SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)of the Securities Exchange Act of 1934
For The Quarter Ended June 30, 1996
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.)
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 the number of shares outstanding of each issuer's class of
common stock, as of the latest practicable date.
Common Stock - $1 par value, 177,692,798 shares as of November 11,1996
Treasury Stock - 5,402,957 shares as of November,11, 1996
<PAGE>
MERCURY FINANCE COMPANY
FORM 10-Q
<TABLE>
INDEX PAGE
<S> <C>
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 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
CONSOLIDATED FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
INDEX OF EXHIBITS 19
Exhibit No. 11 - Computation of Net Income Per Share 20
Exhibit No. 12 - Ratio of Earnings to Fixed Charges 21
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCURY FINANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
(Dollars in thousands) September 30 Dec. 31
1996 1995 1995
<S> <C> <C> <C>
(Unaudited)
ASSETS
Cash.............................................. $28,717 $18,037 $22,967
Investments....................................... 221,201 11,968 242,043
Finance receivables............................... 1,204,471 1,186,177 1,196,737
Less allowance for finance credit losses.......... (51,862) (24,796) (44,566)
Nonrefundable dealer reserves..................... (75,702) (73,179) (63,761)
---------- ---------- ----------
Finance receivables, net.......................... 1,076,907 1,088,202 1,088,410
Deferred income taxes............................. 29,234 8,821 22,031
Furniture, fixtures and equipment, net of
accumulated depreciation...................... 8,072 5,964 7,022
Goodwill.......................................... 14,666 15,476 15,274
Reinsurance receivable............................ 34,396 0 89,962
Deferred acquisition costs........................ 60,723 1,164 26,171
Other assets (including repossessions)............ 164,769 20,765 121,038
---------- ---------- ----------
TOTAL ASSETS...................................... $1,638,685 $1,170,397 $1,634,918
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper..................... $443,307 $397,311 $489,990
Senior debt, term notes........................... 488,750 398,875 438,750
Subordinated debt................................. 26,000 33,500 29,500
Accounts payable and other liabilities............ 75,390 57,021 68,931
Unearned premium and claim reserves............... 228,737 1,180 195,761
Reinsurance payable............................... 40,845 0 105,081
Income taxes payable.............................. 10,023 6,942 22,640
---------- ---------- ----------
TOTAL LIABILITIES................................. 1,313,052 894,829 1,350,653
---------- ---------- ----------
STOCKHOLDERS' EQUITY
Common stock-$1.00 par value:
500,000,000 shares authorized
Sep 30 1996- 177,608,090 shares outstanding
Sep 30 1995- 117,332,000 shares outstanding...
Dec 31 1995- 176,477,520 shares outstanding 177,608 176,464 176,478
Paid in capital................................... 5,798 0 39
Retained earnings................................. 186,602 124,174 142,916
Unrealized appreciation........................... 0 0 1,969
Treasury stock at cost:
Sep 30 1996- 4,566,557 shares
Sep 30 1995- 2.974,657 shares
Dec 31 1995- 3,896,557 shares................ (44,375) (25,070) (37,137)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY........................ 325,633 275,568 284,265
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,638,685 $1,170,397 $1,634,918
========== ========== ==========
</TABLE>
<PAGE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED SEPTEMBER 30
<TABLE>
(Dollars in thousands except per share amounts) Three Months Ended Nine Months Ended
1996 1995 1996 1995
<S> <C> <C> <C> <C>
(Unaudited)
INTEREST INCOME
Finance charges, fees and other interest ......... $75,853 $68,180 $220,527 $196,297
Investment income 3,386 195 8,985 590
--------- --------- --------- ---------
Total interest income ............................ 79,239 68,375 229,512 196,887
Interest expense.................................. 15,686 14,499 47,705 41,505
--------- --------- --------- ---------
Net interest income............................... 63,553 53,876 181,807 155,382
Provision for finance credit losses............... 44,566 2,112 50,283 6,962
--------- --------- --------- ---------
Net interest income after provision for
finance credit losses......................... 18,987 51,764 131,524 148,420
--------- --------- --------- ---------
OTHER INCOME
Insurance premiums and commissions................ 35,717 10,892 87,101 31,357
Fees and other.................................... 1,869 3,020 6,015 8,200
--------- --------- --------- ---------
Total other income................................ 37,586 13,912 93,116 39,557
--------- --------- --------- ---------
OTHER EXPENSES
Salaries and employee benefits.................... 13,330 12,248 40,029 35,368
Occupancy expense................................. 1,507 1,241 4,378 3,527
