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 September 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: (848) 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, 176,473,020 shares as of November 10, 1995.
Treasury Stock - 3,697,357 shares as of November 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>
September 30 Dec. 31
(Dollars in thousands) 1995 1994 1994
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,037 $15,795 $19,980
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 11,968 11,349 14,184
Finance receivables . . . . . . . . . . . . . . . . . . . . . . 1,161,381 976,574 1,039,867
Less allowance for finance credit losses . . . . . . . . . . . (26,596) (21,533) (22,488)
Less Nonrefundable dealer reserves . . . . . . . . . . . . . . (71,379) (71,728) (66,477)
Finance receivables, net . . . . . . . . . . . . . . . . . . . 1,063,406 883,313 950,902
Prepaid pension expense . . . . . . . . . . . . . . . . . . . . 507 500 507
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 9,505 6,847 7,290
Premises, fixtures and equipment at cost, net of
accumulated depreciation . . . . . . . . . . . . . . . . 5,964 3,521 3,492
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,476 15,419 15,404
Other assets (including repossessions) . . . . . . . . . . . . 19,286 13,913 24,644
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $1,144,149 $950,657 $1,036,403
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper . . . . . . . . . . . . . . . . . $397,311 $356,897 $449,945
Senior debt, term notes . . . . . . . . . . . . . . . . . . . . 398,875 265,500 265,375
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . 33,500 37,930 35,500
Accounts payable and other liabilities . . . . . . . . . . . . 60,226 58,947 53,401
Income taxes payable . . . . . . . . . . . . . . . . . . . . . (2,855) 4,893 4,668
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 887,057 724,167 808,889
STOCKHOLDERS' EQUITY
Common stock - $1.00 par value:
300,000,000 shares authorized
Sep 30 1995 - 176,464,332 shares issued
Sep 30 1994 - 116,033,738 shares issued
Dec 31 1994 - 116,079,703 shares issued . . . . . . . 176,464 116,034 116,080
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . 0 5,992 6,384
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 105,698 104,635 128,157
Treasury stock at cost: Sep 30, 1995 - 2,974,657 shares
Sep 30, 1994 - 63,205 shares
Dec 31, 1994 - 1,839,705 shares . (25,070) (171) (23,107)
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . 257,092 226,490 227,514
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . $1,144,149 $950,657 $1,036,403
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
<CAPTION>
Three Months Ended Nine 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 . . . . . . $65,000 $53,399 $186,263 $152,033
Interest expense . . . . . . . . . . . . . . . . . . 14,499 9,969 41,506 27,799
Net interest income . . . . . . . . . . . . . . . . . 50,501 43,430 144,757 124,234
Provision for finance credit losses . . . . . . . . . 3,312 1,657 8,762 4,833
Net interest income after provision for
finance credit losses . . . . . . . . . . . . . 47,189 41,773 135,995 119,401
OTHER INCOME
Insurance commissions . . . . . . . . . . . . . . . . 4,468 4,906 15,813 12,990
Insurance premiums . . . . . . . . . . . . . . . . . 1,697 2,411 4,872 6,665
Fees and other . . . . . . . . . . . . . . . . . . . 1,970 2,911 5,900 7,678
Total other income . . . . . . . . . . . . . . . . . 8,135 10,228 26,585 27,333
OTHER EXPENSES
Salaries and employee benefits . . . . . . . . . . . 12,248 8,887 35,367 25,972
Occupancy expense . . . . . . . . . . . . . . . . . . 1,241 963 3,528 2,722
Equipment expense . . . . . . . . . . . . . . . . . . 531 411 1,496 1,211
