SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarter Ended June 30, 1995 Commission File No. 1-10176
MERCURY FINANCE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-3627010
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
100 FIELD DRIVE, SUITE 340, LAKE FOREST, ILLINOIS 60045
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 295-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
Yes No X
Indicate the number of shares outstanding of each issuer's class of common
stock, as of the latest practicable date.
Common Stock - $1 par value, 117,473,772 shares as of August 10, 1995.
Treasury Stock - 1,983,105 shares as of August 10, 1995
MERCURY FINANCE COMPANY
FORM 10-Q
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets . . . . . . . . . . . 1
Consolidated Statements of Income . . . . . . . . 2
Consolidated Statements of Changes in Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows . . . . . . 4
Notes to Consolidated Financial Statements . . . 6
Consolidated Average Balance Sheets . . . . . . . 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
CONSOLIDATED FINANCIAL CONDITION AND RESULTS
OF OPERATIONS . . . . . . . . . . . . . . . . . . 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities . . . . . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 19
INDEX OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . 20
Exhibit No. 11 - Computation of Net Income Per
Share . . . . . . . . . . . . . . 21
PART 1 - FINANCIAL INFORMATION
As more fully described in the Notes to Consolidated Financial Statements,
financial information in this Report has been restated to correct improper
adjustments reflected in previous reports which had the effect of overstating
earnings.
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30 Dec. 31
(Dollars in thousands) 1995 1994 1994
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,803 $13,164 $19,980
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 11,966 10,732 14,184
Finance receivables . . . . . . . . . . . . . . . . . . . . . . 1,136,587 913,607 1,039,867
Less allowance for finance credit losses . . . . . . . . . . . (25,210) (19,995) (22,488)
Less Nonrefundable dealer reserves . . . . . . . . . . . . . . (70,744) (67,580) (66,477)
Finance receivables, net . . . . . . . . . . . . . . . . . . . 1,040,633 826,032 950,902
Prepaid pension expense . . . . . . . . . . . . . . . . . . . . 507 860 507
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 8,847 6,568 7,290
Premises, fixtures and equipment at cost, net of
accumulated depreciation . . . . . . . . . . . . . . . . 4,499 3,350 3,492
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,679 9,850 15,404
Other assets (including repossessions) . . . . . . . . . . . . 18,161 10,756 24,644
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $1,111,095 $881,312 $1,036,403
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper . . . . . . . . . . . . . . . . . $354,713 $309,209 $449,945
Senior debt, term notes . . . . . . . . . . . . . . . . . . . . 423,875 266,000 265,375
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . 35,500 35,000 35,500
Accounts payable and other liabilities . . . . . . . . . . . . 44,653 47,421 53,401
Income taxes payable . . . . . . . . . . . . . . . . . . . . . (2,295) 2,791 4,668
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 856,446 660,421 808,889
STOCKHOLDERS' EQUITY
Common stock - $1.00 par value:
300,000,000 shares authorized
Jun 30 1995 - 117,332,000 shares outstanding
Jun 30 1994 - 115,976,409 shares outstanding
Dec 31 1994 - 116,079,703 shares outstanding . . . . 117,332 115,976 116,080
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . 13,769 5,541 6,384
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 148,618 99,545 128,157
Treasury stock at cost: Jun 30, 1995 - 1,983,105 shares
Jun 30, 1994 - 63,205 shares
Dec 31, 1994 - 1,839,705 shares . (25,070) (171) (23,107)
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . 254,649 220,891 227,514
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . $1,111,095 $881,312 $1,036,403
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in thousands except per share amounts) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST INCOME
Finance charges, fees and other interest . . . . . . $61,993 $50,818 $121,263 $98,635
Interest expense . . . . . . . . . . . . . . . . . . 13,897 9,302 27,007 17,831
Net interest income . . . . . . . . . . . . . . . . . 48,096 41,516 94,256 80,804
Provision for finance credit losses . . . . . . . . . 3,026 1,409 5,450 3,175
Net interest income after provision for
finance credit losses . . . . . . . . . . . . . 45,070 40,107 88,806 77,629
OTHER INCOME
Insurance commissions . . . . . . . . . . . . . . . . 4,515 4,053 11,345 8,084
Insurance premiums . . . . . . . . . . . . . . . . . 1,591 2,039 3,175 4,255
Fees and other . . . . . . . . . . . . . . . . . . . 1,962 2,496 3,930 4,766
Total other income . . . . . . . . . . . . . . . . . 8,068 8,588 18,450 17,105
OTHER EXPENSES
Salaries and employee benefits . . . . . . . . . . . 11,916 8,678 23,119 17,085