Equipment expense................................. 677 531 1,907 1,496
Data processing expense........................... 732 766 2,247 2,241
Insurance claims expense.......................... 9,314 847 25,392 2,195
Other operating expenses.......................... 5,791 4,975 18,398 15,369
--------- --------- --------- ---------
Total other expenses.............................. 31,351 20,608 92,351 60,196
--------- --------- --------- ---------
Income before income taxes........................ 25,222 45,068 132,289 127,781
Applicable income taxes........................... 9,325 16,607 49,716 47,491
--------- --------- --------- ---------
Income before effect of accounting change......... 15,897 28,461 82,573 80,290
Cumulative effect of accounting change............ 0 0 0 0
--------- --------- --------- ---------
NET INCOME $15,897 $28,461 $82,573 $80,290
========== ========== ========== ==========
NET INCOME PER COMMON SHARE (adjusted for all
stock splits)................................. $0.09 $0.16 $0.48 $0.46
========== ========== ========== ==========
Weighted average number of common and common
share equivalents outstanding................. 173,526 175,137 173,740 173,973
========== ========== ========== ==========
</TABLE>
<PAGE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE AND SIX MONTHS ENDED SEPTEMBER 30
<TABLE>
(Dollars in thousands) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of period.................... $177,403 $117,332 $176,478 $116,080
Stock options exercised........................... 205 311 1,392 1,739
Stock traded in to exercise stock options......... 0 0 (262) (176)
Stock split....................................... 0 58,821 0 58,821
---------- ---------- ---------- ----------
Balance at end of period.......................... $177,608 $176,464 $177,608 $176,464
========== ========== ========== ==========
PAID IN CAPITAL
Balance at beginning of period.................... $4,113 $13,769 $39 $6,384
Stock options exercised........................... 1,685 2,289 1,941 3,712
Tax benefit from stock options exercised.......... 0 1,376 3,818 7,338
Transfer from Retained Earnings................... 0 41,387 0 41,387
Stock split....................................... 0 (58,821) 0 (58,821)
---------- ---------- ---------- ----------
Balance at end of period.......................... $5,798 $0 $5,798 $0
========== ========== ========== ==========
RETAINED EARNINGS
Balance at beginning of period.................... $183,704 $160,488 $142,916 $128,157
Net income........................................ 15,897 28,461 82,573 80,290
Dividends......................................... (12,999) (23,388) (38,887) (42,886)
Transfer to Paid in Capital....................... 0 (41,387) 0 (41,387)
---------- ---------- ---------- ----------
Balance at end of period.......................... $186,602 $124,174 $186,602 $124,174
========== ========== ========== ==========
UNREALIZED APPRECIATION
Balance at beginning of period.................... (130) 0 1,969 0
Change during the period.......................... 130 0 (1,969) 0
---------- ---------- ---------- ----------
Balance at end of period.......................... $0 $0 $0 $0
========== ========== ========== ==========
TREASURY STOCK
Balance at beginning of period.................... ($38,225) ($25,070) ($37,137) ($23,107)
Purchases......................................... (6,150) 0 (7,238) (1,963)
Retirements....................................... 0 0 0 0
---------- ---------- ---------- ----------
Balance at end of period.......................... ($44,375) ($25,070) ($44,375) ($25,070)
========== ========== ========== ==========
Total stockholders' equity at end of period....... $325,633 $275,568 $325,633 $275,568
========== ========== ========== ==========
</TABLE>
<PAGE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED SEPTEMBER 30
<TABLE>
(Dollars in thousands) Three Months Ended Nine Months Ended
1996 1995 1996 1995
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $15,897 $28,461 $82,573 $80,290
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for finance credit losses............. 44,566 2,112 50,283 6,962
Net finance receivables charged off against
allowance for finance credit losses.......... (3,192) (1,926) (8,233) (4,654)
Provision for deferred income taxes............. (12,145) (202) (7,203) (1,531)
Depreciation.................................... 364 293 1,092 815
Amortization of goodwill........................ 202 202 608 608
Net (increase) decrease in other assets......... (49,964) (1,677) (22,719) 2,743
Net increase (decrease) in other liabilities.... 34,497 17,396 (37,418) 6,871
Net increase (decrease) in dealer reserves...... (20,494) 1,835 (22,813) 6,702
---------- ---------- ---------- ----------
Net cash provided by operating activities..... 9,731 46,494 36,170 98,806
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash collected on finance receivables........... 283,427 257,559 876,315 801,410
Finance receivables originated or acquired (gross) (266,092) (291,273) (873,033) (968,618)