Data processing expense . . . . . . . . . . . . . . . 766 640 2,241 1,895
Insurance claims expense . . . . . . . . . . . . . . 315 560 445 1,820
Other operating expenses . . . . . . . . . . . . . . 5,275 3,902 20,570 10,458
Total other expenses . . . . . . . . . . . . . . . . 20,376 15,363 63,647 44,078
Income before income taxes . . . . . . . . . . . . . 34,948 36,638 98,933 102,656
Applicable income taxes . . . . . . . . . . . . . . . 13,093 14,158 37,119 39,619
NET INCOME $21,855 $22,480 $61,814 $63,037
NET INCOME PER COMMON SHARE
(post split) note 2 . . . . . . . . . . . . . . $0.12 $0.13 $0.36 $0.36
Weighted average number of common and
common share equivalents outstanding . . . . . . 175,137 175,792 173,973 175,820
SUPPLEMENTAL INFORMATION
NET INCOME PER COMMON SHARE
(pre split) . . . . . . . . . . . . . . . . . . $0.19 $0.19 $0.53 $0.54
Weighted average number of common and
common share equivalents outstanding . . . . . . 116,758 117,194 115,982 117,213
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of period . . . . . . . . . . . $117,332 $115,976 $116,080 $115,649
Stock options exercised . . . . . . . . . . . . . . . 311 58 1,739 385
Stock traded in to exercise stock options . . . . . . 0 0 (176) 0
Three-for-two stock split . . . . . . . . . . . . . . 58,821 0 58,821 0
Balance at Sept 30 . . . . . . . . . . . . . . . . . $176,464 $116,034 $176,464 $116,034
PAID IN CAPITAL
Balance at beginning of period . . . . . . . . . . . $13,769 $5,541 $6,384 $2,856
Stock options exercised . . . . . . . . . . . . . . . 2,289 253 3,712 1,713
Tax benefit from stock options exercised . . . . . . 1,376 198 7,338 1,423
Transfer from retained earnings . . . . . . . . . . . 41,387 0 41,387 0
Three-for-two stock split . . . . . . . . . . . . . . (58,821) 0 (58,821) 0
Balance at Sept 30 . . . . . . . . . . . . . . . . . $ 0 $5,992 $ 0 $5,992
RETAINED EARNINGS
Balance at beginning of period . . . . . . . . . . . $148,618 $99,545 $128,157 $75,193
Net income . . . . . . . . . . . . . . . . . . . . . 21,855 22,480 61,814 63,037
Dividends . . . . . . . . . . . . . . . . . . . . . . (23,388) (17,390) (42,886) (33,595)
Transfer to paid in capital . . . . . . . . . . . . . (41,387) 0 (41,387) 0
Balance at Sept 30 . . . . . . . . . . . . . . . . . $105,698 $104,635 $105,698 $104,635
TREASURY STOCK
Balance at beginning of period . . . . . . . . . . . ($25,070) ($171) ($23,107) ($171)
Purchases . . . . . . . . . . . . . . . . . . . . . . 0 0 (1,963) 0
Balance at Sept 30 . . . . . . . . . . . . . . . . . ($25,070) ($171) ($25,070) ($171)
Total stockholders' equity . . . . . . . . . . . . . $257,092 $226,490 $257,092 $226,490
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . $21,855 $22,480 $61,814 $63,037
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for finance credit losses . . . . . . . 3,312 1,657 8,762 4,833
Net finance receivables charged off against
allowance for finance credit losses . . . . . (1,926) (1,150) (4,654) (2,674)
Provision for deferred income taxes . . . . . . . (658) (279) (2,215) (1,336)
Depreciation . . . . . . . . . . . . . . . . . . . 293 214 815 640
Amortization of goodwill . . . . . . . . . . . . . 202 132 608 396
Net (increase) decrease in other assets . . . . . (1,124) (2,782) 4,879 (2,534)
Net increase (decrease) in other liabilities . . . 15,013 9,629 (901) 17,358
Net increase (decrease) in dealer reserve . . . . 635 4,148 4,902 14,667
Net cash provided by operating activities . 37,602 34,049 74,010 94,387
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance receivables . . . . . 224,733 173,143 633,714 513,689
Finance receivables originated or acquired . . . . . (249,527) (210,204) (755,228) (644,070)
