SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission file number: 1-10176
MERCURY FINANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
Delaware 36-3627010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Field Drive, Suite 340, Lake Forest, Illinois 60045
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 295-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK ($1.00 PAR VALUE) NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the Registrant (l) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of March 3, 1998, 172,497,714 shares of Common Stock were outstanding (net of
Treasury stock).
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates on March 3, 1998 totaled approximately $84,416,874 (based on the
closing price of the Company's common stock on the New York Stock Exchange, as
reported by The Wall Street Journal (Midwest edition for March 4, 1998)).
The following documents are incorporated into this Form 10-K by reference:
None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
PART I
ITEM 1 - BUSINESS
GENERAL
Mercury Finance Company ("Mercury" or the "Company") is a consumer finance
concern engaged, through its operating subsidiaries, in the business of
acquiring 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 borrowers
represent a broad cross section of the consumer market. Approximately 6% of
Mercury's borrowers are military personnel. Mercury's loans and acquired retail
installment contracts range for periods from 3 months to 48 months at annual
interest rates ranging, with minor exception, from 18% to 40%. Generally, all
loans and acquired retail installment contracts are repayable in monthly
installments.
Mercury was organized in 1988, as a wholly-owned subsidiary of First Illinois
Corporation (an Evanston, Illinois based bank holding company). On April 24,
1989, First Illinois Corporation distributed to its stockholders one share of
Mercury for each two shares of First Illinois Corporation stock held.
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 from 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. Substantially all of Mercury's
borrowers are "non-prime" borrowers. These are borrowers which generally would
not be expected to qualify for traditional financing such as that provided by
commercial banks or automobile manufacturers' captive finance companies.
RECENT DEVELOPMENTS
On January 29, 1997, the Company announced the discovery of accounting
irregularities which caused an overstatement of the previously released earnings
for 1995 and 1996. The accounting irregularities were the result of
unauthorized entries being made to the accounting records of the Company.
Immediately following discovery of the accounting irregularities, the Board of
Directors established a Special Committee for the purpose of investigating the
circumstances surrounding these activities. The investigation was undertaken
with the assistance of special legal counsel and auditing experts.
Shortly after the announcement of the accounting irregularities, the Company's
Board of Directors named William A. Brandt, Jr., President and Chief Executive
Officer of the Company. Mr. Brandt is the President and Chief Executive Officer
of Development Specialists, Inc., a firm specializing in providing management,
consulting and turnaround assistance to reorganizing businesses. The Company's
former President and Chief Executive Officer, John Brincat, resigned from both
positions in February, 1997. Mr. Brincat also resigned as a director of the
Company as of December 1, 1997. The Company's Chief Financial Officer before
the Company's announcement of the accounting irregularities, James A. Doyle, was
relieved of his duties in January, 1997.
As a result of the accounting irregularities, the Company was in violation of
certain covenants in its senior note and subordinated debt agreements. In
addition, the Company did not have access to commercial paper markets, which
historically provided a significant portion of the Company's financing.
Consequently, the Company was unable to repay maturing debt and has not repaid
the principal portion of any debt subsequent to announcement of the accounting
irregularities, except as described below. The Company is now current on all
interest payments, other than certain portions deferred by agreement, and is not
now obtaining additional financing.
On February 7, 1997, Mercury and all of its subsidiaries, other than its
insurance subsidiaries (the "Subsidiary Borrowers"), entered into a Loan and
Security Agreement (the "Loan Agreement") with certain financial institutions,
including BankAmerica Business Credit, Inc. ("BankAmerica"), which provided the
Company with a $50 million credit facility. Amounts outstanding under the Loan
Agreement were secured by substantially all of the property and assets of the
Company and its Subsidiary Borrowers other than equipment and real estate. In
addition, the Company pledged to BankAmerica all of the capital stock of each
Subsidiary Borrower. This facility, combined with daily cash flows, provided
the Company with sufficient working capital to operate the business, discharge
significant expenses resulting from the accounting irregularities, and pay
interest on its debt obligations. The facility terminated according to its
terms on January 6, 1998, at which time no amounts were outstanding thereunder.
Effective July 11, 1997, the Company and its lenders signed a Forbearance
Agreement (the "Forbearance Agreement") and Waivers (the "Waivers"), both of
which expired on September 30, 1997. Under the Forbearance Agreement, the
lenders agreed not to take action against the Company for defaults under the
applicable debt agreements prior to October 1, 1997, subject to certain
termination events enumerated in the Forbearance Agreement. The Company made a
$70 million payment to reduce principal and brought its interest payments
current. Subsequent interest payments (at the greater of 7 percent per annum or
the stated non-default rate) were made on the last business day of July, August,
and September, of 1997, with a $6 million escrow established to insure payment
of the September 30 interest payment. The Company also agreed to make
additional cash payments to its lenders (i) on July 16, 1997, August 5, 1997,
September 4, 1997, and October 3, 1997, if the Company's cash balances exceeded
certain threshold amounts, and (ii) at such other times from the proceeds of an
asset sale with a book value in excess of $5 million or tax refunds. The
additional principal payments aggregated $31 million under this agreement. The
Company also paid default interest subject to a cap of 9% on September 30,
1997.
On November 6, 1997, the Forbearance Agreement was amended (the "Amended
Forbearance Agreement") such that the lenders agreed to not take action against
the Company prior to March 2, 1998, unless the Forbearance Agreement was
breached or otherwise terminated early. The Amended Forbearance Agreement
provided for principal repayments based on excess cash balances at each month
end during the duration of the agreement, a $7.0 million escrow fund to be used
to pay any due and unpaid interest at the end of the forbearance period and
payment of principal and interest from cash proceeds arising from the occurrence
of certain significant events. Pursuant to the Amended Forbearance Agreement,
the Company paid additional principal payments aggregating $151 million through
March 3, 1998, bringing total principal repayments to $252 million since the
Company entered into the forbearance agreements. The Company continues to
negotiate with all of its lenders in an attempt to reach a consensual
restructuring agreement.
On February 6, 1997, the Company suspended payment of the dividend previously
announced on January 14, 1997, of $0.075 per share of Mercury common stock. The
Company does not anticipate the payment of any dividends for the foreseeable
future. In addition, on February 27, 1997, the Company adopted a stockholder
rights plan designed to protect the Company's stockholders from abusive takeover
tactics and from attempts to acquire control of Mercury without offering a fair
price to all of the Company's stockholders. The plan does not preclude the
Board of Directors from considering and accepting an offer if the Board believes
it is in the best interest of the Company, its creditors and stockholders.
On February 18, 1997, the Company advised KPMG Peat Marwick LLP ("KPMG"), its
independent accountants, that the Company was discontinuing KPMG's services.
The Company then engaged Arthur Andersen LLP as the Company's new independent
accountants. See Item 9 "Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures."
On March 28, 1997, Mercury entered into a Stock Purchase Agreement with Frontier
Insurance Group, Inc. to sell the stock of Lyndon for $92 million in cash.
Lyndon was acquired by the Company in October, 1995, from ITT for $72.5
million and the assumption of their net liabilities. Since then, other smaller
insurance operations of the Company had been combined with Lyndon. The sale
which closed on June 3, 1997, resulted in a loss to Mercury of approximately $30
million that was recorded in the first quarter of 1997. In addition, the
earnings of Lyndon from the date of the agreement through the date of sale
aggregating approximately $2 million accrued to the benefit of the buyer. As
the Lyndon subsidiary had been operated on a standalone basis, its divestiture
is not expected to have a significant effect on the Company's ability to operate
the Company's core consumer finance business and to continue to offer insurance
products to its consumer finance customers. Management has determined that it
is in the best interest of the Company to remain in the insurance business and
formed a new captive insurance subsidiary during 1997, MFN Insurance Company.
As a result, the sale of Lyndon is not considered the discontinuation of a
business. The loss associated with the sale of Lyndon will not be tax
deductible to the Company as a loss on the sale of a consolidated subsidiary
is, under certain circumstances, not deductible for tax purposes.
On June 17, 1997, the Company announced that it had revised and re-established
its stock option program for key employees. As part of the implementation of
that program, 408 employees were given the opportunity to receive new stock
options with an exercise price equal to $3.00 per share covering the same number
of option shares that these employees held under earlier options with a vesting
schedule that vests the options over an 18-month period. In addition, the
Company granted new stock options for a total of approximately 709,000 shares of
common stock, also exercisable at $3.00 per share to a total of 304 employees.
The Company believes that these grants were necessary and appropriate to
motivate and retain key employees.
On January 10, 1997, Mercury entered into a definitive agreement with Bank of
Boston Corporation for the acquisition by Mercury of Bank of Boston's consumer
finance subsidiary, Fidelity Acceptance Corporation. The agreement called for
Mercury to issue approximately 32,708,000 shares of common stock in
consideration for the acquisition. On January 30, 1997, Bank of Boston
terminated the agreement with Mercury as a result of certain alleged breaches in
the agreement on the part of Mercury. Bank of Boston alleged damages as a
result of the termination of the agreement. Such claims were settled for a cash
payment of $1,600,000 in January, 1998, with a charge to earnings in the fourth
quarter of 1997 of $1,600,000.
At December 31, 1997, the Company had 218 operating branches versus 287 at
December 31, 1996. The Company closed 38 branches in the second quarter of 1997
which were considered to be duplicative or under-performing. The costs related
to the closings, consisting primarily of lease settlements and write off of
leasehold improvements, aggregated $325,000. In December, 1997, Mercury
announced the implementation of a business plan that included the closing of
approximately 70 operating branches. The number of additional branch closings
was subsequently increased to 82. The branches are being closed because they
are either unprofitable or considered redundant in view of the location of
nearby branches. The closings are estimated to result in a decrease in the
outstanding portfolio of approximately $250 million over the next twelve to
eighteen months. The closings will not be treated as discontinued operations,
however, a provision was recorded in the fourth quarter of 1997 to cover the
costs of the closings which are estimated to be $3.4 million.
See Item 3 "Legal Proceedings" for information regarding legal proceedings
related to the accounting irregularities described above.
BRANCH OFFICE NETWORK/OPERATION
In December, 1997, the Company announced the implementation of its business plan
for 1998 which provides for the exit of non-profitable market areas and the
closing of branches which are considered redundant in consideration of nearby
locations for a total reduction of 82 branches. The existing portfolios of the
82 branches to be closed have either been transferred to nearby continuing
branches or will remain in 22 branches that will continue to exist for up to
eighteen months in order to collect the existing portfolio. While the Company
will temporarily have 202 branches, after the closings, Mercury will have 180
continuing operating branches.
The continuing branch operations are divided into 24 geographically organized
districts, with each district headed by a regional director. A regional
director is generally responsible for six to twelve offices (depending on size
and geographical dispersion). Regional directors report to four Group Vice
Presidents. A summary of the operating branches by state is as follows:
<TABLE>
<CAPTION>
State Office Locations State Office Locations
<S> <C> <C> <C>
Alabama 1 Nevada 2
Arizona 3 New Mexico 1
Colorado 1 New York 2
Delaware 1 North Carolina 8
Florida 20 Ohio 11
Georgia 7 Oklahoma 1
Illinois 15 Pennsylvania 6
Indiana 6 South Carolina 4
Kansas 1 Tennessee 2
Kentucky 3 Texas 15
Louisiana 33 Virginia 11
Michigan 5 Washington 2
Mississippi 12 Wisconsin 4
Missouri 3
TOTAL 180
</TABLE>
In addition, Midland Finance Co. has one operating office located in Chicago,
Illinois.
Management has developed its workforce by attempting to train experienced
consumer lending professionals. The training program includes actual training
at branch offices and personal interviews by senior operating management of the
Company. The training program which is called the "Pride Program" is
administered by the branch managers and regional directors and is a requirement
for all branch personnel. In addition, the Company also conducts a Manager's
Qualification Program for prospective managers.
Beginning in 1994, the Company began to experience a significant level of
turnover in its branch staff as a result of increased demand for experienced
personnel by competitors. After the announcement of the accounting
irregularities, the Company experienced further difficulty in retaining and
hiring qualified consumer lending professionals. The rate of turnover in
management positions has declined and, although still a cause for concern,
management believes that the turnover rate is no greater than that experienced
by the Company prior to discovery of the accounting irregularities.
The business mix of Mercury's branch office network between sales finance
receivables (which constitutes 86% of total gross receivables) and direct
consumer loans (which constitutes 14% of total gross receivables) is generally
consistent within the 24 supervisory districts of the country. The business mix
in any one branch office is dependent upon the location of the office and the
background of an office's loan personnel.
See "Recent Developments" for additional information regarding the elimination
and consolidation of certain of Mercury's offices.
LOAN AND CONTRACT ORIGINATION AND MARKETING
Historically, Mercury originated loans and acquired individual sales finance
contracts through its office network based upon a decentralized approval process
tailored to the market in which its specific offices operated. All credit
extensions were reviewed and approved at the branch level with extensions of
credit in excess of preset limits requiring approval by a regional director. In
1998, Mercury initiated 15 regional centralized purchasing offices that review
and approve the origination of loans and acquisitions of sales finance contracts
for a majority of the Company's volume. Through this process, management
believes that underwriting criteria will be applied more consistently while
still allowing for flexibility to be responsive to local market conditions. In
addition, the realignment will release branch personnel from making credit
decisions and will allow for greater emphasis to be placed on cash collections
and expanding dealer relationships.
Installment sales finance receivables which originate with local dealers
(household goods, appliance and automobile) are subjected to the same credit
review and credit worthiness policies as direct consumer loans. A specific
installment sales finance contract is acquired only after objective
investigations of the credit worthiness of the borrower and a determination of
the underlying value of the asset through use of industry publications, combined
with the subjective assessment by underwriters. Every sales finance
contract is reviewed individually and extensions of credit are made based upon
the credit worthiness of each contract.
Individual sales finance contracts are acquired pursuant to formal agreements
with local merchants. Mercury acquires sales finance contracts from local
franchised and independent used car dealers with which Mercury has established
ongoing relationships. A relationship with a dealer begins only after analysis
of the soundness of their business is completed. Mercury acquires a majority of
its sales finance contracts from dealers at a discount. 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
acquired.
Mercury encourages a decentralized marketing approach which allows each office
to pursue and develop business leads which are unique to individual markets.
Mercury does no national advertising. Branch offices may advertise in local
publications and most branch offices rely on the endorsement of customers to
build a client base. Mercury believes that client service in the form of timely
loan application processing makes customer referrals the most cost effective
primary marketing tool.
INSURANCE OPERATIONS
In conjunction with their lending practices, the consumer finance subsidiaries
offer credit life, accident and health and property insurance to borrowers who
obtain financing directly from the consumer finance subsidiaries, and to
borrowers under sales finance contracts and financing contracts acquired from
merchants and automobile dealers. Notwithstanding the disposition of Lyndon,
Mercury continues to offer a variety of insurance and insurance related products
through third party carriers.
Lyndon was engaged in the business of direct writing of credit life, accident
and health and various other credit related insurance policies for customers of
Mercury and other companies. Prior to disposition, Lyndon Life was licensed in
forty-eight states and Lyndon Property was licensed in forty-seven states.
Lyndon subsidiaries, Mercury Life and Gulfco Life were engaged primarily in the
business of reinsuring and direct writing, respectively, of credit life and
accident and health insurance policies issued to borrowers under finance
receivables and sales finance contracts acquired by Mercury. The policies
insure the holder of a sales finance contract or other debt instrument for the
outstanding balance payable in the event of death or disability of the debtor.
Premiums are earned over the life of the contracts principally using pro-rata
and sum-of-the-months digits methods or in relation to anticipated benefits to
the policy holder. As described above, Lyndon (including its subsidiaries) was
disposed of on June 3, 1997. Management has determined that it is in the best
interest of the Company to remain in the insurance business and has formed a new
captive insurance subsidiary during 1997, MFN Insurance Company. As a result,
the sale of Lyndon is not considered the discontinuation of a business.
SOURCE OF FUNDS
Mercury funds its operations primarily through collections of principal and
interest from finance receivables and the sale of debt securities. At
December 31, 1997, Mercury had total debt of $852 million. Of this total, 48.9%
was in commercial paper and notes, 48.4% was in fixed rate senior term notes and
2.7% was in fixed rate subordinated term notes. In addition, Mercury previously
had a $50 million credit facility which expired on its own terms in January,
1998, with no amounts then outstanding thereunder.
As indicated above, as a result of the accounting irregularities, the Company's
credit rating has been downgraded and consequently, the Company does not have
access to the commercial paper markets and is not now obtaining additional
financing. Proceeds from the collection of existing sales finance contracts
have provided and are expected to continue to provide sufficient working capital
for operations, since collections exceed originations. Lower amounts are being
spent on new sales finance contracts due to the reduction in the number of
operating branches and the stricter underwriting criteria. Reductions in the
sales finance portfolio are funding current operating losses.
COMPETITION
The consumer finance business is intensely competitive. Mercury competes with
other consumer finance companies, personal loan departments of commercial banks,
federally insured credit unions, industrial banks, credit card issuers and
companies which finance the sales of their own merchandise or the merchandise of
others.
In recent months, a number of Mercury's competitors have announced that they
have exited the sub-prime sales finance industry, have no funds available to
acquire additional sales finance contracts or have tightened credit standards
resulting in lower volumes. While this may be a sign that competitive pressures
should be easing, there still appears to be no shortage of alternatives for auto
dealers attempting to sell sales finance contracts.
EMPLOYEES
As of December 31, 1997, Mercury had approximately 1,570 employees. None of its
employees are represented by a collective bargaining agreement.
GOVERNMENT REGULATION
All consumer finance operations are subject to federal and state regulations.
Personal loan lending laws generally require licensing of the lender,
limitations on the amount, duration and charges for various categories of loans,
adequate disclosure of certain contract terms and limitations on certain
collection policies and creditor remedies. Federal consumer credit statutes
primarily require disclosures of credit terms in consumer finance transactions.
In general, the business is conducted under licenses issued by individual
states. Each licensed office is subject to periodic examination by state
regulatory authorities. The state licenses are revocable for cause. Mercury
believes that its current operations comply in all material respects with these
regulations. Mercury is also subject to the provisions of the Federal Consumer
Credit Protection Act and its related regulations.
Credit insurance offered in connection with the direct lending and sales finance
activities of Mercury and the premiums payable by credit customers and
commissions payable by insurers to the originators of such insurance are also
subject to state laws and regulations.
ITEM 2
PROPERTIES
The executive offices of Mercury are located at 100 Field Drive, Lake Forest,
Illinois 60045, telephone number (847) 295-8600. Mercury occupies approximately
11,750 square feet of a modern office building subject to a lease having a term
expiring on March 31, 2002. Mercury also leases space for all its branch
offices. The leases for the branch offices are generally for terms from 3 to 5
years. Total rent expense for the Company approximated $4,571,000, $4,392,000
and $4,176,000 in 1997, 1996 and 1995, respectively.
ITEM 3.
LEGAL PROCEEDINGS
The Company has been named as a defendant in a variety of lawsuits generally
arising from the Company's announcement on January 29, 1997 that it would
restate its earnings for certain prior periods as a result of accounting
irregularities. To date, forty-five actions against the Company are pending in
the United States District Court for the Northern District of Illinois, six
cases are pending against the Company in Illinois Chancery Court, and nine cases
are pending in Delaware Chancery Court. The complaints seek compensatory
damages, attorneys' fees and costs, and some seek punitive or treble damages as
well.
Forty-one of the lawsuits pending in the Northern District of Illinois are class
actions which generally allege claims under Sections 10 and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. These
lawsuits name one or more officers or directors of the Company as additional
defendants. One case pending in the Northern District of Illinois alleges
derivative claims seeking to recover damages on behalf of the Company from
certain of the Company's officers and directors. Thirty-nine of the non-
derivative cases pending in the Northern District of Illinois were consolidated
pursuant to a Stipulation entered on April 30, 1997. In November, 1997, the
Minnesota State Board of Investment was appointed lead plaintiff in the federal
class cases. One of the cases pending in the Northern District of Illinois
seeks to represent a class of participants in Mercury's employee retirement plan
and alleges ERISA violations arising out of the plan's investment in Mercury's
allegedly overvalued stock. Participants in the proposed class may include
certain officers and former officers of the Company. Two cases pending in the
Northern District of Illinois allege non-class securities fraud and common law
claims. The ERISA action and the two non-class securities fraud cases were
consolidated in February, 1998, with the cases in which the Minnesota State
Board of Investment is lead plaintiff. Three of the Illinois state court
actions are class actions alleging claims under the Illinois Securities Act, the
Illinois Consumer Fraud and Deceptive Business Practices Act and common law
claims of fraud and negligent misrepresentation. The other Illinois state court
actions are derivative actions which seek to recover damages on behalf of the
Company from certain of the Company's officers and directors. One of the
derivative actions was recently amended to include allegations of RICO
violations. Each of the Delaware state court actions is a derivative action
which seeks to recover damages on behalf of the Company from certain of the
Company's officers and directors. The Company is unable to predict the
potential financial impact of the litigation.
The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities. Those events are also under investigation by
the United States Attorney for the Northern District of Illinois and the Federal
Bureau of Investigation, which executed a search warrant on the Company's
premises on February 3, 1997. The Company is cooperating fully in these
investigations.