Net change in unearned finance charges and
unearned insurance commissions.................. (9,576) 28 (11,016) 20,898
Net (increase) decrease in investment securities.. (9,482) (2) 20,842 2,217
Net increase (decrease) in unrealized appreciation 130 0 (1,969)
Purchases of properties and equipment............. (180) (1,758) (2,142) (3,287)
---------- ---------- ---------- ----------
Net cash used in investing activities......... (1,773) (35,446) 8,997 (147,380)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in commercial paper....... 28,389 42,598 (46,683) (52,634)
Senior debt retired............................... (15,000) (25,000) (40,000) (26,500)
Senior debt issued................................ 0 0 90,000 160,000
Subordinated debt retired......................... 0 (2,000) (3,500) (2,000)
Stock options exercised........................... 1,890 3,976 6,889 12,614
Dividends paid.................................... (12,999) (23,388) (38,885) (42,886)
Treasury stock acquired........................... (6,150) 0 (7,238) (1,963)
---------- ---------- ---------- ----------
Assets acquired................................... 0 0 0 0
Liabilities assumed............................... 0 0 0 0
---------- ---------- ---------- ----------
Net assets acquired............................... 0 0 0 0
Excess of purchase price over net assets acquired. 0 0 0 0
---------- ---------- ---------- ----------
Net cash provided by financing activities..... (3,870) (3,814) (39,417) 46,631
---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents............................. 4,088 7,234 5,750 (1,943)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD..... 24,629 10,803 22,967 19,980
CASH AND CASH EQUIVALENTS ACQUIRED................ 0 0 0 0
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS END OF PERIOD........... $28,717 $18,037 $28,717 $18,037
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES
Income taxes paid to federal and state
governments...................................... $15,250 $14,109 $63,245 $40,714
========== ========== ========== ==========
Interest paid to creditors........................ $15,750 $14,499 $39,104 $40,834
========== ========== ========== ==========
</TABLE>
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 1995 Annual Report.
2. Effective September 30,1996, the Company adopted a new reserving
methodology commonly referred to as "static pooling." The static pooling
reserving methodology allows the Company to stratify components of its
receivables portfolio (i.e., nonrefundable dealer reserves, principals
loan balances, and related loan charge-offs) into separately identified
and chronologically ordered pools. The method previously used by the
Company analyzed reserve adequacy on a total loan portfolio basis. In
management's view, static pooling provides a more sophisticated and
comprehensive analysis of the adequacy of the reserves and is preferable
to the method previously uses. With the adoption of static pooling, the
Company increased, by a charge to operations, its allowance for loan
losses in the amount of $33 million which is included in the aggregate
provision for loan losses of $44.6 million and $50.3 million for the
three months ended September 30, 1996 and the nine months ended September
30, 1996, respectively.
As a part of its adoption of the static pooling reserving methodology,
the Company adjusted its newly identified September 30, 1996 nonrefundable
dealer reserve pools to eliminate any negative pools, (i.e., those where
related loan charge-offs exceeded available nonrefundable dealer reserve
pool balances), and to reflect certain previous sales finance charge-offs
as reductions in dealer reserves as opposed to reductions in the allowance
for loan losses. The net effect of these adjustments was to increase
nonrefundable dealer reserves by $34.8 million and decrease the allowance for
loan losses buy a corresponding amount at September 30, 1996. These
adjustments had no impace on operating results but only represented a
reclassification of balances between nonrefundable dealer reserves and the
allowance for loan losses.
Pursuant to static pooling, nonrefundable dealer reserves represent the
Company's primary protection against future losses on sales finance contracts.
To the extent that nonrefundable dealer reserve pools are insufficient to
absorb estimated charge-offs adjusted for the impact of current delinquencies
and other economic indicators, management provides for such deficiencies by
charges to operations through the establishment of an allowance for loan
losses. To the extent that nonrefundable dealer reserve pools are determined
to be sufficient to absorb all charge-offs through the ultimate liquidation
of the related loan pool, the sufficiency is accreted into income on an
effective yield method over the estimated remaining life of each related
loan pool.
3 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.
4. Certain data from the prior year has been reclassified to
conform to the 1996 presentation.