Net (increase) decrease in investment securities . . (2) (617) 2,217 (816)
Purchases of properties and equipment . . . . . . . . (1,758) (185) (3,287) (1,216)
Net cash used in investing activities . . . (26,554) (37,863) (122,584) (132,413)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in commercial paper . . . . . 42,598 42,488 (52,634) 91,437
Senior debt retired . . . . . . . . . . . . . . . . . (25,000) (5,000) (26,500) (5,000)
Senior debt issued . . . . . . . . . . . . . . . . . 0 0 160,000 0
Subordinated debt retired . . . . . . . . . . . . . . (2,000) 0 (2,000) 0
Stock options exercised . . . . . . . . . . . . . . . 3,976 508 12,614 3,520
Dividends paid . . . . . . . . . . . . . . . . . . . (23,388) (17,390) (42,886) (33,596)
Treasury stock acquired . . . . . . . . . . . . . . . 0 0 (1,963) 0
Assets acquired . . . . . . . . . . . . . . . . . . . 0 (25,730) 0 (25,730)
Liabilities assumed . . . . . . . . . . . . . . . . . 0 16,630 0 16,630
Net assets acquired . . . . . . . . . . . . . . . . . 0 (9,100) 0 (9,100)
Excess of purchase price over net assets acquired . . 0 (5,701) 0 (5,701)
Net cash provided by financing activities . (3,814) 5,805 46,631 41,560
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . 7,234 1,991 (1,943) 3,534
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD . . . . . . . . . . . . . . 10,803 13,164 19,980 11,621
CASH AND CASH EQUIVALENTS ACQUIRED . . . . . . . . . 0 640 0 640
CASH AND CASH EQUIVALENTS
END OF PERIOD . . . . . . . . . . . . . . . . . $18,037 $15,795 $18,037 $15,795
SUPPLEMENTAL DISCLOSURES
Income taxes paid to federal and state
governments . . . . . . . . . . . . . . . . . . $14,109 $12,313 $40,714 $38,209
Interest paid to creditors . . . . . . . . . . . . . $14,499 $ 9,132 $40,384 $27,009
</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 including
the three-for-two stock split declared September 15, 1995 and distributed on
October 31, 1995.
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 Nine Months Ended
September 30, 1995 September 30, 1995
<S> <C> <C>
Decrease in finance charges and loan fees $3,375 $10,225
Increase in provision for finance credit
losses 1,200 1,800
Decrease in other income 5,777 13,372
Increase (Decrease) in other expenses (232) 3,451
Decrease in income before income taxes 10,120 28,848
Decrease in provision for income taxes 3,514 10,372
Decrease in net income for 1995 and
decrease in retained earnings as of
December 31, 1995 $6,606 $18,476
Decrease in net income per common share $.04 $.14
</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 NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . $13,913 $13,859 $15,650 $13,317
Investments . . . . . . . . . . . . . . . . . . . . . 11,885 12,448 13,058 11,814
Finance receivables . . . . . . . . . . . . . . . . . 1,162,846 932,434 1,094,169 887,854
Less allowance for finance credit losses . . . . . (25,123) (20,331) (24,980) (19,543)
Less nonrefundable dealer reserves . . . . . . . . (73,160) (68,829) (69,705) (64,774)
Finance receivables, net . . . . . . . . . . . . . 1,064,563 843,274 999,484 803,537
Prepaid pension expense . . . . . . . . . . . . . . . 507 950 507 1,040
Deferred income taxes . . . . . . . . . . . . . . . . 8,892 6,742 8,592 6,297
Furniture, fixtures and equipment, net of
accumulated depreciation . . . . . . . . . . . . . 5,042 3,336 4,275 3,274
Other assets (including repossessions & goodwill) . . 36,490 23,882 34,180 21,012
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . $1,141,292 $904,491 $1,075,746 $860,291
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper . . . . . . . . . . . . $363,360 $316,070 $436,869 $287,701
Senior debt, term notes . . . . . . . . . . . . . . . 419,708 265,167 317,575 265,722