On January 10, 1997, the Company entered into an agreement (the "Agreement")
with BankBoston Corporation ("BankBoston") pursuant to which the Company was to
acquire all of the outstanding stock of Fidelity Acceptance Corporation, a
subsidiary of BankBoston, in return for the issuance of approximately 32.7
million shares of the Company's common stock. On January 30, 1997, BankBoston
notified the Company that it was terminating the Agreement as a result of
breaches of the Agreement resulting from the accounting irregularities described
above. On July 10, 1997, BankBoston notified Mercury that BankBoston intended
to seek appropriate compensation for its damages resulting from such breaches.
Such claims were settled for a cash payment of $1,600,000 in January, 1998 which
was accrued in December, 1997.
In the normal course of its business, Mercury and its subsidiaries are named as
defendants in legal proceedings. A number of such actions, including fifteen
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 vigorously defend litigation, but Mercury and
(or) its subsidiaries 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.
The Company recognizes the expense for litigation when the incurrance of loss
is probable and the amount of such loss is estimable. Because of the
uncertainty that surrounds the above described litigation, no accrual has been
made for the majority of these lawsuits at December 31, 1997 with the exception
of the $1,600,000 Bank of Boston settlement. The costs to defend against this
litigation are expensed as incurred.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Mercury Finance Company began trading on the New York Stock
Exchange on April 11, 1989 under the symbol MFN. Mercury common stock is also
traded on the Chicago Stock Exchange. On December 31, 1997, Mercury had
approximately 4,791 holders of record of common stock, exclusive of holders of
shares in "street" or nominee names. The following table sets forth the high
and low closing sale prices as reported on the New York Stock Exchange during
the last two fiscal years. The table also indicates the cash dividends declared
by the Company per share during such periods.
<TABLE>
<CAPTION>
1997 1996
Dividends Dividends
High Low Declared High Low Declared
<S> <C> <C> <C> <C> <C> <C>
First Quarter . . . . . . . . . . $ 15 3/4 $ 1 7/8 $.075 $15 1/8 $11 $.075
Second Quarter . . . . . . . . . 2 3/4 1 1/2 0 14 1/2 11 3/8 .075
Third Quarter . . . . . . . . . . 2 11/16 1 3/8 0 12 1/8 10 3/4 .075
Fourth Quarter . . . . . . . . . 1 11/16 9/16 0 13 1/8 11 .075
</TABLE>
On January 14, 1997, the Board of Directors declared a dividend of $0.075 per
share of Mercury Common Stock to be payable March 3, 1997, to holders of record
at February 17, 1997. On February 6, 1997, the Company suspended payment of
this dividend.
Based on existing defaults and events of default under the Company's Senior and
Subordinated Note Agreements, no dividends may be paid on the capital stock of
the Company. The Company does not anticipate the payment of any dividends for
the foreseeable future.
ITEM 6
SELECTED FINANCIAL DATA
Introduction
All financial information included herein reflects the adjustments to correct
for the irregularities described in Item 1, "Business - Recent Developments."
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Years ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT
Interest income . . . . . . . . . . . . . $ 235,621 $ 271,889 $ 255,066 $ 211,565 $ 165,054
Interest expense . . . . . . . . . . . . 86,529 64,789 57,303 39,375 32,933
Net interest income before provision for
finance credit losses . . . . . . . . 149,092 207,100 197,763 172,190 132,121
Provision for finance credit losses . . . 106,374 215,171 32,641 7,376 6,392
Net interest income/(loss) after provision
for finance credit losses . . . . . . . 42,718 (8,071) 165,122 164,814 125,729
Other income . . . . . . . . . . . . . . 47,080 101,985 58,349 40,907 29,342
Other expenses . . . . . . . . . . . . . 128,005 143,297 103,363 64,731 50,204
Operating income/(loss) before income
tax provisions/(benefits) and cumulative
effect of change in accounting principle (38,207) (49,383) 120,108 140,990 104,867
Non-operating expenses . . . . . . . . . (52,236) 0 0 0 0
Income tax provision/(benefit) . . . . . (16,250) (20,415) 45,979 54,445 40,174
Income/(loss) before cumulative effect of
change in accounting principle . . . . (74,193) (28,968) 74,129 86,545 64,693
Cumulative effect
of change in accounting principle . . . 0 0 0 0 234
Net income/(loss) . . . . . . . . . . . . $ (74,193) $ (28,968) $ 74,129 $ 86,545 $ 64,927
Weighted average common shares
outstanding:
Basic . . . . . . . . . . . . . . . . . 172,489 172,768 172,449 173,342 172,882
Diluted . . . . . . . . . . . . . . . . 172,489 172,768 174,109 175,150 175,450
Per share net income/(loss) attributable to
common shares
Basic . . . . . . . . . . . . . . . . . $ (0.43) $ (0.17) $ 0.43 $ 0.50 $ 0.38
Diluted . . . . . . . . . . . . . . . . $ (0.43) $ (0.17) $ 0.43 $ 0.49 $ 0.37
Dividend per share declared $ .075 $ .30 $ .25 $ .19 $ .14
SELECTED BALANCES AT YEAR END
Total assets . . . . . . . . . . . . . . $ 979,404 $ 1,543,360 $ 1,598,098 $ 1,036,403 $ 797,090
Gross finance and credit card receivables 1,175,439 1,396,081 1,441,288 1,272,430 1,004,517
Total finance receivables (Net of
unearned charges) . . . . . . . . . . . 971,377 1,160,423 1,197,776 1,039,867 820,287
Allowance for finance credit losses . . . 102,204 97,762 46,366 22,488 18,344
Nonrefundable dealer reserves . . . . . . 52,731 89,378 61,961 66,477 57,241
Senior debt, commercial paper and other
notes . . . . . . . . . . . . . . . . . 416,731 525,051 489,990 449,945 260,260
Senior debt, term notes . . . . . . . . . 412,514 488,625 438,750 265,375 266,000
Subordinated debt . . . . . . . . . . . . 22,500 22,500 29,500 35,500 35,000
Stockholders' equity. . . . . . . . . . .. 82,700 168,885 259,487 227,514 193,527
SELECTED RATIOS
Net income/(loss) to average total assets (5.94%) (1.88%) 6.01% 9.71% 9.12%
Net income/(loss) to average
stockholders' equity . . . . . . . . . (64.20%) (12.85%) 29.64% 40.23% 38.95%
Total stockholders' equity to total assets 8.44% 10.94% 16.24% 21.95% 24.28%
Earnings to fixed charges (Note 1) . . . - - 3.05 4.48 4.10
Deficiency of fixed charges
coverage (Note 1) . . . . . . . . . . . $ 90,443 $ 49,383 N/A N/A N/A
Note 1.
SEC Regulation S-K requires the disclosure of the ratio of earnings to fixed charges except where the ratio falls below 1, then
the deficiency shall be disclosed in dollar terms.
</TABLE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in tables in thousands)
The following discussion is intended to assist readers in their analysis of the
accompanying consolidated financial statements and notes that are presented
elsewhere in this report.
OVERVIEW
Mercury continued to experience fierce competition in 1997 both from growing
specialty finance companies similar to Mercury and from traditional financial
institutions which reduced credit standards to obtain higher yields. Mercury
had previously responded to the competitive pressures by reducing its credit
standards while accepting lower pricing on sales finance contracts and
introducing new products that ultimately proved to be unprofitable. The Company
also continued to experience a high level of turnover at the branch manager and
staff levels. These factors resulted in a higher level of delinquencies and
charge-offs in 1997 and 1996. The delinquencies and charge-offs combined with
interest expense at default rates and lower volumes caused the Company to incur
an operating loss for 1997.
FINANCIAL CONDITION
ASSETS AND FINANCE RECEIVABLES
During the year, total assets of Mercury decreased 37% to $979.4 million at
December 31, 1997. This follows a decrease of 3% during 1996. Total assets
declined significantly in 1997 due to the sale of Lyndon combined with a
decrease in sales finance receivables.
Total finance receivables decreased 16% in 1997 compared to 1996 after a 3%
decrease in 1996 over 1995. Finance receivables decreased in 1997 as a result
of a lower level of new volume due to increased credit standards, a fewer number
of branches and the disruption caused by the accounting irregularities. Total
finance receivables decreased in 1996 as a result of lower acquisitions at
existing locations due to increased competition offset by the introduction of a
credit card program. Number of branches open at December 31, 1997, 1996 and
1995 were 218, 287 and 276, respectively. The Company's offices in Texas,
Florida and Illinois accounted for approximately 16%, 15% and 11% of gross
sales and direct finance receivables at December 31, 1997 with the remainder
being originated in the other 26 states where offices are located.
The Company closed 38 branches in the second quarter of 1997 which were
considered to be duplicative or under-performing. The costs related to the
closings consisted primarily of lease settlements and write-offs of leasehold
improvements aggregated $0.325 million.
In December, 1997, Mercury announced the implementation of a business plan that
included the closing of an additional 82 branches. These branches are being
closed because they are either unprofitable or considered redundant in view of
the location of nearby branches. Of the branches announced to be closing, 22
branches will remain open for up to eighteen months to collect existing
portfolios. The additional closings are estimated to result in a decrease in
the finance receivables portfolio of approximately $250 million over the next
twelve to eighteen months. The closings will not be treated as discontinued
operations, however, a provision of $3.4 million was recorded in the fourth
quarter of 1997 to cover the costs of the closings. For additional
information on branch closings, refer to "Restructuring Charges."
The following tables summarize the composition of finance receivables at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Gross finance receivables:
Sales $954,319 $1,159,848 $1,256,631
Direct 149,624 152,633 152,125
Total gross finance
receivables 1,103,943 1,312,481 1,408,756
Less: Unearned finance
charges (200,820) (228,405) (234,792)
Unearned commissions,
insurance premiums and
insurance claim reserves (3,242) (7,253) (8,720)
Sales and direct finance receivables 899,881 1,076,823 1,165,244
Credit Card 71,496 83,600 32,532
Total Finance Receivables $971,377 $1,160,423 $1,197,776
</TABLE>
ALLOWANCE AND PROVISION FOR FINANCE CREDIT LOSSES
Mercury originates direct consumer loans, acquires individual sales finance
contracts from third party dealers and provides revolving credit to individuals
through a Visa affiliated program. The Company continues to maintain an
allowance for the direct and credit card receivables to cover finance credit
losses that are expected to be incurred on receivables that have demonstrated a
risk of loss based upon delinquency or bankruptcy status.
The sales finance contracts are generally acquired at a discount from the
principal amount. This discount is normally referred to as a non-refundable
dealer reserve. The amount of the discount is based upon the credit risk of the
borrower, the note rate of the contract and competitive factors. In 1994 and
prior, the non-refundable dealer reserve was considered to be adequate to absorb
the majority of losses on the acquired receivables. However, as the sub-prime
market has evolved and become more competitive, the dealer reserve has proven to
be inadequate to absorb all of the credit losses. In 1995 and prior, the
Company maintained a balance of the combined non-refundable dealer reserves and
allowance for finance credit losses in an amount sufficient to cover losses that
were expected to be incurred on receivables that had demonstrated a risk of loss
based upon delinquency or bankruptcy status.
Each period the provision for finance credit losses in the income statement
results from the combination of a) an estimate by management of loan losses that
occurred during the current period and b) the ongoing adjustment of prior
estimates of losses occurring in prior periods. As the specific borrower and
amount of a loan loss is confirmed by gathering additional information, taking
collateral in full or partial settlement of the loan, bankruptcy of the
borrower, etc., the loan is charged off, reducing the allowance for finance
credit losses. If, subsequent to a charge off, the Company is able to collect
additional amounts from the borrower or obtain control of collateral worth more
than earlier estimated, a recovery is recorded, decreasing current period
charge offs.
In 1996, Mercury adopted a loss reserving methodology commonly referred to as
"static pooling." The static pooling methodology provides that the company
stratify the components of its sales finance receivable portfolio (i.e. dealer
reserve, principal loan balances and related chargeoffs) into separately
identified pools based upon the period the loans were acquired. Mercury defines
a pool as loans acquired within a given month.
The dealer reserve is made available to absorb credit losses over the life of
the pool of receivables. The dealer reserve cannot be utilized to offset
provision for finance credit losses immediately, but must be held to offset
future losses. Management believes this method provides for an appropriate
matching of finance charge income and provision for finance credit losses. The
application of the static pooling methodology as described above increased the
1996 provision for credit losses by $89 million.
Reserve requirements for sales finance, direct and credit card receivables are
calculated based on the estimated losses inherent in each category of
delinquency (i.e. 30, 60, 90 and 120 days past due). These assumed losses are
utilized to determine the projected cash flows from each impaired category. The
projected cash flow is then discounted at the loan's original yield to estimate
the net present value of the impaired loans. A reserve is established in an
amount sufficient to reduce the book value of the impaired receivable to its net
present value. Repossessed collateral is valued at an estimate of its net
realizable value.
A summary of the activity in the allowance for finance credit losses for the
years ended December 31, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $97,762 $46,366 $22,488
Provision charged to expense 106,374 215,171 32,641
Finance receivables charged-off, net of recoveries (101,932) (89,326) (8,763)
Transfer to nonrefundable dealer reserves 0 (74,449) 0
Balance at year end $102,204 $97,762 $46,366
Allowance as a percent of total finance receivables outstanding 10.52% 8.42% 3.87%
</TABLE>
The increase in the provision and allowance for finance credit losses in 1997
and 1996 versus 1995 is attributable to the adoption of the static pool method
of accounting for loss reserves and an increase in delinquencies and charge-offs
combined with a lower level of acquired nonrefundable dealer reserves.
NONREFUNDABLE DEALER RESERVES
Mercury acquires a majority of its sales finance contracts from dealers at a
discount. Mercury negotiates the amount of the discount with the dealers based
upon various criteria, one of which is the credit risk associated with the sales
finance contracts being acquired. The following table sets forth a
reconciliation of the changes in nonrefundable dealer reserves for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $89,378 $61,961 $66,477
Discounts acquired on new volume 45,010 67,442 98,559
Losses absorbed (81,657) (114,474) (96,117)
Transfer from the Allowance for Finance Credit Losses 0 74,449 0
Other 0 0 (6,958)
Balance at end of year $52,731 $89,378 $61,961
Reserve as a percent of gross sales finance receivables 5.53% 7.71% 4.93%
</TABLE>
Under the static pooling methodology utilized in 1996 and 1997, the balances of
nonrefundable dealer reserves are not available to offset current finance credit
losses, but are amortized and made available to absorb credit losses over the
life of the corresponding pool of receivables. The balance of nonrefundable
dealer reserves at December 31, 1995 was computed under the previous reserving
methodology wherein nonrefundable dealer reserves acquired were available to
offset current losses.
The discount acquired on new volume decreased in 1997 from 1996 as a result of
lower volume levels. The discount acquired on new volume decreased in 1996
versus 1995 as a result of both lower volume and lower percentage of discount on
new volume.
DEFERRED AND INCOME TAX RECEIVABLES
At December 31, 1997, the Company had recorded an income tax receivable of $79.9
million. This balance is comprised of three primary items: (i) refund claim
for the amendment of 1995 and prior income tax returns for the accounting
irregularities, (ii) the carryback of the net operating loss for 1996 to prior
periods and (iii) an estimate of the carryback of the net operating loss for
1997 to prior periods. Of the income tax receivable, $27.5 million was received
in February, 1998. The majority of the receivable relates to the carryback of
the 1997 net operating loss which will not be filed for until the end of the
second quarter of 1998. The timing of receipt of the actual refund in unknown.
At December 31, 1996, the Company had recorded a deferred tax asset balance of
$33.3 million. No valuation allowance against the deferred tax asset balance
was recorded as of December 31, 1996, as Mercury believed it was more likely
than not that the deferred tax assets would be realized in the future under
existing tax laws at December 31, 1996. This conclusion was based on the
extremely short period in which the existing deductible temporary differences,
primarily related to finance credit losses, would reverse and the existence of
sufficient taxable income within the carryback period of three years that
existed at December 31, 1996.
A provision of the Taxpayer Relief Act of 1997, signed into law in August, 1997,
was to reduce the Net Operating Loss (NOL) carryback period from three years to
two years for tax years beginning after August 5, 1997. For tax reporting
purposes, this new law restricts net operating losses, if any, incurred in 1998
to be carried back to 1996, where the Company did not have taxable income,
versus under the previous legislation, any 1998 net operating losses would carry
back to 1995, where the Company had reported significant taxable income. For
financial reporting purposes, the change in tax law raises a question as to the
future realizability of the deferred tax asset that would be recorded in the
financial statements ($0.657 million as of December 31, 1997) because as of
January 1, 1998, the reversal of the temporary differences giving rise to the
deferred taxes can no longer be carried back to periods of taxable income.
Accordingly, a full valuation allowance on deferred tax assets has been recorded
at December 31, 1997.
Mercury elected to be treated as a dealer in securities under Section 475 of the
Internal Revenue Code effective for the year ended December 31, 1996. Pursuant
to this election, Mercury must annually recognize as taxable income or loss the
difference between the fair market value of its securities and the income tax
basis of the securities for the year ended December 31, 1996 and prospectively.
This election has no impact on the recognition of pre-tax income for financial
reporting purposes. As a result of this election, the Company is entitled to a
cumulative deduction for tax purposes in excess of the allowance for finance
credit loss amount recorded for financial reporting purposes.
DEBT
The primary source for funding Mercury's finance receivables comes from debt
issued by Mercury. At December 31, 1997, Mercury had total debt of $851.7
million, which compares to $1,036.2 million and $958.2 million at December 31,
1996 and 1995, respectively. The following table represents Mercury's debt
instruments and the corresponding stated rates on the debt at the end of the
periods indicated:
<TABLE>
<CAPTION>
Dec. 31, 1997 Dec. 31, 1996 Dec. 31,1995
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Senior Debt:
Commercial paper $416,731 5.7% $525,051 5.6% $489,990 6.0%
Term notes 412,514 7.0% 488,625 7.0% 438,750 7.2%
Subordinated
debt 22,500 10.3% 22,500 10.3% 29,500 10.2%
Total $851,745 6.5% $1,036,176 6.4% $958,240 6.6%
</TABLE>
As a result of the 1996 net loss, accounting irregularities, and related
matters, Mercury violated its debt and financial covenants permitting the
holders of its Senior Term Notes and Subordinated Debt to accelerate all such
debt, which would result in all of such debt becoming immediately due and
payable. The Company has been accruing interest at default rates since
February 10, 1997 and pursuant to forbearance agreements have been paying
interest since that date at default rates subject to a cap of 9%.
STOCKHOLDERS' EQUITY
Total stockholders' equity at December 31, 1997 was $82.7 million which compares
with $168.9 million at December 31, 1996. During the year Mercury had a net
loss of $74.2 million and declared dividends of $12.9 million. The Company did
not repurchase any shares of common stock during the year. At December 31,
1997, Mercury's stockholders' equity as a percent of total assets was 8.44%
which compares with 10.94% at December 31, 1996.
Total stockholders' equity at December 31, 1996 was $168.9 million which
compares with $259.5 million at December 31, 1995. During that year Mercury had
a net loss of $29.0 million, paid dividends of $51.8 million and repurchased 1.5
million shares of common stock costing $16.5 million. At December 31, 1996,
Mercury's stockholders' equity as a percent of total assets was 10.94% which
compares with 16.24% at December 31, 1995.
In February 1997, the FASB issued SFAS 129, "Disclosure of Information about
Capital Structure". SFAS 129 establishes standards for disclosing information
about an entity's capital structure. This statement is effective for financial
statements issued for periods ending after December 15, 1997. The adoption of
this statement did not have a significant impact on the financial position and
results of operations of the Company and related disclosures.
RESULTS OF OPERATIONS
NET INCOME (LOSS)
For the year ended December 31, 1997, Mercury had a net loss of $74.2 million.
The 1997 net loss compares to a net loss in 1996 of $29.0 million and net income
of $74.1 million earned in 1995. The 1997 results are adversely impacted by the
incurrence of non-operating expenses relating to the investigation and
restructuring of the business, default rates of interest expense after February
10, 1997, the loss on the sale of Lyndon and the lack of earnings of the Lyndon
insurance subsidiaries which were attributable to the buyer after March 28, 1997
and a decrease in volume. The decrease in 1996 net income was primarily
attributable to an increase in the loss provision for finance credit losses
offset by the profitable operations of Lyndon Insurance Companies.
INTEREST INCOME AND INTEREST EXPENSE
The largest single component of net income is net interest income which is the
difference between interest income and interest expense before provision for
finance credit losses. For the year ended December 31, 1997, net interest
income was $149.1 million, which compares with $207.1 million and $197.8 million
in 1996 and 1995, respectively. Impacting the growth in interest income in 1996
was the investment portfolio of the Lyndon Insurance Companies, acquired in
October 1995. For the year ended December 31, 1997, Mercury's net interest
margin, which is the ratio of net interest income divided by average interest
earning assets, was 12.68%. This compares with a net interest margin of 14.73%
and 16.24% in 1996 and 1995, respectively. The decrease in net interest margin
in 1997 is primarily the result of the increase in interest expense to default
levels beginning in February, 1997. The change in the net interest margin in
1996 was primarily attributable to lower yielding investment assets associated
with the Lyndon acquisition. The investment portfolio of Lyndon yielded
approximately 7% vs. approximately 23% for the finance receivable portfolio in
1996. The following table summarizes net interest income and the net interest
margin for the three years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Average interest earning assets $1,176,194 $1,405,916 $1,217,798
Average interest bearing liabilities 963,431 984,904 843,239
Net $212,763 $421,012 $374,559
Interest income $235,621 $271,889 $255,066
Interest expense 86,529 64,789 57,303
Net interest income before provision for
finance credit losses $149,092 $207,100 $197,763
Rate earned 20.03% 19.34% 20.94%
Rate paid 8.98% 6.58% 6.80%
Net 11.05% 12.76% 14.14%
Net interest margin 12.68% 14.73% 16.24%
</TABLE>
OTHER INCOME
In addition to finance charges and interest, Mercury 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 Mercury. Other credit-related sources
of revenue are derived from the sale of other products and services.
