000 are carried in other assets and are
reserved at 70% of the outstanding balance owed. Prior to September 30, 2000
repossessed assets were carried net of a 75% reserve. The reduction of the
reserve from 75% to 70% is due to improved recovery rates during the past year.
The repossessed asset reserve is established as a transfer from the allowance
for finance credit losses upon initiation of the repossession proceedings when
the finance receivable balance is reclassified to other assets. Proceeds from
the sale of repossessed assets are applied against the outstanding balance owed
and any outstanding balance deficiency is charged-off. Reserves on sold
repossessed assets are then transferred back to the allowance for finance credit
losses. The increase or decrease in the allowance for finance credit losses
related to the transfer from the repossessed asset reserve is due to the decline
or increase in repossessed assets.
The amount of the provision for credit losses decreased in the three-month and
nine-month periods ended September 30, 2000 compared to the same periods in 1999
due to lower charge offs and an improvement in the relative delinquency of the
remaining portfolio. The overall reduction of the reserve as a percent of the
receivable portfolio is due to improvement in the amount of delinquencies at
September 30, 2000 compared to the same period one year ago.
Nonrefundable Dealer Reserves
The Company acquires a majority of its sales finance contracts from dealers at a
discount. The amount of the discounts are negotiated with the dealers based upon
various criteria, one of which is the credit risk associated with the sales
finance contracts being acquired.
22
<PAGE>
The following is a summary of the activity in the nonrefundable dealer reserves
for the three-month and nine-month periods ended September 30 (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period $33,164 $37,863 $ 34,062 $ 36,820
Discounts acquired on new volume 6,958 6,525 22,181 22,923
Net charge offs absorbed (8,971) (8,382) (25,092) (23,737)
Reserve adjustment in conjunction
with sale of finance receivables -- 495 -- 495
------- ------- -------- --------
Balance at end of period $31,151 $36,501 $ 31,151 $ 36,501
======= ======= ======== ========
Nonrefundable dealer reserves as a percent of sales
finance receivables, net of unearned income 6.46% 7.27%
==== ====
Discounts acquired as a percent of sales finance
receivable originations, net of unearned income 8.51% 8.70% 8.72% 8.82%
==== ==== ==== ====
</TABLE>
Under the static pooling methodology, the total balances of nonrefundable dealer
reserves are not available to offset current finance credit losses, but instead
are amortized and made available to absorb credit losses over the life of the
corresponding pool of receivables.
Income Tax Accounts
At September 30, 2000, the Company had recorded net income tax receivables and
prepayments of approximately $6.8 million and a $23.6 million tax liability
consisting primarily of deferred taxes.
MFN elected to be treated as a dealer in securities for income tax purposes
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 eligible securities and the income tax basis of those same eligible
securities for the year ended December 31, 1996 and prospectively. The eligible
securities to which this provision applies generally include all of the finance
receivables held from the election's effective date through August 31, 2000.
This provision will not apply with respect to the finance receivables purchased
or originated after August 31, 2000. The Section 475 election has no impact on
the recognition of pre-tax income for financial reporting purposes.
23
<PAGE>
Debt
The following table presents the Company's debt instruments and the interest
rates on the debt at both September 30, 2000 and December 31, 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------- ------------------
Balance Rate Balance Rate
---------- ------- --------- -------
<S> <C> <C> <C> <C>
Senior secured debt $359,792 10.00% $381,242 10.00%
Senior subordinated debt 22,500 11.00% 22,500 11.00%
-------- ----- -------- -----
Total $382,292 10.06% $403,742 10.06%
======== ===== ======== =====
</TABLE>
Debt is used as the primary source for funding the Company's finance
receivables.
The senior secured debt is comprised of (i) Series A Notes Due March 23, 2001,
which have a 10% annual fixed rate of interest, payable quarterly and (ii)
Series B Notes Due March 23, 2001, which have a floating rate of interest based
on three month LIBOR (London Interbank Offered Rate), payable quarterly.
