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, 1994
Commission File No. 1-10176
Mercury Finance Company
(Exact name of registrant as specified in its charter)
Delaware 36-3627010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization identification no.)
40 Skokie Boulevard, Northbrook, Illinois 60062
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (708) 564-3720
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 the number of shares outstanding of each issuer's class of
common stock, as of the latest practicable date.
Common Stock - $1 par value, 116,048,571 shares as of November 11,
1994.
MERCURY FINANCE COMPANY
FORM 10-Q
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Changes in
Stockholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 6
Consolidated Average Balance Sheets 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
CONSOLIDATED FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
INDEX OF EXHIBITS 20
Exhibit No. 11 - Computation of Net Income Per
Share 21
Exhibit No. 12 - Ratio of Earnings to
Fixed Charges 22
Exhibit No. 15 - Report of KPMG Peat Marwick
regarding unaudited interim
financial information 23
Exhibit No. 23 - Consent of KPMG Peat Marwick 24
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCURY FINANCE COMPANY
CONSOLIDATED BALANCE SHEETS
September 30 Dec. 31
- - - -------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1993
- - - -------------------------------------------------------------------
(Unaudited)
ASSETS
Cash $ 15,795 $ 8,807 $ 11,621
Investments 11,349 12,272 10,533
Finance receivables 976,574 791,694 820,287
Less allowance for finance
credit losses (21,533) (17,950) (18,344)
-------- -------- --------
Finance receivables, net 955,041 773,744 801,943
Prepaid pension expense 500 2,051 1,040
Deferred income taxes 6,847 4,444 5,511
Premises, fixtures and equipment at cost,
net of accumulated depreciation 3,521 2,585 2,745
Goodwill 15,419 10,176 10,113
Other assets (including repossessions) 13,913 8,275 10,825
--------- -------- --------
TOTAL ASSETS $1,022,385 $822,354 $854,331
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper $356,897 $280,015 $260,260
Senior debt, term notes 265,500 224,500 266,000
Subordinated debt 37,930 35,000 35,000
Accounts payable and other liabilities 58,947 40,966 39,076
Income taxes payable 4,893 3,945 3,227
Reserves withheld, dealers 71,728 56,845 57,241
------- ------- -------
TOTAL LIABILITIES 795,895 641,271 660,804
------- ------- -------
STOCKHOLDERS' EQUITY
Common stock - $1.00 par value:
300,000,000 shares authorized
Sep 30 1994 - 116,033,738 shares outstanding
Sep 30 1993 - 115,565,474 shares outstanding
Dec 31 1993 - 115,648,624 shares outstanding
116,034 115,565 115,649
Paid in capital 5,992 2,154 2,856
Retained earnings 104,635 63,535 75,193
Treasury stock 63,206 shares at cost (171) (171) (171)
--------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 226,490 181,083 193,527
--------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,022,385 $822,354 $854,331
======== ======== ========
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Three Months Ended Nine Months Ended
- - - -------------------------------------------------------------------
(Dollars in thousands
except per share amounts) 1994 1993 1994 1993
- - - -------------------------------------------------------------------
INTEREST INCOME
Finance charges, fees and
other interest $53,399 $43,294 $152,033 $118,864
Interest expense 9,969 8,423 27,799 24,457
-------- -------- -------- ----------
Net interest income 43,430 34,871 124,234 94,407
Provision for finance
credit losses 1,657 1,762 4,833 5,048
------ ------ ------- -------
Net interest income after provision
for finance credit losses 41,773 33,109 119,401 89,359
------ -------- ------- -------
OTHER INCOME
Insurance commissions 4,906 3,694 12,990 9,388
Insurance premiums 2,411 2,496 6,665 6,339
Fees and other 2,911 2,383 7,678 6,225
------ ----- ----- -----
Total other income 10,228 8,573 27,333 21,952
------ ----- ------ --------
OTHER EXPENSES
Salaries and employee
benefits 8,887 7,771 25,972 21,221
Occupancy expense 963 900 2,722 2,358
Equipment expense 411 330 1,211 880
Data processing expense 640 450 1,895 1,393
Insurance claims expense 560 1,185 1,820 2,984
Other operating expenses 3,902 3,002 10,458 7,999
------ ------- ------- -------
Total other expenses 15,363 13,638 44,078 36,835
------ ------- ------- -------
Income before income taxes 36,638 28,044 102,656 74,476
Applicable income taxes 14,158 10,989 39,619 28,375
Income before effect of
accounting change 22,480 17,055 63,037 46,101
Cumulative effect of
accounting change 0 0 0 234
------- ------- ------- -------
NET INCOME $22,480 $17,055 $63,037 $46,335
======= ======== ======== ========
NET INCOME PER COMMON SHARE
(adjusted for all
stock splits) $0.19 $0.15 $0.54 $0.40