Lyndon earned insurance premiums on business it has underwritten through outside
distributors, business in a run-off mode from subsidiaries of its prior owner,
and going forward, through Mercury's branch offices. Insurance premiums are
also earned by Mercury's other insurance subsidiaries as reinsurers of credit
life and accident and health policies issued through Mercury branch offices. For
the years ended December 31, 1996 and 1995, Mercury experienced increases in its
insurance premiums which were attributable to the acquisition of Lyndon in the
fourth quarter of 1995. Insurance premiums declined in 1997 because Lyndon was
sold on June 3, 1997. Commission income declined during the same periods as a
result of a number of the insurance programs being written by Lyndon since its
acquisition and no commission is earned on a consolidated basis as well as an
overall decline in new volume. The following table summarizes the amounts
earned from these products for the three years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Insurance premiums $35,660 $83,277 $29,686
Fees, commissions and other 11,420 18,708 28,663
Total $47,080 $101,985 $58,349
Other income as a % of average interest earning assets 4.00% 7.25% 4.79%
</TABLE>
OTHER EXPENSES (EXCLUDING RESTRUCTURING EXPENSES)
In addition to interest expense and the provision for finance credit losses,
Mercury incurs other operating expenses in the conduct of its business. During
1997 other operating expenses decreased 13.3% from $143.3 million in 1996, which
had increased 38.6% over 1995. The increase in expenses during 1996 primarily
related to the acquisition of Lyndon and an increase in the number of branches.
1997 decreased compared to 1996 as a result of the sale of Lyndon as of June 3,
1997. The following table summarizes the components of other expenses for the
three years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Salaries and employee benefits $56,799 $54,942 $48,590
Incurred insurance claims expense and other underwriting
expense 20,466 47,243 17,703
Other operating expenses excluding restructuring expenses 47,015 41,112 37,070
Total $124,280 $143,297 $103,363
Operating expenses excluding restructuring charges
as a % of average interest earning assets 10.57% 10.19% 8.49%
</TABLE>
RESTRUCTURING CHARGES
During 1997, the Company closed a number of branches and implemented a plan to
close additional branches for a total closure of approximately 110 branches and
to reduce approximately 260 branch personnel. The amount charged during the
year was $3.725 million ($0.02 per common share) of which $0.301 million has
been utilized to date. These charges and their utilization to December 31, 1997
are summarized in the following table:
<TABLE>
<CAPTION>
Dollars in thousands:
Amounts Charged Amounts Utilized Amounts to be
in 1997 in 1997 Utilized in 1998
<S> <C> <C> <C>
Asset and leasehold write-offs $ 1,200 $ 200 $ 1,000
Lease buyouts and other expenses 1,025 101 924
Employee severance and retention 1,500 0 1,500
$ 3,725 $ 301 $ 3,424
</TABLE>
The Company records restructuring charges against operations and provides a
reserve based on the best information available at the time the commitment is
made to undertake the restructuring action. The reserves are considered
utilized when specific restructuring criteria are met, indicating the planned
restructuring action has occurred. Work-force-related reserves are considered
utilized at payment for termination or acceptance of other contractual
arrangements.
The reserve for lease buyouts is utilized when the remaining lease obligations
are settled or the space has been vacated and made available for sublease. It
is the Company's policy to continue to charge depreciation, rental, and other
operating costs relating to excess space to ongoing operations while they remain
in business use. Salaries and benefits are charged to operations while the
employee is actively employed.
Reserves for assets and leasehold improvements written-off are utilized at the
date of disposal or the final date of the lease.
OTHER NON-OPERATING EXPENSES
Non-operating expenses of $20.7 million for 1997 include the costs of the
investigation of the accounting irregularities, professional fees related to the
negotiations with creditors, legal defense of the Company, the costs of the
interim financing facility, a portion of the fees for the crisis management team
and the costs of the audit examination of the 1996 financial statements and the
reviews of the 1997 quarterly financial statements, offset by approximately $1.1
million from the proceeds of a life insurance policy.
INCOME TAXES
The effective rate of tax benefit applicable to the net loss in 1997 and 1996
was 18.0% and 41.3%, respectively. The effective tax rate on income before
income taxes was 38.3% in 1995.
The relatively low rate of benefit in 1997 is primarily due to the loss on the
sale of Lyndon which was not deductible for tax purposes. Also, the Company was
required to record a valuation allowance against deferred tax assets of $0.657
million at December 31, 1997. Such amount had been estimated at the end of the
third quarter to be $18.5 million but due to a favorable interaction of the
valuation of finance receivables for tax purposes versus financial reporting
purposes, the change was reduced to $0.657 million.
CREDIT LOSSES
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 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 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Loss provision charged to income $106,374 $215,171 $32,641
Net charge-offs against allowance 101,932 89,326 8,763
Net charge-offs against nonrefundable dealer reserves 81,657 114,474 96,117
Allowance for finance credit losses at end of period 102,204 97,762 46,366
Dealer reserves at end of period $52,731 $89,378 $61,961
RATIOS
1997 1996 1995
Net charge-offs against allowance to average total
finance receivables 9.44% 7.54% .76%
Net charge-offs against nonrefundable dealer reserves
to average total finance receivables 7.56% 9.66% 8.37%
Allowance for finance credit losses to total gross
finance receivables at end of period 9.26% 7.45% 3.29%
Dealer reserves to gross sales finance receivables
at end of period 5.53% 7.71% 4.93%
</TABLE>
The increase in the provision and allowance for finance credit losses in 1997
and 1996 versus 1995 is attributable to the adoption of the static pool method
of accounting for loss reserves and an increase in delinquencies and charge-offs
combined with a lower level of acquired nonrefundable dealer reserves.
DELINQUENCIES AND REPOSSESSIONS
The Company generally suspends the accrual of interest when an account becomes
60 days or more contractually delinquent and no full contractual payment is
received in the month the account obtains such status or if the borrower has
filed for bankruptcy protection. The following table sets forth certain
information with respect to the contractually delinquent receivables and
repossessed assets (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
<S> <C> <C>
Delinquent gross receivables $41,970 $52,008
Bankrupt accounts 37,037 17,499
Repossessed assets 5,167 6,700
Total $84,174 $76,207
Delinquent gross receivables and bankrupt accounts
to sales and direct finance receivables 8.78% 5.30%
Delinquent gross receivables, bankrupt accounts and
repossessed assets to sales and direct finance
receivables plus repossessed assets 9.30% 5.78%
</TABLE>
Loan collateral is repossessed when debtors are 120 days late or more on
payments. Automobiles are generally sold within 60 days at auction.
CREDIT CARD PROGRAM
The Company has a portfolio of approximately $70 million of receivables at
December 31, 1997 relating to a credit card program that had solicitations in
late 1995 and late 1996. This program generated losses prior to the allocation
of interest expense of $5.0 million in 1997 and $1.4 million in 1996.
DISPOSITION OF LYNDON
During 1997, Lyndon's claims paying ability was downgraded by A.M. Best to a
rating of B with negative implications. This action, together with regulatory
concerns and the liquidity needs of Mercury, caused Mercury to decide to dispose
of Lyndon. On March 28, 1997, Mercury executed a Stock Purchase Agreement with
Frontier Insurance Group, Inc. ("Frontier") for the sale of Lyndon to Frontier
for $92 million. The sale, which closed on June 3, 1997, resulted in a loss to
Mercury of approximately $30 million. In addition, the earnings of Lyndon from
the date of the agreement through the date of sale aggregating approximately $2
million accrued to the benefit of the buyer. Management has determined that it
is in the best interest of the Company to remain in the insurance business and
formed a new captive insurance subsidiary during 1997, MFN Insurance Company.
As a result, the sale of Lyndon is not considered the discontinuation of a
business. The loss associated with the sale of Lyndon will not be tax
deductible to the Company as a loss on the sale of a consolidated subsidiary is,
under certain circumstances, not deductible for tax purposes.
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 Mercury's operations. Mercury 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 of Mercury are at fixed rates, and have an average initial
maturity of approximately 24 months.
As a result of the accounting irregularities, the Company was in violation of
certain covenants in its senior note and subordinated debt agreements. In
addition, the Company did not have access to commercial paper markets, which
historically provided a significant portion of the Company's financing.
Consequently, the Company was unable to repay maturing debt and has not repaid
the principal portion of any debt subsequent to announcement of the accounting
irregularities, except in connection with the forbearance agreements described
herein. The Company is now current on all interest payments, other than
certain portions deferred by agreement, and is not now obtaining additional
financing.
YEAR 2000 COMPLIANCE
The Company has undertaken a review of its exposure to computer malfunctions
relating to the Year 2000. The Year 2000 issue exists because many computer
systems and applications currently use two-digit date fields to designate a
year. As the century date change occurs, date-sensitive systems will recognize
the year 2000 as 1900, or not at all. This inability to recognize or properly
treat the Year 2000 may cause systems to process critical financial and
operational information incorrectly. Mercury is expected to incur expenditures
over the next two years to address this issue.
The Company has several information system improvement initiatives under way
that will require increased expenditures during the next two years. These
initiatives, which began in 1997, include the conversion of certain Company
computer systems to be Year 2000 compliant. Mercury utilizes computer software
developed by external vendors and has received assurances from these vendors
that Year 2000 compliant upgrades will be available by June, 1998, and this will
allow the Company more than sufficient time for an orderly transition.
Maintenance or modification costs will be expensed as incurred, while the costs
of new software will be capitalized and amortized over the software's useful
life. The costs of the upgrade to compliance is not expected to be material.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" which
establishes standards for reporting and displaying comprehensive income.
Management does not expect the adoption of this statement to have a
significantimpact on the financial position and results of operations of the
Company. This statement is effective for financial statements issued for
periods beginning after December 15, 1997.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
MERCURY FINANCE COMPANY:
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity and cash flows of Mercury Finance Company and subsidiaries
for the year ended December 31, 1995. These consolidated financial statements
are the responsibility of Mercury Finance Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Mercury Finance Company for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 12, 1996, except as to notes 5, 14 and 17,
which are dated as of October 27, 1997.
Chicago, Illinois
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Mercury Finance Company:
We have audited the accompanying consolidated balance sheets of Mercury Finance
Company and subsidiaries (the "Company") as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mercury Finance Company and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As further discussed in Notes 1 and 5 to the financial statements, effective in
1996, the Company changed its methodology for evaluating the adequacy of the
allowance for finance credit losses by adopting a static pooling methodology.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred losses in 1997 and 1996 and is continuing
to incur losses in 1998. In addition, all of the Company's debt is subject to
acceleration or has matured by its terms as a result of the Company's defaults
of its various lending agreements. The Company is currently the defendant in
various litigation arising from the restatement of previously reported financial
information for 1995 and interim earnings in 1996. As further described in Note
2, the Company is in negotiations with its creditors and has retained an
investment banker to refinance its existing debt and/or explore strategic
alternatives. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 17, 1998
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
<CAPTION>
(In thousands, except per share amounts)
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 53,896 $ 20,957
Short-term investments (at amortized cost which
approximates fair value) 0 43,411
Investments available-for-sale, at fair value 0 161,781
Investments held-to-maturity, at cost 0 7,765
Finance Receivables 971,377 1,160,423
Less allowance for finance credit losses (102,204) (97,762)
Less nonrefundable dealer reserves (52,731) (89,378)
FINANCE RECEIVABLES, NET 816,442 973,283
Deferred income taxes, net 0 33,356
Income taxes receivable 79,941 53,764
Premises and equipment (at cost, less accumulated
depreciation of $10,750 and $9,157) 5,899 7,266
Goodwill 13,604 14,463
Reinsurance receivable 0 93,458
Deferred acquisition costs and present value of future profits 0 62,809
Other assets (including repossessions) 9,622 71,047
TOTAL ASSETS $ 979,404 $ 1,543,360
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper and notes $ 416,731 $ 525,051
Senior debt, term notes 412,514 488,625
Subordinated notes 22,500 22,500
Accounts payable and other liabilities 44,959 81,282
Unearned premium and claim reserves 0 239,573
Reinsurance payable 0 17,444
TOTAL LIABILITIES 896,704 1,374,475
CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY
Common stock - $1.00 par value per share:
300,000,000 shares authorized
1997 - 177,900,671 shares outstanding
1996 - 177,719,447 shares outstanding 177,901 177,719
Paid in capital 8,244 6,539
Retained earnings/(deficit) (49,781) 37,349
Unrealized appreciation on available-for-sale securities,
net of tax 0 942
Treasury stock - 5,402,957 shares, at cost (53,664) (53,664)
TOTAL STOCKHOLDERS' EQUITY 82,700 168,885
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 979,404 $ 1,543,360
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
<CAPTION>
(In thousands, except per share amounts)
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME
Finance charges and loan fees $ 228,028 $ 258,602 $ 249,913
Investment income 7,593 13,287 5,153
Total finance charges, loan fees and investment income 235,621 271,889 255,066
Interest expense 86,529 64,789 57,303
Net interest income before provision for finance
credit losses 149,092 207,100 197,763
Provision for finance credit losses 106,374 215,171 32,641
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR FINANCE CREDIT LOSSES 42,718 (8,071) 165,122
OTHER OPERATING INCOME
Insurance premiums 35,660 83,277 29,686
Insurance commissions, fee and other 11,420 18,708 28,663
TOTAL OTHER INCOME 47,080 101,985 58,349
OTHER OPERATING EXPENSES
Salaries and employee benefits 56,799 54,942 48,590
Occupancy expense 5,897 5,923 4,880
Equipment expense 3,870 3,158 2,041
Data processing expense 2,059 2,366 3,071
Incurred insurance claims and other underwriting
expense 20,466 47,243 17,703
Restructuring charges 3,725 0 0
Other operating expenses 35,189 29,665 27,078
TOTAL OTHER EXPENSES 128,005 143,297 103,363
OPERATING INCOME/(LOSS) (38,207) (49,383) 120,108
NON-OPERATING EXPENSES
Loss on sale of Lyndon (29,528) 0 0
Income from Lyndon due to buyer (2,025) 0 0
Other non-operating expenses (20,683) 0 0
Total non-operating expenses (52,236) 0 0
Income/(loss) before income taxes (90,443) (49,383) 120,108
Provision/(benefit) for income taxes (16,250) (20,415) 45,979
NET INCOME (LOSS) $ (74,193) $ (28,968) $ 74,129
Weighted average common shares outstanding:
Basic 172,489 172,768 172,449
Diluted 172,489 172,768 174,109
Per share net income/(loss) attributable to common shares:
Basic $ (0.43) $ (0.17) $ 0.43
Diluted $ (0.43) $ (0.17) $ 0.43
Dividends per share declared $ .075 $ .30 $ .25
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
(In thousands, except per share amounts)
Retained
Common Paid in Earnings/ Unrealized Treasury
Stock Capital (Deficit) Appreciation Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $116,080 $6,384 $128,157 $0 $(23,107) $227,514
1995 net income 74,129 74,129
Stock options exercised 1,573 11,181 12,754
Dividends declared ($.25 per share) (42,849) (42,849)
Transfer to Paid in Capital 41,299 (41,299)
Three for two stock split 58,825 (58,825)
Unrealized appreciation on
available-for-sale securities,
net of tax 1,969 1,969
Treasury stock acquired (14,030) (14,030)
Balance at December 31, 1995 176,478 39 118,138 1,969 (37,137) 259,487
1996 net loss (28,968) (28,968)
Stock options exercised 1,241 6,500 7,741
Dividends declared ($.30 per share) (51,821) (51,821)
Unrealized depreciation on
available-for-sale securities,
net of tax (1,027) (1,027)
Treasury stock acquired (16,527) (16,527)
Balance at December 31, 1996 177,719 6,539 37,349 942 (53,664) 168,885
1997 net loss (74,193) (74,193)
Stock options exercised 182 1,705 1,887
Dividends declared ($0.075 per
share) (Note 7) (12,937) (12,937)
Unrealized depreciation on or sale of
available-for-sale securities,
net of tax (942) (942)
Balance at December 31, 1997 $ 177,901 $ 8,244 $(49,781) $ 0 $ (53,664) $ 82,700
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<CAPTION>
(In thousands)
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(74,193) $ (28,968) $ 74,129
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on sale of Lyndon 29,528 0 0
Provision for finance credit losses 106,374 215,171 32,641
Credit for deferred income taxes 38,964 (11,432) (10,595)
Depreciation and amortization 2,842 5,207 4,361
Gain on sale of investment securities 0 (769) (19)
Net increase in reinsurance receivable (6,287) (3,496) (37,476)
Net (increase)/decrease in deferred acquisition costs and
present value of future profits 15,473 (39,567) (2,176)
Net increase in taxes receivable (26,177) (53,764) 0
Net (increase)/decrease in other assets 29,412 15,739 (14,044)
Net increase/(decrease) in reinsurance payable 12,582 (87,637) (14,116)
Net increase in unearned premium and claim reserves (12,388) 43,812 10,970
Net increase/(decrease) in taxes payable 0 (9,261) 4,593
Net increase/(decrease) in other liabilities (45,526) (1,920) 3,120
Net increase/(decrease) in nonrefundable dealer reserves 0 0 (4,516)
Net cash provided by/(used in) operating activities 70,604 43,115 46,872
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance receivables 791,135 860,190 825,779
Principal originated or acquired on finance receivables (740,668) (959,195) (992,450)
Purchases of short term and available for sale investment securities (44,169) (83,816) (24,010)
Purchases of held to maturity investment securities (2,552) (8,480) 0
Proceeds from sales and maturities of short term and
available for sale investment securities 46,786 104,774 55,694
Proceeds from maturities of held to maturity investment securities 6,476 13,393 3,413
Net proceeds from the sale of Lyndon, net of cash sold 88,884 0 0
Net purchase of premises and equipment (616) (2,254) (4,683)
Assets acquired in purchase of Lyndon 0 0 (393,318)
Liabilities assumed 0 0 310,519
Net assets acquired 0 0 (82,799)
Purchase price less than fair value of net assets acquired 0 0 10,299
Net cash provided by/(used in) investing activities 145,276 (75,388) (208,757)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings/(repayments) of commercial paper and notes (108,320) 35,061 40,045
Borrowings of senior debt, term notes 0 90,000 200,000
Repayments of senior debt, term notes (76,111) (40,125) (26,625)
Repayments of subordinated notes 0 (7,000) (6,000)
Stock options exercised 1,490 7,741 12,754
Cash dividends paid 0 (38,887) (42,849)
Treasury stock acquired 0 (16,527) (14,030)
Net cash provided by/(used in) financing activities (182,941) 30,263 163,295
Net increase/(used in) in cash and cash equivalents 32,939 (2,010) 1,410
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,957 22,967 19,980
CASH ACQUIRED 0 0 1,577
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 53,896 $ 20,957 $ 22,967
Supplemental Disclosures
Income taxes paid to federal and state governments $ 5,138 $ 40,092 $ 51,967
Interest paid to creditors $ 84,118 $ 62,079 $ 57,797
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(dollars in tables in thousands, except per share amounts)
1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mercury Finance Company ("Mercury" or the "Company") is a consumer finance
company doing business in 29 states under its own name and through its
subsidiaries MFC Finance Company, MERC Finance Company, Gulfco Investment Inc.
and subsidiary and Midland Finance Co. (the "consumer finance subsidiaries").
The Company also offered certain insurance services through its former
subsidiary, Lyndon Property Insurance Company and subsidiaries ("Lyndon") and
now through MFN Insurance Company ("MFN Insurance"), a subsidiary. The
Company's borrowers generally would not be expected to qualify for traditional
financing, such as that provided by commercial banks or automobile
manufacturers' captive finance companies.
BASIS OF PRESENTATION
The accounting and reporting policies of Mercury conform to generally accepted
accounting principles for the finance and insurance industries. The
consolidated financial statements include the accounts of the Company, the
consumer finance subsidiaries, Lyndon and MFN Insurance. All significant
intercompany accounts and transactions have been eliminated. In addition,
certain amounts from prior years have been reclassified to conform to the 1997
presentation.
REVENUE RECOGNITION - CONSUMER FINANCE SUBSIDIARIES
Finance charges on precomputed loans and sales finance contracts (collectively
referred to as "precompute accounts") are credited to unearned finance charges
at the time the loans and sales finance contracts are made or acquired.
Interest income is calculated using the effective interest method to produce
constant rates of interest (yields). If a precompute account becomes greater
than 60 days contractually delinquent and no full contractual payment is
received in the month the account attains such delinquency status, the accrual
of income is suspended until one or more full contractual monthly payments are
received. Interest on interest bearing loans and sales finance contracts is
calculated on a 360-day year basis and recorded on the accrual basis; accrual is
suspended when an account is 60 or more days contractually delinquent. Late
charges and deferment charges on all contracts are taken into income as
collected. Fees and other income are derived from the sale of other products
and services.
