SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarter Ended March 31, 1998 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 X No
Indicate the number of shares outstanding of each issuer's class of common
stock, as of the latest practicable date.
Common Stock - $1 par value, 177,900,671 shares as of April 27, 1998.
Treasury Stock - 5,402,957 shares as of April 27, 1998.
MERCURY FINANCE COMPANY
FORM 10-Q
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets . . . . . . . 1
Condensed Consolidated Statements of Income and Other
Comprehensive Income . . . . . . . . . . . . . . 2
Consolidated Statements of Changes in Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows . . 4
Notes to Condensed Consolidated Financial Statements 5
Report of Independent Public Accountants . . . . . 12
Condensed Consolidated Average Balance Sheets . . . 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 32
Item 2. Changes in Securities . . . . . . . . . . . . . . 32
Item 3. Defaults Upon Senior Securities . . . . . . . . . 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information . . . . . . . . . . . . . . . . 32
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 32
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 33
INDEX OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . 34
Exhibit No. 11 - Computation of Net Income Per Share 35
Exhibit No. 27 - Financial Data Schedule . . . . . 36
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MERCURY FINANCE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION> March 31 Dec. 31
(Dollars in thousands, except per share amounts) 1998 1997 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $65,296 $25,790 $53,896
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 0 221,421 0
Finance receivables . . . . . . . . . . . . . . . . . . . . . . 860,585 1,126,119 971,377
Less: Allowance for finance credit losses . . . . . . . . . . (88,191) (111,584) (102,204)
Less: Nonrefundable dealer reserves . . . . . . . . . . . . . (43,667) (80,677) (52,731)
Finance receivables, net . . . . . . . . . . . . . . . . . . . 728,727 933,858 816,442
Income tax receivable . . . . . . . . . . . . . . . . . . . . . 52,351 51,072 79,941
Deferred income taxes, net . . . . . . . . . . . . . . . . . . 0 39,260 0
Furniture, fixtures and equipment, net of
accumulated depreciation . . . . . . . . . . . . . . . . 4,908 7,043 5,899
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . 0 98,353 0
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,389 14,248 13,604
Deferred acquisition costs and present value of
future profits . . . . . . . . . . . . . . . . . . . . . 0 43,503 0
Other assets (including repossessions) . . . . . . . . . . . . 7,738 61,087 9,622
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $872,409 $1,495,635 $979,404
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper and notes (Notes 7 and 10) . . . $366,980 $503,619 $416,731
Senior debt, term notes (Notes 7 and 10) . . . . . . . . . . . 363,265 488,625 412,514
Subordinated debt (Notes 7 and 10) . . . . . . . . . . . . . . 22,500 22,500 22,500
Accounts payable and other liabilities . . . . . . . . . . . . 38,442 70,779 44,959
Unearned premium and claim reserves . . . . . . . . . . . . . . 0 227,450 0
Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . 0 30,026 0
Reserve for loss on sale of Lyndon (Note 4) . . . . . . . . . . 0 29,528 0
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . $791,187 $1,372,527 $896,704
Contingencies (Note 5)
STOCKHOLDERS' EQUITY
Common stock - $1.00 par value:
300,000,000 shares authorized
Mar 31 1998 - 177,900,671 shares outstanding
Mar 31 1997 - 177,900,671 shares outstanding
Dec 31 1997 - 177,900,671 shares outstanding . . . . $177,901 $177,901 $177,901
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . 8,244 8,244 8,244
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . (51,259) (8,756) (49,781)
Accumulated other comprehensive income . . . . . . . . . . . . 0 (617) 0
Treasury stock - Mar 31, 1998 - 5,402,957 shares at cost
Mar 31, 1997 - 5,402,957 shares at cost
Dec 31, 1997 - 5,402,957 shares at cost . . (53,664) (53,664) (53,664)
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . $81,222 $123,108 $82,700
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . $872,409 $1,495,635 $979,404
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
OTHER COMPREHENSIVE LOSS
PERIODS ENDED MARCH 31
<CAPTION>
Three Months Ended
(In thousands except per share amounts) 1998 1997
(Unaudited)
<S> <C> <C>
INTEREST INCOME
Finance charges and loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . $50,499 $63,491
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 642 3,289
Total finance charges, fees and investment income . . . . . . . . . . . . . . . . 51,141 66,780
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,597 20,716
Net interest income before provision for finance credit losses . . . . . . . . . 32,544 46,064
Provision for finance credit losses . . . . . . . . . . . . . . . . . . . . . . . 12,959 30,462
Net interest income after provision for finance credit losses . . . . . . . . . . 19,585 15,602
OTHER INCOME
Insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,357 23,220
Fees, commissions and other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,569 3,503
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,926 26,723
OTHER OPERATING EXPENSES
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . 13,002 14,644
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,215 1,555
Equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 908 852
Data processing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 543
Insurance claims expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 732 16,715