Occupancy expense . . . . . . . . . . . . . . . . . . 1,160 884 2,287 1,759
Equipment expense . . . . . . . . . . . . . . . . . . 504 408 965 801
Data processing expense . . . . . . . . . . . . . . . 734 636 1,475 1,255
Insurance claims expense . . . . . . . . . . . . . . 14 544 130 1,260
Other operating expenses . . . . . . . . . . . . . . 9,913 3,373 15,295 6,556
Total other expenses . . . . . . . . . . . . . . . . 24,241 14,523 43,271 28,716
Income before income taxes . . . . . . . . . . . . . 28,897 34,172 63,985 66,018
Applicable income taxes . . . . . . . . . . . . . . . 10,578 13,170 24,026 25,461
NET INCOME $18,319 $21,002 $39,959 $40,557
NET INCOME PER COMMON SHARE
(adjusted for all stock splits) . . . . . . . . $0.16 $0.18 $0.35 $0.35
Weighted average number of common and
common share equivalents outstanding . . . . . . 115,843 117,221 115,594 117,223
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE AND SIX MONTHS ENDED JUNE 30
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in thousands) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of period . . . . . . . . . . . $116,251 $115,769 $116,080 $115,649
Stock options exercised . . . . . . . . . . . . . . . 1,257 207 1,428 327
Stock traded in to exercise stock options . . . . . . (176) 0 (176) 0
Balance at June 30 . . . . . . . . . . . . . . . . . $117,332 $115,976 $117,332 $115,976
PAID IN CAPITAL
Balance at beginning of period . . . . . . . . . . . $7,621 $3,900 $6,384 $2,856
Stock options exercised . . . . . . . . . . . . . . . 734 857 1,423 1,460
Tax benefit from stock options exercised . . . . . . 5,414 784 5,962 1,225
Balance at June 30 . . . . . . . . . . . . . . . . . $13,769 $5,541 $13,769 $5,541
RETAINED EARNINGS
Balance at beginning of period . . . . . . . . . . . $130,384 $86,654 $128,157 $75,193
Net income . . . . . . . . . . . . . . . . . . . . . 18,319 21,002 39,959 40,557
Dividends . . . . . . . . . . . . . . . . . . . . . . (85) (8,111) (19,498) (16,205)
Balance at June 30 . . . . . . . . . . . . . . . . . $148,618 $99,545 $148,618 $99,545
TREASURY STOCK
Balance at beginning of period . . . . . . . . . . . ($25,070) ($171) ($23,107) ($171)
Purchases . . . . . . . . . . . . . . . . . . . . . . 0 0 (1,963) 0
Balance at June 30 . . . . . . . . . . . . . . . . . ($25,070) ($171) ($25,070) ($171)
Total stockholders' equity . . . . . . . . . . . . . $254,649 $220,891 $254,649 $220,891
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED JUNE 30
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in thousands) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . $18,319 $21,002 $39,959 $40,557
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for finance credit losses . . . . . . . 3,026 1,409 5,450 3,175
Net finance receivables charged off against
allowance for finance credit losses . . . . . (1,422) (692) (2,728) (1,524)
Provision for deferred income taxes . . . . . . . (848) (366) (1,557) (1,057)
Depreciation . . . . . . . . . . . . . . . . . . . 271 214 522 426
Amortization of goodwill . . . . . . . . . . . . . 203 132 406 264
Net (increase) decrease in other assets . . . . . 1,513 (1,656) 5,802 249
Net increase (decrease) in other liabilities . . . (36,984) (10,497) (15,713) 7,729
Net increase (decrease) in dealer reserve . . . . 836 3,741 4,267 10,519
Net cash provided by operating activities . (15,086) 13,287 36,408 60,338
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance receivables . . . . . 221,650 173,702 408,981 340,546
Finance receivables originated or acquired . . . . . (262,562) (214,796) (505,701) (433,866)
Net (increase) decrease in investment securities . . 1,830 1,026 2,219 (199)
Purchases of properties and equipment . . . . . . . . (1,293) (264) (1,529) (1,031)
Net cash used in investing activities . . . (40,375) (40,332) (96,030) (94,550)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in commercial paper . . . . . (115,353) 33,358 (95,232) 48,949
Senior debt retired . . . . . . . . . . . . . . . . . (1,500) 0 (1,500) 0
Senior debt issued . . . . . . . . . . . . . . . . . 160,000 0 160,000 0
Subordinated debt retired . . . . . . . . . . . . . . 0 0 0 0
Stock options exercised . . . . . . . . . . . . . . . 7,230 1,848 8,638 3,012
Dividends paid . . . . . . . . . . . . . . . . . . . (85) (8,111) (19,498) (16,206)
Treasury stock acquired . . . . . . . . . . . . . . . 0 0 (1,963) 0
Net cash provided by financing activities . 50,292 27,095 50,445 35,755
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . (5,169) 50 (9,177) 1,543
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD . . . . . . . . . . . . . . 15,972 13,114 19,980 11,621
CASH AND CASH EQUIVALENTS
END OF PERIOD . . . . . . . . . . . . . . . . . $10,803 $13,164 $10,803 $13,164
SUPPLEMENTAL DISCLOSURES
Income taxes paid to federal and state
governments . . . . . . . . . . . . . . . . . . $24,157 $24,667 $26,605 $25,896
Interest paid to creditors . . . . . . . . . . . . . $13,897 $10,404 $25,885 $17,877
</TABLE>
MERCURY FINANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements of Mercury Finance Company and