INSURANCE OPERATIONS
In conjunction with their lending practices, the consumer finance subsidiaries,
as agents for Lyndon (through the date of its sale) and unaffiliated insurers,
offer credit life, accident and health and property insurance to borrowers who
obtain direct consumer loans directly from the consumer finance subsidiaries,
and to borrowers under sales finance contracts and financing contracts
acquired from merchants and automobile dealers. Commissions on credit life,
accident and health and property insurance from unaffiliated insurers are
earned by Mercury over the average terms of the related policies on the
sum-of-the-months digits method.
Lyndon was engaged in the business of reinsuring and direct writing of credit
life, accident and health and various other property and casualty insurance
policies issued to borrowers under direct consumer loan and sales finance
contracts originated by Mercury and other companies. The policies insure the
holder of a sales finance contract or other debt instrument for the outstanding
balance payable in the event of death or disability of the debtor. Insurance
premiums are earned over the life of the contracts principally using pro-rata
and sum-of-the-months digits methods or in relation to anticipated benefits to
the policy holders.
Lyndon had established policy liabilities and claim reserves. The claim
reserves were based upon accumulated estimates of claims reported, plus
estimates of incurred but unreported claims.
Lyndon was sold during the second quarter of 1997. Also during the second
quarter of 1997, the Company formed a captive insurance company, MFN Insurance
Company, to participate in the Company program which provides insurance to
Mercury's customers who do not provide proof of coverage on automobiles that are
collateral for the outstanding loans.
FINANCE RECEIVABLES, ALLOWANCE FOR FINANCE CREDIT LOSSES AND NONREFUNDABLE
DEALER RESERVES
Mercury originates direct consumer loans and acquires individual sales finance
contracts from third party dealers. Finance receivables consist of
contractually scheduled payments from sales finance contracts net of unearned
finance charges, direct finance receivables and credit card receivables. The
Company's borrowers typically have limited access to traditional sources of
consumer credit due to past credit history or insufficient cash to make the
required down payment on an automobile. As a result, receivables originated or
acquired by the Company are generally considered to have a higher risk of
default and loss than those of other consumer financings.
Statement of Financial Accounting Standards ("SFAS") 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases," requires that loan origination and commitment
fees and certain direct loan origination costs be deferred and amortized as an
adjustment to the related loan's yield. Mercury has not adopted the provisions
of this statement because adoption would not have a material effect on the
Company's reported results of operations or financial condition.
Unearned finance charges represent the balance of finance income (interest)
remaining from the capitalization of the total interest to be earned over the
original term of the related precompute account.
Mercury acquires a majority of its sales finance contracts from dealers at a
discount. The level of discount is based on, among other things, the credit
risk of the borrower. The discount, which is the difference between the amount
financed and the acquisition cost, represents nonrefundable dealer reserves
which are available to absorb future credit losses over the life of the acquired
loan. Historical loss experience on the Company's sales finance receivables has
shown that the acquisition discount recorded as nonrefundable dealer reserves is
not adequate to cover potential losses over the life of the loans. In 1996,
Mercury adopted a reserving methodology commonly referred to as "static
pooling". The method previously used by the Company analyzed reserve adequacy
on a total portfolio basis. The static pooling reserving methodology allows
Mercury to stratify components of its sales finance receivables portfolio (i.e.,
nonrefundable dealer reserves, principal loan balances, and related loan
charge-offs) into separately identified and chronologically ordered monthly
pools. A portion of the dealer reserve is made available to cover estimated
credit losses for each identified monthly pool based on a pro rata calculation
over the term of each specific account.
Each period the provision for finance credit losses in the income statement
results from the combination of a) an estimate by management of loan losses that
occurred during the current period and b) the ongoing adjustment of prior
estimates of losses occurring in prior periods.
The allowance for finance credit losses is maintained by direct charges to
operations in amounts that are intended to provide adequate reserves on the
Company's finance receivables portfolio to absorb possible credit losses
incurred on finance receivables that are considered to be impaired (in excess of
the available nonrefundable dealer reserves for sales finance accounts).
Management evaluates the allowance requirements by examining current
delinquencies, the characteristics of the accounts, the value of the underlying
collateral, the availability of the nonrefundable dealer reserves to absorb
credit losses on impaired loans and general economic conditions and trends.
As the specific borrower and amount of a loan loss is confirmed by gathering
additional information, taking collateral in full or partial settlement of the
loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the
allowance for finance credit losses. If, subsequent to a chargeoff, the Company
is able to collect additional amounts from the borrower or obtain control of
collateral worth more than earlier estimated, a recovery is recorded, increasing
the allowance for finance credit losses.
The Company applies SFAS 114 and 118, which address the accounting by creditors
for impairment of a loan and related income recognition and disclosures. In
accordance with SFAS 114, the Company's approach for estimating losses results
in a measure of impairment based on discounting expected future cash flows
(including the anticipated proceeds from repossessed collateral) at the loan's
original yield. If the measure of the impaired receivable is less than the net
recorded investment in the receivable, the Company recognizes an impairment by
creating an additional allowance for finance credit losses in excess of the
nonrefundable dealer reserves available to absorb losses, with a corresponding
charge to provision for finance credit losses. Generally, the Company considers
receivables more than 60 days contractually delinquent to be impaired.
Direct installment loans on which no payment is received within 149 days, on a
recency basis, are charged off. Sales finance accounts (net of unearned finance
charges) 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 a temporary extension if collection appears imminent during the
next calendar month.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes readily marketable securities with
original maturities of three months or less.
INVESTMENTS
The Company classifies its investments as held-to-maturity securities and
available-for-sale securities. Held-to-maturity securities are reported at
cost, adjusted for amortization of premium or discount, and available-for-sale
securities are reported at fair value with unrealized gains and losses excluded
from earnings and reported in a separate component of stockholder's equity, net
of applicable income taxes.
Fair values for held-to-maturity and available-for-sale fixed maturity
securities are based on quoted market prices, where available. For securities
not actively traded, fair values are estimated using values obtained from
independent pricing services. Short-term investments are carried at cost, which
approximates their fair value. Realized gains and losses from sales or
liquidation of investments are determined using the specific identification
basis.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation, and
are depreciated on a straight-line basis over their estimated useful lives.
REINSURANCE ACTIVITIES
In the normal course of business, Lyndon assumed and ceded reinsurance on both a
pro rata and excess basis. Reinsurance provides greater diversification of
business and limits the maximum net loss potential arising from large claims.
Although the ceding of reinsurance does not discharge an insurer from its
primary legal liability to a policy holder, the reinsuring company assumes the
related insurance risk. Lyndon monitored the financial condition of its
reinsurers on a periodic basis. This risk was assumed by the buyer after the
date of sale.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return
and individual state tax returns in most states.
Mercury recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company evaluates deferred tax assets to determine whether they are likely
to be realized. In making its determination, management considers the possible
recovery of taxes already paid but does not assume the generation of additional
taxable income in the future. See note 14 for a discussion of the valuation
reserve at December 31, 1997. No reserves against deferred tax assets were
considered necessary in 1996 and 1995.
IMPAIRMENT OF LONG-LIVED ASSETS
In March, 1995, the Financial Accounting Standards Board ("the FASB") issued
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to
be Disposed of," which is effective for financial statements issued for fiscal
years beginning after December 15, 1995. SFAS 121 requires that long-lived
assets and certain identifiable intangibles that are used in operations be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets might not be recoverable. The adoption of
SFAS 121 did not have a material effect on the Company's financial condition or
results of operations.
At each balance sheet date, the Company evaluates the realizability of goodwill
(and other intangibles) based on expectations of non-discounted cash flows and
operating income for each subsidiary having a material goodwill balance. The
Company believes that no material impairment of goodwill exists at December 31,
1997.
STOCK-BASED COMPENSATION
In October, 1995, the FASB issued SFAS 123, "Accounting for Stock-based
Compensation", which is effective for fiscal years beginning after December 31,
1995. This statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting. The Company has elected, as permitted under
SFAS 123, to continue to measure compensation cost for its plan using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. The accounts which are subject to such estimation
techniques include the allowance for finance credit losses as more fully
discussed in Note 5. Actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" which
establishes standards for reporting and displaying comprehensive income.
Management does not expect the adoption of this statement to have a
significantimpact on the financial position and results of operations of the
Company. This statement is effective for financial statements issued for
periods beginning after December 15, 1997.
2) GOING CONCERN
The Company incurred losses in the years ended December 31, 1997 and 1996 and
continues to incur losses in 1998. As a result, the Company has experienced a
significant reduction in capital. All of its outstanding debt is subject to
acceleration or has matured by its terms as a result of the Company's defaults
of its various lending agreements. In addition, the Company is currently a
defendant in various litigation arising from the restatement of previously
reported financial information for 1995 and interim periods in 1996.
As a result of the above matters, the Board has hired the services of a crisis
manager to assist in the operation of the business. In addition, the Company is
in negotiations with its creditors and has retained an investment banker to
refinance its existing debt and/or explore strategic alternatives. There can be
no assurances that the Company will be successful in its attempt to refinance
its debt and return to profitable operations. Thus, there is substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements have been prepared on the basis that the Company is a going
concern and do not include any adjustments that might result from the outcome of
this uncertainty.
3) ACQUISITIONS AND DISPOSITIONS
On October 20, 1995, Mercury acquired all the shares of ITT Lyndon Property
Insurance Company and ITT Lyndon Life Insurance Company for $72.5 million in
cash and a note payable of $8.6 million due in connection with the run-off of
certain reinsurance business. ITT Lyndon Property Insurance Company 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 Insurance Company and Lyndon Life Insurance
Company and Mercury contributed its investment in Twin Mercury Life Insurance
Company and Gulfco Life Insurance Company to 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 flows since the date of acquisition.
On March 28, 1997, Mercury executed a Stock Purchase Agreement between Mercury
Finance Company and Frontier Insurance Group, Inc. ("Frontier") for the sale of
Lyndon to Frontier for $92 million. The sale, which closed on June 3, 1997,
resulted in a loss to Mercury of approximately $30 million. In addition, the
earnings of Lyndon from the date of the agreement through the date of sale
aggregating approximately $2 million accrued to the benefit of the buyer.
Management has determined that it is in the best interest of the Company to
remain in the insurance business and formed a new captive insurance subsidiary
during 1997, MFN Insurance Company. As a result, the sale of Lyndon is not
considered the discontinuation of a business. The loss associated with the sale
of Lyndon was not tax deductible to the Company as a loss on the sale of a
consolidated subsidiary is, under certain circumstances, not deductible for tax
purposes.
4) INVESTMENTS
All investment securities other than short-term investments were held by
Lyndon, which was disposed of during the year. See Note 3 for discussion of
disposition of Lyndon. The amortized cost, gross unrealized gains and losses
and approximate fair values for available-for-sale and held-to-maturity
securities by major security type at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1996
AVAILABLE-FOR-SALE:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 9,490 $ 13 $ (78) $ 9,425
Obligations of states and
political subdivisions 68,397 1,378 (391) 69,384
Corporate securities 63,629 882 (443) 64,068
Mortgage backed securities 18,816 166 (78) 18,904
Total available-for-sale $ 160,332 $ 2,439 $ (990) $ 161,781
HELD-TO-MATURITY:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 2,833 $ 17 $ (31) $ 2,819
Obligations of states and political
subdivisions 3,787 75 (1) 3,861
Corporate securities 850 33 0 883
Other securities 295 174 (7) 462
Total held-to-maturity $ 7,765 $ 299 $ (39) $ 8,025
</TABLE>
5) FINANCE RECEIVABLES
Direct loans generally have terms of 12 to 24 months with maximum terms of 36
months; secured loans are generally collateralized by real or personal
property. Sales finance contracts are generally accounted for on a discount
basis and generally have terms of 18 to 36 months with maximum terms of 48
months. Mercury Card receivables are mainly unsecured balances. The
Company's finance receivables are primarily with individuals located in the
southeastern, central and western United States. As of December 31, 1997,
approximately 15% and 11% of gross sales and direct finance receivables were
from branches located in Texas, Florida and Illinois, respectively. Loans
outstanding at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
DIRECT FINANCE RECEIVABLES
Interest bearing $ 20,504 $ 25,117
Precompute 129,120 127,516
Total direct finance receivables 149,624 152,633
SALES FINANCE RECEIVABLES
Total sales finance receivables 954,319 1,159,848
Total gross finance receivables 1,103,943 1,312,481
Less: Unearned finance charges (200,820) (228,405)
Unearned commissions, insurance
premiums and insurance claim reserves (3,242) (7,253)
Sales and direct finance receivables 899,881 1,076,823
CREDIT CARD
Total credit card 71,496 83,600
Total finance receivables $ 971,377 $ 1,160,423
</TABLE>
Included in finance receivables at December 31, 1997 and 1996 were $79,007 and
$69,507, respectively, of receivables for which interest accrual had been
suspended. Contractual maturities of the finance receivables by year are not
readily available at December 31, 1997 and 1996, but experience has shown that
such information is not an accurate forecast of the timing of future cash
collections due to the amount of renewals, conversions, repossessions, or
payoffs prior to actual maturity.
As part of the reduction in the number of its branches, the Company has
estimated that the gross finance receivables portfolio will be reduced by
approximately $250 million over the next 12 months. For additional information
on branch closings, refer to Note 9.
Repossessed assets, classified as other assets, primarily consists of vehicles
held for resale and vehicles which have been sold for which payment has not been
received. Repossessed assets are carried at estimated fair value. At December
31, 1997 and 1996, repossessed assets totaled approximately $5,167 and $6,700,
respectively.
Principal cash collections (excluding finance charges earned) for the years
ended December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
DIRECT FINANCE RECEIVABLES
Principal cash collections $ 136,004 $ 125,494
Percent of average net balances 107% 97%
SALES FINANCE RECEIVABLES
Principal cash collections $ 599,977 $ 646,481
Percent of average net balances 69% 65%
CREDIT CARD RECEIVABLES
Principal cash collections $ 55,154 $ 88,215
Percent of average balances 71% 152%
</TABLE>
Effective in 1996, the Company adopted a static pooling methodology for
computing the allowance for finance credit losses. During 1996, Mercury
converted to a more sophisticated portfolio manager software system, which
enabled the Company to analyze performance criteria on a static pool basis. In
management's view, the static pooling methodology was preferable to the method
previously used. If static pooling had not been adopted in 1996, the 1996
provision for finance credit losses would have been decreased by approximately
$89 million.
As a part of its adoption of the static pooling reserving methodology, the
Company adjusted its newly identified 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 finance credit losses. The net
effect of these adjustments was to increase nonrefundable dealer reserves by $74
million and decrease the allowance for finance credit losses by a corresponding
amount. A summary of the activity in the allowance for finance credit losses
for the years ended December 31, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 97,762 $ 46,366 $ 22,488
Provision for finance credit losses 106,374 215,171 32,641
Finance receivables charged off,
net of recoveries (101,932) (89,326) (8,763)
Transfer to non-refundable dealer reserves 0 (74,449) 0
Balance at end of year $102,204 $ 97,762 $ 46,366
</TABLE>
A summary of the activity in nonrefundable dealer reserves for the years ended
December 31, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 89,378 $ 61,961 $ 66,477
Discounts acquired on new volume 45,010 67,442 98,559
Transfer from the allowance for
finance credit losses 0 74,449 0
Losses absorbed, net of recoveries (81,657) (114,474) (96,117)
Other 0 0 (6,958)
Balance at end of year $ 52,731 $ 89,378 $ 61,961
</TABLE>
Under the static pooling methodology utilized in 1996 and 1997, the balances of
nonrefundable dealer reserves are not available to offset current finance credit
losses, but is amortized and made available to absorb credit losses over the
life of the corresponding pool of receivables. The balance of nonrefundable
dealer reserves at December 31, 1995 was computed under the previous reserving
methodology wherein nonrefundable dealer reserves acquired were available to
offset current losses.
6) SENIOR AND SUBORDINATED DEBT AND LINES OF CREDIT
As a result of the 1996 net loss, accounting irregularities, and related
matters, Mercury violated its debt and financial covenants permitting the
holders of its Senior and Subordinated Debt to accelerate all such debt which,
if accelerated, would result in all of such debt being currently due and
payable.
The Senior and Subordinated Debt is unsecured. During 1997, the Company had
allowed assets of the Company to be used as security for a credit facility line
of $50 million under which there were no amounts outstanding as of December 31,
1997. This facility was allowed to expire on its own terms in January 1998.
The Company had a forbearance agreement with its creditors which, including
extensions (the "Forbearance Agreements"), expired March 2, 1998. Under the
terms of the Forbearance Agreements, the Company has made interest payments on
senior debt through the date of this report at default rates of interest,
subject to a maximum rate of nine percent (9.0%) and subordinated note holders
received interest at a rate of five and one-half percent (5.5%). In addition,
the agreements required the periodic payment of excess cash to be applied as
reduction of outstanding principal. Approximately $252 million of principal has
been paid to creditors under the Forbearance Agreements through March 3, 1998.
The Company continues to negotiate with all of its lenders in an attempt to
reach a consensual restructuring agreement.
7) DIVIDEND RESTRICTIONS
On February 6, 1997, the Company suspended payment of the dividend previously
declared on January 14, 1997 of $0.075 per share of Mercury common stock. In
addition, under the terms of certain debt instruments, the Company is no longer
permitted to pay dividends, therefore, management does not expect that dividends
will be paid in the foreseeable future.
8) COMMON STOCK
The Company has implemented the provisions of SFAS 128 "Earnings Per Share".
This standard requires the presentation of basic and diluted earnings per share
as opposed to primary and fully diluted earnings per share under APB Opinion
15. This standard also prescribes that when computing the dilution of
options, the Company is to use its average stock price for the period, rather
than the more dilutive greater of the average share price or end-of-period
share price required by APB Opinion 15 for fully diluted earnings per share.
Earnings per share is computed by dividing net income by the total of weighted
average common shares and common stock equivalents outstanding during the
periods, adjusted for all stock splits. The calculated averages were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Weighted Average:
Common Shares 177,892,453 177,129,351 175,631,175
Treasury Shares (5,402,957) (4,361,499) (3,182,283)
Basic Shares 172,489,496 172,767,852 172,448,892
Common Equivalents 0 0 1,660,524
Diluted Shares 172,489,496 172,767,852 174,109,416
</TABLE>
In February, 1997, following the announcement of the discovery of accounting
irregularities which caused the overstatement of the previously released
earnings for 1995 and 1996, the market value of the Company's common stock was
significantly reduced. Since the announcement, the market value of the common
stock has not exceeded the exercise price of the stock options granted or
regranted under the revised stock option program (See Note 11). As a result,
the calculation of the common share equivalents becomes meaningless for the
year ended December 31, 1997.
The calculation of common stock equivalents for the year ended December 31, 1996
can be completed as the market value of common stock was in excess of the
exercise price of the stock options outstanding, however, as the Company
incurred a net loss for the year ended December 31, 1996, common share
equivalents totaling 923,236 would be anti-dilutive to earnings per share and
have not been included in the weighted average shares calculation.
In February 1997, the FASB issued SFAS 129, "Disclosure of Information about
Capital Structure". SFAS 129 establishes standards for disclosing information
about an entity's capital structure. This statement is effective for financial
statements issued for periods ending after December 15, 1997. The adoption of
this statement did not have a significant impact on the Company's financial
statement disclosures.
9) RESTRUCTURING CHARGES
During 1997, the Company closed a number of branches and implemented a plan to
close additional branches for a total closure of approximately 110 branches and
to reduce approximately 260 branch personnel. The amount charged during the
year was $3.725 million ($0.02 per common share) of which $0.301 million has
been utilized to date. These charges and their utilization to December 31, 1997
are summarized in the following table:
<TABLE>
<CAPTION>
Dollars in thousands:
Amounts Charged Amounts Utilized Amounts to be
in 1997 in 1997 Utilized in 1998
<S> <C> <C> <C>
Asset and leasehold write-offs $ 1,200 $ 200 $ 1,000
Lease buyouts and other expenses 1,025 101 924
Employee severance and retention 1,500 0 1,500
$ 3,725 $ 301 $ 3,424
</TABLE>
The Company records restructuring charges against operations and provides a
reserve based on the best information available at the time the commitment is
made to undertake the restructuring action. The reserves are considered
utilized when specific restructuring criteria are met, indicating the planned
restructuring action has occurred. Work-force-related reserves are considered
utilized at payment for termination or acceptance of other contractual
arrangements.
The reserve for lease buyouts is utilized when the remaining lease obligations
are settled or the space has been vacated and made available for sublease. It
is the Company's policy to continue to charge depreciation, rental, and other
operating costs relating to excess space to ongoing operations while they remain
in business use. Salaries and benefits are charged to operations while the
employee is actively employed.
Reserves for assets and leasehold improvements written-off are utilized at the
date of disposal or the final date of the lease.
10) OTHER NON-OPERATING EXPENSES
Other non-operating expenses are as follows:
<TABLE>
<CAPTION>
1997
<S> <C>
Corporate counsel $ 2,836
Investment banking 2,657
Creditor attorneys and advisors 2,584
Independent accountants 2,469
Management consultants 2,399
Special investigation 1,919
Bank line of credit fees 1,650
Bank of Boston settlement 1,600
Board of Directors representation 1,132
Other 1,437
$20,683
</TABLE>
11) STOCK OPTIONS
Under the terms of Mercury's 1989 Stock Option and Incentive Compensation Plan
("the Plan"), 24,837,036 common shares were reserved for the future granting of
options to officers, non-employee directors and other key employees. Options
become exercisable in whole or in part up to two years after the date of grant
at the closing price of Mercury's common stock on the date of grant. Options
are forfeited upon termination of employment and expire after ten years. Shares
available for future grants totaled 4,895,091, 134,055 and 891,055 at December
31, 1997, 1996 and 1995, respectively.