5. During 1996, the Company identified certain 1995 fourth quarter accounting
transactions associated with single interest insurance that were incorrectly
classified with nonrefundable dealer reserves thereby impacting the adequacy
of the allowance for loan losses. Accordingly, effective September 30, 1996,
the Company has restated its previously issued 1995 financial statements
to appropriately reflect aggregate nonrefundable dealer reserves and a
resulting impact on unearned single interest insurance commissions and
finance charges and the allowance for loan losses. The impact of the
restatement on the previously issued financial statements was to decrease
nonrefundable dealer reserves by $6,392, increase unearned single interest
insurance commissions by $4,794, increase unearned single interest
finance charges by $1,598, and increase, by a charge to operations, the
allowance for loan losses by $17,583; thereby reducing net income after taxes
by $12,000 from that previously reported.
<PAGE>
MERCURY FINANCE COMPANY
CONSOLIDATED AVERAGE BALANCE SHEETS
THREE AND SIX MONTHS ENDED SEPTEMBER 30
<TABLE>
Three Months Ended Nine Months Ended
(Dollars in thousands) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
(Unaudited)
ASSETS
Cash.............................................. $26,681 $13,913 $25,638 $15,650
Investments....................................... 216,462 11,885 216,626 13,058
Finance receivables............................... 1,196,163 1,169,045 1,209,761 1,119,770
Less allowance for finance credit losses........ (27,835) (24,673) (27,614) (23,930)
Less nonrefundable dealer reserves.............. (69,377) (73,610) (70,649) (70,755)
---------- ---------- ---------- ----------
Finance receivables, net........................ 1,098,951 1,070,762 1,111,498 1,025,085
Deferred income taxes............................. 11,317 8,721 11,696 8,193
Furniture, fixtures and equipment, net of
accumulated depreciation........................ 8,169 5,042 8,155 4,275
Other assets (including repossessions & goodwill). 238,397 37,531 201,187 38,013
---------- ---------- ---------- ----------
TOTAL ASSETS.................................. $1,599,977 $1,147,854 $1,574,800 $1,104,274
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper..................... 429,113 $363,360 416,822 $436,869
Senior debt, term notes........................... 496,250 419,708 494,583 317,575
Subordinated debt................................. 26,000 33,833 27,611 34,944
Accounts payable and other liabilities............ 317,514 53,508 308,055 58,382
Income taxes payable.............................. 4,760 8,411 9,421 8,453
---------- ---------- ---------- ----------
TOTAL LIABILITIES............................. 1,273,637 878,820 1,256,492 856,223
---------- ---------- ---------- ----------
STOCKHOLDER'S EQUITY
Common stock...................................... 177,506 117,481 177,023 116,898
Paid in capital................................... 4,956 15,446 2,771 11,361
Retained earnings................................. 185,179 161,177 177,763 144,753
Unrealized appreciation........................... 0 0 0 0
Treasury stock.................................... (41,301) (25,070) (39,250) (24,961)
---------- ---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY.................... 326,340 269,034 318,307 248,051
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $1,599,977 $1,147,854 $1,574,800 $1,104,274
========== ========== ========== ==========
NUMBER OF DAYS 92 92 274 273
MONTHS COMPLETED 3 3 9 9
RATIOS
Return on average equity.......................... 19.49% 42.32% 34.59% 43.16%
Return on average assets.......................... 3.97% 9.92% 6.99% 9.69%
Yield on earning assets........................... 22.44% 23.16% 21.45% 23.17%
Rate on interest bearing liabilities.............. 6.54% 7.04% 6.77% 7.03%
Net interest margin............................... 18.03% 18.29% 17.00% 18.27%
</TABLE>
<PAGE>
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 concern 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 the U.S.
military servicemen. Building on this direct lending niche,
Mercury has also built a substantial, diversified consumer finance
portfolio by purchasing individual installment sales finance contracts
from retail vendors and automobile dealers.
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. On September 30, 1994 Mercury acquired
all the shares of Midland Finance Co. for $15.1 million in cash and the
assumption of its net liabilities. Midland Finance Co. conducted its
consumer finance business through a central office in Chicago, Illinois.
The acquisitions were accounted for under the purchase method of accounting.
Accordingly their results of operations have been included in the consolidated
financial statements of income and statements of cash flow since the dates of
acquisitions. The excess of cost over fair value of net assets acquired
(goodwill) relating to the acquisitions is being amortized over twenty
years on the straight line method.