===== ===== ===== =====
Weighted average number of
common and common share
equivalents outstanding 117,194 117,177 117,213 116,344
======= ======= ======= =======
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Three Months Ended Nine Months Ended
- - - -------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1994 1993
- - - -------------------------------------------------------------------
COMMON STOCK
Balance at beginning
of period $115,976 $115,365 $115,649 $86,125
Stock options exercised 58 200 385 619
Stock split 0 0 0 28,821
------ ------- ------ -------
Balance at September 30 $116,034 $115,565 $116,034 $115,565
======= ======== ======== =======
PAID IN CAPITAL
Balance at beginning
of period $5,541 $499 $2,856 $5,274
Stock options exercised 253 872 1,713 3,301
Tax benefit from stock
options exercised 198 783 1,423 2,234
Transfer from
Retained Earnings 0 0 0 20,076
Stock split 0 0 0 (28,821)
------- -------- ------- --------
Balance at September 30 $5,992 $2,154 $5,992 $2,154
======== ======== ======= ========
RETAINED EARNINGS
Balance at beginning
of period $99,545 $53,405 $75,193 $53,692
Net income 22,480 17,055 63,037 46,335
Dividends (17,390) (6,925) (33,595) (16,416)
Transfer to Paid in Capital 0 0 0 (20,076)
-------- -------- -------- --------
Balance at September 30 $104,635 $63,535 $104,635 $63,535
======== ======== ======== ========
TREASURY STOCK
Balance at beginning
of period ($171) ($171) ($171) ($171)
Purchases 0 0 0 0
Retirements 0 0 0 0
-------- ------- ------ --------
Balance at September 30 ($171) ($171) ($171) ($171)
======== ======= ======= ========
Total stockholders' equity $226,490 $181,083 $226,490 $181,083
========= ========= ========= =========
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Three Months Ended Nine Months Ended
- - - -------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1994 1993
- - - -------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $22,480 $17,055 $63,037 $46,335
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for finance
credit losses 1,657 1,762 4,833 5,048
Net finance receivables charged off against allowance
for finance credit losses (1,150) (971) (2,674) (2,687)
Provision for deferred
income taxes (279) (196) (1,336) (238)
Depreciation 214 183 640 466
Amortization of goodwill 132 128 396 256
Net (increase) decrease in
other assets (2,782) 2,348 (2,534) 1,579
Net increase (decrease) in
other liabilities 13,777 6,588 32,025 27,437
-------- ------- -------- --------
Net cash provided by
operating activities 34,049 26,897 94,387 78,196
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance
receivables 173,143 151,951 513,689 421,637
Finance receivables originated or
acquired (210,204) (199,041) (664,070) (545,391)
Net (increase) decrease in
investment securities (617) (2,518) (816) (6,093)
Purchases of properties
and equipment (185) (325) (1,216) (665)
-------- -------- -------- ---------
Net cash used in investing
activities (37,863) (49,933) (132,413) (130,512)
--------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
commercial paper 42,488 20,015 91,437 75,044
Senior debt retired (5,000) (15,000) (5,000) (45,000)
Senior debt issued 0 24,000 0 59,000
Subordinated debt retired 0 0 0 (6,000)
Stock options exercised 508 1,855 3,520 6,244
Dividends paid (17,390) (6,925) (33,596) (16,416)
--------- -------- -------- --------
Assets acquired (25,730) 0 (25,730) (55,519)
Liabilities assumed 16,630 0 16,630 43,746
--------- -------- -------- ---------
Three Months Ended Nine Months Ended
- - - -------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1994 1993
- - - -------------------------------------------------------------------
Net assets acquired (9,100) 0 (9,100) (11,773)
Excess of purchase price over net
assets acquired (5,701) 0 (5,701) (10,477)
-------- ------- -------- --------
Net cash provided by financing
activities 5,805 23,945 41,560 50,622
-------- ------- -------- --------
Net increase (decrease) in cash and
cash equivalents 1,991 3,427 3,534 4,399
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 13,164 17,652 11,621 10,999
CASH AND CASH EQUIVALENTS
ACQUIRED 640 0 640 5,681
------- ------- ------- -------
CASH AND CASH EQUIVALENTS
END OF PERIOD $15,795 $21,079 $15,795 $21,079
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES
Income taxes paid to federal and state
governments $12,313 $9,670 $32,209 $26,986
======= ====== ======= =======
Interest paid to creditors $9,132 $8,214 $27,009 $23,516
======= ======= ======= =======
MERCURY FINANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements of Mercury Finance
Company and Subsidiaries are unaudited, but in the opinion of
management reflect all necessary adjustments, consisting only of
normal recurring accruals, for a fair presentation of results as of
the dates and for the periods covered by the financial statements.