Principal payments on the senior secured debt are not due until maturity on
March 23, 2001.
The principal amounts of Series A Notes and Series B Notes outstanding at
September 30, 2000 were $181,379,482 and $178,412,263, respectively, for a total
of $359,791,745. The principal amounts of Series A Notes and Series B Notes
outstanding at December 31, 1999 were $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.
Subsequent to September 30, 2000, MFN retired debt with a face value of $16.46
million prior to scheduled maturity.
The Company's senior secured debt is secured by substantially all of the assets
of the Company and its domestic subsidiaries, which have guaranteed the
Company's obligations under the senior secured notes.
The senior subordinated debt, with an aggregate principal amount of $22.5
million, has an 11% annual fixed rate of interest, payable quarterly and is due
March 23, 2002.
Stockholders' Equity
Total stockholders' equity at September 30, 2000 was $122.6 million or 21.1% of
total assets compared with $105.5 million or 17.9% of total assets at December
31, 1999. During the nine-month period ended September 30, 2000, the Reorganized
Company reported net income of $17.1 million and did not declare any dividends
or repurchase any shares of common stock.
24
<PAGE>
RESULTS OF OPERATIONS
The results of operations shown in the accompanying Condensed Consolidated
Financial Statements are for both the Reorganized Company and the Predecessor
Company. MFN adopted Fresh Start Reporting in accordance with SOP 90-7 effective
March 31, 1999. To facilitate a meaningful comparison of the Company's operating
performance, the following discussion of certain consolidated financial
information may be presented on a traditional comparative basis for all periods
even though the accounting requirements for companies upon emergence from
bankruptcy calls for separate reporting for the Reorganized Company and the
Predecessor Company.
Net Income
During the three-month period ended September 30, 2000, net income was $4.3
million compared to $13.1 million for the same period one year ago. Results for
the third quarter of 2000 included a gain on early retirement of debt and, for
the same period one year ago, included a gain on the sale of assets, reversal of
a tax valuation allowance and a gain on early retirement of debt. Excluding
these items, net income for the third quarter of 2000 was $3.8 million, compared
to $3.5 million for the same period one year ago. Consistent with the Company's
adoption of Fresh Start reporting as of March 31, 1999, financial results for
the nine months ended September 30, 2000 are not comparable to the same period
one year ago.
Interest Income and Interest Expense
The largest single component of net income is net interest income which is the
difference between interest income and interest expense before provision for
finance credit losses. For the three-month period ended September 30, 2000, net
interest income was $22.2 million compared to $24.4 million one year ago. The
decline in net interest income is due to lower finance receivable balances. The
net interest margin, which is the ratio of net interest income divided by
average interest earning assets, was 13.77% for the three-month period ended
September 30, 2000 compared to 14.46% one year ago. The decline in the net
interest margin is attributable to a change in the mix of earning assets. During
this same period, 22.3% of average earning assets were in lower-yielding cash
and cash equivalents compared to 13.8% for the same period one year ago.
For the nine-month period ended September 30, 2000, net interest income was
$66.2 million compared to $76.6 million one year ago. 1999 net interest income
of $76.6 million has been adjusted to remove the impact of SOP 90-7. This
adjustment reduces reported interest expense and interest income by $11.473
million and $1.893 million, respectively. For the nine-month period ended
September 30, 2000, the net interest margin was 13.61% compared to 13.78% one
year ago, adjusted to remove the impact of SOP 90-7. During this same period,
21.9% of average earning assets were in lower-yielding cash and cash equivalents
compared to 17.8% for the same period one year ago.