Activity with respect to stock options is as follows for the years ended
December 31, (as adjusted for all stock splits):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Outstanding January 1 7,967,919 8,714,492 10,183,320
Options granted (average price of $3.36 in 1997,
$11.10 in 1996 and $11.38 in 1995) 3,420,318 1,300,250 1,582,375
Forfeited/cancelled (8,181,354) (543,250) (428,750)
Options exercised (average price of $8.21 in 1997,
$4.48 in 1996 and $3.12 in 1995) (181,224) (1,503,573) (2,622,453)
Outstanding December 31 3,025,659 7,967,919 8,714,492
</TABLE>
The average option price under the plan was $3.23, $10.53 and $9.45 at December
31, 1997, 1996 and 1995, respectively.
On June 13, 1997, the Company cancelled and reissued 2,385,443 options at a new
exercise price of $3.00. New options were also granted to certain employees
with an exercise price equal to $3.00 per share. 2001 of the 3,025,659 options
outstanding at December 31, 1997 have an exercise price of $1.63 and a remaining
contractual life of approximately 3 years. None of these options are
exercisable. The remaining 3,023,658 options have exercise prices between $3.00
and $3.73, with a weighted average exercise price of $3.00 and a remaining
contractual life of approximately nine years. 1,990,784 of these options are
exercisable.
The Company applies APB Opinion 25 in accounting for its Plan, and accordingly,
no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997
<S> <C> <C>
Net Loss As reported $(74,193)
Pro forma $(78,564)
Basic and Diluted Loss per Share As reported $ (0.43)
Pro forma $ (0.46)
</TABLE>
The weighted average fair value of the options granted, using the Black-Scholes
method, was $2.41 per option in 1997. The full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss amounts presented above because compensation cost is
reflected over the options' vesting period of eighteen months.
Upon the announcement of the discovery of the accounting irregularities and
financial statement restatement described in Note 2, the market value of the
Company's common stock declined dramatically. Management thus believes that the
market value of the Company's common stock during 1996 and 1995 was overstated.
Because a key component of the fair value calculation (and the related pro forma
net income and earnings per share disclosures) is the market value of the
Company's stock, the fair value and other disclosures required under SFAS 123
for 1996 and 1995 are not considered meaningful.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for the seven option grants in 1997: risk-free interest rate
of 6.37 percent, expected dividend yield of 0 percent, expected life of 10
years and expected volatility of 80.52 percent.
12) CONTINGENCIES AND LEGAL MATTERS
The Company has been named as a defendant in a variety of lawsuits generally
arising from the Company's announcement on January 29, 1997 that it would
restate previously reported financial information for 1995 and interim earnings
for 1996 as a result of the discovery of accounting irregularities. To date,
forty-five actions against the Company are pending in United States District
Court for the Northern District of Illinois, six cases are pending against the
Company in Illinois Chancery Court, and nine cases are pending in the Delaware
Chancery Court. The complaints seek compensatory damages, attorneys' fees and
costs, and some seek punitive or treble damages as well.
Forty-one of the lawsuits pending in the Northern District of Illinois are class
actions which allege claims under Section 10 of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. These lawsuits name one or more
officers or directors of the Company as additional defendants. One case pending
in the Northern District of Illinois alleges derivative claims seeking to
recover damages on behalf of the Company from certain of the Company's officers
and directors. Thirty-nine of the non-derivative cases pending in the Northern
District of Illinois were consolidated pursuant to a Stipulation entered on
April 30, 1997. Certain plaintiffs have filed motions for appointment of one or
more lead plaintiffs, each of which is pending. One of the cases pending in the
Northern District of Illinois seeks to represent a class of participants in
Mercury's employee retirement plan and alleges ERISA violations arising out of
the plan's investment in Mercury's allegedly overvalued stock. Two cases
pending in the Northern District of Illinois allege non-class securities fraud
and common law claims. The ERISA action and the two non-class securities fraud
cases were consolidated in February, 1998, with the cases in which the Minnesota
State Board of Investment is lead plaintiff. Three of the Illinois state court
actions are class actions alleging claims under the Illinois Securities Act, the
Illinois Consumer Fraud and Deceptive Business Practices Act and common law
claims of negligence, fraud and negligent misrepresentation. The other Illinois
state court actions are derivative actions which seek to recover damages on
behalf of the Company from certain of the Company's officers and directors.
One of the derivative actions was recently amended to include allegations of
RICO violations. Each of the Delaware state court actions is a derivative
action which seeks to recover damages on behalf of the Company from certain of
the Company's officers and directors. The Company is unable to predict the
potential financial impact of the litigation.
The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities. Those events are also under investigation by
the United States Attorney for the Northern District of Illinois and the Federal
Bureau of Investigation, which executed a search warrant on the Company's
premises on February 3, 1997. The Company is cooperating fully in these
investigations.
On January 10, 1997, the Company entered into an agreement (the "Agreement")
with BankBoston Corporation ("BankBoston") pursuant to which the Company was to
acquire all of the outstanding stock of Fidelity Acceptance Corporation, a
subsidiary of BankBoston, in return for the issuance of approximately 32.7
million shares of the Company's common stock. On January 30, 1997, BankBoston
notified the Company that it was terminating the Agreement as a result of
breaches of the Agreement resulting from the accounting irregularities described
above. On July 10, 1997, BankBoston notified Mercury that BankBoston intended
to seek appropriate compensation for its damages resulting from such breaches.
Such claims were settled for a cash payment of $1.6 million in January, 1998
which was accrued in December, 1997.
In the normal course of its business, Mercury and its subsidiaries are named as
defendants in legal proceedings. A number of such actions, including fifteen
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 vigorously defend litigation, but Mercury and
(or) its subsidiaries 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.
The Company recognizes the expense for litigation when the incurrance of loss
is probable and the amount of such loss is estimable. Because of the
uncertainty that surrounds the above described litigation, no accrual has been
made for the majority of these lawsuits at December 31, 1997 with the exception
of the $1,600,000 Bank of Boston settlement. The costs to defend against this
litigation are expensed as incurred.
13) PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Substantially all employees of Mercury are covered by non-contributory defined
benefit pension plans. Total pension (income)/expense aggregated ($901), $770
and $317 in 1997, 1996 and 1995, respectively.
The following table sets forth the funded status of Mercury's qualified plans
and amounts recognized in the 1997, 1996 and 1995 consolidated financial
statements:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligations, including vested
benefits of $8,097, $6,231 and $5,631 $ 9,126 $ 7,024 $ 6,430
Projected benefit obligation for service rendered to date $ (14,098) $ (10,686) $ (9,763)
Plan assets at fair value 16,667 13,638 11,542
Plan assets in excess of projected benefit obligation 2,569 2,952 1,779
Unrecognized net asset as of December 31, being
recognized over 15-22 years (340) (391) (442)
Unrecognized net gain (3,834) (3,272) (1,397)
Unrecognized prior service cost 93 100 106
Prepaid (accrued) pension expense $ (1,512) $ (611) $ 46
Components of net pension expense:
Service cost-benefits earned during the period $ 1,332 $ 1,060 $ 884
Interest cost on projected benefit obligation 846 727 601
Actual return on plan assets (3,197) (2,085) (1,743)
Net amortization and deferral 118 1,068 575
Net periodic pension,(income)/expense $ (901) $ 770 $ 317
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5% at December 31, 1997, 1996
and 1995. The rates of increase in future compensation were 5.5% - 7.0% at
December 31, 1997, 1996 and 1995. The expected long-term rates of return on
plan assets in 1997, 1996 and 1995 was 8.0% - 9.0%.
Mercury has an employee stock purchase plan and a tax deferred Retirement
Savings Trust ("401(k) Plan"). Employees are eligible to participate in these
plans after having attained specified terms of service. Both plans cover
substantially all full time employees of Mercury and provide for employee
contributions and partial matching contributions by Mercury. The expenses
related to these plans are not material.
During 1997, as discussed in Note 11, the market value of the Company's common
stock declined dramatically. At December 31, 1996, the employee stock purchase
plan, 401(k) Plan and Mercury Finance Company Retirement Plan ("Retirement
Plan") held significant shares of Mercury stock. All Mercury stock held by the
401(k) Plan and Retirement Plan was sold during 1997.
14) INCOME TAXES
The components of the 1997, 1996 and 1995 provisions (benefits) were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CURRENT INCOME TAX PROVISION/(BENEFIT)
Federal $ (55,214) $ (8,274) $ 47,858
State 0 (709) 8,716
Total (55,214) (8,983) 56,574
Deferred income tax provision/(benefit) 38,964 (11,432) (10,595)
Total income tax provision/(benefit) $ (16,250) $ (20,415) $ 45,979
</TABLE>
The differences between the U.S. federal statutory income tax rate and the
Company's effective rate are:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory federal income tax (35.0)% (35.0)% 35.0%
Loss on sale of Lyndon 11.4 0 0
Income from Lyndon due to buyer .8 0 0
Impact of change in tax law .7 0 0
State income taxes, net of federal tax benefit 2.1 (3.0) 3.3
Other, net 2.0 (3.3) 0
Total (18.0)% (41.3)% 38.3%
</TABLE>
The total income tax benefit reflected in stockholders' equity for stock options
exercised was $397, $4,400 and $7,363 in 1997, 1996 and 1995, respectively.
Temporary differences between the amounts reported in the financial statements
and the tax basis of assets and liabilities result in deferred taxes. Deferred
tax assets and liabilities at December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
DEFERRED TAX ASSETS:
Valuation of finance receivables $ 0 $ 37,150
Unearned premiums and ceding fees 0 13,632
Accrued non-operating expenses 1,758 0
Other 1,095 3,151
Deferred tax assets 2,853 53,933
DEFERRED TAX LIABILITIES:
Valuation of finance receivables 2,196 0
Unrealized appreciation on available-for-sale
securities 0 507
Policy acquisition costs 0 18,011
Other 0 2,059
Deferred tax liabilities 2,196 20,577
Net deferred tax assets before valuation allowance 657 33,356
Less: Valuation allowance (657) 0
NET DEFERRED TAX ASSETS $ 0 $ 33,356
</TABLE>
No valuation allowance for deferred tax assets was recorded at December 31,
1996, as Mercury believed it was more likely than not that the deferred tax
assets would be realized in the future under the existing tax laws at December
31, 1996. This conclusion was based on the extremely short period in which the
existing deductible temporary differences, primarily related to finance credit
losses, would reverse and the existence of sufficient taxable income within the
carryback period of three years available under the existing tax law at December
31, 1996. However, under new tax laws enacted in August 1997, the carryback
period has been shortened thereby limiting the source of taxable income
available to realize the Company's tax benefits for deductible temporary
differences.
The Taxpayer Relief Act of 1997 ("the Act") was signed into law in August 1997.
A provision of the Act is to reduce the Net Operating Loss carryback period from
three years to two years for taxable years beginning after August 5, 1997. For
tax reporting purposes, this new law restricts net operating losses, if any,
incurred in 1998 to be carried back to 1996, where the Company did not have
taxable income versus under the previous legislation, any 1998 net operating
losses would carry back to 1995, where the Company has reported significant
taxable income. For financial reporting purposes, the change in the tax law
raises a question as to the realizability of the deferred tax asset that would
be recorded in the financial statements ($657 as of December 31, 1997) because
as of January 1, 1998, the reversal of the temporary differences that give rise
to the deferred taxes, can no longer be carried back to periods of taxable
income. Accordingly, a full valuation allowance on deferred tax assets has been
recorded at December 31, 1997.
Mercury has elected to be treated as a dealer in securities under section 475 of
the Internal Revenue Code. Pursuant to this election, Mercury must recognize as
taxable income or loss the difference between the fair market value of its
securities and the income tax basis of its securities. This election has no
impact on the recognition of pre-tax income for financial reporting purposes.
As a result of this election, being effective beginning in its 1996 tax year,
the Company has increased the taxable loss reported for the year ended
December 31, 1996 and increased the taxable loss to be reported for the year
ended December 31, 1997. Accordingly, for financial reporting purposes, a
portion of the previously recorded deferred taxes have been reclassified as
current refunds.
15) LEASES
Mercury and its subsidiaries lease office space generally under cancelable
operating leases expiring in various years through 2003. Most of these leases
are renewable for periods ranging from three to five years. Future minimum
payments, by year and in the aggregate, under operating leases with initial or
remaining terms of one year or more consisted of the following at December 31,
1997:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1998 $ 4,321
1999 3,186
2000 1,860
2001 1,181
2002 and after 419
Total $10,967
</TABLE>
The Company has announced its intention to close branches and expects to settle
commitments for less than the current lease contracts on the closed branches.
It is expected that in the normal course of business, office leases that expire
will be renewed or replaced by leases on other properties. Total rent expense
approximated $4,571, $4,392 and $4,176 in 1997, 1996 and 1995, respectively.
16) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. Fair value estimates are made at a specific point in time for Mercury's
financial instruments; they are subjective in nature and involve uncertainties,
and matters of significant judgment and, therefore, cannot be determined with
precision. Fair value estimates assume the continuation of Mercury as a going
concern.
CASH AND CASH EQUIVALENTS
Due to the short term nature of these items, management believes that the
carrying amount is a reasonable estimate of fair value.
INVESTMENTS
For bonds, the estimated fair value is based on quoted market price. For other
investments, which consist primarily of short-term money market instruments, the
carrying amount is a reasonable estimate of fair value due to the short-term
nature of these items.
FINANCE RECEIVABLES
Finance receivables have been valued based upon an estimate of the future cash
flows discounted at imputed weighted average cost of capital. The 1996 fair
value amount has been revised by the Company to reflect additional information
available in 1997 for estimating the 1996 fair value amount.
SENIOR DEBT, COMMERCIAL PAPER AND NOTES
At December 31, 1997, the fair value has been computed based upon pricing of
recent trades. At December 31, 1996, the fair value was considered to equal
book value.
SENIOR DEBT, TERM NOTES AND SUBORDINATED DEBT
At December 31, 1997, the fair value has been computed based upon pricing of
recent trades. At December 31, 1996, the rates were based on debt with
similar terms available to Mercury and remaining maturities were used to
discount the future cash flows related to existing debt and arrive at an
estimate of fair value.
The estimated fair values of Mercury's financial instruments at December 31,
which have not been adjusted for the events disclosed in Notes 2 and 12 which
have a substantial negative impact on these estimates, were as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash $ 53,896 $ 53,896 $ 20,957 $ 20,957
Investments 0 0 212,957 213,217
Finance Receivables, net 816,442 731,038 973,283 941,323
Total $ 870,338 $ 784,934 $ 1,207,197 $ 1,175,497
FINANCIAL LIABILITIES:
Senior Debt, Commercial Paper and Notes $ 416,731 $ 354,221 $ 525,051 $ 525,051
Senior Debt, Term Notes 412,514 350,637 488,625 476,469
Subordinated Debt 22,500 16,875 22,500 22,711
Total $ 851,745 $ 721,733 $ 1,036,176 $ 1,024,231
</TABLE>
17) BUSINESS SEGMENT DATA
The Finance Segment consists of the noninsurance segment of Mercury. The
Insurance Segment consists of Lyndon through date of disposition and MFN
Insurance thereafter. Included in revenues are interest income before provision
for finance credit losses and total other income. Operating profit represents
income before income taxes and includes interest expense, as financing costs are
integral to the Company's operations. Income by segment assumes each business
services its own debt (including acquisition debt). The segments generally
provide for income taxes as if separate returns were filed subject to certain
consolidated return limitations and benefits. The following table presents the
business segment data of Mercury for the years ended December 31, 1996 and
1995. Following the sale of Lyndon, the operations of the insurance segment
are not a material segment of the Company's operations and are therefore not
disclosed in the following table:
<TABLE>
<CAPTION>
(dollars in millions)
1996 1995
<S> <C> <C>
REVENUES
Finance $ 203.2 $ 218.3
Insurance 105.9 37.8
Total $ 309.1 $ 256.1
OPERATING PROFITS (LOSSES)
Finance $ (89.4) $ 107.7
Insurance 40.0 12.4
Total $ (49.4) $ 120.1
NET INCOME (LOSS)
Finance $ (56.0) $ 66.3
Insurance 27.0 7.8
Total $ (29.0) $ 74.1
IDENTIFIABLE ASSETS
Finance $ 1,123.4 $ 1,168.1
Insurance 420.0 430.0
Total $ 1,543.4 $ 1,598.1
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (UNAUDITED)
BALANCE SHEET AVERAGE FOR THE QUARTER 1997
4th Qrtr 3rd Qrtr 2nd Qrtr 1st Qrtr
<S> <C> <C> <C> <C>
ASSETS
Cash $28,844 $67,351 $78,350 $23,374
Investments 23,368 23,368 110,711 217,189
Finance Receivables 1,008,767 1,070,968 1,110,949 1,143,272
Allowance for Credit Losses (111,168) (121,868) (117,594) (104,673)
Nonrefundable Dealer Reserves (57,019) (66,336) (76,021) (85,028)
Other Assets 121,486 141,484 231,814 325,366
Total Assets $1,014,278 $1,114,967 $1,338,209 $1,519,500
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior Debt, Commercial Paper $431,305 $469,749 $498,619 $514,335
Senior Debt, Term Notes 426,939 464,995 488,625 488,625
Subordinated Debt 22,500 22,500 22,500 22,500
Other Liabilities 48,289 56,151 209,234 348,042
Total Stockholders' Equity 85,245 101,572 119,231 145,998
Liabilities and Stockholders' Equity $1,014,278 $1,114,967 $1,338,209 $1,519,500
INCOME STATEMENT
Interest Income 47,950 57,588 62,505 66,780
Interest Expense (20,710) (21,554) (23,549) (20,716)
Net Interest Income 28,039 36,034 38,956 46,064
Provision for Credit Losses (24,288) (27,080) (24,544) (30,462)
Net Interest Income after Credit Losses 3,750 8,954 14,412 15,602
Other Operating Income 4,089 3,329 12,939 26,723
Other Operating Expenses (28,501) (23,818) (32,684) (43,001)
Non-operating Expenses (7,088) (3,013) (7,478) (34,657)
Income/(Loss) Before Income Taxes (27,750) (14,548) (12,811) (35,333)
Applicable Income Taxes/(Credit) (22,661) 13,018 (4,442) (2,165)
Net Income/(Loss) ($5,089) ($27,566) ($8,369) ($33,168)
Average Common & Equivalent
Shares Outstanding 172,498 172,498 172,948 172,465
Per Common Share (adjusted for stock splits) ($0.03) ($0.16) ($0.05) ($0.19)
Net Income/(Loss) ($5,089) ($27,566) ($8,369) ($33,168)
Cash Dividend Declared 0 0 0 $0.075
Market Price:
High 1 11/16 2 11/16 2 3/4 15 3/4
Low 9/16 1 3/8 1 1/2 1 7/8
Close at End of Period 9/16 1 3/8 2 7/16 2 1/2
Ratios
Net Interest Margin 10.84% 13.06% 12.79% 13.73%
Net Income/(loss) to Average Total Assets (1.99)% (9.81)% (2.51)% (8.85)%
Net Income/(loss) to Average
Stockholders' Equity (23.68)% (107.67)% (28.15)% (92.13)%
Note 1
Please refer to the "Income Taxes" section of Management's Discussion and Analysis for more information concerning the Company's
income taxes and benefits.
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET AVERAGE FOR THE QUARTER 1996
4th Qrtr 3rd Qrtr 2nd Qrtr 1st Qrtr
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
ASSETS
Cash $17,089 $9,056 $4,970 $14,009
Investments 214,651 214,059 216,985 232,120
Finance Receivables 1,162,478 1,179,475 1,200,767 1,202,447
Allowance for Credit Losses (105,125) (93,073) (61,419) (47,772)
Nonrefundable Dealer Reserves (96,445) (78,581) (55,906) (60,061)
Other Assets 335,112 292,036 228,879 224,163
Total Assets $1,527,760 $1,522,972 $1,534,276 $1,564,906
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior Debt, Short Term $484,179 $429,113 $439,523 $477,059
Senior Debt, Long Term 503,688 526,250 503,750 456,250
Subordinated Debt 24,250 26,000 27,750 29,500
Other Liabilities 339,252 322,865 305,944 341,840
Total Stockholders' Equity 176,392 218,744 257,309 260,257
Liabilities and Stockholders' Equity $1,527,760 $1,522,972 $1,534,276 $1,564,906
INCOME STATEMENT
Interest Income 69,032 66,641 68,167 68,049
Interest Expense (16,615) (16,154) (15,983) (16,037)
Net Interest Income 52,417 50,487 52,184 52,012
Provision for Credit Losses (31,842) (124,220) (40,498) (18,611)
Net Interest Income after Credit Losses 20,575 (73,733) 11,686 33,401
Other Income 29,383 27,022 25,569 20,011
Other Expenses (42,029) (38,029) (35,412) (27,827)
Income Before Income Taxes 7,929 (84,740) 1,843 25,585
Applicable Income Taxes 2,448 (32,115) 175 9,077
Net Income/(loss) 5,481 (52,625) 1,668 16,508
Average Common & Equivalent
Shares Outstanding 172,768 173,566 173,937 174,058
Per Common Share (adjusted for stock splits) $0.03 $(0.30) $0.01 $0.09
Net Income/(loss) $5,481 $(52,625) $1,668 $16,508
Cash Dividend $0.075 $0.075 $0.075 $0.075
Market Price:
High 13 1/8 12 1/8 14 1/2 15 1/8
Low 11 10 3/4 11 3/8 11
Close at End of Period 12 1/4 12 1/8 12 3/4 14 1/8
Ratios
Net Interest Margin 15.14% 14.41% 14.80% 14.58%
Net Income/(loss) to Average Total Assets 1.43% (13.75%) 0.44% 4.24%
Net Income/(loss) to Average
Stockholders' Equity 12.36% (95.71%) 2.61% 25.51%
</TABLE>
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
On February 18, 1997, the Company advised KPMG Peat Marwick LLP ("KPMG") that
the Company was discontinuing KPMG's services as the Company's independent
accountants and was engaging Arthur Andersen LLP ("Arthur Andersen") as the
Company's independent accountants. The decision to discontinue KPMG and to
engage Arthur Andersen was approved by the Audit Committee of the Board of
Directors as well as by the Board of Directors as a whole.