The results for the interim periods are not necessarily indicative
of the results of operations that may be expected for the fiscal
year. It is suggested that the unaudited interim 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 1993 Annual Report.
2. Net income per common share amounts are based on the average
number of common shares and common stock equivalents outstanding.
All per share amounts have been adjusted to reflect all stock
splits declared by the Company.
3. During the first quarter of 1993 the Company recognized a one
time tax benefit of $234 thousand upon implementation of FASB #109.
This resulted primarily from taxable temporary differences
associated with the loss reserve.
4. On August 4, 1994, a jury verdict of $90,000 in compensatory
damages and $50,000,000 in punitive damages was rendered against
Mercury Finance Corporation of Alabama ("Mercury Alabama"), a
subsidiary of the Company, in the Circuit Court of Barbour County,
Alabama. Judgment was entered on the jury's verdict on August 8,
1994. Post-trial motions seeking to overturn the jury's verdict,
a new trial, or a reduction in the amount of the compensatory and
punitive damage award, are pending before the Barbour County Court.
Management considers the verdict eminently unjust and intends to
pursue vigorously all available avenues for relief from the
judgment.
Mercury Alabama is named as a defendant or a counterclaim
defendant in approximately 30 other lawsuits pending in state and
federal courts in Alabama, the majority of which have been filed
since the entry of the August 4, 1994 jury verdict. The cases
(some of which also name the Company as a defendant) include claims
for alleged truth-in-lending violations, nondisclosures,
misrepresentations, wrongful repossessions of vehicles and
deceptive trade practices, among other things. The relief
requested by the plaintiffs varies but includes requests for
compensatory, statutory and punitive damages, as well as
declaratory and equitable relief.
A number of the cases are brought as putative class actions.
On October 14, 1994, the Circuit Court of Barbour County certified
a plaintiff class in a case alleging breach of contract and fraud
claims against Mercury Alabama and the Company in connection with
Alabama financing transactions. The Court has not yet ordered the
transmittal of notice to the class. Mercury Alabama and the
Company intend to defend the litigation vigorously.
Through September 30, 1994, the Company has accrued $500,000
in legal fees for costs associated with its defense. Through
September 30, 1994, the Company has not accrued any amounts
associated with the punitive damage award of $50,000,000 because
the ultimate resolution of this matter can not be predicted with
certainty.
MERCURY FINANCE COMPANY
CONSOLIDATED AVERAGE BALANCE SHEETS
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Three Months Ended Nine Months Ended
- - - -------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1994 1993
- - - -------------------------------------------------------------------
ASSETS
Cash $13,859 $10,381 $13,317 $9,827
Investments 12,448 10,968 11,814 9,323
Finance receivables 932,434 772,338 887,854 711,936
Less allowance for finance credit
losses (20,331) (17,648) (19,543) (16,018)
--------- --------- -------- ---------
Finance receivables, net 912,103 754,690 868,311 695,918
Prepaid pension expense 950 1,605 1,040 1,521
Deferred income taxes 6,742 4,378 6,297 4,272
Furniture, fixtures and equipment, net of
accumulated depreciation 3,336 2,496 3,274 2,180
Other assets (including repossessions &
goodwill) 23,882 20,164 21,012 14,709
-------- -------- ------- -------
TOTAL ASSETS $973,320 $804,682 $925,065 $737,750
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt,
commercial paper $316,070 $255,392 $287,701 $224,884
Senior debt, term notes 265,167 233,000 265,722 215,500
Subordinated debt 35,000 35,000 35,000 38,667
Accounts payable and
other liabilities 57,443 47,162 53,242 43,042
Income taxes payable 7,371 5,844 8,318 6,173
Reserves withheld, dealers 68,829 55,628 64,774 48,806
--------- -------- -------- --------
TOTAL LIABILITIES 749,880 632,026 714,757 577,071
--------- -------- -------- --------
STOCKHOLDERS' EQUITY
Common stock 116,002 115,483 115,859 97,638
Paid in capital 5,751 1,418 4,601 4,709
Retained earnings 101,858 55,815 90,019 58,503
Treasury stock (171) (171) (171) (171)
--------- -------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 223,440 172,656 210,308 160,679
--------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $973,320 $804,682 $925,065 $737,750
======== ======== ======== ========
NUMBER OF DAYS 92 92 273 273
MONTHS COMPLETED 3 3 9 9
RATIOS
Return on average equity 40.24% 39.51% 39.96% 38.45%
Return on average assets 9.24% 8.48% 9.09% 8.37%
Yield on earning assets 22.61% 22.11% 22.53% 21.97%
Rate on interest bearing
liabilities 6.42% 6.38% 6.32% 6.83%
Net interest margin 18.42% 17.84% 18.40% 17.44%
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Mercury Finance Company ("Mercury"), ("Company") is a consumer
finance company engaged in the business of purchasing 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.