Subsidiaries are unaudited, but in the opinion of management reflect all
necessary adjustments, consisting only of normal recurring accruals, for a fair
presentation of results as of the dates and for the periods covered by the
financial statements. The results for the interim periods are not necessarily
indicative of the results of operations that may be expected for the fiscal
year. It is suggested that the unaudited interim consolidated financial
statements contained herein be used in conjunction with the financial statements
and the accompanying notes to the financial statements included in the Company's
1994 Annual Report.
2. Net income per common share amounts are based on the average number of
common shares and common stock equivalents outstanding. All per share amounts
have been adjusted to reflect all stock splits declared by the Company.
3. Certain data from the prior year has been reclassified to conform to the
1995 presentation.
4. Restatement of Financial Statements.
In January, 1997, Mercury discovered that certain improper adjustments had
been made to overstate earnings in previously issued financial statements. As a
result, a Special Committee of the Board of Directors commenced an investigation
of the misstatements of previously issued financial statements. As a result of
this investigation, Mercury has restated the previously reported financial
statements for 1995 as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
<S> <C> <C>
Decrease in finance charges and loan fees 3,725 6,850
Increase in provision for finance credit
losses 600 600
Decrease in other income 5,236 7,595
Increase in other expenses 3,894 3,683
Decrease in income before income taxes 13,455 18,728
Decrease in provision for income taxes 4,956 6,858
Decrease in net income for 1995 and
decrease in retained earnings as of
December 31, 1995 8,499 11,870
Decrease in net income per common share $.07 $.10
</TABLE>
5. See Current Report on Form 8-K filed November 6, 1997, containing 1996,
1995 (as restated) and 1994 financial statements for additional information
regarding the impact of the overstatement of earnings and the restatement of
previously issued financial statements.
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED AVERAGE BALANCE SHEETS
THREE AND SIX MONTHS ENDED JUNE 30
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in thousands) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . $15,252 $12,629 $16,519 $13,047
Investments . . . . . . . . . . . . . . . . . . . . . 14,048 11,746 13,644 11,497
Finance receivables . . . . . . . . . . . . . . . . . 1,126,064 892,076 1,092,659 865,564
Less allowance for finance credit losses . . . . . (24,313) (19,617) (23,709) (19,149)
Less nonrefundable dealer reserves . . . . . . . . (70,573) (65,818) (69,177) (62,747)
Finance receivables, net . . . . . . . . . . . . . 1,031,178 806,641 999,773 783,668
Prepaid pension expense . . . . . . . . . . . . . . . 507 1,040 507 1,040
Deferred income taxes . . . . . . . . . . . . . . . . 8,384 6,377 7,986 6,075
Furniture, fixtures and equipment, net of
accumulated depreciation . . . . . . . . . . . . . 4,302 3,314 3,892 3,243
Other assets (including repossessions & goodwill) . . 32,474 19,422 31,141 19,620
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . $1,106,145 $861,169 $1,073,462 $838,190
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper . . . . . . . . . . . . $493,654 $288,452 $473,624 $273,517
Senior debt, term notes . . . . . . . . . . . . . . . 267,641 266,000 266,508 266,000
Subordinated debt . . . . . . . . . . . . . . . . . . 35,500 35,000 35,500 35,000
Accounts payable and other liabilities . . . . . . . 60,971 52,605 61,831 51,140
Income taxes payable . . . . . . . . . . . . . . . . 4,406 8,439 4,778 8,791
TOTAL LIABILITIES . . . . . . . . . . . . . . . . 862,172 650,496 842,241 634,448
STOCKHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . . 117,010 115,871 116,606 115,787
Paid in capital . . . . . . . . . . . . . . . . . . . 11,408 4,694 9,319 4,026
Retained earnings . . . . . . . . . . . . . . . . . . 140,625 90,279 130,203 84,100
Treasury stock . . . . . . . . . . . . . . . . . . . (25,070) (171) (24,907) (171)
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 243,973 210,673 231,221 203,742
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . $1,106,145 $861,169 $1,073,462 $838,190
NUMBER OF DAYS 91 91 181 181
MONTHS COMPLETED 3 3 6 6
RATIOS
Return on average equity . . . . . . . . . . . . . . 30.03% 39.88% 34.56% 39.81%
Return on average assets . . . . . . . . . . . . . . 6.62% 9.76% 7.44% 9.68%
Yield on earning assets . . . . . . . . . . . . . . . 21.75% 22.49% 21.92% 22.49%
Rate on interest bearing liabilities . . . . . . . . 7.00% 6.33% 7.02% 6.26%
Net interest margin . . . . . . . . . . . . . . . . . 16.86% 18.36% 17.00% 18.39%
</TABLE>
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As more fully described in the Notes to Consolidated Financial Statements,
financial information in this Report has been restated to correct improper
adjustments reflected in previous reports which had the effect of overstating
earnings.