On January 29, 1997, the Company announced the discovery of accounting
irregularities with respect to previously reported results for fiscal years 1993
through 1996. Results for 1996 had recently been announced by the Company, but
KPMG had not completed its audit of the 1996 financial statements. In
connection with KPMG's incomplete audit, KPMG advised the Company that
information had come to its attention that the Company's previously announced
unaudited results for 1996 were materially misstated. In addition, KPMG advised
the Company that information had come to its attention that materially impacted
the fairness and reliability of the Company's previously issued 1995 financial
statements and the related audit report. KPMG further informed the Company that
information had come to its attention that, subject to further investigation,
may have caused KPMG to have been unwilling to rely on representations of
management employed at the time of discovery of the accounting irregularities.
As a result of its dismissal, KPMG did not complete such further investigation.
KPMG's reports on the financial statements of the Company for the fiscal years
ended December 31, 1994 and 1995 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
To the knowledge of the present executive management and the Board of Directors
of the Company, in connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31, 1994 and 1995,
and in the subsequent interim period, there were no disagreements with KPMG on
any matters of accounting principles or practices, financial statement
disclosure or auditing scope and procedure which, if not resolved to the
satisfaction of KPMG, would have caused KPMG to make reference to the matter in
its reports.
Arthur Andersen was engaged by legal counsel to the Special Committee of the
Board of Directors in connection with the investigation of the previously
announced accounting irregularities at the Company.
Subsequent to the discontinuation of KPMG's services described above, KPMG
reissued their opinion on the Company's restated 1995 financial statements.
KPMG's report on these financial statements appears in Item 8 of this Report.
PART III
ITEM 10
<TABLE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
<CAPTION>
Principal Occupation for Last Five
Name of Position With Years and
Director Age the Company Directorships
<S> <C> <C> <C>
Dennis H. Chookaszian 54 Director since 1993 Chairman and Chief Executive Officer of
CNA Insurance Companies since 1992.
President and Chief Operating Officer
of CNA from 1990 to 1992. Vice
President and Chief Financial Officer
of CNA prior to 1990. Also a director
of Loews Corporation.
William C. Croft 80 Director since 1989. Chairman of the Board, Clements
National Company (manufacturer of
electrical products). Also a director
of Methode Electronics, Inc.
Clifford R. Johnson 74 Director since 1989 Consultant since 1986, after retirement
as Executive Vice President, Jewel
Companies, Inc. and American Stores
Properties, Inc. (retail food and drug
stores).
Andrew McNally IV 58 Director since 1989 Retired Chairman and Chief Executive
Officer of Rand McNally & Co. (printer
and publishing). Director of Rand
McNally & Co., Hubbell, Inc., Zenith
Electronics Corporation, Morgan Stanley
Funds and Borg Warner Security.
Bruce I. McPhee 53 Director since 1993 Vice Chairman of Kimball Homes, Inc.
since 1993. President and Chief
Executive Officer of Illinois Banc One
Corporation from 1992 to 1993.
President and Chief Executive Officer
of First Illinois Corporation from 1989
to 1992. Also a Director of A.T.
Gerrard & Co.
Fred G. Steingraber 59 Director since 1993 Chief Executive Officer and Director,
A.T. Kearney, Inc. Also a Director of
Maytag Corporation, the Southeastern
Thrift and Bank Fund and Lawter
International.
Philip J. Wicklander 59 Director since 1989 President and Chief Executive Officer
of Wicklander Printing Corporation.
</TABLE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
Position with the Company;
Principal Occupation
Name Age for Last Five Years
<S> <C> <C>
William A. Brandt, Jr. 48 President and Chief Executive Officer of the Company
since February, 1997. Also President and Chief Executive
Officer of Development Specialists, Inc. ("DSI"), a firm
specializing in providing management, consulting and
turnaround assistance to reorganizing businesses, since
1978.
Fred Caruso 43 Acting Chief Operating Officer since 1997. Also a
consultant with DSI since 1982.
Patrick J. O'Malley 38 Acting Principal Financial and Accounting Officer since
1997. Also a consultant with DSI since 1991.
Edward G. Stautzenbach 59 Vice President, Marketing since 1991. Formerly Assistant
Vice President from 1988.
Steven G. Gould 41 Vice President - Operations of the Company since July
1994. Formerly Assistant Vice President/Regional
Director of Company and First Illinois Finance Company
(the Company's predecessor) from 1986.
George R. Carey 57 Vice President - Operations of the Company since June
1995. Formerly Assistant Vice President/Regional
Director of Company from September 1992.
Sheila M. Tilson 47 Vice President - Operations and Assistant Secretary since
April 1995. Assistant Vice President Operations from
January 1987.
John N. Brincat, Jr. 37 Vice President - Operations of the Company since July
1994. Formerly Assistant Vice President/Regional
Director of Company from 1991.
Michael Caul 54 Vice President - Operations of the Company since January,
1997. Formerly Vice President - Operations of General
Acceptance Corporation for two years. Prior thereto,
Assistant Vice President/Regional Director of the Company
since 1988.
David Joseph Peters 39 Vice President - Operations of the Company since March,
1997. Formerly Assistant Vice President/Regional
Director of the Company since 1993, and prior thereto,
branch manager since 1987.
Charles H. Lam 46 Vice President - Operations of the Company since
February, 1996. Formerly Assistant Vice President/
Regional Director of Company from October 1990. Branch
Manager prior thereto.
Gerald M. Mizel<F1> 64 Vice President - Operations since October 1994. Formerly
Executive Vice President Midland Finance.
<FN>
<F1> Mr. Mizel retired in February, 1998.
</FN>
</TABLE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
As a result of administrative problems discovered in connection with the
accounting irregularities discussed in Item 1 "Business - Recent Developments,"
Forms 3, 4 and 5 were not timely filed for certain of the directors and
executive officers of the Company.
Based solely upon a review of Forms 3, 4 and 5, amendments thereto and related
information furnished to the Registrant during 1997, the following executive
officers were delinquent in their Section 16(a) reporting obligations:
Mr. David Peters failed to file a Form 4 regarding 2 transactions;
Mr. Charles H. Lam failed to file a Form 3 and 2 Form 4's regarding 2
transactions;
Mr. John N. Brincat, Jr. failed to file a Form 3;
Mr. Edward G. Stautzenbach failed to file a Form 3;
Mr. Gerald Mizel failed to file a Form 3;
Mr. Steven G. Gould failed to file a Form 3 and a Form 4 regarding 1
transaction; and
Mr. George R. Carey failed to file a Form 3.
Based solely upon a review of Forms 3, 4 and 5, amendments thereto and related
information furnished to the Registrant, during 1997, the following directors
were delinquent in their Section 16(a) reporting obligations:
Mr. Fred G. Steingraber failed to file a Form 3 and 2 Form 4's for 2
transactions;
Mr. Dennis H. Chookaszian failed to file a Form 3;
Mr. Bruce I. McPhee failed to file a Form 3;
Mr. Clifford R. Johnson failed to file a Form 3; and
Mr. Andrew McNally IV failed to file a Form 3.
The Company believes that all such filings have been completed. The Company is
establishing a system to expedite the filing of such forms on a timely basis.
ITEM 11
EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table sets forth information regarding compensation paid by the
Company for services rendered in all capacities to the Company and its
subsidiaries by the Company's Chief Executive Officer and the other four most
highly compensated executive officers (the "Named Executive Officers") for the
1997, 1996 and 1995 fiscal years. Certain executive officers of the Company are
employed by Development Specialists, Inc. and are not included in the table
below. See "Item 13 - Certain Relationships and Related Transactions" for more
information regarding the relationship between the Company and Development
Specialists, Inc.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term
Annual Compensation Compensation
Securities
Name and Principal Underlying All Other
Position Year Base Salary Bonus Options (#) Compensation<F1>
<S> <C> <C> <C> <C> <C>
William A. Brandt, Jr. 1997 $750,000 $ 0 0 $ 0
President and Chief Executive 1996 - - - -
Officer 1995 - - - -
Gerald Mizel 1997 168,000 0 0 9,500
Vice President-Operations 1996 166,000 30,000 10,000 9,000
1995 156,000 30,000 7,500 9,034
Charles H. Lam 1997 130,000 25,000 10,000 7,624
Vice President-Operations 1996 132,000 60,000 15,000 6,923
1995 71,000 40,000 5,250 3,843
Steven G. Gould 1997 132,000 12,500 10,000 7,745
Vice President-Operations 1996 134,000 45,000 20,000 7,396
1995 96,000 30,000 15,000 5,392
John N. Brincat, Jr. 1997 130,000 30,000 10,000 7,625
Vice President-Operations 1996 118,385 40,000 20,000 7,304
1995 90,000 20,000 15,000 5,379
John N. Brincat<F2> 1997 476,666 0 0 9,500
Former President and Chief 1996 430,000 244,760<F3> 0 9,000
Executive Officer 1995 360,000 1,718,121<F3> 0 9,240
<FN>
<F1> Represents the Company matching contribution to the 401K Plan.
<F2> Mr. Brincat resigned as President and Chief Executive Officer of the Company in February, 1997. Thereafter, until
December 1, 1997, he remained employed by the Company.
<F3> A total of $1,000,000 of Mr. Brincat's 1995 and 1996 bonus was repaid by Mr. Brincat to the Company in the first quarter of
1998. See "Employment Agreements."
</FN>
</TABLE>
<TABLE>
OPTIONS GRANTED IN THE LAST FISCAL YEAR
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
% of Total of Stock Appreciation
Options Granted Exercise for Option Term<F2>
Options to Employees in Price per Expiration
Granted Fiscal Year Share<F1><F3> Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
William A. Brandt, Jr. 0 0.00% $ - - $ - $ -
Gerald Mizel . . . . . . . . . . 0 0.00% $ - - $ - $ -
Charles H. Lam . . . . . . . . . 10,000 0.97% $ 3.00 9/19/07 $ 48,867 $ 77,812
Steven G. Gould . . . . . . . . . 10,000 0.97% $ 3.00 9/19/07 $ 48,867 $ 77,812
John N. Brincat, Jr. . . . . . . 10,000 0.97% $ 3.00 9/19/07 $ 48,867 $ 77,812
John N. Brincat . . . . . . . . . 0 0.00% $ - - $ - $ -
<FN>
<F1> Options were granted at the market price of the stock at the date of grant.
<F2> The dollar amounts under these columns are the result of calculations at the 5% and 10% rates required by the SEC and,
therefore are not intended to forecast future appreciation of the stock price.
<F3> Options vest one third amount every six-month period and are not transferable.
</FN>
</TABLE>
As a result of the accounting irregularities discussed under Item 1 "Business -
Recent Developments", the price of the Company's common stock fell
significantly. On May 30, 1997, the Closing price of the Company's common stock
on the New York Stock Exchange was $2 5/8 per share. The Board of Directors and
the Compensation Committee determined that the outstanding options were not
providing the incentive required to motivate and retain the officers and other
key employees during a critical period for the Company. Consequently, the Board
of Directors offered most option holders the ability to cancel their existing
options with exercise prices above $3.00 per share in return for new options at
an exercise price of $3.00 per share. 408 holders of options were given the
opportunity to enter into this arrangement. In addition, options for
approximately 709,000 additional shares were granted at an exercise price of
$3.00 per share to 304 employees on June 17, 1997.
<TABLE>
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR
AND YEAR END OPTION VALUES
<CAPTION>
Value of
Number of Unexercised Unexercised In-the-Money
Options at Year End Options at Year End
Shares
Acquired
on Value Exercisable Unexercisable Exercisable Unexercisable
Exercise Realized
<S> <C> <C> <C> <C> <C> <C>
William A. Brandt, Jr. 0 - - - - -
Gerald Mizel - $ 0 0 70,000 $ 0 $ 0
Charles H. Lam 5,300 $ 36,166 0 25,000 $ 0 $ 0
Steven G. Gould 15,000 $ 79,950 0 30,000 $ 0 $ 0
John N. Brincat, Jr. 0 $ 0 0 120,413 $ 0 $ 0
John N. Brincat 0 $ 0 0 0 $ 0 $ 0
</TABLE>
RETIREMENT PLAN
The Company has a defined benefit Retirement Plan (The "Plan") covering eligible
employees who are at least 21 years of age and have completed at least 1 year of
service. The amount of the Company's annual contribution to the Plan is
determined for the total of all participants covered by such Plan, and the
amount of payment in respect of a specified person is not and cannot readily be
separated or individually calculated by the regular actuaries for the Plan. The
remuneration covered by the Plan ("pension based pay") is the highest average
monthly total compensation for any 5 consecutive years out of the employee's
last 10 years of employment. The normal retirement benefit at age 65 equals 70%
of pension base pay minus 50% of the participant's primary Social Security
benefit. This amount is reduced by 1/35th for each year by which the
participant has fewer than 35 years of participation in the Plan. Benefits are
also available to participants who terminate employment before age 65 after
completing 5 or more years of service or due to total and permanent disability.
The following table sets forth estimated annual benefits upon retirement,
payable on a straight life annuity basis, for employees in the specified pension
base pay (shown on an annual basis) and years of participation classifications,
and is based upon the assumption that the Plan will be continued and that the
employee will continue with the Company until his normal retirement age of 65:
<TABLE>
Number of Years of Participation
<CAPTION>
Remuneration** 5 10 15 20 25 30 35
<S> <C> <C> <C> <C> <C> <C> <C>
$ 100,000 $ 8,930 $ 17,860 $ 26,790 $ 35,720 $ 44,650 $ 53,580 $ 62,510
$ 110,000 $ 9,930 $ 19,860 $ 29,790 $ 39,720 $ 49,650 $ 59,580 $ 69,510
$ 120,000 $ 10,930 $ 21,860 $ 32,790 $ 43,720 $ 54,650 $ 65,580 $ 76,510
$ 130,000 $ 11,930 $ 23,860 $ 35,790 $ 47,720 $ 59,650 $ 71,580 $ 83,510
$ 140,000 $ 12,930 $ 25,860 $ 38,790 $ 51,720 $ 64,650 $ 77,580 $ 90,510
$ 150,000 $ 13,930 $ 27,860 $ 41,790 $ 55,720 $ 69,650 $ 83,580 $ 97,510
$ 160,000 $ 14,930 $ 29,860 $ 44,790 $ 59,720 $ 74,650 $ 89,580 $104,510
$ 170,000 $ 15,930 $ 31,860 $ 47,790 $ 63,720 $ 79,650 $ 95,580 $111,510
$ 180,000 $ 16,930 $ 33,860 $ 50,790 $ 67,720 $ 84,650 $101,580 $118,510
$ 190,000 $ 17,930 $ 35,860 $ 53,790 $ 71,720 $ 89,650 $107,580 $125,510*
$ 200,000 $ 18,930 $ 37,860 $ 56,790 $ 75,720 $ 94,650 $113,580 $132,510*
* The annual retirement benefits are subject to maximum limitations ($125,000 at December 31, 1997) under the Internal Revenue
Code.
** The annual limit on remuneration for purposes of pension plan benefit calculation was $160,000 at December 31, 1997 under the
Internal Revenue Code.
</TABLE>
The credited years of participation for the individuals named in the above
compensation table are as follows: Gerald Mizel, 3 year; Charles H. Lam, 10
years; Steven G. Gould, 13 years; John N. Brincat, Jr., 12 years; and John N.
Brincat, 15 years. Mr. Brandt does not participate in the Plan.
DIRECTOR COMPENSATION
The compensation of Directors is based upon standard fee arrangements for the
Company which provide for non-management directors' fees consisting of an annual
retainer of $3,000 payable quarterly, plus an attendance fee of $200 for each
board and committee meeting of the Company attended.
The Company has a Deferred Compensation Plan for Directors ("Deferred
Compensation Plan"). Pursuant to the provisions of the Deferred Compensation
Plan, any director of the Company may elect to defer all or any portion of the
compensation due him as a director. Interest shall be computed on and credited
to any deferred compensation at the prevailing market rate for 6 month
Individual Retirement Account Certificates of Deposit. The rate is adjusted on
January 1 and July 1 each year. Payments of the amount of deferred compensation
and interest earned thereon shall commence as of the first day in May after a
director ceases to be a director of the Company. Payment may be made in a lump
sum or in any number of installments (maximum of 5 annually), equal or
otherwise, as the Executive Committee shall determine. All directors elected to
defer their compensation beginning in 1997.
EMPLOYMENT AGREEMENTS
In February, 1997, the Company entered into an employment agreement with
Mr. Brandt, President and Chief Executive Officer of Development Specialists,
Inc., employing Mr. Brandt as President and Chief Executive Officer of the
Company. The annual salary under the employment contract is $750,000. The
Company may terminate the employment agreement with 90 days notice of
termination or immediately with continuation of compensation for 90 days.
Mr. Brandt may terminate the employment agreement with 30 days notice. See
"Item 13 - Certain Relationships and Related Transactions" for more information
regarding the relationship between the Company and Development Specialists, Inc.
Mr. Brincat, the Company's former President and Chief Executive Officer,
resigned from both positions in February, 1997. Mr. Brincat also resigned as an
employee and director of Mercury effective as of December 1, 1997. Pursuant to
a separation agreement which was consummated in the first quarter of 1998,
Mr. Brincat returned $1 million of bonus compensation which he previously
received and waived rights to certain other benefits.
Prior to Mr. Brincat's resignation, Mr. Brincat had entered into a five year
employment contract in January 1994, with a term expiring on December 31, 1998.
The following were the material terms of Mr. Brincat's employment contract. Mr.
Brincat's employment agreement provided a guaranteed annual base salary as
follows:
o 1994 $300,000 o 1996 $430,000 o 1998 $600,000
o 1995 $360,000 o 1997 $520,000
In addition, Mr. Brincat was eligible for an annual incentive bonus equal to 1%
of net after tax earnings (subject to certain adjustments) ("Net Earnings") of
the Company and was eligible for an additional bonus based upon annual increases
in Net Earnings per share only after earnings exceed 20% over the prior year.
The additional bonus was determined as follows:
o Net Earnings per share increases of 0 to 19.99%, no additional bonus was
paid.
o Net Earnings per share increase of 20% to 29.99%, additional bonus was equal
to 2.5% of the amount of increase from the prior year.
o Net Earnings per share increase of 30% to 39.99%, additional bonus was equal
to 3.0% of the amount of increase from the prior year.
o Net Earnings per share increase of 40% or more, additional bonus was equal to
3.5% of the amount of increase from the prior year.
In addition, at the time the employment contract was entered into Mr. Brincat
was issued a stock option grant under the 1989 Stock Option and Incentive
Compensation Plan of 3,750,000 shares at a price of $11.58 per share, the fair
market value on the date of the grant. The agreement provided that the option
would vest equally during the five year term of the contract and was exercisable
in increments of 750,000 shares annually only if Net Earnings per share each
year exceeded the prior year's Net Earnings per share by 20%. If Net Earnings
per share did not increase by 20%, the agreement provided that Mr. Brincat was
to forfeit that year's options and have no further right or claim to that year's
options. In the event of a sale or merger of the Company, all options granted
to Mr. Brincat were to become immediately vested and exercisable.
The agreement contained confidentiality and noncompetition provisions. In the
event of the death of Mr. Brincat during the term of the employment agreement,
the Company would have made, until the end of the term of employment thereunder,
payments at a rate equal to the annual rate of guaranteed base salary in effect
on the date of death. In addition, the Company would also have paid pro rata
bonus earned, if any. The payments to be made would not have been reduced by
reason of any insurance proceeds payable directly to the Employee's
beneficiaries or estate pursuant to insurance carried or provided by the
Company, and would have been made to such beneficiary as the Employee designated
for that purpose in written notice given prior to his death, or if the Employee
did not so designate, then to the personal representative of his Estate.
According to the employment contract, the Company could have terminated the
active employment of Mr. Brincat if, in the reasonable judgment of the Board of
Directors of the Company, he became unable to satisfactorily perform his duties
and responsibilities thereunder during the term of his employment because of
mental or physical disability. Upon such termination, Mr. Brincat would have
been relieved of all further obligations. In the event of such termination, the
Company would continue to pay to Mr. Brincat, until the end of the term of his
employment hereunder, a salary at a rate equal to the annual rate of the
guaranteed base salary in effect on the date of such termination.