On October 20, 1995 Mercury acquired all the shares of ITT Lyndon Property
and ITT Lyndon Life Insurance Company for $72.5 million in cash and the
assumption of their net liabilities. ITT Lyndon Property and ITT Lyndon
Life Insurance Company conducted their business through a central office
in St. Louis, Missouri. Following the acquisition, the names of the
companies were changed to Lyndon Property and Lyndon Life Insurance
Companies ("Lyndon"). The acquisition was accounted for under the purchase
method of accounting. Accordingly their results of operations have been
included in the consolidated statements of income and statements of cash
flow since the date of acquisition. The excess of fair value over cost of
nets assets acquired (negative goodwill of $10,299) relating to the
acquisition was offset against the present value of future profits of
acquired insurance in force. The balance of the present value of future
profits was $16.6 million at December 31, 1995 and is being amortized
over an approximate three year period.
Mercury's loans range for periods from 3 months to 48 months at annual
interest rates ranging, with minor exception, 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 scheduled 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, 1996 (unaudited) when
compared with September 30, 1995 (unaudited) and December 31, 1995 and the
results of operations for the three and nine months ended September 30, 1996
and 1995 (unaudited). This discussion should be read in conjunction with
the Company's consolidated financial statements and notes thereto appearing
elsewhere in this quarterly report.
<PAGE>
FINANCIAL CONDITION
Assets and Finance Receivables
Total assets of the Company increased 40% to $1,639 million from
$1,170 million one year ago. Finance receivables increased 2% to
$1,204.5 million at September 30, 1996.
The increase in assets, exclusive of the growth in finance receivables,
was primarily the result of the October 1995 acquisition of Lyndon. The
increase in finance receivables was primarily attributable to production
of receivables from the increased number of offices operated by the
Company.
During the period from December 31, 1995 through March 31, 1996 total
assets increased $3.8.
The Company's offices in Florida, Texas and Illinois accounted for
approximately 46% of all finance receivables, with the remainder
being originated in the other 28 states where offices are located.
The total number of offices at September 30, 1996 was 287 compared to
260 at September 30, 1995 and 276 at December 31, 1995.
The following table summarizes the composition of finance
receivables at the dates indicated (dollars in thousands):
<PAGE>
<TABLE>
Sep. 30, 1996 Sep. 30, 1995 Dec. 31, 1995
% of % of % of
Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
Sales finance
receivables $1,250,136 87% $1,294,366 90% $1,256,977 87%
Direct finance
receivables 187,868 13% 145,272 10% 184,309 13%
----- --- ------- -- ------ ---
Total gross
finance
receivables 1,438,004 100% 1,439,638 100% 1,441,286 100%
=== == === == ===== ==
Unearned
finance
charges (222,641) (243,161) (231,791)
Unearned
insurance
commissions,
insurance
premiums
and
insurance
reserves (10,982) (10,300) (12,758)
--- ---- ----
Finance
receivables $1,204,471 $1,186,177 $1,196,737
===== ===== =====
</TABLE>
<PAGE>
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.
Effective September 30, 1996 the Company adopted a new reserving
method referred to as "static pooling." Reference should be made to
the footnotes accompanying the 10q for a detailed explanation of
the method and its impact on the financial statements.
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, 1996 (dollars in thousands):
<TABLE>
1996 1995
<S> <C> <C>
Balance at beginning of period $44,566 $22,488
Acquisition 0 0
Provision charged to expense 50,283 4,850
Finance receivables charged-off (9,823) (3,506)
recoveries 1,590 778
Transfer to nonrefundable
dealer reserves (34,754) 0
---- ----
Balance at September 30 $51,862 $24,610
===== =====
Allowance as a percent of finance
receivables outstanding at end
of period 4.31% 2.14%
===== =====
</TABLE>
<PAGE>
The increase in the provision and allowance for finance credit
losses in 1996 is attributable to the increase in finance
receivables outstanding, the adoption of the static pool method
of accounting for loss reserves, and expected increases in
future losses.
Nonrefundable Dealer Reserves
Mercury purchases a majority of its sales finance contracts from
dealers at a discount. A significant portion of the discount
represents anticipated credit losses and based upon projected
loss experience, is allocated to nonrefundable dealer reserves.
Mercury negotiates the amount of the discounts with the dealers
based upon various criteria, one of which is the credit risk
associated with the sales finance contracts being purchased.
The following table sets forth a reconciliation of the changes in
nonrefundable dealer reserves for the nine month periods ended
September 30. Reference should be made to the footnotes for a complete
explanation of the "static pool" method adopted by the Company on
September 30, 1996.