Subordinated debt . . . . . . . . . . . . . . . . . . 33,833 35,000 34,944 35,000
Accounts payable and other liabilities . . . . . . . 54,014 57,443 60,913 53,242
Income taxes payable . . . . . . . . . . . . . . . . 5,962 7,371 (2,746) 8,318
TOTAL LIABILITIES . . . . . . . . . . . . . . . . 876,877 681,051 847,555 649,983
STOCKHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . . 117,481 116,002 116,898 115,859
Paid in capital . . . . . . . . . . . . . . . . . . . 15,446 5,751 11,361 4,601
Retained earnings . . . . . . . . . . . . . . . . . . 156,558 101,858 124,893 90,019
Treasury stock . . . . . . . . . . . . . . . . . . . (25,070) (171) (24,961) (171)
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 264,415 223,440 228,191 210,308
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . $1,141,292 $904,491 $1,075,746 $860,291
NUMBER OF DAYS 92 92 273 273
MONTHS COMPLETED 3 3 9 9
RATIOS
Return on average equity . . . . . . . . . . . . . . 33.06% 40.24% 31.17% 39.96%
Return on average assets . . . . . . . . . . . . . . 7.66% 9.94% 7.22% 9.77%
Yield on earning assets . . . . . . . . . . . . . . . 22.13% 22.61% 21.14% 22.53%
Rate on interest bearing liabilities . . . . . . . . 7.04% 6.42% 6.79% 6.32%
Net interest margin . . . . . . . . . . . . . . . . . 17.24% 18.42% 16.42% 18.40%
</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 September 30, 1995 (unaudited) when
compared with September 30, 1994 (unaudited) and December 31, 1994, and the
results of operations for the three and nine months ended September 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 20% to $1,144.1 million from $950.7
million one year ago. Finance receivables increased 19% to $976.6 million at
September 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 September 30, 1995 total assets
and finance receivables increased 14% and 16% 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
25 states where offices are located. The total number of offices at September
30, 1995 was 274 compared to 237 at September 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>
SEPT. 30, 1995 SEPT. 30, 1994 DEC. 31, 1994
% of % of % of
Amount Total Amount Total Amount Total
<S> <C> <C> <C> <C> <C> <C>
Sales finance receivables . . . . . . . . $1,267,466 90% $1,092,644 91% $1,136,958 89%
Direct finance receivables . . . . . . . 144,924 10% 106,355 9% 135,472 11%
Total gross finance receivables . . . . . 1,412,390 100% 1,198,999 100% 1,272,430 100%
Unearned finance charges . . . . . . . . (243,161) (213,180) (222,284)
Unearned insurance commissions,
insurance premiums and
insurance reserves . . . . . . . . . (7,848) (9,245) (10,279)
Finance receivables . . . . . . . . . . . $1,161,381 $976,574 $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 nine month periods ended September 30, 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . . . . . . $22,488 $18,344
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 1,030
Provision charged to expense . . . . . . . . . . . . . . . . . . . 8,762 4,833
Finance receivables charged-off . . . . . . . . . . . . . . . . . . (6,399) (3,809)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,745 1,135
Balance at September 30 . . . . . . . . . . . . . . . . . . . . . . $26,596 $21,533
Allowance as a percent of finance receivables
outstanding at end of period . . . . . . . . . . . . . . . . . 2.29% 2.20%
</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 $71.4 million
and $71.7 million at September 30, 1995 and 1994 respectively.
DEBT
The primary source for funding the Company's finance receivables comes from the
issuance of debt. At September 30, 1995 the Company had total debt of $829.7
million which compares with $660.3 million at September 30, 1994.