Mercury Finance Company ("Mercury"), ("Company") is a consumer finance company
engaged in the business of purchasing individual installment sales finance
contracts from automobile dealers and retail vendors, extending short term
installment loans directly to consumers and selling credit insurance and other
related products.
Mercury's operating subsidiaries commenced operations in February 1984 for the
purpose of penetrating the market for small dollar amount consumer loans
(average of $3,000 or less). The initial focus was toward small, short term,
direct installment loans made to U.S. military servicemen. Building on this
direct lending niche, Mercury has also built a substantial, diversified consumer
finance portfolio by purchasing individual sales finance contracts from
automobile dealers and retail vendors.
On April 1, 1993 Mercury acquired all the shares of Gulfco Investment Inc. for
$22.3 million in cash. Gulfco Investment Inc. was the parent company which
owned all of the stock of Gulfco Finance Company and Gulfco Life Insurance
Company. Gulfco Finance Company conducted its consumer finance business through
a branch network of 62 offices located in Louisiana, Mississippi, and Texas.
The acquisition was accounted for under the purchase method of accounting.
Accordingly their results of operations have been included in the consolidated
financial statements since the date of acquisition. The excess of cost over
fair value of net assets acquired (goodwill) relating to the acquisition is
being amortized over twenty years on the straight line method.
On September 30, 1994 Mercury acquired all the shares of Midland Finance Co. for
$15.1 million in cash and the assumption of its net liabilities. Midland
Finance Co. conducted its consumer finance business through a central office in
Chicago, Illinois. The acquisition was accounted for under the purchase method
of accounting. Accordingly their results of operations have been included in
the consolidated financial statements of income and statements of cash flow
since the date of acquisition. The excess of cost over fair value of net assets
acquired (goodwill) relating to the acquisition is being amortized over twenty
years on the straight line method.
Mercury's loans range from periods from 3 months to 48 months at annual interest
rates ranging, with minor exceptions, from 18% to 40%. Generally all loans are
repayable in monthly installments. Generally late payment fees are assessed to
accounts which fail to make their scheduled payments within 10 days of the
schedule due date.
Direct finance receivables on which no payment is received within 149 days, on a
recency basis, are charged off. Sales finance receivables which are
contractually delinquent 150 days are charged off in the month before they
become 180 days delinquent. Accounts which are deemed uncollectible prior to
the maximum charge off period are charged off immediately. Management may
authorize an extension if collection appears imminent during the next calendar
month.
Accounts which become 60 or more days contractually delinquent and no full
contractual payment is received in the month the account attains such
delinquency status cease earning interest.
The following is management's discussion and analysis of the consolidated
financial condition of the Company at June 30, 1995 (unaudited) when compared
with June 30, 1994 (unaudited) and December 31, 1994, and the results of
operations for the three and six months ended June 30, 1995 and 1994
(unaudited). This discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
quarterly report.
FINANCIAL CONDITION
ASSETS AND FINANCE RECEIVABLES
Total assets of the Company increased 26% to $1,111.1 million from $881.3
million one year ago. Finance receivables increased 24% to $913.6 million at
June 30, 1995. The increase in assets and finance receivables were primarily
attributable to the production of receivables from the increased number of
offices operated by the Company and increased volume in existing offices.
During the period from December 31, 1994 through June 30, 1995 total assets and
finance receivables increased 14% and 19% respectively on an annualized basis.