<TABLE>
1996 1995
<S> <C> <C>
Balance at beginning of period 63,761 66,477
Discounts acquired on new volume 52,477 72,161
Transfers and other (16,341) 0
Losses absorbed (58,919) (65,459)
Transfer from allowance for
finance credit losses 34,754 0
-------- --------
Balance at September 30 75,702 73,179
===== =====
</TABLE>
Debt
The primary source for funding the Company's finance receivables
comes from the issuance of debt. At September 30, 1996 the Company had
total debt of $958.1 million which compares with $829.7 million at
September 30, 1995.
In addition to the Company's outstanding debt the Company has
revolving credit facilities and a back up line of credit which
total $600 million. The revolving credit facilities and the back
up line are totally available for use by the Company and at September
30, 1996 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):
<PAGE>
<TABLE>
Sep. 30, 1996 Sep. 30, 1995 Dec. 31, 1995
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Senior Debt:
Commercial
paper $443,307 5.6% $397,311 6.2% $489,990 6.0%
Term notes 488,750 7.0% 398,875 7.2% 438,750 7.2%
Subordinated
debt 26,000 10.3% 35,500 10.2% 29,500 10.2%
---- --- ---- -- ---- ---
Total $958,057 6.4% $829,686 6.8% $958,240 6.6%
==== == ===== == ===== ==
</TABLE>
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 12 basis points at September 30, 1996.
The following table sets forth information with respect to
maturities of senior and subordinated debt at September 30, 1996
(dollars in thousands):
<TABLE>
Senior Debt Senior Debt
Maturity Commercial Term Subordinated
Paper Notes Debt Total
<S> <C> <C> <C> <C>
1996 $443,307 125 3,500 446,932
1997 0 96,625 15,000 111,625
1998 0 167,000 7,500 174,500
1999 0 81,000 81,000
After 1999 0 144,000 144,000
--- ---- ---- ----
Total $443,307 $488,750 $26,000 $958,057
=== === === ===
</TABLE>
<PAGE>
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, 1996 was $325.6 million which
compares with $266.5 million at September 30, 1995 and $284.3 million at
December 31, 1995. For the nine months ended September 30, 1996 the
Company had net income of $82.666.7 million and paid cash dividends of
$38.9 million resulting in a retention of 53% of current earnings.
In addition, eligible employees of the Company exercised options to
purchase shares resulting in $6.9 million also being added to the
equity of the Company. The Company also repurchased 670,000 shares during
the year totaling $7.2 million.
At September 30, 1996 stockholders' equity stated as a percent of total
assets was 19.87% which compares with 23.54% at September 30, 1995 and
17.39% at December 31, 1995.
RESULTS OF OPERATIONS
Net Income
For the three and nine months ended September 30, 1996 the Company had
net income of $15.9 million and $82.6 million compared with the
$28.5 million and $80.3 million earned in 1995. The year to date
increase in net income is primarily attributable to income derived from
increased finance receivables outstanding resulting from additional offices
opened in 1996 and 1995, and a change in the portfolio mix to higher
yielding direct loans, and increased insurance premiums resulting
from the Company's insurance subsidiaries.
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, 1996 the Company's net interest income was
$63.6 million and $181.8 million an increase of 18% and 17% from
1995. The net interest margin which is the ratio of net interest
income divided by average interest earning assets was 18.03% for
the three months ended September 30, 1996 and 17% for the nine months
ended September 30, 1996. This compares with a net interest margin of
18.29% and 18.12% for the three and nine months ended September 30, 1995.