Notwithstanding the foregoing, the amounts so payable would be reduced by any
amounts payable to Mr. Brincat during the term of his employment thereunder
pursuant to any disability benefit or wage continuation plan of the Company in
effect.
The Company could also terminate the agreement in the event of fraud,
defalcation, or other similar dishonesty of Mr. Brincat involving the
operations, funds or other assets of the Company, or if Mr. Brincat is convicted
of a crime involving moral turpitude or Mr. Brincat breached the terms of the
agreement in any material respect. In such event, Mr. Brincat would not have
been entitled to any further compensation or benefits under the agreement.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based on information within the Company's possession including Schedules 13D and
13G filed with the Securities and Exchange Commission, as of December 31, 1997,
there were not any persons or entities known by the Company to be the beneficial
owner of more than five percent of the Company's voting securities.
The following table sets forth, with respect to the Company's Common Stock,
shares believed by the Company to be beneficially owned as of March 1, 1998 by
(i) all directors, (ii) the executive officers named in the Summary Compensation
Table, and (iii) the directors and all executive officers as a group. The
information is based on data within the Company's possession.
<TABLE>
<CAPTION>
Beneficial Shares Owned Unexercised
Before Exercisable Options Exercisable Percent
Stock Options<F1> within 60 days Total of Class
<S> <C> <C> <C> <C>
DIRECTORS
Dennis H. Chookaszian . . 1,500 20,000 21,500 *
William C. Croft . . . . 660,363 20,000 680,363 *
Clifford R. Johnson<F2> . 573,037 31,602 604,639 *
Andrew McNally IV . . . . 377,162 20,000 397,162 *
Bruce I. McPhee . . . . . 303,259 20,000 323,259 *
Fred G. Steingraber . . . 6,000 20,000 26,000 *
Philip J. Wicklander<F3> 217,790 20,000 237,790 *
OTHER EXECUTIVE OFFICERS:
William A. Brandt, Jr. . 0 0 0 0
Gerald Mizel<F4> . . . . 3,550 23,333 26,883 *
Charles H. Lam . . . . . 0 8,333 8,333 *
Steven G. Gould . . . . . 0 10,000 10,000 *
John N. Brincat, Jr. . . 7,933 40,138 48,071 *
John N. Brincati<F5> . . 1,505,488 0 1,505,488 *
Directors and Executive
Officers as a Group<F6> 3,663,966 317,082 3,981,048 2.3%
*Less than one percent.
<FN>
<F1> Nature of beneficial ownership of securities is direct unless otherwise indicated by footnote. Beneficial ownership as
shown in the table arises from sole voting power and sole investment power unless otherwise indicated by footnote.
<F2> Includes 216,984 shares held by Mr. Johnson's wife, as to which Mr. Johnson disclaims beneficial interest.
<F3> Does not include 1,500 shares held by minor children.
<F4> Includes 3,550 shares held by Mr. Mizel's wife.
<F5> John N. Brincat resigned as President and Chief Executive Officer of the Company in February, 1997.
<F6> Includes shares held by John N. Brincat, who resigned as President and Chief Executive Officer of the Company in February
1997 and as director effective December 1, 1997.
</FN>
</TABLE>
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Item 11-Employment Agreements."
The Consulting firm of Development Specialists, Inc. ("DSI"), owned by William
A. Brandt, Jr., was engaged to fill certain positions of executive management
including Chief Operating Officer, Chief Accounting Officer and Chief Credit
Officer. In addition, DSI staff members have provided additional support in the
accounting and finance area. These services are being provided based upon time
spent performing such functions at the individuals' customary hourly billing
rates. For the year ended December 31, 1997, the Company paid $2,400,000 of
fees relating to services rendered by DSI.
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Filed in this Annual Report on Form 10-K
Report of Arthur Andersen LLP
Report of KPMG Peat Marwick LLP
Consolidated Balance Sheets as of December 31, 1997, and December 31, 1996.
Consolidated Statements of Income for the years ended December 31, 1997, 1996,
and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995.
Consolidated Statement of Cash Flows for the years ended December 31, 1997,
1996, and 1995.
Notes to Consolidated Financial Statements for the years ended December 31,
1997, 1996, and 1995.
Quarterly Financial Data (unaudited)
(a)(2) Financial Statement Schedules
None
(a)(3) Exhibits
3A Certificate of Incorporation, as amended, incorporated herein by reference
to Exhibit Number 3A to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
3B Bylaws, incorporated herein by reference to Exhibit Number 3B to the
Company's Form 10 filed February 1, 1989.
10A 1989 Mercury Finance Company Stock Option Plan, incorporated herein by
reference to Exhibit Number 10A to the Company's Form 10 filed February 1,
1989.
10B Mercury Finance Company Employee Stock Purchase Plan, incorporated herein
by reference to Exhibit Number 10B to the Company's Form 10 filed February
1, 1989.
10C Mercury Finance Company Retirement Plan and Retirement Trust, incorporated
herein by reference to Exhibit Number 10C to the Company's Form 10 filed
February 1, 1989.
10D Mercury Finance Company Deferred Compensation Plan for Directors,
incorporated herein by reference to Exhibit Number 10D to the Company's
Form 10 filed February 1, 1989.
10E Mercury Finance Company Dividend Reinvestment Plan, incorporated herein by
reference to Exhibit Number 10E to the Company's Form 10 filed February 1,
1989.
10F Form of Mercury Finance Company Commercial Paper Note, incorporated herein
by reference to Exhibit Number 10T to the Company's Form 10 filed February
1, 1989.
10G Senior Subordinated Note Agreement Series C Dated as of December 1, 1989
Between Mercury Finance Company and:
- Cigna Property and Casualty Insurance Company
- Connecticut General Life Insurance Company
- Life Insurance Company of North America
- Phoenix Mutual Life Insurance Company,
incorporated herein by reference to Exhibit Number AM to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
10H Senior Subordinated Note Agreement Series D Dated as of May 15, 1990
Between Mercury Finance Company and:
- Cigna Property and Casualty Company
- Connecticut General Life Insurance Company,
incorporated herein by reference to Exhibit Number AF to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
10I Issuing and Paying Agent Agreement between Security Pacific National Trust
Company (New York) and Mercury Finance Company dated August 1, 1990,
incorporated herein by reference to Exhibit 10I to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
10J Commercial Paper Dealer Agreement dated as of March 25, 1991, between
Mercury Finance Company and Paine Webber Inc., as successor to Kidder,
Peabody & Co.
10K Loan Agreement Dated October 30, 1991 Between Mercury Finance Company and
Allomon Funding Corporation (Uncommitted Credit Facility), incorporated
herein by reference to Exhibit Number AJ to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
10L Senior Note Agreement Dated March 1, 1992 Between Mercury Finance Company
and Principal Mutual Life Insurance Company, incorporated herein by
reference to Exhibit Number 10AK to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1992.
10M Senior Note Agreement Dated May 1, 1992 Between Mercury Finance Company
and:
- Allstate Life Insurance Company
- State Mutual Life Assurance Company of America,
incorporated herein by reference to Exhibit Number 10AL to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10N Senior Note Agreement Dated March 1, 1993 Between Mercury Finance Company
and Principal Mutual Life Insurance Company, incorporated herein by
reference to Exhibit Number 10AS to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1993.
10O Purchase Agreement Dated April 1, 1993 Between Mercury Finance Company and
Independent Life Insurance Company, incorporated herein by reference to
Exhibit Number 10AR to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
10P Senior Note Agreement Dated July 1, 1993 Between Mercury Finance Company
and Pacific Mutual Life Insurance Company, incorporated herein by reference
to Exhibit Number 10AT to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
10Q Senior Note Agreement Dated December 1, 1993 Between Mercury Finance
Company and:
- American United Life Insurance Company
- MONY Capital Management
- Pacific Mutual Life Insurance Company
- Principal Mutual Life Insurance Company,
incorporated herein by reference to Exhibit Number 10AU to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10R Employment Agreement Dated January 1, 1994 Between Mercury Finance Company
and John N. Brincat, incorporated herein by reference to Exhibit Number
10AY to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10S Letter Agreement dated March 23, 1994, between NationsBanc Capital Markets,
Inc. and Mercury Finance Company, incorporated hereby by reference to
Exhibit 10S to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10T Purchase Agreement Dated September 30, 1994 Between Mercury Finance Company
and Midland Finance Co., incorporated herein by reference to Exhibit Number
10AX to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10U Dealer Agreement dated as of October 24, 1994 between BA Securities, Inc.
and Mercury Finance Company, incorporated herein by reference to Exhibit
10U to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10V Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
Company and Norddeutsche Landesbank Girozentrale, incorporated herein by
reference to Exhibit Number 10AZ to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1994.
10W Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
Company and The Long-Term Credit Bank of Japan, Ltd., incorporated herein
by reference to Exhibit Number 10BA to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
10X Senior Note Agreement Dated June 29, 1995 Between Mercury Finance Company
and:
- Allstate Life Insurance Company
- Allstate Insurance Company
- Metropolitan Life Insurance Company
- Principal Mutual Life Insurance Company
- Pacific Mutual Life Insurance Company
- PM Group Life Insurance Company
- TMG Life Insurance Company
- Lincoln-Security Life Insurance Company
- Security-Connecticut Life Insurance Company
- Oxford Life Insurance Company
- London Life International Reinsurance Corporation
- American States Life Insurance Company
- Phoenix Home Life Mutual Insurance Company
- Phoenix American Life Insurance Company
- American Guardian Life Assurance Company,
incorporated herein by reference to Exhibit Number 10BB to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
10Y Senior Note Agreement Date October 3, 1995 Between Mercury Finance Company
and Bank of America Illinois, incorporated herein by reference to Exhibit
Number 10BC to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
10Z Purchase Agreement Dated October 20, 1995 Between Mercury Finance Company
and ITT Corporation, incorporated herein by reference to Exhibit Number
10BE to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
10AA Senior Note Agreement, dated as of April 5, 1996, as amended, among Mercury
Finance Company and the noteholders party thereto, incorporated herein by
reference to Exhibit 10AA to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
10AB Demand Promissory Note dated January 29, 1997, made by Mercury Finance
Company in favor of Bank of America Illinois, incorporated herein by
reference to Exhibit 10AB to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
10AC Employment Agreement between Mercury Finance Company and William A. Brandt,
Jr. dated February 1, 1997, incorporated herein by reference to Exhibit
10AC to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10AD Form of Limited Waiver Agreement entered into between Mercury Finance
Company and senior noteholders on or about February 7, 1997, incorporated
herein by reference to Exhibit 99.2 to the Company's Current Report on Form
8-K dated March 13, 1997.
10AE Limited Waiver Agreement entered into between Mercury Finance Company and
Paine Webber Inc. dated February 7, 1997 under Commercial Paper Dealer
Agreement, incorporated herein by reference to Exhibit 99.4 to the
Company's Current Report on Form 8-K dated March 13, 1997.
10AF Loan and Security Agreement (the "Loan Agreement"), dated as of February 7,
1997 between Mercury Finance Company and all of its subsidiaries, other
than its insurance company subsidiaries and BankAmerica Business Credit,
Inc., incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated February 13, 1997.
10AG First Amendment to Loan Agreement dated February 14, 1997, between Mercury
Finance Company and BankAmerica Business Credit, Inc., incorporated herein
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
dated March 11, 1997.
10AH Rights Agreement dated as of February 27, 1997 between Mercury Finance
Company and Harris Trust and Savings Bank as Rights Agent, which includes
as Exhibit A the Forms of Rights Certificates, and as Exhibit B the Form of
Rights Summary, incorporated herein by reference to Exhibit 1 to the
Company's Form 8-A dated March 18, 1997.
10AI Form of Second Limited Waiver Agreement entered into between Mercury
Finance Company and senior noteholders on or about March 10, 1997,
incorporated herein by reference to Exhibit 99.3 to the Company's Current
Report on Form 8-K dated March 13, 1997.
10AJ Limited Waiver Agreement entered into between Mercury Finance Company and
Paine Webber Inc. dated March 10, 1997 under Commercial Paper Dealer
Agreement, incorporated herein by reference to Exhibit 99.5 to the
Company's Current Report on Form 8-K dated March 13, 1997.
10AK Second Amendment to Loan Agreement dated March 12, 1997, between Mercury
Finance Company and BankAmerica Business Credit, Inc., incorporated herein
by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K
dated March 13, 1997.
10AL Form of Limited Waiver Agreement entered into between Mercury Finance
Company and Credit Suisse First Boston Corporation, holder of Mercury
commercial paper dated on or about February 7, 1997, incorporated herein by
reference to Exhibit 99.6 to the Company's Current Report on Form 8-K dated
March 13, 1997.
10AM Limited Waiver Agreement entered into between Mercury Finance Company and
Credit Suisse First Boston Corporation, holder of Mercury commercial paper
dated as of March 10, 1997, incorporated herein by reference to Exhibit
99.7 to the Company's Current Report on Form 8-K dated March 13, 1997.
10AN Limited Waiver Agreement entered into between Mercury Finance Company and
Credit Suisse First Boston Corporation, holder of Mercury Subordinated
Notes dated as of March 10, 1997, incorporated herein by reference to
Exhibit 99.8 to the Company's Current Report on Form 8-K dated March 13,
1997.
10AO Letter Agreement of Mercury Finance Company to the Paying Agent and Holders
of Commercial Paper of Mercury Finance Company dated March 12, 1997,
incorporated herein by reference to Exhibit 99.9 to the Company's Current
Report on Form 8-K dated March 13, 1997.
10AP Stock Purchase Agreement between Mercury Finance Company and Frontier
Insurance Group, Inc. dated March 28, 1997, incorporated herein by
reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated
March 28, 1997.
10AQ Forbearance Agreement dated as of July 11, 1997, between Mercury Finance
Company and the persons listed on the signature pages thereto, incorporated
herein by reference to Exhibit 99.1 to the Company's Current Report on Form
8-K dated July 16, 1997.
10AR Forbearance Agreement dated as of July 11, 1997, between Mercury Finance
Company and the persons listed on the signature pages thereto, incorporated
herein by reference to Exhibit 99.2 to the Company's Current Report on Form
8-K dated July 16, 1997.
10AS Forbearance and Third Limited Waiver Agreement dated as of July 11, 1997,
between Mercury Finance Company and Credit Suisse First Boston Management
Corporation, incorporated herein by reference to Exhibit 99.3 to the
Company's Current Report on Form 8-K dated July 16, 1997.
10AT Third Amendment to Loan and Security Agreement dated as of July 9, 1997,
among certain financial institutions, BankAmerica Business Credit, Inc.,
Mercury Finance Company, and certain other borrowers, incorporated herein
by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K
dated July 16, 1997.
10AU First Amendment to Forbearance Agreement dated as of November 6, 1997
between the Company and certain lenders, incorporated herein by reference
to Exhibit 99.3 to the Company's Current Report on Form 8-K dated November
6, 1997.
10AV Fourth Limited Waiver Agreement dated as of November 6, 1997 between the
Company and certain lenders, incorporated herein by reference to Exhibit
99.4 to the Company's Current Report on Form 8-K dated November 6, 1997.
10AW Fourth Limited Waiver Agreement dated as of November 6, 1997 between the
Company and Credit Suisse First Boston Management, incorporated herein by
reference to Exhibit 99.5 to the Company's Current Report on Form 8-K dated
November 6, 1997.
10AX Fourth Limited Waiver Agreement dated as of November 6, 1997 between the
Company and Painewebber, Inc., incorporated herein by reference to Exhibit
99.6 to the Company's Current Report on Form 8-K dated November 6, 1997.
10AY Forbearance and Fourth Limited Waiver Agreement dated as of November 6,
1997 between the Company and Credit Suisse First Boston Management
Corporation, incorporated herein by reference to Exhibit 99.7 to the
Company's Current Report on Form 8-K dated November 6, 1997.
10AZ Separation Agreement between the Company and John N. Brincat dated
December 30, 1997, incorporated herein by reference to Exhibit 10AZ to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
10BA Retention and Letter of Engagement between the Company and Development
Specialists, Inc. dated February 5, 1997.
11 Computation of Net Income Per Share
12 Ratio of Earnings to Fixed Charges
16 Letter dated February 25, 1997, from KPMG Peat Marwick LLP to the
Securities and Exchange Commission, incorporated herein by reference to
Exhibit 16 to the Company's Current Report on Form 8-K dated February 25,
1997.
21 Subsidiaries of Mercury Finance Company
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the fourth
quarter of 1997:
(i) Item 5 and Item 7 8-K dated November 7, 1997. Mercury's
Consolidated Financial Statements as of December 31, 1996, 1995 (As
Restated), and 1994 were filed as Exhibit 99.1 thereto;
(ii) Item 5 and Item 7 8-K dated December 8, 1997; and
(iii) Item 5 and Item 7 8-K dated December 18, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Mercury Finance Company
(Registrant)
Date: March 27, 1998
By: /s/ William A. Brandt, Jr.
William A. Brandt, Jr.,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ William A. Brandt, Jr. March 27, 1998
William A. Brandt, Jr.
President and Chief Executive Officer
/s/ Patrick J. O'Malley March 27, 1998
Patrick J. O'Malley
Principal Financial and Accounting Officer
/s/ Dennis H. Chookaszian Director March 27, 1998
Dennis H. Chookaszian
/s/ William C. Croft Director March 27, 1998
William C. Croft
/s/ Clifford R. Johnson Director March 27, 1998
Clifford R. Johnson
/s/ Andrew McNally IV Director March 27, 1998
Andrew McNally IV
/s/ Bruce I. McPhee Director March 27, 1998
Bruce I. McPhee
/s/ Fred G. Steingraber Director March 10, 1998
Fred G. Steingraber
/s/ Philip J. Wicklander Director March 27, 1998
Philip J. Wicklander
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3A Certificate of Incorporation, as amended, incorporated herein by reference
to Exhibit 3A to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
3B Bylaws, incorporated herein by reference to Exhibit Number 3B to the
Company's Form 10 filed February 1, 1989.
10A 1989 Mercury Finance Company Stock Option Plan, incorporated herein by
reference to Exhibit Number 10A to the Company's Form 10 filed February 1,
1989.
10B Mercury Finance Company Employee Stock Purchase Plan, incorporated herein
by reference to Exhibit Number 10B to the Company's Form 10 filed February
1, 1989.
10C Mercury Finance Company Retirement Plan and Retirement Trust, incorporated
herein by reference to Exhibit Number 10C to the Company's Form 10 filed
February 1, 1989.
10D Mercury Finance Company Deferred Compensation Plan for Directors,
incorporated herein by reference to Exhibit Number 10D to the Company's
Form 10 filed February 1, 1989.
10E Mercury Finance Company Dividend Reinvestment Plan, incorporated herein by
reference to Exhibit Number 10E to the Company's Form 10 filed February 1,
1989.
10F Form of Mercury Finance Company Commercial Paper Note, incorporated herein
by reference to Exhibit Number 10T to the Company's Form 10 filed February
1, 1989.
10G Senior Subordinated Note Agreement Series C Dated as of December 1, 1989
Between Mercury Finance Company and:
- Cigna Property and Casualty Insurance Company
- Connecticut General Life Insurance Company
- Life Insurance Company of North America
- Phoenix Mutual Life Insurance Company,
incorporated herein by reference to Exhibit Number AM to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
10H Senior Subordinated Note Agreement Series D Dated as of May 15, 1990
Between Mercury Finance Company and:
- Cigna Property and Casualty Company
- Connecticut General Life Insurance Company,
incorporated herein by reference to Exhibit Number AF to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
10I Issuing and Paying Agent Agreement between Security Pacific National Trust
Company (New York) and Mercury Finance Company dated August 1, 1990,
incorporated herein by reference to Exhibit 10I to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
10J Commercial Paper Dealer Agreement dated as of March 25, 1991, between
Mercury Finance Company and Paine Webber Inc., as successor to Kidder,
Peabody & Co.
10K Loan Agreement Dated October 30, 1991 Between Mercury Finance Company and
Allomon Funding Corporation (Uncommitted Credit Facility), incorporated
herein by reference to Exhibit Number AJ to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
10L Senior Note Agreement Dated March 1, 1992 Between Mercury Finance Company
and Principal Mutual Life Insurance Company, incorporated herein by
reference to Exhibit Number 10AK to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1992.
10M Senior Note Agreement Dated May 1, 1992 Between Mercury Finance Company
and:
- Allstate Life Insurance Company
- State Mutual Life Assurance Company of America,
incorporated herein by reference to Exhibit Number 10AL to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10N Senior Note Agreement Dated March 1, 1993 Between Mercury Finance Company
and Principal Mutual Life Insurance Company, incorporated herein by
reference to Exhibit Number 10AS to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1993.