25
<PAGE>
The following table summarizes net interest income and the net interest margin
for the three-month and nine-month periods ended September 30 (dollars in
thousands) after taking into consideration the adjustments noted to the 1999
nine-month amounts:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average interest earning assets:
Cash and cash equivalents $143,855 $ 93,049 $142,324 $132,057
Finance receivables, net of unearned income 501,086 580,834 506,566 608,925
-------- -------- -------- --------
Total average earning assets 644,941 673,883 648,890 740,982
Average interest bearing liabilities 390,517 430,204 398,452 528,076
-------- -------- -------- --------
Net $254,424 $243,679 $250,438 $212,906
======== ======== ======== ========
Interest income:
Cash and cash equivalents $ 2,448 $ 1,240 $ 6,912 $ 5,533
Finance receivables, net of unearned income 29,519 33,940 89,259 105,085
-------- -------- -------- --------
Total interest income 31,967 35,180 96,171 110,618
Interest expense 9,758 10,825 29,922 34,048
-------- -------- -------- --------
Net interest income before provision
for finance credit losses $ 22,209 $ 24,355 $ 66,249 $ 76,570
======== ======== ======== ========
Yield:
Cash and cash equivalents 6.77% 5.29% 6.49% 5.60%
Finance receivables, net of unearned income 23.56% 23.37% 23.49% 23.01%
-------- -------- -------- --------
Earning assets 19.83% 20.88% 19.76% 19.91%
Cost of funds 10.00% 10.06% 10.01% 8.60%
-------- -------- -------- --------
Net interest spread 9.83% 10.82% 9.75% 11.31%
======== ======== ======== ========
Net interest margin 13.77% 14.46% 13.61% 13.78%
======== ======== ======== ========
</TABLE>
Yields on finance receivables in the three-month and nine-month periods of 2000
improved 19 basis points and 48 basis points, respectively, compared to the same
periods one year ago. This was the result of lower levels of nonaccrual loans
and a change in the mix of finance receivables.
Other Operating Income
In addition to finance charges and interest, the Company has other operating
income from the sale of other credit related products. These products include
insurance relating to the issuance of credit life, accident and health and other
credit insurance policies to borrowers of the Company.
Other operating income for the three-month and nine-month periods ended
September 30, 2000 decreased $7.2 million and $4.9 million, respectively,
compared to the same periods one year ago. Excluding the gain on sale of finance
receivables and assets, other operating income for the three-month period ended
September 30, 2000 was essentially flat with the same period one year ago.
Excluding the gain on sale of finance receivables and assets, other operating
income for the
26
<PAGE>
nine-month period ended September 30, 2000 increased $2.1 million or 23.1%
primarily due to a new revenue sharing program on collateral protection
insurance. The Company recently raised the minimum account balance on which it
will place collateral protection insurance. This will have a negative impact on
the future other operating income; however, there should be little impact on net
income as underwriting and claims expenses are also expected to decline.
Commissions earned on credit life, accident and health, property and involuntary
unemployment insurance decreased $2.0 million during this period reflecting a
shift away from the direct lending business.
The following table summarizes the components of other operating income for the
three-month and nine-month periods ended September 30 (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Insurance premiums $2,918 $ 2,466 $ 8,805 $ 4,378
Fees and insurance commissions 203 737 913 2,943
Other income 295 333 1,340 1,659
Gain on sale of finance receivables and assets -- 7,058 77 7,058
------ ------- ------- -------
Total $3,416 $10,594 $11,135 $16,038
====== ======= ======= =======
Other operating income as a percent of
average interest earning assets 2.12% 6.29% 2.29% 2.89%
====== ======= ======= =======
Other operating income as a percent of average
interest earning assets excluding gain on
sale of finance receivables and other assets 2.12% 2.10% 2.27% 1.62%
====== ======= ======= =======
</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 expense for the three-month period ended September 30, 2000
remained relatively flat compared to the same period one year ago as personnel
expenses declined but were offset by higher insurance claims and underwriting
expenses, outside services and professional fees. For the nine-month period
ended September 30, 2000, other operating expense decreased $5.6 million or
10.7%, compared the same period one year ago, of which $2.5 million represents
amortization of the excess of revalued net assets over liabilities and
stockholders' equity. The excess of revalued net assets over liabilities and
stockholders' investment totaling $49.4 million recorded on March 23, 1999 as a
result of Fresh Start Reporting is being amortized over a 60 month period and
appears as a credit to operating expense. Salaries and benefits decreased $3.8
million during the nine-month period ended September 30, 2000 compared with the
same period one year ago attributable to staff reductions. Insurance claims and
underwriting expenses associated with the collateral protection insurance
program increased $4.6 million during the same period. The nine-month period of
1999 was positively impacted by reserve adjustments resulting from
27
<PAGE>
favorable claims experience. The Company recently raised the minimum account
balance on which it will place collateral protection insurance. This will reduce
future claims and underwriting expense. There will also be a reduction in other
operating income associated with this product. The net impact to operating
results is not expected to be material.