Mercury's operating subsidiaries commenced operations in February
1984 for the purpose of penetrating the market for small dollar
amount consumer loans (average of $3,000 or less). The initial
focus was toward small, short term, direct installment loans made
to U.S. military servicemen. Building on this direct lending
niche, Mercury has also built a substantial, diversified consumer
finance portfolio by purchasing individual sales finance contracts
from automobile dealers and retail vendors.
On April 1, 1993 Mercury acquired all the shares of Gulfco
Investment Inc. for $22.3 million in cash. Gulfco Investment Inc.
was the parent company which owned all of the stock of Gulfco
Finance Company and Gulfco Life Insurance Company. Gulfco Finance
Company conducted its consumer finance business through a branch
network of 62 offices located in Louisiana, Mississippi, and Texas.
The acquisition was accounted for under the purchase method of
accounting. Accordingly their results of operations have been
included in the consolidated financial statements since the date of
acquisition. The excess of cost over fair value of net assets
acquired (goodwill) relating to the acquisition is being amortized
over twenty years on the straight line method.
On September 30, 1994, the Company acquired all of the shares of
Midland Finance Co. for $14.8 million in cash. Midland Finance Co.
which specializes in the purchase of sales finance contracts and
direct loans is headquartered in Chicago, Illinois and has over 40
years experience in the consumer finance business. The acquisition
was accounted for under the purchase method of accounting. The
excess of cost over fair value of net assets acquired (goodwill)
relating to the acquisition was $5.7 million and will be amortized
over 20 years on the straight line method commencing in the fourth
quarter of 1994. Accordingly, the Consolidated Balance Sheet of
Mercury Finance Company at September 30, 1994 includes the assets
($25.7 million) and liabilities ($16.6 million) of Midland Finance
Co.
Mercury's loans range from periods from 3 months to 48 months at
annual interest rates ranging, with minor exceptions, from 18% to
40%. Generally all loans are repayable in monthly installments.
Generally late payment fees are assessed to accounts which fail to
make their scheduled payments within 10 days of the schedule due
date.
Direct finance receivables on which no payment is received within
149 days, on a recency basis, are charged off. Sales finance
receivables which are contractually delinquent 150 days are charged
off in the month before they become 180 days delinquent. Accounts
which are deemed uncollectible prior to the maximum charge off
period are charged off immediately. Management may authorize an
extension if collection appears imminent during the next calendar
month.
Accounts which become 60 or more days contractually delinquent and
no full contractual payment is received in the month the account
attains such delinquency status cease earning interest.
The following is management's discussion and analysis of the
consolidated financial condition of the Company at September 30,
1994 (unaudited) when compared with September 30, 1993 (unaudited)
and December 31, 1993, and the results of operations for the three
and nine months ended September 30, 1994 and 1993 (unaudited).
This discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing
elsewhere in this quarterly report.
FINANCIAL CONDITION
Total assets of the Company increased 24% to $1.022 billion from
$822.4 million one year ago. Finance receivables increased 23% to
$976.6 million at September 30, 1994. The increase in assets and
finance receivables were primarily attributable to the production
of receivables from the increase number of offices operated by the
Company, increased volume in existing offices and the acquisition
of Midland Finance Co..
During the period from December 31, 1993 through September 30, 1994
total assets and finance receivables increased 26% and 25%
respectively on an annualized basis.
The Company's offices in Florida, Texas and Illinois accounted for
approximately 49% of all finance receivables, with the remainder
being originated in the other 21 states where offices are located.
The total number of offices at September 30, 1994 was 237 compared
to 217 at September 30, 1993 and 218 at December 31, 1993.
The following table summarizes the composition of finance
receivables at the dates indicated (dollars in thousands):
September 30, 1994 September 30, 1993 Dec. 31, 1993
% of % of % of
Amount Total Amount Total Amount Total
Sales finance
receivables $1,092,644 91% $880,178 91% $905,223 90%
Direct finance
receivables 106,355 9% 89,561 9% 99,294 10%
---------- --- -------- --- -------- ---
Total gross finance
receivables 1,198,999 100% 970,807 100% 1,004,517 100%
==== ==== ====
Unearned finance charges (213,180) (169,360) (174,440)
Unearned insurance commissions,
insurance premiums and
insurance reserves (9,245) (9,753) (9,790)
---------- ----------- ----------
Finance receivables $976,574 $791,694 $820,287
======== ======== ========
Allowance and Provision for Finance Credit Losses
The Company maintains an allowance for finance credit losses at a
level which, in the opinion of management, provides adequately for
current and possible future losses in the finance receivables
portfolio. Management evaluates allowance requirements by
examining current delinquencies, the characteristics of the
accounts, the value of the underlying collateral, and general
economic conditions and trends. Management also evaluates the
availability of dealer reserves to absorb finance credit losses.