The change in net interest margin is primarily attributable to
lower yielding investment assets associated with the Lyndon
acquisition and 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 six months ended September 30 (dollars
in thousands):
<PAGE>
<TABLE>
1996
Annualized
Three Months Ended Average Interest Rate
Out- Income Earned
standing Expense and Paid
<S> <C> <C> <C>
Finance receivables $1,196,163 $75,8534 23.37%
Investments 216,462 3,386 6.62%
-------- -------- --------
Total interest earning
assets $1,412,625 $79,239 22.44%
Interest bearing liabilities 951,363 15,686 6.54%
---- ---- ---
Net $441,262 $63,553 15.90%
==== ==== ===
Net interest margin as a
percentage of average
interest earning assets 18.03%
===
</TABLE>
<TABLE>
1995
Annualized
Three Months Ended Average Interest Rate
Out- Income Earned
standing Expense and Paid
<S> <C> <C> <C>
Finance receivables $1,169,045 $68,180 23.33%
Investments 11,885 195 6.56%
-------- -------- --------
Total interest earning
assets $1,180,930 $68,375 23.16%
Interest bearing liabilities 816,901 14,499 7.04%
---- ---- ---
Net $364,029 $53,876 16.12%
==== ==== ===
Net interest margin as a
percentage of average
interest earning assets 18.29%
===
</TABLE>
<TABLE>
1996
Annualized
Nine Months Ended Average Interest Rate
Out- Income Earned
standing Expense and Paid
<S> <C> <C> <C>
Finance receivables $1,209,761 $220,527 24.31%
Investments 216,626 8,985 5.53%
-------- -------- --------
Total interest earning
assets $1,426,387 $229,512 21.45%
Interest bearing liabilities 939,016 47,705 6.77%
---- ---- ---
Net $487,371 $181,807 14.68%
==== ==== ===
Net interest margin as a
percentage of average
interest earning assets 17.00%
===
</TABLE>
<TABLE>
1995
Annualized
Nine Months Ended Average Interest Rate
Out- Income Earned
standing Expense and Paid
<S> <C> <C> <C>
Finance receivables $1,119,770 $196,297 23.37%
Investments 13,058 590 6.03%
-------- -------- --------
Total interest earning
assets $1,132,828 $196,877 23.17%
Interest bearing liabilities 789,388 41,505 7.03%
---- ---- ---
Net $343,440 $155,382 16.14%
==== ==== ===
Net interest margin as a
percentage of average
interest earning assets 18.27%
===
</TABLE>
<PAGE>
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 subsidiaries as
direct writers and reinsurers of credit life and accident and health
policies issued through the Company's branch offices.
For the three and nine months ended September 30, 1996, the Company
experienced increases in its insurance premiums which are
primarily attributable to the acquisition of Lyndon Insurance Companies
in 1995. The following table summarizes the amounts earned from these
products for the three and nine months ended September 30 (dollars
in thousands):
<TABLE>
Three Months Ended Nine Months Ended
Sep. 30 Sep. 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Insurance premiums and
commissions $35,717 $10,892 $87,101 $31,357
Vehicle protection club
memberships 472 1,021 1,870 3,056
Fees and other 1,397 1,999 4,145 5,144
--- --- --- ---
Total $37,586 $13,912 $93,116 $39,557
==== ==== ==== ====
Other income as a %
of average interest
earnings assets
(Annualized) 10.64% 4.71% 8.70% 4.66%
==== ==== ==== ====
</TABLE>
Other Expenses
In addition to interest expense and the provision for finance
credit losses, the Company incurs other operating expenses in the
conduct of its business.
The following table summarizes the components of other expenses for
the three and nine months ended September 30 (dollars in thousands):
<TABLE>
Three Months Ended Nine Months Ended
Sep. 30 Sep. 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Salaries and employees
benefits $13,330 $12,248 $40,029 $35,368
Insurance claims expense 9,314 847 25,392 1,820
Other operating expenses 8,707 7,513 26,930 22,633
--- --- --- ---
Total $31,351 $20,608 $92,351 $60,196
==== ==== ==== ====
Other expenses as a % of
average interest
earning assets
(Annualized) 8.88% 6.98% 8.63% 7.09%
==== ==== ==== ====
</TABLE>
Income Taxes
Income taxes increased due to a higher level of pretax income in
1996. The effective tax rate was 37.6% in 1996 and 37.2% in 1995.
<PAGE>
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:
<TABLE>
Three Months Ended Nine Months Ended
Sep. 30 Sep. 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Loss provision charged to
income $44,566 $2,112 $50,283 $6,962
Charge-offs net of
recoveries 3,192 1,926 8,233 4,654
Net charge-offs against
nonrefundable dealer
reserves 17,518 26,452 58,919 65,459
Allowance for finance
credit losses at end
of period 51,862 24,796
Dealer reserves at end
of period 75,702 73,179
Ratios:
Net charge offs
(annualized) against
allowance to average
finance receivables 1.07% .66% .91% .55%
Net charge-offs against
nonrefundable dealer
reserves 5.86% 9.05% 6.49% 7.79%
Allowance for finance
credit losses to net
finance receivables
at end of period 4.31% 2.09%
Dealer reserves to
net sales finance
receivables at end
of period 6.06% 5.65%
</TABLE>
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):
<TABLE>
Sep. 30, 1996 Sep. 30, 1995
% of related % of related
Gross Outstanding Gross Outstanding
Receivable Receivable
Amount Balance Amount Balance
<S> <C> <C> <C> <C>
Sales finance
receivables $10,376 .83% $8,948 .69%
Direct finance
receivables 3,734 1.99% 3,046 2.09%
--- --- --- --
Total $14,110 .98% $11,994 .83%
=== == ==== ==
</TABLE>
<PAGE>
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, 546% has an original maturity
of greater than one year at a fixed rate of interest.