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,362 8,692
Total other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . 22,699 43,001
OPERATING INCOME/(LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812 (676)
NON-OPERATING (INCOME)/EXPENSES
Loss on sale of Lyndon (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . 0 29,528
Non-operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,255 5,129
Non-operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,965) 0
Total non-operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 2,290 34,657
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,478) (35,333)
Credit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (2,165)
NET LOSS ATTRIBUTABLE TO COMMON SHARES . . . . . . . . . . . . . . . . . . . . . ($1,478) ($33,168)
OTHER COMPREHENSIVE LOSSES
Unrealized depreciation on available for sale securities . . . . . . . . . . . . 0 (1,559)
COMPREHENSIVE LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($1,478) ($34,727)
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,498 172,465
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,498 172,465
Per share net loss attributable to common shares:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($0.01) ($0.19)
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($0.01) ($0.19)
Dividends per share declared . . . . . . . . . . . . . . . . . . . . . . . . . . $0.00 $0.075
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
PERIODS ENDED MARCH 31
<CAPTION>
Three Months Ended
(Dollars in thousands) 1998 1997
(Unaudited)
<S> <C> <C>
COMMON STOCK
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . $177,901 $177,719
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 182
Balance at March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $177,901 $177,901
PAID IN CAPITAL
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . $8,244 $6,539
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 1,705
Balance at March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,244 $8,244
RETAINED EARNINGS/(DEFICIT)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . ($49,781) $37,349
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,478) (33,168)
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (12,937)
Balance at March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($51,259) ($8,756)
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . $0 $942
Change during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (1,559)
Balance at March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0 ($617)
TREASURY STOCK
Balance at beginning of period and at March 31 . . . . . . . . . . . . . . . . . ($53,664) ($53,664)
Total stockholders' equity at March 31 . . . . . . . . . . . . . . . . . . . . . $81,222 $123,108
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED MARCH 31
<CAPTION>
Three Months Ended
(Dollars in thousands) 1998 1997
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($1,478) ($33,168)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for finance credit losses . . . . . . . . . . . . . . . . . . . . 12,959 30,462
Decrease in income tax receivable . . . . . . . . . . . . . . . . . . . . . 27,590 0
Credit for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 0 (5,904)
Loss on sale of Lyndon . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 29,528
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 673 739
Net increase in reinsurance receivable . . . . . . . . . . . . . . . . . . . 0 (4,895)
Net increase in deferred acquisition costs and present
value of future profits . . . . . . . . . . . . . . . . . . . . . . . . . 0 19,306
Net decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,884 12,652
Net increase in reinsurance payable . . . . . . . . . . . . . . . . . . . . 0 12,582
Net decrease in unearned premium and claim reserves . . . . . . . . . . . . 0 (12,123)
Net decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . (5,852) (23,440)
Net decrease in nonrefundable dealer reserves . . . . . . . . . . . . . . . 0 (8,701)
Net cash provided by operating activities . . . . . . . . . . . . . . . 35,776 17,038
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance receivables . . . . . . . . . . . . . . . . . 159,312 197,052
Finance receivables originated or acquired . . . . . . . . . . . . . . . . . (84,556) (179,386)
Purchase of short term and available for sale investment securities . . . . 0 (43,448)
Purchase of held to maturity investment securities . . . . . . . . . . . . . 0 (306)
Proceeds from sales and maturities of short term and available for
sale investment securities . . . . . . . . . . . . . . . . . . . . . . . . 0 34,102
Proceeds from maturities of held to maturity investment securities . . . . . 0 24
Net purchases of property and equipment . . . . . . . . . . . . . . . . . . (132) (301)
Net cash provided by investing activities . . . . . . . . . . . . . . . 74,624 7,737
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of senior debt, commercial paper and notes . . . . . . . . . (99,000) (21,432)
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . 0 1,490
Net cash used in financing activities . . . . . . . . . . . . . . . . . (99,000) (19,942)
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . 11,400 4,833
Cash and equivalents at beginning of quarter . . . . . . . . . . . . . . . . 53,896 20,957
Cash and equivalents at end of quarter . . . . . . . . . . . . . . . . . . . $65,296 $25,790
SUPPLEMENTAL DISCLOSURES
Income taxes paid to federal and state government . . . . . . . . . . . . . $0 $0
Interest paid to creditors . . . . . . . . . . . . . . . . . . . . . . . . . $21,196 $17,463
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
</TABLE>
MERCURY FINANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. Basis of Presentation.