A provision for losses is charged to earnings in an amount
sufficient to maintain the allowance. The following table sets
forth a reconciliation of the changes in the allowance for finance
credit losses for the nine month periods ended September 30, 1994
(dollars in thousands):
1994 1993
Balance at beginning of period $18,344 $13,198
Acquisition 1,030 2,391
Provision charged to expense 4,833 5,048
Finance receivables charged-off (3,809) (3,483)
Recoveries 1,135 796
---------- ---------
Balance at September 30 $21,533 $17,950
======== ========
Allowance as a percent of finance receivables
outstanding at end of period 2.20% 2.27%
===== =====
The increase in the provision and allowance for finance credit
losses in 1994 is primarily attributable to the increase in finance
receivables outstanding.
Reserves Withheld, Dealers
Individual sales finance contracts are purchased pursuant to formal
agreements with local merchants negotiated at the branch office
level. As part of Mercury's financing of sales finance contracts,
arrangements are entered into with dealers, whereby reserves are
established to protect Mercury from potential losses associated
with such contracts. As part of Mercury's agreement with the
dealers, a portion of the proceeds from the sales finance contracts
are retained by Mercury and are available to Mercury to charge
specific accounts against. Mercury negotiates the amount of the
reserves with the dealers based upon various criteria, one of which
is the credit risk associated with the sales finance contracts
being purchased. Dealer reserves amounted to $71.7 million and
$56.8 million at September 30, 1994 and 1993 respectively.
Debt
The primary source for funding the Company's finance receivables
comes from the issuance of debt. At September 30, 1994 the Company
had total debt of $660.3 million which compares with $539.5 million
at September 30, 1993.
In addition to the Company's outstanding debt the Company has
revolving credit facilities and a back up line of credit which
total $400 million. The new revolving credit facilities were
entered into on September 1, 1994 and and replaced a prior
revolving credit facility which totalled $330.0 million. The
revolving credit facilities are totally available for use by the
Company and at September 30, 1994 nothing was outstanding under
these arrangements.
The following table presents the Company's debt instruments and the
stated interest rates on the debt at the periods indicated (dollars
in thousands):
Sept. 30, 1994 Sept. 30, 1993 Dec. 31, 1993
Balance Rate Balance Rate Balance Rate
Senior Debt:
Commercial paper $356,897 5.1% $280,015 3.3% $260,260 3.5%
Term notes 265,500 7.6% 224,500 7.9% 266,000 7.2%
Subordinated debt 37,930 10.2% 35,000 10.2% 35,000 10.2%
-------- ----- -------- ----- -------- -----
Total $660,327 6.4% $539,515 5.7% $561,260 5.7%
======== === ======== === ======== ===
The interest rates reflected in the preceding table do not include
amortized costs related to the issuance of debt, costs related to
the maintenance of credit line facilities and the interest
differential related to interest exchange agreements. The effect
of these costs, which are included in interest expense in the
consolidated financial statements, increases the effective interest
rate by approximately 28 basis points at September 30, 1994.
The following table sets forth information with respect to
maturities of senior and subordinated debt at September 30, 1994
(dollars in thousands):
Senior Debt Senior Debt Subordinated
Maturity Commercial Paper Term Notes Debt Total
1994 $356,897 28,500 2,930 $388,327
1995 - 29,500 - 29,500
1996 - 40,000 - 40,000
1997 - 56,500 20,000 76,500
1998 - 111,000 15,000 126,000
1999 - - - -
Total $356,897 $265,500 $37,930 $660,327
======== ======== ======= ========
The Company has no interest exchange agreements at September 30,
1994.
Stockholders' Equity
The other primary source for funding the growth in finance
receivables comes from the retention of earnings by the Company and
the exercise of stock options by eligible employees. Total
stockholders' equity at September 30, 1994 was $220.9 million which
compares with $181.1 million at September 30, 1993 and $193.5
million at December 31, 1993. For the nine months ended September
30, 1994 the Company had net income of $63.0 million and paid or
declared cash dividends of $33.6 million. In addition, eligible
employees of the Company exercised options to purchase shares
resulting in $2.7 million also being added to the equity of the
Company.