The following table summarizes the components of other operating expenses for
the three-month and nine-month periods ended September 30 (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 9,920 $10,774 $31,569 $35,339
Insurance claims and other underwriting expense 1,774 1,328 5,461 887
Goodwill amortization -- -- -- 215
Amortization of excess of revalued net assets
over liabilities and stockholders' equity (2,471) (2,470) (7,409) (4,938)
Restructuring expenses (12) 9 (170) 1,950
Other expenses 5,332 4,782 16,097 18,371
------- ------- ------- -------
Total $14,543 $14,423 $45,548 $51,824
======= ======= ======= =======
Other operating expense as a percent of
average interest earning assets 9.02% 8.56% 9.36% 9.33%
======= ======= ======= =======
Other operating expense as a percent of average
interest earning assets excluding amortization 10.55% 10.03% 10.88% 10.18%
======= ======= ======= =======
</TABLE>
Reorganization Expenses
Reorganization expenses for the three-month period ended March 31, 1999 (dollars
in thousands) are as follows:
Professional fees $ 2,998
Interest income (1,893)
---------
Total $ 1,105
=========
The Company estimated the amount of professional fees which related specifically
to the Voluntary Case. In accordance with Fresh Start Reporting, interest earned
on funds held for deposit that would have been paid to senior debt holders if
the Company had not filed the Voluntary Case is offset against expenses related
to the Voluntary Case.
Restructuring Charges
During the second quarter of 1999, the Company implemented a plan to close a
total of 46 branches. The Company recorded a provision against earnings in the
amount of $1.9 million to 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):
28
<PAGE>
<TABLE>
<CAPTION>
Amounts Amounts Amounts Adjust- Balance
Charged Utilized Utilized ments Sept. 30,
In 1999 In 1999 In 2000 In 2000 2000
------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Lease buyouts and other expenses $ 998 $380 $373 $ 81 $ 164
Employee severance and retention 952 333 504 89 26
------ ---- ---- ---- -----
Total $1,950 $713 $877 $170 $ 190
====== ==== ==== ==== =====
</TABLE>
The Company records restructuring charges against operations and provides a
reserve based on the best information available at the time the commitment is
made to undertake the restructuring action. The reserves are considered utilized
when specific restructuring criteria are met, indicating the planned
restructuring action has occurred. Work-force-related reserves are considered
utilized at payment for termination or acceptance of other contractual
arrangements.
The reserve for lease buyouts is utilized when the remaining lease obligations
are settled or the space has been vacated and made available for sublease. It is
the Company's policy to continue to charge depreciation, rental and other
operating costs relating to excess space to ongoing operations while they remain
in business use. Salaries and benefits are charged to operations while the
employee is actively employed.
A $170,000 credit was recorded to restructuring expense during the nine-month
period ended September 30, 2000 to adjust previously recorded reserves for a
change in estimated reserve requirements.