The Company also maintains back up revolving credit facilities
totalling $600 million. At September 30, 1996 the Company had no
debt outstanding under these credit arrangements.
CONTINGENCIES AND LEGAL MATTERS
In the normal course of its business, Mercury and its subsidiaries
are named as defendants in legal proceedings. A number of such
actions, including two cases which have been brought as putative
class actions, are pending in the various states in which
subsidiaries of Mercury do business. It is the policy of Mercury
and its subsidiaries to vigourously defend litigation, but Mercury
and (or) its subisidiaries have and may in the future enter into
settlements of claims where management deems appropriate.
Although management is of the opinion that the resolution of these
proceedings will not have a material effect on the financial
position of Mercury, it is not possible at this time to estimate
the amount of damages or settlement expenses that may be incurred.
Accordingly, no provision has been made in the consolidated
financial statements for any of the pending proceedings.
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 1996.
<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.
MERCURY FINANCE COMPANY
(Registrant)
Date: November 14, 1996 /s/ John N. Brincat
John N. Brincat
Chairman of the Board,
President & Chief
Executive Officer
(Duly Authorized Officer)
Date: November 14, 1996 /s/ James A. Doyle
James A. Doyle
Senior Vice President,
Controller & Principal
Accounting Officer
Date: November 14, 1996 /s/ Bradley S. Vallem
Bradley S. Vallem
Treasurer
& Principal Financial Officer
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Description
11. Computation of Net Income Per Share
12. Ratio of Earnings to Fixed Charges
<PAGE>
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, the four-for-three stock split distributed on
June 22, 1993 and the three-for-two stock split distributed on
October 31, 1995.
<TABLE>
(Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INCOME DATA:
1. Net income
Mercury Finance
Company $15,897 $28,461 $82,573 $80,290
2. Weighted
average common
shares
outstanding
(adjusted for
stock split) 177,506 176,233 176,936 175,351
3. Treasury stock (4,266) (2,974) (4,087) (2,974)
EFFECT OF COMMON
STOCK EQUIVALENTS
(C.S.E.):
4. Weighted
average shares
reserved for
stock options 326 1,878 991 1,596
NET INCOME PER
COMMON SHARE:
5. Weighted
average common
share and common
stock equivalents
(line 2+3+4) 173,566 175,137 173,740 173,973
6. Mercury
Finance Company
net income per
share
(line 1/line 5) $0.09 $0.16 $0.48 $0.46
</TABLE>
<PAGE>
MERCURY FINANCE COMPANY
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES
THREE AND SIX MONTHS ENDED September 30
(Unaudited)
<TABLE>
(Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income $15,897 $28,461 $82,573 $80,290
Provision for
income taxes 9,325 16,607 49,716 47,491
---- ---- ---- ---
Add Fixed Charges:
Cost of
borrowings 15,686 14,499 47,705 41,505
One-thrid of
rentals 425 342 1,254 986
---- ---- ---- ---
Total fixed
charges 16,111 14,841 48,959 42,491
---- ---- ---- ---
Total net income,
provision for
income taxes and
fixed charges
"earnings" $41,333 $59,909 $181,248 $170,272
===== ===== ===== ====
Ratio of earnings
to fixed charges 2.57 4.04 3.70 4.01
===== ===== ===== ====
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 28717
<SECURITIES> 221201
<RECEIVABLES> 1204471
<ALLOWANCES> (51862)
<INVENTORY> 0
<CURRENT-ASSETS> 303788
<PP&E> 15222
<DEPRECIATION> 7150
<TOTAL-ASSETS> 1638685
<CURRENT-LIABILITIES> 354995
<BONDS> 958057
<COMMON> 177608
0
0
<OTHER-SE> 148025
<TOTAL-LIABILITY-AND-EQUITY> 1638685
<SALES> 229512
<TOTAL-REVENUES> 313643
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 92351
<LOSS-PROVISION> 50283
<INTEREST-EXPENSE> 47705
<INCOME-PRETAX> 132289
<INCOME-TAX> 49716
<INCOME-CONTINUING> 82573
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82573
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
</TABLE>