The Company's offices in Florida, Texas and Illinois accounted for approximately
48% of all finance receivables, with the remainder being originated in the other
24 states where offices are located. The total number of offices at June 30,
1995 was 260 compared to 232 at June 30, 1994 and 247 at December 31, 1994.
The following table summarizes the composition of finance receivables at the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1994 DEC. 31, 1994
% of % of % of
Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
Sales finance receivables . . . . . . . . $1,254,572 90% $1,024,551 91% $1,136,958 89%
Direct finance receivables . . . . . . . 134,602 10% 96,101 9% 135,472 11%
Total gross finance receivables . . . . . 1,389,174 100% 1,120,652 100% 1,272,430 100%
Unearned finance charges . . . . . . . . (244,124) (197,511) (222,284)
Unearned insurance commissions,
insurance premiums and
insurance reserves . . . . . . . . . (8,463) (9,534) (10,279)
Finance receivables . . . . . . . . . . . $1,136,587 $913,607 $1,039,867
</TABLE>
ALLOWANCE AND PROVISION FOR FINANCE CREDIT LOSSES
The Company maintains an allowance for finance credit losses at a level which,
in the opinion of management, provides adequately for current and possible
future losses in the finance receivables portfolio. Management evaluates
allowance requirements by examining current delinquencies, the characteristics
of the accounts, the value of the underlying collateral, and general economic
conditions and trends. Management also evaluates the availability of dealer
reserves to absorb finance credit losses. A provision for losses is charged to
earnings in an amount sufficient to maintain the allowance. The following table
sets forth a reconciliation of the changes in the allowance for finance credit
losses for the six month periods ended June 30, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . . . . . . $22,488 $18,344
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0
Provision charged to expense . . . . . . . . . . . . . . . . . . . 5,450 3,175
Finance receivables charged-off . . . . . . . . . . . . . . . . . . (3,506) (2,263)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778 739
Balance at June 30 . . . . . . . . . . . . . . . . . . . . . . . . $25,210 $19,995
Allowance as a percent of finance receivables
outstanding at end of period . . . . . . . . . . . . . . . . . 2.22% 2.19%
</TABLE>
The increase in the provision and allowance for finance credit losses in 1995 is
primarily attributable to the increase in finance receivables outstanding.
RESERVES WITHHELD, DEALERS
Individual sales finance contracts are purchased pursuant to formal agreements
with local merchants negotiated at the branch office level. As part of
Mercury's financing of sales finance contracts, arrangements are entered into
with dealers, whereby reserves are established to protect Mercury from potential
losses associated with such contracts. As part of Mercury's agreement with the
dealers, a portion of the proceeds from the sales finance contracts are retained
by Mercury and are available to Mercury to charge specific accounts against.
Mercury negotiates the amount of the reserves with the dealers based upon
various criteria, one of which is the credit risk associated with the sales
finance contracts being purchased. Dealer reserves amounted to $70.7 million
and $67.6 million at June 30, 1995 and 1994 respectively.
DEBT
The primary source for funding the Company's finance receivables comes from the
issuance of debt. At June 30, 1995 the Company had total debt of $814.1 million
which compares with $610.2 million at June 30, 1994.
In addition to the Company's outstanding debt the Company has revolving credit
facilities and a back up line of credit which total $510 million. The revolving
credit facilities and the back up line are totally available for use by the
Company and at June 30, 1995 nothing was outstanding under these arrangements.
The following table presents the Company's debt instruments and the stated
interest rates on the debt at the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1994 DEC. 31, 1994
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Senior Debt:
Commercial paper . . . . . . . . . . . $354,713 6.2% $309,209 4.5% $449,945 6.4%
Term notes . . . . . . . . . . . . . . 423,875 7.1% 266,000 7.2% 265,375 7.1%
Subordinated debt . . . . . . . . . . . . 35,500 10.2% 35,000 10.2% 35,500 10.2%
Total . . . . . . . . . . . . . . $814,088 6.9% $610,209 6.0% $750,820 6.8%
</TABLE>
The interest rates reflected in the preceding table do not include amortized
costs related to the issuance of debt, costs related to the maintenance of
credit line facilities and the interest differential related to interest
exchange agreements. The effect of these costs, which are included in interest
expense in the consolidated financial statements, increases the effective
interest rate by approximately 23 basis points at June 30, 1995.