The accompanying (a) condensed balance sheet as of December 31, 1997, which has
been derived from audited financial statements, and (b) unaudited interim
condensed financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although Mercury Finance
Company ("Mercury" or the "Company") believes that the disclosures made are
adequate to make the information presented not misleading. The condensed
financial statements of the Company, in the opinion of management, reflect all
necessary adjustments for a fair presentation of results as of the dates and for
the periods covered by the financial statements. See Note 10 for a discussion
of the current status of Mercury's ongoing negotiations with its creditors. If
the Company effectuates a restructuring, as is contemplated, the Company will
adopt fresh-start accounting.
The results of the interim periods are not to be considered as being indicative
of the results of operations that are expected for the full year as the Company
is currently experiencing a significant reduction in its finance receivable
portfolio and dramatic shifts in the relative delinquency of the remaining
portfolio.
The Company's independent public accountants qualified their report on the
Company's 1997 financial statements due to their doubt as to the ability of the
Company to continue as a going concern. It is suggested that the unaudited
interim condensed 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 Annual Report on Form 10-K for
the year ended December 31, 1997.
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. Actual results
could differ from these estimates.
2. Common Stock and Per Share Amounts.
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.
In February, 1997, following the announcement of the discovery of accounting
irregularities which caused the overstatement of the previously released
earnings for 1995 and interim earnings for 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. As a
result, the calculation of the common share equivalents becomes meaningless for
the quarter ended March 31, 1998. For the quarter ended March 31, 1997, common
share equivalents would have been anti-dilutive to earnings per share and were
not included in the weighted average shares calculation. Therefore, for both
periods, the Company's basic and diluted weighted average common shares
outstanding are the same.
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
statements.
3. Reclassifications.
Certain data from the prior periods has been reclassified to conform to the 1998
presentation.
4. Disposition of Lyndon.
On March 28, 1997, Mercury executed a Stock Purchase Agreement for the sale of
Lyndon in the amount of approximately $92 million. The sale, which closed on
June 3, 1997, resulted in a loss to Mercury of approximately $29.5 million net
of earnings through the date of sale. This loss was reflected on Mercury's 1997
first quarter consolidated statement of income.
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.
5. 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 its earnings for certain prior periods 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.
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. 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 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 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 at December 31, 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.
See Item 3 in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, for more information regarding the litigation arising from
the overstatement of earnings and the restatement of previously issued financial
statements.
The Company recognizes the expense for litigation when the incurrence 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.
6. Income Taxes.
The Company recorded a benefit for income taxes for the first quarter of 1997
due to reporting a pre-tax loss that was able to be carried back to previous
periods of taxable income to generate tax refunds. The effective tax rate was
6.1% for the first quarter of 1997 which is significantly lower than the
statutory rate as the loss recorded on the sale of Lyndon was not deductible for
tax purposes. The Company recorded a full valuation allowance related to the
tax benefit for the loss recorded during the first quarter of 1998 as the
Company is unable to carryback the losses to prior periods of taxable income.