At September 30, 1994 stockholders' equity stated as a percent of
total assets was 22.2% which compares with 22.0% at September 30,
1993 and 22.7% at December 31, 1993.
RESULTS OF OPERATIONS
Net Income
For the three and nine months ended September 30, 1994 the Company
had net income of $22.5 million and $63.0 million which represent
increases of 32% and 36% from the $17.1 million and $46.3 million
earned in 1993. The increase in net income is primarily
attributable to income derived from increased finance receivables
outstanding resulting from additional offices opened in 1994 and
1993 and increased volume in existing offices.
Interest Income and Interest Expense
The largest single component of net income is net interest income
which is the difference between interest earned on finance
receivables and interest paid on borrowings. For the three and
nine months ended September 30, 1994 the Company's net interest
income was $43.4 million and $124.2 million an increase of 25% and
32% from 1993. The net interest margin which is the ratio of net
interest income divided by average interest earning assets was
18.42% for the three months ended September 30, 1994 and 18.40% for
the nine months ended September 30, 1994. This compares with a net
interest margin of 17.84% and 17.44% for the three and nine months
ended September 30, 1993. The change in net interest margin is
primarily attributable to interest rate changes on the Company's
various debt instruments. The following tables summarize the
amount of the net interest margin for the three and nine months
ended September 30 (dollars in thousands):
1994 1993
Three Months Ended Annualized Annualized
Average Interest Rate Average Interest Rate
Out- Income/ Earned Out- Income/ Earned
standing Expense and Paid standing Expense and Paid
Interest earning
assets $944,882 $53,399 22.61% $783,306 $43,294 22.11%
Interest bearing
liabilities 616,237 9,969 6.42% 523,392 8,423 6.38%
--------- ------- ----- -------- ------- -----
Net $328,645 $43,430 16.19% $259,914 $34,871 15.73%
======== ======= ====== ======== ======= ======
Net interest margin as a
percentage of average interest
earning assets 18.42% 17.84%
===== =====
1994 1993
Nine Months Ended Annualized Annualized
Average Interest Rate Average Interest Rate
Out- Income/ Earned Out- Income/ Earned
standing Expense and Paid standing Expense and Paid
Interest earning
assets $899,668 $152,033 22.53% $721,259 $118,864 21.97%
Interest bearing
liabilities 588,423 27,799 6.32% 479,051 24,457 6.83%
-------- ------- ------ -------- ------- -----
Net $311,245 $124,234 16.21% $242,208 $94,407 15.14%
======== ======= ====== ======== ======= ======
Net interest margin as a
percentage of average interest
earning assets 18.40% 17.44%
====== ======
Other Income
In addition to finance charges and interest, the Company derives
commission 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 credit-related sources of revenue
are derived from the sale of other products and services.
Insurance premiums are earned by the life insurance subsidiary as
a reinsurer of credit life and accident and health policies issued
through the Company's branch offices.
For the three and nine months ended September 30, 1994, the Company
experienced increases in its insurance commissions which are
attributable to the additional loan volume, the inclusion of the
Gulfco branches acquired in 1993 and the increased number of
borrowers obtaining these types of products and the acquisition of
Gulfco Investment, Inc. The following table summarizes the amounts
earned from these products for the three and nine months ended
September 30 (dollars in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
Insurance commissions $4,906 $3,694 $12,990 $9,388
Insurance premiums 2,411 2,496 6,665 6,339
Vehicle protection club memberships 1,798 923 4,713 2,632
Fees and other 1,113 1,460 2,965 3,593
------ ------ ------ ------
Total $10,228 $8,573 $27,333 $21,952
======= ====== ====== =======
Other income as a % of average interest
earnings assets (Annualized) 4.32% 4.38% 4.05% 4.06%
==== ==== ==== ====
Other Expenses
In addition to interest expense and the provision for finance
credit losses, the Company incurs other operating expenses in the
conduct of its business.
The following table summarizes the components of other expenses for
the three and nine months ended September 30 (dollars in
thousands):
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
Salaries and employees benefits $8,887 $7,771 $25,972 $21,221
Insurance claims expense 566 1,185 1,820 2,984
Other operating expenses 5,910 4,682 16,286 12,630
------- ------- ------- -------
Total $15,363 $13,638 $44,078 $36,835
======= ======= ======= =======
Other expenses as a % of average interest
earning assets (Annualized) 6.50% 6.96% 6.53% 6.81%
==== ==== ==== ====
Included in other expenses is $500 thousand in legal fees accrual
associated with the Alabama litigation.
Income Taxes
Income taxes increased due to a higher level of pretax income in
1994. The increase in the effective tax rate from 38.1% in 1993 to
38.6% in 1994 was primarily due to the increase in the Federal
income tax rate from 34% to 35%.