Non-Operating Reorganization Expenses
In accordance with SOP 90-7, expenses resulting from the Plan of Reorganization
are reported separately as reorganization expenses in the Condensed Consolidated
Statements of Income. These expenses were incurred by the Predecessor Company
and are summarized below for the three month period ended March 31, 1999
(dollars in thousands):
<TABLE>
<S> <C>
Interest expense $19,847
Management consultants 6,933
Adjustments of assets and liabilities to fair value 3,085
Creditor attorneys and advisors 1,193
Corporate counsel 846
Independent accountants 550
Board of Directors representation 100
Other 1,165
-------
Total $33,719
=======
</TABLE>
29
<PAGE>
CREDIT LOSSES AND DELINQUENCIES
The credit loss and delinquency information below are for both the Reorganized
Company and the Predecessor Company.
Credit Losses
Finance receivable accounts which are contractually delinquent 90 days are
charged off monthly before they become 120 days contractually delinquent.
Accounts which are deemed uncollectible prior to the maximum charge off period
are charged off immediately. Management may authorize an extension of the charge
off period if collection appears imminent during the next calendar month. The
following table sets forth information relating to charge offs, the allowance
for finance credit losses and dealer reserves (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------
Sept. 30, Sept. 30, Sept.30, Sept. 30,
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Provision for finance credit losses $5,900 $ 9,232 $12,550 $27,515
Net charge offs:
Absorbed by allowance for credit losses 4,338 10,913 15,868 37,872
Absorbed by nonrefundable dealer reserves 8,971 8,382 25,092 23,737
Allowance for finance credit losses at end of period 38,362 42,158
Nonrefundable dealer reserves at end of period 31,151 36,501
Ratios
------
Net charge offs as a percent of average total
finance receivables, net of unearned income
Absorbed by allowance for credit losses 3.46% 7.52% 4.18% 8.29%
Absorbed by nonrefundable dealer reserves 7.16% 5.77% 6.60% 5.20%
------ ------- ------- -------
Total 10.62% 13.29% 10.78% 13.49%
====== ======= ======= =======
Allowance for finance credit losses as a percent of
total finance receivables, net of unearned income 7.71% 7.79%
======= =======
Nonrefundable dealer reserves as a percent of sales
finance receivables, net of unearned income 6.46% 7.27%
======= =======
</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 placed on a nonaccrual status. The following table
sets forth certain information regarding nonaccrual accounts and repossessed
assets at September 30 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Nonaccrual non-bankrupt receivables, net of unearned income $ 5,468 $ 8,292
Nonaccrual bankrupt accounts, net of unearned income 2,066 5,873
Repossessed assets, net of reserves 2,315 2,928
------- -------
Total nonaccrual accounts, net of unearned income and
repossessed assets, net of reserves $ 9,849 $17,093
======= =======
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C>
Bankrupt accounts, net of unearned income not in nonaccrual status $ 5,756 $ 8,067
======= =======
Nonaccrual accounts, net of unearned income and
repossessed assets, net of reserves as a percent of
total finance receivables, net of unearned income 1.98% 3.16%
======== =======
</TABLE>
Repossession of collateral generally occurs when debtors are 45 to 90 days late
on payments. Repossession activities have been consolidated within the Company
and many of the activities have been outsourced to other parties, which handles
the pickup of collateral and delivery to auction. Automobiles are generally sold
within 60 days of repossession at auction.
Repossessed assets at September 30, 2000 are carried in other assets and are
reserved at 70% of the outstanding balance owed. Prior to September 30, 2000,
repossessed assets were carried net of a 75% reserve. The reduction of the
reserve from 75% to 70% is due to improved recovery rates during the past year.
The repossessed asset reserve is established as a transfer from the allowance
for credit losses upon initiation of the repossession proceedings when the
finance receivable balance is reclassified to other assets. Proceeds from the
sale of repossessed assets are applied against the outstanding balance owed and
any outstanding balance deficiency is charged-off. Reserves on sold repossessed
assets are then transferred back to the allowance for credit losses at the time
of charge off.