The following table sets forth information with respect to maturities of senior
and subordinated debt at June 30, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
SENIOR DEBT SENIOR DEBT SUBORDINATED
MATURITY COMMERCIAL PAPER TERM NOTES DEBT TOTAL
<S> <C> <C> <C> <C>
1995 . . . . . . . . . . . . . $354,713 25,125 - 379,838
1996 . . . . . . . . . . . . . - 40,125 - 40,125
1997 . . . . . . . . . . . . . - 57,625 20,000 77,625
1998 . . . . . . . . . . . . . - 166,000 15,500 181,500
After 1998 . . . . . . . . . . - 135,000 135,000
Total . . . . . . . . . . . . . $354,713 $423,875 $35,500 $814,088
</TABLE>
STOCKHOLDERS' EQUITY
The other primary source for funding the growth in finance receivables comes
from the retention of earnings by the Company and the exercise of stock options
by eligible employees. Total stockholders' equity at June 30, 1995 was $254.6
million which compares with $220.9 million at June 30, 1994 and $227.5 million
at December 31, 1994. For the six months ended June 30, 1995 the Company had
net income of $40.0 million and paid cash dividends of $19.5 million resulting
in a retention of 51% of current earnings. In addition, eligible employees of
the Company exercised options to purchase shares resulting in $8.6 million also
being added to the equity of the Company.
At June 30, 1995 stockholders' equity stated as a percent of total assets was
22.9% which compares with 25.1% at June 30, 1994 and 22.0% at December 31, 1994.
RESULTS OF OPERATIONS
NET INCOME
For the three and six months ended June 30, 1995 the Company had net income of
$18.3 million and $40.0 million which represent decreases of 13% and 1.5% from
the $21.0 million and $40.6 million earned in 1994. Net income for the second
quarter would be relatively flat with the prior year except for the costs to
settle certain litigation which was recorded in the second quarter. During the
comparative periods, higher interest income from a larger portfolio was offset
by higher interest expense and operating expenses.
INTEREST INCOME AND INTEREST EXPENSE
The largest single component of net income is net interest income which is the
difference between interest earned on finance receivables and interest paid on
borrowings. For the three and six months ended June 30, 1995 the Company's net
interest income was $48.1 million and $94,256 million an increase of 16% and 17%
from 1994. The net interest margin which is the ratio of net interest income
divided by average interest earning assets was 16.86% for the three months ended
June 30, 1995 and 17.00% for the six months ended June 30, 1995. This compares
with a net interest margin of 18.36% and 18.39% for the three and six months
ended June 30, 1994. The change in net interest margin is primarily
attributable to interest rate changes on the Company's various debt
instruments. The following tables summarize the amount of the net interest
margin for the three and six months ended June 30 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
Annualized Annualized
THREE MONTHS ENDED Average Interest Rate Average Interest Rate
Out- Income/ Earned Out- Income/ Earned
standing Expense and Paid standing Expense and Paid
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets . . . . $1,140,112 $61,993 21.75% $903,822 $50,818 22.49%
Interest bearing liabilities . 796,795 13,897 6.98% 589,452 9,302 6.33%
Net . . . . . . . . . . . . . . $343,317 $48,096 14.77% $314,370 $41,516 16.16%
Net interest margin as a
percentage of average interest
earning assets . . . . . . . . 16.87% 18.36%
1995 1994
Annualized Annualized
SIX MONTHS ENDED Average Interest Rate Average Interest Rate
Out- Income/ Earned Out- Income/ Earned
standing Expense and Paid standing Expense and Paid
Interest earning assets . . . . $1,106,303 $121,263 21.92% $877,061 $98,635 22.49%
Interest bearing liabilities . 775,632 27,006 6.96% 574,517 17,831 6.26%
Net . . . . . . . . . . . . . . $330,671 $94,257 14.96% $302,544 $80,804 16.23%
Net interest margin as a
percentage of average interest
earning assets . . . . . . . . 17.04% 18.39%
</TABLE>
OTHER INCOME
In addition to finance charges and interest, the Company derives commission
income from the sale of other credit related products. These products include
insurance relating to the issuance of credit life, accident and health and other
credit insurance policies to borrowers of the Company. Other credit-related
sources of revenue are derived from the sale of other products and services.
Insurance premiums are earned by the life insurance subsidiary as a reinsurer of
credit life and accident and health policies issued through the Company's branch
offices.
For the three and six months ended June 30, 1995, the Company experienced
increases in its insurance commissions which are attributable to the additional
loan volume, the inclusion of the Midland branch acquired in 1994 and the
increased number of borrowers obtaining these types of products. The following
table summarizes the amounts earned from these products for the three and six
months ended June 30 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Insurance commissions . . . . . . . . . . . . . . . . . . $4,515 $4,053 $11,345 $8,084
Insurance premiums . . . . . . . . . . . . . . . . . . . 1,591 2,039 3,175 4,255
Fees and other . . . . . . . . . . . . . . . . . . . . . 1,962 2,496 3,930 4,766
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $8,068 $8,588 $18,450 17,105
Other income as a % of average interest
earnings assets (Annualized) . . . . . . . . . . . . . . 2.83% 3.80% 3.34% 3.90%
</TABLE>
OTHER EXPENSES
In addition to interest expense and the provision for finance credit losses, the
Company incurs other operating expenses in the conduct of its business.