In the third quarter of 1997, Mercury 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 years ended December 31, 1996 and December 31, 1997.
Accordingly, in the third quarter of 1997 for financial reporting purposes, a
portion of the previously recorded deferred taxes were reclassified as currently
refundable. During the first quarter of 1998, the Company received $27.4
million in tax refunds, but is unable to provide an estimate as to the expected
date of receipt of the remaining tax receivable at March 31, 1998 of $52.4
million.
7. Debt.
As a result of net losses incurred, accounting irregularities, and related
matters, Mercury violated certain covenants permitting the holders of its Senior
Term Notes and Subordinated Debt to accelerate all such debt which, if
accelerated, would result in all of such debt being currently due and payable.
In addition, the Company is no longer permitted by the terms of certain debt
instruments to pay dividends. The following table represents Mercury's debt
instruments and the corresponding stated rates at the end of the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997 DEC. 31, 1997
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Senior Debt:
Commercial paper and short-term loans 366,980 5.7% $503,619 5.6% $416,731 5.7%
Term notes . . . . . . . . . . . . . . 363,265 7.0% 488,625 7.0% 412,514 7.0%
Subordinated debt . . . . . . . . . . . . 22,500 10.3% 22,500 10.3% 22,500 10.3%
Total . . . . . . . . . . . . . . 752,745 6.5% $1,014,744 6.4% $851,745 6.5%
</TABLE>
The Company has a forbearance agreement with its lenders which, including
extensions (the "Forbearance Agreements"), expires July 15, 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. Through May 5, 1998, approximately $307
million of principal has been paid to creditors under the Forbearance Agreements
of which $154 million was paid during 1998. See Note 10 - Subsequent Events and
the Company's Current Report on Form 8-K filed on May 15, 1998 for more
information regarding the continuation of the Forbearance Agreements.
8. Going Concern.
The Company incurred losses for 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. There can be no assurance
that the Company will be successful in its attempt to complete the financial
restructuring of the Company 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.
9. Recent Accounting Pronouncements.
In July, 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" which
establishes standards for reporting and displaying comprehensive income. The
Company adopted this statement effective January 1, 1998. The application of
this standard did not have a significant impact on the financial position,
results of operations or financial statement disclosures of the Company.
Accumulated other comprehensive income in the accompanying financial statements
represents unrealized appreciation/(depreciation) on available-for-sale
securities.
10. Subsequent Events.
On May 14, 1998, the Company entered into an agreement with substantially all of
its senior lenders and with the subordinated debt holder providing for the
financial restructuring and recapitalization of the Company. The agreement
contemplates that the restructuring will be implemented under a prestructured
plan of reorganization to be filed in the federal bankruptcy court within the
next 60 days. The Company conducts its business operations through wholly
owned subsidiaries. It is anticipated that none of the Company's subsidiaries
will be included in the chapter 11 case. As a result, all trade debt and dealer
contracts will remain unimpaired and will continue to be paid and honored in the
ordinary course without interruption. If the plan of reorganization is approved
by the court, the Company's senior lenders will receive new senior secured notes
equal to 75 percent of the face value of their then current claims and all of
the initial equity of the reorganized company. The holders of subordinated
notes will receive $22.5 million in new junior unsecured subordinated notes.
The shareholders and the securities class action claimants, as a combined group,
will receive three series of warrants, each series exercisable for five percent
of the common stock of the restructured company, with expiration dates of three,
four and five years, respectively, from approval of the plan. The exercise
prices will be set at increasing levels. The first series will contain an
exercise price reflective of a market price for the common stock which results
in the senior lender(s) having received total value from both common stock and
senior secured notes equal to 100% of their claims on the effective date of the
plan. The second and third series will contain exercise prices reflective of a
market price for the common stock which translates into a 10% and a 20% premium,
respectively, of the total amount of such claims. Consequently, it is
anticipated that the exercise prices of the warrants will be significantly in
excess of the initial market price of the common stock of the restructured
company. Shareholders as of May 14, 1998 will also have the right to purchase
their pro rata amount of the senior lenders' debt at a price, in cash, equal to
98.5% of the senior lenders' claims, subject to a specific provision detailed
in the restructuring agreement.