Delinquency and repossession numbers show significant improvement from September
30, 1999 due to improved collections. The Company believes this is due to
focusing branch activities on collections, placing less emphasis on direct
lending efforts and favorable general economic conditions. Delinquency and
repossession numbers did increase the past quarter when compared to June 30,
2000. The increase is consistent with seasonal fluctuations. The Company may
experience an increase in delinquencies during the 4th quarter of 2000 as it
transitions to a centralized lock-box operation to collect payments from
customers. In addition, changes in economic conditions can have an impact on
delinquency results as can changes in underwriting policies.
The Company recently installed a new application processing system which
incorporates credit scoring and other risk management provisions. While the
Company believes this will improve credit performance, it is too early to
determine the timing and extent such measures will ultimately have on
delinquency results.
LIQUIDITY AND FINANCIAL RESOURCES
At September 30, 2000, the Company had sufficient cash flow from cash
collections on finance receivables to meet the current funding requirements of
new originations and purchases of finance receivables. In addition, at September
30, 2000 the Company had $138.0 million in cash and cash equivalents, which can
be used to fund future growth of finance receivables and other corporate
activities.
At September 30, 2000, the Company had $359.8 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,
31
<PAGE>
2002 in the form of Senior Subordinated Notes. See Notes 2 and 8 to the
Condensed Consolidated Financial Statements.
The Company has installed new technology for underwriting sales finance
receivables and to track portfolio performance. These systems enable the Company
to respond to information requests from potential funding sources. The Company
is currently seeking funding alternatives to refinance its debt. Until funding
is secured, there can be no assurance as to the Company's ability to refinance
its debt, the market conditions for subprime automobile funding or the terms of
any such refinancing.
Dividends may be paid on the Reorganized Company's Common Stock subject to
certain financial conditions contained in the Company's indentures governing its
Senior Secured Notes. At September 30, 2000, $18.8 million was available for
payment under these restrictions. However, the Company does not anticipate
payment of any dividends for the foreseeable future.
CONTINGENCIES AND LEGAL MATTERS
The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities announced by the Predecessor Company in
January, 1997. Those events are also under investigation by the United States
Attorney for the Northern District of Illinois and the Federal Bureau of
Investigation. The Company is cooperating fully in these investigations.
In the normal course of its business, MFN and its subsidiaries are named as
defendants in legal proceedings. A number of such actions (the "Consumer Finance
Cases"), including cases which have been brought as putative class actions, are
pending in the various states in which the Company's subsidiaries conduct
business. It is the policy of MFN and its subsidiaries to vigorously defend
litigation, however, MFN and (or) its subsidiaries have and may in the future
enter into settlements of claims where management deems appropriate. Although it
is not possible at this time to estimate the amount of damages or settlement
expenses that may be incurred, management is of the opinion that the resolution
of these proceedings will not have a material effect on the financial position
and results of operations of MFN.
The Company recognizes the expense for litigation when the incurrence of loss is
probable and the amount of such loss is estimable. Because of the uncertainty
that surrounds the Consumer Finance Cases, no accrual has been made for the
majority of these lawsuits.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS 138, is
effective for fiscal years beginning after June 15, 2000. Management does not
expect this statement to have a material impact on either the financial
position, results of operations or financial statement disclosures of the
Company.
32
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no significant changes in market risk since December 31, 1999.
33
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings - See "Part I, Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Contingencies and Legal Matters" which is incorporated herein by
reference.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index following the signature page
(b) Reports on Form 8-K - The Company did not file any Current
Reports on Form 8-K during the quarter ended September 30, 2000.
34
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFN FINANCIAL CORPORATION
(Registrant)
Date: November 7, 2000 /s/ Edward G. Harshfield
------------------------
Edward G. Harshfield
Chairman and Chief Executive Officer
Date: November 7, 2000 /s/ Jeffrey B. Weeden
---------------------
Jeffrey B. Weeden
President and Chief Operating Officer
Date: November 7, 2000 /s/ Mark D. Whitham
-------------------
Mark D. Whitham
Chief Financial Officer
(Principal Accounting Officer)
35
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Description
----------- -----------
11. Computation of Earnings Per Share
27. Financial Data Schedule
36