In addition to the Company's outstanding debt the Company has revolving credit
facilities which total $500 million. The revolving credit facilities are
totally available for use by the Company and at September 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>
SEPT. 30, 1995 SEPT. 30, 1994 DEC. 31, 1994
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Senior Debt:
Commercial paper . . . . . . . . . . . $397,311 6.1% $356,897 5.1% $449,945 6.4%
Term notes . . . . . . . . . . . . . . 398,875 7.2% 265,500 7.6% 265,375 7.1%
Subordinated debt . . . . . . . . . . . . 33,500 10.2% 37,930 10.2% 35,500 10.2%
Total . . . . . . . . . . . . . . $829,686 6.8% $660,327 6.4% $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 September 30, 1995.
The following table sets forth information with respect to maturities of senior
and subordinated debt at September 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 . . . . . . . . . . . . . $397,311 125 - 397,436
1996 . . . . . . . . . . . . . - 40,125 - 40,125
1997 . . . . . . . . . . . . . - 57,625 18,000 75,625
1998 . . . . . . . . . . . . . - 166,000 15,500 181,500
After 1998 . . . . . . . . . . - 135,000 135,000
Total . . . . . . . . . . . . . $397,311 $398,875 $33,500 $829,686
</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 September 30, 1995 was
$257.1 million which compares with $226.5 million at September 30, 1994 and
$227.5 million at December 31, 1994. For the nine months ended September 30,
1995 the Company had net income of $61.8 million and paid cash dividends of
$42.9 million. In addition, eligible employees of the Company exercised options
to purchase shares resulting in $12.6 million also being added to the equity of
the Company.
At September 30, 1995 stockholders' equity stated as a percent of total assets
was 22.5% which compares with 23.8% at September 30, 1994 and 22.0% at December
31, 1994.
On September 15, 1995 the Company declared a three-for-two stock split to be
distributed on October 31, 1995. This was the seventh stock split declared by
the Company since becoming a publicly owned Company in April 1989. The common
shares outstanding after the split will be approximately 176.5 million shares.
RESULTS OF OPERATIONS
NET INCOME
For the three and nine months ended September 30, 1995 the Company had net
income of $21.9 million and $61.8 million which represent decreases of 3% and 2%
from the $22.5 million and $63.0 million earned in 1994. This relatively flat
level of net income is the net result of higher interest income derived from a
larger portfolio 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 nine months ended September 30, 1995 the
Company's net interest income was $50.5 million and $144.8 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 18.12% for the
three months ended September 30, 1995 and 16.42% for the nine months ended
September 30, 1995. This compares with a net interest margin of 18.42% and
18.40% for the three and nine months ended September 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 nine months ended September 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 . . . . $1,174,731 $65,000 22.13% $944,882 $53,399 22.61%
Interest bearing liabilities . 816,901 14,499 7.10% 616,237 9,969 6.42%
Net . . . . . . . . . . . . . . $357,830 $50,501 15.03% $328,645 $43,430 16.19%
Net interest margin as a
percentage of average interest
earning assets . . . . . . . . 17.20% 18.42%
1995 1994
Annualized Annualized
NINE 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 . . . . $1,174,731 $186,263 21.14% $899,668 $152,033 22.53%
Interest bearing liabilities . 816,901 41,506 6.77% 588,423 27,799 6.32%
Net . . . . . . . . . . . . . . $357,830 $144,757 14.37% $311,245 $124,234 16.21%
Net interest margin as a
percentage of average interest
earning assets . . . . . . . . 16.43% 18.40%
</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 nine months ended September 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 nine
months ended September 30 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Insurance commissions . . . . . . . . . . . . . . . . . . $4,468 $4,906 $15,813 $12,990
Insurance premiums . . . . . . . . . . . . . . . . . . . 1,697 2,411 4,872 6,665
Fees and other . . . . . . . . . . . . . . . . . . . . . 1,970 2,911 5,900 7,678
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $8,135 $10,228 $26,585 $27,333
Other income as a % of average interest
earnings assets (Annualized) . . . . . . . . . . . . . . 2.77% 4.33% 3.02% 4.05%
</TABLE>
OTHER EXPENSES
In addition to interest expense and the provision for finance credit losses, the
Company incurs other operating expenses in the conduct of its business.