In connection with the proposed restructuring arrangement, the Company and its
lenders agreed to extend their existing forbearance agreements to July 15,
1998. Under the extended forbearance agreement, the Company will continue to
keep interest payments current and will make periodic payments to reduce the
principal of the outstanding debt as cash flow permits. In addition, the
Company will pay a forbearance fee of 2.25% of outstanding debt to those senior
lenders who have executed the extended forbearance agreement. In return, the
Company's lenders have agreed not to take action against the Company while the
forbearance agreement is in effect, subject to the terms thereof.
For a complete description of the proposed restructuring arrangement, see the
Current Report on Form 8-K filed with the Securities and Exchange Commission on
May 15, 1998.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Mercury Finance Company
We have reviewed the accompanying condensed consolidated balance sheets of
Mercury Finance Company and subsidiaries as of March 31, 1998 and March 31,
1997, and the related condensed consolidated statements of income, changes in
stockholders' equity and cash flows for the three-month periods ended March 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Mercury Finance Company and subsidiaries as of
December 31, 1997 (not presented herein), and in our report dated March 17,
1998, we expressed a qualified opinion on that statement. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 8 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 described in Note 10, the
Company entered into an agreement with its lenders with respect to the
principal terms of a financial restructuring of the Company. The agreement
contemplates that the restructuring will be accomplished pursuant to a plan of
reorganization to be filed in the Bankruptcy Court within the next several
months. If the Company effectuates a restructuring, as is contemplated, the
Company will adopt fresh-start accounting. 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.
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 15, 1998
<TABLE>
MERCURY FINANCE COMPANY
CONDENSED CONSOLIDATED AVERAGE BALANCE SHEETS
PERIODS ENDED MARCH 31
(Unaudited)
<CAPTION>
Three Months Ended
(Dollars in thousands) 1998 1997
<S> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,596 $23,374
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 217,189
Finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915,981 1,143,272
Less allowance for finance credit losses . . . . . . . . . . . . . . . . . . . (95,198) (104,673)
Less nonrefundable dealer reserves . . . . . . . . . . . . . . . . . . . . . . (48,199) (85,028)
Finance receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 772,584 953,571
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,146 52,418
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 95,906
Deferred acquisition costs and present value of profits . . . . . . . . . . . . . 0 53,156
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 36,308
Furniture, fixtures and equipment, net of accumulated depreciation . . . . . . . 5,404 7,155
Other assets (including repossessions & goodwill) . . . . . . . . . . . . . . . . 22,177 80,423
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $925,907 $1,519,500
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . $391,856 $514,335
Senior debt, term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387,890 488,625
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500 22,500
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . 41,700 76,031
Unearned premium and claim reserve . . . . . . . . . . . . . . . . . . . . . . . 0 233,512
Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 23,735
Reserve for loss on sale of Lyndon . . . . . . . . . . . . . . . . . . . . . . . 0 14,764
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 843,946 1,373,502
STOCKHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,901 177,810
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,244 7,392
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,520) 14,297
Unrealized gain on available for sale securities . . . . . . . . . . . . . . . . 0 163
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53,664) (53,664)
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . 81,961 145,998
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . $925,907 $1,519,500
NUMBER OF DAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 90
MONTHS COMPLETED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3
RATIOS (Annualized)
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7.31)% (92.13)%
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.65)% (8.85)%
Yield on earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.64% 19.91%
Rate on interest bearing liabilities . . . . . . . . . . . . . . . . . . . . . . 9.40% 8.19%
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.41% 13.73%
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"SAFE HARBOR" STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995:
This Quarterly Report on Form 10-Q for the quarter ended March 31, 1998,
contains certain forward-looking statements pertaining to the outcome of the
Company's agreement with certain lenders, the expected terms of securities
of the restructured Company, expected operating results, loss provisions and
other matters. These statements are subject to uncertainties and other
factors. Should one or more of these uncertainties or other factors
materialize, or should underlying assumptions prove incorrect, actual events
or results may vary materially from those anticipated. Such uncertainties
and other factors include the outcome of negotiations with the Company's
senior lenders with respect to the plan of reorganization and other
documents related thereto, approval by the Bankruptcy Court, objections of
third parties, as well as the Company's ability to acquire finance
receivables on terms it deems acceptable, changes in the quality of finance
receivables, trends in the automobile and finance industries, and general
economic conditions. The Company undertakes no obligation to update any
such factor or to publicly announce the results of any revisions to any
forward-looking statements contained herein to reflect future events or
developments.