During the first quarter of 1993 the Company recognized a one time
tax benefit of $234 thousand upon implementation of FASB #109.
CREDIT LOSSES AND DELINQUENCIES
Credit Losses
Direct finance receivables on which no payment is received within
149 days, on a recency basis, are charged off. Sales finance
receivable accounts which are contractually delinquent 150 days are
charged off monthly before they become 180 days delinquent.
Accounts which are deemed uncollectible prior to the maximum charge
off period are charged off immediately. Management may authorize
an extension if collection appears imminent during the next
calendar month. The following table sets forth information
relating to charge-offs, the allowance for finance credit losses
and dealer reserves:
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
Loss provision charged to income $1,657 $1,762 $4,833 $5,048
Charge-offs net of recoveries 1,149 971 2,674 2,687
Allowance for finance credit
losses at end of period 21,533 17,950
Dealer reserves at end of period 71,728 56,845
Ratios:
Net charge offs (annualized) against allowance
to average finance receivables .49% .50% .40% .50%
Allowance for finance credit losses to net finance
receivables at end of period 2.20% 2.27%
Dealer reserves to gross sales finance receivables
at end of period 6.56% 6.50%
Delinquencies
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 60 day
and greater contractually delinquent accounts at September 30
(dollars in thousands):
September 30, 1994 September 30, 1993
% of related % of related
Gross Outstanding Gross Outstanding
Receivable Receivable
Amount Balance Amount Balance
Sales finance receivables $5,277 .48% $5,470 .63%
Direct finance receivables 3,068 2.89% 3,019 3.14%
-------- ----- ------- ----
Total $8,345 .72% $8,489 .87%
====== ==== ====== ====
The increase in delinquency rate for direct finance receivables was
primarily attributable to the inclusion of receivables and
delinquency from the Gulfco acquisition.
LIQUIDITY AND FINANCIAL RESOURCES
Because the consumer finance business involves the purchase and
carrying of receivables, a relatively high ratio of borrowings to
net worth is customary and is an important element in the Company's
operations. The Company endeavors to maximize its liquidity by
diversifying its sources of funds which include (a) cash from
operations, (b) the issuance of short term commercial paper, and
(c) direct borrowings available from commercial banks and insurance
companies, consisting of short term lines of credit and long term
senior and subordinated notes. Most of the assets are at fixed
rates, and have an average initial maturity of approximately 26
months. Of the Company's total debt, 46% has an original maturity
of greater than one year at a fixed rate of interest or is hedged
with interest rate exchange agreements.
The Company also maintains back up lines of credit totalling $20
million and revolving credit facilities totalling $310 million. At
September 30, 1994 the Company had no debt outstanding
under these credit arrangements.
LITIGATION EVENT
On August 4, 1994, a jury verdict of $90,000 in compensatory
damages and $50,000,000 in punitive damages was rendered against
Mercury Finance Corporation of Alabama ("Mercury Alabama"), a
subsidiary of the Company, in the Circuit Court of Barbour County,
Alabama. Judgment was entered on the jury's verdict on August 8,
1994. Post-trial motions seeking to overturn the jury's verdict,
a new trial, or a reduction in the amount of the compensatory and
punitive damage award, are pending before the Barbour County Court.
Management considers the verdict eminently unjust and intends to
pursue vigorously all available avenues for relief from the
judgment.
Mercury Alabama is named as a defendant or a counterclaim defendant
in approximately 30 other lawsuits pending in state and federal
courts in Alabama, the majority of which have been filed since the
entry of the August 4, 1994 jury verdict. The cases (some of which
also name the Company as a defendant) include claims for alleged
truth-in-lending violations, nondisclosures, misrepresentations,
wrongful repossessions of vehicles and deceptive trade practices,
among other things. The relief requested by the plaintiffs varies
but includes requests for compensatory, statutory and punitive
damages, as well as declaratory and equitable relief.
A number of the cases are brought as putative class actions. On
October 14, 1994, the Circuit Court of Barbour County certified a
plaintiff class in a case alleging breach of contract and fraud
claims against Mercury Alabama and the Company in connection with
Alabama financing transactions. The Court has not yet ordered the
transmittal of notice to the class. Mercury Alabama and the
Company intend to defend the litigation vigorously.
Through September 30, 1994, the Company has accrued $500,000 in
legal fees for costs associated with its defense. Through
September 30, 1994, the Company has not accrued any amounts
associated with the punitive damage award of $50,000,000 because
the ultimate resolution of this matter can not be predicted with
certainty.
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information - Not Applicable
Item 6. (a) Exhibits - See Exhibit Index following the signature
page
(b) Reports on Form 8-K - No reports on Form 8-K were
filed during the third quarter of 1994.