The following table summarizes the components of other expenses for the three
and six months ended June 30 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Salaries and employees benefits . . . . . . . . . . . . . $11,916 $8,678 $23,119 $17,085
Insurance claims expense . . . . . . . . . . . . . . . . 14 544 130 1,260
Other operating expenses . . . . . . . . . . . . . . . . 12,311 5,301 20,022 10,371
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $24,241 $14,523 $43,271 $28,716
Other expenses as a % of average interest
earning assets (Annualized) . . . . . . . . . . . . . . . 8.50% 6.43% 7.82 6.54%
Other operating expenses increased in the three months ended June 30, 1995 as a result of the costs incurred to settle certain
litigation.
</TABLE>
INCOME TAXES
Income taxes varied relative to the levels of pretax income. The effective tax
rate was 36.6% in 1995 and 38.6% in 1994.
CREDIT LOSSES AND DELINQUENCIES
CREDIT LOSSES
Direct finance receivables on which no payment is received within 149 days, on a
recency basis, are charged off. Sales finance receivable accounts which are
contractually delinquent 150 days are charged off monthly before they become 180
days delinquent. Accounts which are deemed uncollectible prior to the maximum
charge off period are charged off immediately. Management may authorize an
extension if collection appears imminent during the next calendar month. The
following table sets forth information relating to charge-offs, the allowance
for finance credit losses and dealer reserves:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Loss provision charged to income . . . . . . . . . . . . $3,026 $1,409 $5,450 $3,175
Charge-offs net of recoveries . . . . . . . . . . . . . . 1,422 692 2,728 1,524
Allowance for finance credit losses at end of period . . 25,210 19,995
Dealer reserves at end of period . . . . . . . . . . . . 70,744 67,580
Ratios:
Net charge offs (annualized) against allowance
to average finance receivables . . . . . . . . . . . . . .51% .42% .51% .42%
Allowance for finance credit losses to net finance
receivables at end of period . . . . . . . . . . . . . . 2.22% 2.19%
Dealer reserves to gross sales finance receivables
at end of period . . . . . . . . . . . . . . . . . . . . 5.64% 6.60%
</TABLE>
DELINQUENCIES
If an account becomes 60 or more days contractually delinquent and no full
contractual payment is received in the month the account attains such
delinquency status, it is classified as delinquent. The following table sets
forth certain information regarding 60 day and greater contractually delinquent
accounts at June 30 (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1994
% of related % of related
Gross Outstanding Gross Outstanding
Receivable Receivable
Amount Balance Amount Balance
<S> <C> <C> <C> <C>
Sales finance receivables . . . . . . . . . . $8,387 .67% $4,985 .49%
Direct finance receivables . . . . . . . . . 2,859 2.12% 2,969 3.09%
Total $11,246 .81% $7,954 .71%
</TABLE>
LIQUIDITY AND FINANCIAL RESOURCES
Because the consumer finance business involves the purchase and carrying of
receivables, a relatively high ratio of borrowings to net worth is customary and
is an important element in the Company's operations. The Company endeavors to
maximize its liquidity by diversifying its sources of funds which include (a)
cash from operations, (b) the issuance of short term commercial paper, and (c)
direct borrowings available from commercial banks and insurance companies,
consisting of short term lines of credit and long term senior and subordinated
notes. Most of the assets are at fixed rates, and have an average initial
maturity of approximately 26 months. Of the Company's total debt, 56% has an
original maturity of greater than one year at a fixed rate of interest.
The Company also maintains back up lines of credit totalling $110 million and
revolving credit facilities totalling $400 million. At June 30, 1995 the
Company had no debt outstanding under these credit arrangements.
CONTINGENCIES AND LEGAL MATTERS
In the normal course of its business, the Company and its subsidiaries are named
as defendants in legal proceedings. A number of such actions are pending in the
various states in which subsidiaries of the Company do business. It is the
policy of the Company and its subsidiaries to vigorously defend litigation, but
the Company and (or) its subsidiaries have and may in the future enter into
settlements of claims where management deems appropriate.