10O Purchase Agreement Dated April 1, 1993 Between Mercury Finance Company and
Independent Life Insurance Company, incorporated herein by reference to
Exhibit Number 10AR to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
10P Senior Note Agreement Dated July 1, 1993 Between Mercury Finance Company
and Pacific Mutual Life Insurance Company, incorporated herein by reference
to Exhibit Number 10AT to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
10Q Senior Note Agreement Dated December 1, 1993 Between Mercury Finance
Company and:
- American United Life Insurance Company
- MONY Capital Management
- Pacific Mutual Life Insurance Company
- Principal Mutual Life Insurance Company,
incorporated herein by reference to Exhibit Number 10AU to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10R Employment Agreement Dated January 1, 1994 Between Mercury Finance Company
and John N. Brincat, incorporated herein by reference to Exhibit Number
10AY to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10S Letter Agreement dated March 23, 1994, between NationsBanc Capital Markets,
Inc. and Mercury Finance Company, incorporated herein by reference to
Exhibit 10S to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10T Purchase Agreement Dated September 30, 1994 Between Mercury Finance Company
and Midland Finance Co., incorporated herein by reference to Exhibit Number
10AX to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10U Dealer Agreement dated as of October 24, 1994 between BA Securities, Inc.
and Mercury Finance Company, incorporated herein by reference to Exhibit
10U to the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
10V Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
Company and Norddeutsche Landesbank Girozentrale, incorporated herein by
reference to Exhibit Number 10AZ to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1994.
10W Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
Company and The Long-Term Credit Bank of Japan, Ltd., incorporated herein
by reference to Exhibit Number 10BA to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
10X Senior Note Agreement Dated June 29, 1995 Between Mercury Finance Company
and:
- Allstate Life Insurance Company
- Allstate Insurance Company
- Metropolitan Life Insurance Company
- Principal Mutual Life Insurance Company
- Pacific Mutual Life Insurance Company
- PM Group Life Insurance Company
- TMG Life Insurance Company
- Lincoln-Security Life Insurance Company
- Security-Connecticut Life Insurance Company
- Oxford Life Insurance Company
- London Life International Reinsurance Corporation
- American States Life Insurance Company
- Phoenix Home Life Mutual Insurance Company
- Phoenix American Life Insurance Company
- American Guardian Life Assurance Company,
incorporated herein by reference to Exhibit Number 10BB to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
10Y Senior Note Agreement Date October 3, 1995 Between Mercury Finance Company
and Bank of America Illinois, incorporated herein by reference to Exhibit
Number 10BC to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
10Z Purchase Agreement Dated October 20, 1995 Between Mercury Finance Company
and ITT Corporation, incorporated herein by reference to Exhibit Number
10BE to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
10AA Senior Note Agreement, dated as of April 5, 1996, as amended, among Mercury
Finance Company and the noteholders party thereto, incorporated herein by
reference to Exhibit 10AA to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
10AB Demand Promissory Note dated January 29, 1997, made by Mercury Finance
Company in favor of Bank of America Illinois, incorporated herein by
reference to Exhibit 10AB to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
10AC Employment Agreement between Mercury Finance Company and William A. Brandt,
Jr. dated February 1, 1997, incorporated herein by reference to Exhibit
10AC to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10AD Form of Limited Waiver Agreement entered into between Mercury Finance
Company and senior noteholders on or about February 7, 1997, incorporated
herein by reference to Exhibit 99.2 to the Company's Current Report on Form
8-K dated March 13, 1997.
10AE Limited Waiver Agreement entered into between Mercury Finance Company and
Paine Webber Inc. dated February 7, 1997 under Commercial Paper Dealer
Agreement, incorporated herein by reference to Exhibit 99.4 to the
Company's Current Report on Form 8-K dated March 13, 1997.
10AF Loan and Security Agreement (the "Loan Agreement"), dated as of February 7,
1997 between Mercury Finance Company and all of its subsidiaries, other
than its insurance company subsidiaries and BankAmerica Business Credit,
Inc., incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated February 13, 1997.
10AG First Amendment to Loan Agreement dated February 14, 1997, between Mercury
Finance Company and BankAmerica Business Credit, Inc., incorporated herein
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
dated March 11, 1997.
10AH Rights Agreement dated as of February 27, 1997 between Mercury Finance
Company and Harris Trust and Savings Bank as Rights Agent, which includes
as Exhibit A the Forms of Rights Certificates, and as Exhibit B the Form of
Rights Summary, incorporated herein by reference to Exhibit 1 to the
Company's Form 8-A dated March 18, 1997.
10AI Form of Second Limited Waiver Agreement entered into between Mercury
Finance Company and senior noteholders on or about March 10, 1997,
incorporated herein by reference to Exhibit 99.3 to the Company's Current
Report on Form 8-K dated March 13, 1997.
10AJ Limited Waiver Agreement entered into between Mercury Finance Company and
Paine Webber Inc. dated March 10, 1997 under Commercial Paper Dealer
Agreement, incorporated herein by reference to Exhibit 99.5 to the
Company's Current Report on Form 8-K dated March 13, 1997.
10AK Second Amendment to Loan Agreement dated March 12, 1997, between Mercury
Finance Company and BankAmerica Business Credit, Inc., incorporated herein
by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K
dated March 13, 1997.
10AL Form of Limited Waiver Agreement entered into between Mercury Finance
Company and Credit Suisse First Boston Corporation, holder of Mercury
commercial paper dated on or about February 7, 1997, incorporated herein by
reference to Exhibit 99.6 to the Company's Current Report on Form 8-K dated
March 13, 1997.
10AM Limited Waiver Agreement entered into between Mercury Finance Company and
Credit Suisse First Boston Corporation, holder of Mercury commercial paper
dated as of March 10, 1997, incorporated herein by reference to Exhibit
99.7 to the Company's Current Report on Form 8-K dated March 13, 1997.
10AN Limited Waiver Agreement entered into between Mercury Finance Company and
Credit Suisse First Boston Corporation, holder of Mercury Subordinated
Notes dated as of March 10, 1997, incorporated herein by reference to
Exhibit 99.8 to the Company's Current Report on Form 8-K dated March 13,
1997.
10AO Letter Agreement of Mercury Finance Company to the Paying Agent and Holders
of Commercial Paper of Mercury Finance Company dated March 12, 1997,
incorporated herein by reference to Exhibit 99.9 to the Company's Current
Report on Form 8-K dated March 13, 1997.
10AP Stock Purchase Agreement between Mercury Finance Company and Frontier
Insurance Group, Inc. dated March 28, 1997, incorporated herein by
reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated
March 28, 1997.
10AQ Forbearance Agreement dated as of July 11, 1997, between Mercury Finance
Company and the persons listed on the signature pages thereto, incorporated
herein by reference to Exhibit 99.1 to the Company's Current Report on Form
8-K dated July 16, 1997.
10AR Forbearance Agreement dated as of July 11, 1997, between Mercury Finance
Company and the persons listed on the signature pages thereto, incorporated
herein by reference to Exhibit 99.2 to the Company's Current Report on Form
8-K dated July 16, 1997.
10AS Forbearance and Third Limited Waiver Agreement dated as of July 11, 1997,
between Mercury Finance Company and Credit Suisse First Boston Management
Corporation, incorporated herein by reference to Exhibit 99.3 to the
Company's Current Report on Form 8-K dated July 16, 1997.
10AT Third Amendment to Loan and Security Agreement dated as of July 9, 1997,
among certain financial institutions, BankAmerica Business Credit, Inc.,
Mercury Finance Company, and certain other borrowers, incorporated herein
by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K
dated July 16, 1997.
10AU First Amendment to Forbearance Agreement dated as of November 6, 1997
between the Company and certain lenders, incorporated herein by reference
to Exhibit 99.3 to the Company's Current Report on Form 8-K dated November
6, 1997.
10AV Fourth Limited Waiver Agreement dated as of November 6, 1997 between the
Company and certain lenders, incorporated herein by reference to Exhibit
99.4 to the Company's Current Report on Form 8-K dated November 6, 1997.
10AW Fourth Limited Waiver Agreement dated as of November 6, 1997 between the
Company and Credit Suisse First Boston Management, incorporated herein by
reference to Exhibit 99.5 to the Company's Current Report on Form 8-K dated
November 6, 1997.
10AX Fourth Limited Waiver Agreement dated as of November 6, 1997 between the
Company and Painewebber, Inc., incorporated herein by reference to Exhibit
99.6 to the Company's Current Report on Form 8-K dated November 6, 1997.
10AY Forbearance and Fourth Limited Waiver Agreement dated as of November 6,
1997 between the Company and Credit Suisse First Boston Management
Corporation, incorporated herein by reference to Exhibit 99.7 to the
Company's Current Report on Form 8-K dated November 6, 1997.
10AZ Separation Agreement between the Company and John N. Brincat dated
December 30, 1997, incorporated herein by reference to Exhibit 10AZ to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
10BA Retention and Letter of Engagement between the Company and Development
Specialists, Inc. dated February 5, 1997.
11 Computation of Net Income Per Share
12 Ratio of Earnings to Fixed Charges
16 Letter dated February 25, 1997, from KPMG Peat Marwick LLP to the
Securities and Exchange Commission, incorporated herein by reference to
Exhibit 16 to the Company's Current Report on Form 8-K dated February 25,
1997.
21 Subsidiaries of Mercury Finance Company
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
05 February 1997
Mercury Finance Company
Suite 340
100 Field Drive
Lake Forest, Illinois 60045
Re: Development Specialists, Inc. ("DSI")
Retention and Letter of Engagement
Gentlemen:
Please accept this letter as our firm's formal written proposal to provide
consulting services to Mercury Finance Company and its wholly-owned subsidiaries
(collectively, "Mercury") in connection with its financial restructuring.
In general, members of DSI will provide to Mercury those services which are
normally the function of its Chief Financial Officer, which include the
following:
1. To review Mercury's overall business plan designed to restore the
confidence of Mercury's lenders, creditors, and ownership. Our role
in this review will be to "flesh-out" its present structure, augment
it where necessary, and proceed to facilitate its implementation in
the context of the overall restructuring.
2. In connection with our review and implementation of the business plan,
we will review all current operating and overhead expenses to
determine if such outlays are reasonable and necessary under the
circumstances, and to insure that Mercury's financial expenditures are
as conservative as possible in the context of any pending
restructuring.
3. Members of our firm will review and analyze all real and personal
property leases, this with respect to continuing endeavors focussed on
the streamlining of the business's operations, its costs, and its
competitiveness in the marketplace.
4. We will assist Mercury's CEO as requested in his negotiations with
Mercury's lenders.
5. We will monitor and control Mercury's accounting department, including
cash management, financial reporting and budgeting.
6. In the event that a bankruptcy filing becomes imminent, we will
provide pre-bankruptcy planning, as well as assistance in the
preparation of the bankruptcy schedules and implementation of the
various reporting systems that will be required to be submitted to the
Bankruptcy Court and the United States Trustee on a periodic basis.
7. Members of DSI will provide any other task as may be reasonably
requested by Mercury.
A number of our firm's personnel have experience in sub-prime and finance
company restructurings. Although we have not yet made the determination as to
the specific members of our staff who will be assigned to this particular
project, we have listed below certain of the DSI personnel (along with their
corresponding billing rates) who would likely constitute the core group from
within which our firm would assemble a team for this matter. These individuals
are:
Fred C. Caruso $280.00/hour
Patrick J. O'Malley $250.00/hour
Steven L. Victor $230.00/hour
Bradley D. Sharp $230.00/hour
George E. Shoup $125.00/hour
Howard K. Katz $120.00/hour
Jonathan D. Carter $75.00/hour
These rates are adjusted on January 1st of each year to reflect advancing
experience, capabilities, and seniority of our professionals as well as general
economic factors. The services of Mr. William A. Brandt, Jr., president of DSI,
will not be invoiced at his standard hourly rate under this engagement letter,
but will be compensated per the terms of the employment agreement between
Mr. Brandt and Mercury.
In order to commence work under this proposed Agreement, DSI would request a
retainer fee in the amount of $250,000.00. DSI would then invoice Mercury on a
semi-monthly basis (or any other reasonable time frame agreed upon by the
parties) for fees earned and expenses incurred for the time period in question.
Mercury shall pay such invoices within five (5) days of receipt and the
$250,000.00 retainer shall remain in place until our tasks are complete or until
our Agreement is terminated. When either of the above occur, DSI will issue a
final billing within seven (7) working days and, if such invoice is less than
$250,000.00, remit the balance of the retainer within five (5) working days;
however, if said invoice is greater than $250,000.00, Mercury shall remit such
amount to DSI within five (5) days of receipt of the final billing.
This Agreement may be terminated by either party upon written notice of two (2)
days.
Mercury would under this proposal indemnify Development Specialists, Inc. and
each and every one of the personnel employed by it who would work on this
particular project, as well as DSI officers, directors, employees and agents
from and against any and all claims, liability, loss, cost, damage or expense
(including reasonable attorney's fees) asserted against it or any of its
individual personnel, or incurred by DSI or its personnel, by reason of or
arising out of this Agreement or performance under this Agreement, except where
primarily caused by the willful misconduct, dishonesty, fraudulent act or
omission, or gross negligence of any of the DSI personnel specifically assigned
to this project, as well as any officers, directors, employees, or agents of
DSI.
It is my belief that this short proposal/Agreement letter sufficiently
encompasses all of the terms and conditions under which Mercury and DSI would
enter into this proposed retention arrangement. If you are in agreement with
the various terms and conditions of this proposal, I would ask that you indicate
your acceptance of the proposal by signing an original copy of this Agreement on
the signature lines below and then by returning one of the fully-executed
Agreements to our Chicago offices.
Should either you or your directors or counsel have any questions, comments or
concerns, or require additional clarification or information, please do not
hesitate to call.
Very truly yours,
/s/ Fred C. Caruso
Fred C. Caruso
FCC/pf
cc: Mr. Bruce L. McPhee
Mr. Lewis S. Rosenbloom
Mr. William A. Brandt, Jr.
Accepted by: Mercury Finance Company
By: Bruce McPhee
Title: Director
Date:
EXHIBIT 11
<TABLE>
MERCURY FINANCE COMPANY
COMPUTATION OF NET INCOME/(LOSS) PER SHARE
<CAPTION>
Year Ended December 31 (dollars in thousands except per share amounts)
1997 1996 1995
<S> <C> <C> <C>
Income Data:
1. Net income/(loss) $(74,193) $(28,968) $74,129
2. Weighted average common share
outstanding, adjusted for stock splits 177,892 177,129 175,631
3. Weighted average shares of treasury stock
outstanding, adjusted for stock splits 5,403 4,361 3,182
4. Weighted average shares reserved for stock
options (utilizing the treasury stock method) 0 0 1,660
NET INCOME PER COMMON SHARE
5. Common Shares Outstanding 172,489 172,768 174,109
(Line 2-3+4)
6. Net income/(loss) per common shares ($0.43) ($0.17) $.43
(Line 1 / 5)
DIVIDEND DATA
1. Dividends Declared $12,937 $51,821 $42,849
2. Average common shares outstanding
on dividend record date 172,498 172,737 172,548
3. Dividends per common share $0.075 $.30 $.25
Note 1.
In February, 1997, following the announcement of the discovery of accounting irregularities which caused the overstatement of the
previously released earnings for 1995 and 1996, the market value of the Company's common stock was significantly reduced.
Since the announcement, the value of the common stock has not exceeded the exercise price of the stock options granted or
regranted under the revised stock option program. As a result, the calculation of the common share equivalents becomes
not meaningful for the year ended December 31, 1997.
The calculation of common stock equivalents for the year ended December 31, 1996 can be completed as the market value of common
stock was in excess of exercise price, however, as the Company incurred a net loss for the period ended December 31, 1996, common
share equivalents totaling 923,236 would be anti-dilutive to earnings per share and have not been included in the weighted average
shares calculation.
The Company has determined that the implementation of SFAS 128 "Earnings Per Share", would have had no effect on the calculated
earnings per share for the period ended December 31, 1997 and 1996. This standard prescribes that when computing the dilution of
options, the Company is to use its average stock price for the period, rather than the more dilutive greater of the average share
price or end-of-period share price required by APB Opinion 15. As the options are excluded from the calculation due to the anti-
dilutive characteristics indicated above, there is no effect on the earnings per share calculation.
</TABLE>
EXHIBIT 12
<TABLE>
MERCURY FINANCE COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Year Ended December 31 (dollars in thousands)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net income/(loss) $(74,193) ($28,968) $74,129 $86,545 $64,927
Added fixed charges:
Cost of Borrowing 86,529 64,789 57,303 39,375 32,933
One-third of rentals 1,524 1,464 1,370 1,056 873
---------- ---------- ---------- ---------- ----------
Total fixed charges: $88,053 $66,253 $58,673 $40,431 $33,806
==== ==== ==== ==== ====
Provisions/(credits) for
income taxes:
Federal (15,276) (18,604) 38,895 46,797 34,634
State (974) (1,811) 7,084 7,648 5,306
---------- ---------- ---------- ---------- ----------
Total income taxes $(16,250) ($20,415) $45,979 $54,445 $39,940
===== ===== ==== ==== ====
Total "earnings"
(net income/(loss),
fixed charges and
income taxes) $(2,390) $16,870 $178,781 $181,421 $138,673
===== ===== ===== ===== ====
Ratio of "earnings" to fixed
charges (Note 1) - - 3.05 4.49 4.10
== == == == ==
Deficiency of fixed charges
coverage (Note 1) $90,443 $49,383 N/A N/A N/A
===== ===== ===== ===== ====
Note 1.
SEC Regulation S-K requires the disclosure of the ratio of earnings to fixed charges except where the ratio falls below 1, then
the deficiency shall be disclosed in dollar terms.
</TABLE>
EXHIBIT 21
MERCURY FINANCE COMPANY
SUBSIDIARIES
Mercury Finance Corporation of Alabama (Ala)
Mercury Finance Company of Arizona (Ariz)
Merc Finance Company of California (Cal)
Mercury Finance Company of Colorado (Del)
Mercury Finance Company of Delaware (Del)
Mercury Finance Company of Florida (Del)
Mercury Finance Company of Georgia (Del)
Mercury Finance Company of Illinois (Del)
Mercury Finance Company of Idaho (Del)
Mercury Finance Company of Iowa (Del)
Mercury Finance Company of Indiana (Del)
Mercury Finance Company of Kansas (Del)
Mercury Finance Company of Kentucky (Del)
Mercury Finance Company of Louisiana (Del)
Mercury Finance Company of Michigan (Del)
Mercury Finance Company of Mississippi (Del)
Mercury Finance Company of Missouri (MO)
Mercury Finance Company of Nevada (Nev)
Mercury Finance Company of New Mexico (Del)
Mercury Finance Company of New York (Del)
Mercury Finance Company of North Carolina (Del)
Mercury Finance Company of Ohio (Del)
MFC Finance Company of Oklahoma (Del)
Mercury Finance Company of Oregon (Del)
Mercury Finance Company of Pennsylvania (Del)
Mercury Finance Company of South Carolina (Del)
Mercury Finance Company of Tennessee (Tenn)
MFC Finance Company of Texas (Del)
Mercury Finance Company of Utah (Del)
Mercury Finance Company of Virginia (Del)
Mercury Finance Company of Washington (Del)
Mercury Finance Company of Wisconsin (Del)
MFC Financial Services, Inc. (Fla)
Filco Marketing Company (Del)
Gulfco Investment Inc. (La)
Gulfco Finance Company (La)
Gulfco Life Insurance Company (La)*
Midland Finance Co. (IL)
Lyndon Life Insurance Company (MO)*
Lyndon Property Insurance Company (MO)*
Twin Mercury Life Insurance Company (AZ)*
Lyndon-DFS Warranty Services, Inc. (MO)*
Lyndon General Agency of Texas (TX)*
Lyndon Southern Insurance Company (La)*
MFN Insurance Company (Turks and Caicos)
* Lyndon Property Insurance Company and its subsidiaries were sold on June 3,
1997.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Mercury Finance Company:
RE: REGISTRATION STATEMENTS ON FORM S-8
o Employee Stock Purchase Plan
o 1989 Stock Option and Incentive Compensation Plan
o 401(k) Plan
We consent to incorporation by reference in the subject Registration Statements
(filed with the Securities and Exchange Commission on May 3, 1989, May 11, 1989
and June 26, 1989) of Mercury Finance Company of our report dated February 12,
1996 except as to notes 5, 14 and 17 which are dated as of October 27,
1997, relating to the consolidated statements of income, changes in
stockholders' equity, and cash flows for the year ended December 31, 1995, which
report appears in the December 31, 1997 annual report on Form 10-K of Mercury
Finance Company.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 20, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 17, 1998, included in this Form 10-K, into Mercury Finance
Company's previously filed Form S-8 Registration Statement File Nos. 33-28513
and 33-28693 and Form S-8 Registration Statement dated June 26, 1989 and Form S-
8A dated July 6, 1989.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 53,896
<SECURITIES> 0
<RECEIVABLES> 971,377
<ALLOWANCES> (154,935)
<INVENTORY> 0
<CURRENT-ASSETS> 959,901
<PP&E> 16,649
<DEPRECIATION> (10,750)
<TOTAL-ASSETS> 979,404
<CURRENT-LIABILITIES> 896,704
<BONDS> 0
0
0
<COMMON> 177,901
<OTHER-SE> (95,201)
<TOTAL-LIABILITY-AND-EQUITY> 979,404
<SALES> 235,621
<TOTAL-REVENUES> 282,701
<CGS> 0
<TOTAL-COSTS> 128,005
<OTHER-EXPENSES> 55,961
<LOSS-PROVISION> 106,374
<INTEREST-EXPENSE> 86,529
<INCOME-PRETAX> (90,443)
<INCOME-TAX> (16,250)
<INCOME-CONTINUING> (74,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (74,193)
<EPS-PRIMARY> ($0.43)
<EPS-DILUTED> ($0.43)
</TABLE>