The following table summarizes the components of other expenses for the three
and nine months ended September 30 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Salaries and employees benefits . . . . . . . . . . . . . $12,248 $8,887 $35,367 $25,972
Insurance claims expense . . . . . . . . . . . . . . . . 315 560 445 1,820
Other operating expenses . . . . . . . . . . . . . . . . 7,813 5,916 27,835 16,286
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $20,376 $15,363 $63,647 $44,078
Other expenses as a % of average interest
earning assets (Annualized) . . . . . . . . . . . . . . . 6.94% 6.50% 7.22% 6.53%
</TABLE>
INCOME TAXES
Income taxes increased due to a higher level of pretax income in 1995. The
effective tax rate was 37.5% 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Loss provision charged to income . . . . . . . . . . . . $3,137 $1,657 $8,762 $4,833
Charge-offs net of recoveries . . . . . . . . . . . . . . 1,926 1,149 4,654 2,674
Allowance for finance credit losses at end of period . . 24,796 21,533
Dealer reserves at end of period . . . . . . . . . . . . 73,179 71,728
Ratios:
Net charge offs (annualized) against allowance
to average finance receivables . . . . . . . . . . . . . .66% .39% .55% .40%
Allowance for finance credit losses to net finance
receivables at end of period . . . . . . . . . . . . . . 2.29% 2.20%
Dealer reserves to gross sales finance receivables
at end of period . . . . . . . . . . . . . . . . . . . . 5.63% 6.56%
</TABLE>
DELINQUENCIES
If an account becomes 60 or more days contractually delinquent and no full
contractual payment is received in the month the account attains such
delinquency status, it is classified as delinquent. The following table sets
forth certain information regarding 60 day and greater contractually delinquent
accounts at September 30 (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
% of related % of related
Gross Outstanding Gross Outstanding
Receivable Receivable
Amount Balance Amount Balance
<S> <C> <C> <C> <C>
Sales finance receivables . . . . . . . . . . $8,948 .69% $5,277 .48%
Direct finance receivables . . . . . . . . . 3,046 2.09% 3,068 2.89%
Total $11,994 .83% $8,345 .72%
</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, 52% has an
original maturity of greater than one year at a fixed rate of interest.
The Company also maintains revolving credit facilities totalling $500 million.
At September 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 September 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 closed on October 23, 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 - None
Item 5. Other Information - Not Applicable
Item 6. (a) Exhibits - See Exhibit Index following the signature page
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the third quarter of 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 NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Net income per share is computed by dividing net income by the total of the
weighted average common shares and common stock equivalents outstanding during
the period. Average common shares and common stock equivalents have been
adjusted to reflect the four-for-three stock splits of Mercury Finance Company
distributed to stockholders on December 28, 1989, October 31, 1990, June 10,
1991 and December 5, 1991, the two-for-one stock split distributed on June 19,
1992, the four-for-three stock split distributed on June 22, 1993 and the three-
for-two split distributed on October 31, 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine 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 . . . . . . . . $21,855 $22,480 $61,814 $63,037
2. Weighted average common shares
outstanding (adjusted for stock split) . . . . . . 176,233 174,003 175,351 173,787
3. Treasury stock . . . . . . . . . . . . . . . . . . (2,974) (95) (2,974) (95)
EFFECT OF COMMON STOCK EQUIVALENTS (C.S.E.):
4. Weighted average shares reserved for
stock options . . . . . . . . . . . . . . . . . . 1,878 1,884 1,596 2,128
NET INCOME PER COMMON SHARE:
5. Weighted average common share and
common stock equivalents (line 2+3+4) . . . . . . 175,137 175,792 173,973 175,820
6. Mercury Finance Company
net income per share (line 1 / line 5) . . . . . . $0.12 $0.13 $0.36 $0.36
</TABLE>