On August 4, 1994, a verdict of $90,000 in compensatory damages and $50,000,000
in punitive damages was rendered against Mercury Finance Corporation of Alabama
("Mercury Alabama"), a subsidiary of the Company, in the Circuit Court of
Barbour County, Alabama. On January 26, 1995, the Circuit Court of Barbour
County, Alabama, entered an order requiring a new trial unless the plaintiff
accepted a reduction of the punitive damage award from $50,000,000 to
$2,000,000. Following the entry of the January 26, 1995 order, parties entered
into a joint motion to vacate the verdict and judgment and dismiss the case
pursuant to a settlement of the plaintiff's claim for an amount less than the
reduced punitive damage award. Mercury Alabama had accrued the cost of the
settlement as of December 31, 1994, and the consolidated statement of income for
the year ended December 31, 1994 reflected this accrual.
As of June 30, 1995, Mercury Alabama was a defendant or counterclaim defendant
in approximately 13 other lawsuits pending in state and federal courts in
Alabama, the majority of which had been filed since the entry of the August 4,
1994 Barbour County jury verdict. The cases (some of which also name the
Company as a defendant) include claims for alleged truth-in-lending violations,
nondisclosures, misrepresentations, wrongful repossessions of vehicles and
deceptive trade practices, among other things. The relief requested by the
plaintiffs varies but includes requests for compensatory, statutory and punitive
damages, as well as declaratory and equitable relief.
Although management is of the opinion that the resolution of these proceedings
will not have a material effect on the financial position of the Company, it is
not possible at this time to estimate the amount of damages or settlement
expenses that may be incurred. Accordingly, no provision has been made in the
consolidated financial statements for any of the pending proceedings.
SUBSEQUENT EVENT
On August 8, 1995 the Company announced that it had reached an agreement to
acquire ITT Lyndon Life and Property Insurance Companies for $72.5 million.
Lyndon Life and Property Insurance Companies are wholly owned subsidiaries of
ITT Corporation. The transaction requires regulatory approvals and is expected
to close by October 30, 1995.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - See Footnote 10 of the 1996, 1995 (as restated)
and 1994 financial statements contained in the Current Report on Form
8-K filed November 6, 1997.
Item 2. Changes in Securities - Not Applicable.
Item 3. Defaults Upon Senior Securities - See Current Report on Form 8-K filed
November 6, 1997, containing 1996, 1995 (as restated) and 1994
financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
- On April 10, 1995 the Company Conducted its Annual Meeting of
Shareholders for the purpose of electing the following directors to
serve for one year:
John N. Brincat Andrew McNally IV
Dennis H. Chookaszian Bruce I. McPhee
William C. Croft Fred G. Steingraber
Clifford R. Johnson Daniel J. Terra
Philip J. Wicklander
All directors were elected to serve a term of one year.
Item 5. Other Information - Not Applicable
Item 6. (a) Exhibits - See Exhibit Index following the signature page
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the second quarter of 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCURY FINANCE COMPANY
(Registrant)
Date: January 7, 1998 /s/ William A. Brandt, Jr.
William A. Brandt, Jr.
President and
Chief Executive Officer
INDEX OF EXHIBITS
Exhibit No. Description
11. Computation of Net Income Per Share
MERCURY FINANCE COMPANY
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
THREE AND SIX MONTHS ENDED JUNE 30
(Unaudited)
Net income per share is computed by dividing net income by the total of the
weighted average common shares and common stock equivalents outstanding during
the period. Average common shares and common stock equivalents have been
adjusted to reflect the four-for-three stock splits of Mercury Finance Company
distributed to stockholders on December 28, 1989, October 31, 1990, June 10,
1991 and December 5, 1991, the two-for-one stock split distributed on June 19,
1992 and the four-for-three stock split distributed on June 22, 1993.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in thousands except per share amounts) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
INCOME DATA:
1. Net income Mercury Finance Company . . . . . . . . $18,319 $21,002 $39,959 $40,557
2. Weighted average common shares
outstanding (adjusted for stock split) . . . . . . 117,010 115,872 116,606 115,788
3. Treasury stock . . . . . . . . . . . . . . . . . . (1,983) (64) (1,983) (64)
EFFECT OF COMMON STOCK EQUIVALENTS (C.S.E.):
4. Weighted average shares reserved for
stock options . . . . . . . . . . . . . . . . . . 816 1,413 971 1,499
NET INCOME PER COMMON SHARE:
5. Weighted average common share and
common stock equivalents (line 2+3+4) . . . . . . 115,843 117,221 115,594 117,223
6. Mercury Finance Company
net income per share (line 1 / line 5) . . . . . . $0.16 $0.18 $0.35 $0.35
</TABLE>