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.
MERCURY FINANCE COMPANY
(Registrant)
Date: November 12, 1994 /s/ John N. Brincat
John N. Brincat
President & Chief
Executive Officer
(Duly Authorized Officer)
Date: November 12, 1994 /s/ James A. Doyle
James A. Doyle
Senior Vice President,
Controller & Principal
Accounting Officer
Date: November 12, 1994 /s/ Charley A. Pond
Charley A. Pond
Vice President, Treasurer
& Principal Financial Officer
INDEX OF EXHIBITS
Exhibit No. Description
11. Computation of Net Income Per Share
12. Ratio of Earnings to Fixed Charges
15. Report of KPMG Peat Marwick regarding
unaudited interim financial information.
23. Consent of KPMG Peat Marwick.
MERCURY FINANCE COMPANY
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Net income per share is computed by dividing net income by the
total of the weighted average common shares and common stock
equivalents outstanding during the period. Average common shares
and common stock equivalents have been adjusted to reflect the
four-for-three stock splits of Mercury Finance Company distributed
to stockholders on December 28, 1989, October 31, 1990, June 10,
1991 and December 5, 1991, the two-for-one stock split distributed
on June 19, 1992 and the four-for-three stock split distributed on
June 22, 1993.
Three Months Ended Nine Months Ended
- - - -------------------------------------------------------------------
(Dollars in thousands except
per share amounts) 1994 1993 1994 1993
- - - -------------------------------------------------------------------
INCOME DATA:
1. Net income Mercury
Finance Company $22,480 $17,055 $63,037 $46,335
2. Weighted average common shares
outstanding (adjusted for stock
split) 116,002 115,486 115,858 115,227
3. Treasury stock (63) (63) (63) (63)
EFFECT OF COMMON STOCK EQUIVALENTS (C.S.E.):
4. Weighted average shares reserved for
stock options 1,255 1,754 1,418 1,698
NET INCOME PER COMMON SHARE:
5. Weighted average common share and
common stock equivalents (line
2+3+4) 117,194 117,177 117,213 116,862
6. Mercury Finance Company
net income per share
(line 1 line 5) $0.19 $0.15 $0.54 $0.40
MERCURY FINANCE COMPANY
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Three Months Ended Nine Months Ended
- - - -------------------------------------------------------------------
(Dollars in thousands except
per share amounts) 1994 1993 1994 1993
- - - -------------------------------------------------------------------
Net income $22,480 $17,055 $63,037 $46,335
Provision for income taxes 14,150 10,989 39,619 28,375
------- ------- ------- -------
Add Fixed Charges:
Cost of borrowings 9,969 8,423 27,799 24,457
One-thrid of rentals 267 226 769 617
------- ------ ------ ------
Total fixed charges 10,216 8,649 28,416 25,074
------- ------ ------ ------
Total net income, provision for income taxes and
fixed charges "earnings" $46,854 $36,693 $131,072 $99,784
======= ======= ======= =======
Ratio of earnings to
fixed charges 4.59 4.24 4.61 3.98
===== ===== ===== ====
KPMG Peat Marwick Exhibit No. 15
Certified Public Accountants
Independent Auditors' Report
The Board of Directors
Mercury Finance Company
Northbrook, Illinois
We have reviewed the consolidated balance sheets of Mercury Finance
Company and Subsidiaries as of September 30, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders'
equity and cash flows for the three month and nine month periods
then ended, in accordance with the standards established by the
American Institute of Certified Public Accountants.
A review of interim financial information consists principally of
obtaining an understanding of the system for the preparation of
interim financial information, applying analytical review
procedures to financial data, and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the consolidated financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Mercury
Finance Company and subsidiaries as of December 31, 1993, and the
related consolidated statements of income, changes in stockholders'
equity and cash flows for the year then ended (not presented
herein); and in our report dated January 21, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1993, is fairly
presented, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick
Chicago, Illinois
October 4, 1994
KPMG Peat Marwick Exhibit No. 23
Certified Public Accountants
The Board of Directors
Mercury Finance Company
Northbrook, Illinois
Re: Registration Statement No. 33-28513 on Form S-8
Registration Statement No. 33-28693 on Form S-8
Registration Statement No. 33-29587 on Form S-8
Gentlemen:
With respect to the subject Registration Statements, we acknowledge
our awareness of the incorporation by reference therein of our
report dated October 4, 1994 related to our review of interim
financial information.
Pursuant to Rule 436(c) under the Securities Act, such a report is
not considered a part of a Registration Statement prepared or
certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of the Act.
/s/ KPMG Peat Marwick
Chicago, Illinois
November 14, 1994