BACKGROUND
Mercury Finance Company ("Mercury" or the "Company") is a consumer finance
concern engaged, through its operating subsidiaries, in the business of
acquiring 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 acquiring individual installment sales finance contracts
from automobile dealers and retail vendors. 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.
Mercury's sales finance contracts and loans range for periods from 3 months to
48 months at annual interest rates ranging, with minor exception, from 18% to
40%. Generally all loans are repayable in monthly installments. Late payment
fees generally are assessed to accounts which fail to make their scheduled
payments within 10 days of the scheduled due date.
OVERVIEW
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 financial statements for fiscal
1995, each of the 1995 quarters, and for the first three quarters of 1996. See
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
and the Company's Annual Report on Form 10-K for the year ended December 31,
1997 for more information regarding the impact of the overstatement of earnings
and the restatement of previously issued financial statements.
During the first quarter of 1997, the Board of Directors hired the services of a
crisis manager to assist in the operation of the business. In addition, an
investment banker was retained to assist in the refinancing of existing debt
and/or explore strategic alternatives. The Company has also been named as a
defendant in a variety of lawsuits generally arising from the restatement of
previously reported financial information.
As a result of the net losses incurred in 1996 and 1997, accounting
irregularities, and related matters, Mercury violated certain debt covenants
thereby permitting the holders of its debt to accelerate all such debt which, if
accelerated, would result in all of such debt being currently due and payable.
Accordingly, the Company has been accruing interest expense at default rates of
interest since February 10, 1997.
Mercury continues to experience fierce competition 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.
The high provision for credit losses as a result of higher delinquencies and
charge-offs combined with interest expense at default rates caused the Company
to incur an operating loss for the three month period ended March 31, 1997. The
Company has since implemented stricter underwriting criteria and during 1998 has
experienced an improvement in delinquencies and charge-offs but at the expense
of new volume.
The Company's challenge is to acquire sufficient sales finance contracts within
the stricter underwriting standards to support the current Company structure and
return to profitable operations. It is anticipated that the Company will need
to significantly increase new volume from current levels to achieve this minimum
level.
The following is management's discussion and analysis of the consolidated
financial condition of the Company at March 31, 1998 (unaudited) when compared
with March 31, 1997 (unaudited) and December 31, 1997 and the results of
operations for the three months ended March 31, 1998 and 1997 (unaudited). This
discussion should be read in conjunction with the Company's condensed
consolidated financial statements and notes thereto appearing elsewhere in this
quarterly report.
RECENT DEVELOPMENTS
On May 14, 1998, the Company entered into an agreement with substantially all of
its senior lenders and with the subordinated debt holder providing for the
financial restructuring and recapitalization of the Company. The agreement
contemplates that the restructuring will be implemented under a prestructured
plan of reorganization to be filed in the federal bankruptcy court within the
next 60 days. The Company conducts its business operations through wholly
owned subsidiaries. It is anticipated that none of the Company's subsidiaries
will be included in the chapter 11 case. As a result, all trade debt and dealer
contracts will remain unimpaired and will continue to be paid and honored in the
ordinary course without interruption. If the plan of reorganization is approved
by the court, the Company's senior lenders will receive new senior secured notes
equal to 75 percent of the face value of their then current claims and all of
the initial equity of the reorganized company. The holders of subordinated
notes will receive $22.5 million in new junior unsecured subordinated notes.
The shareholders and the securities class action claimants, as a combined group,
will receive three series of warrants, each series exercisable for five percent
of the common stock of the restructured company, with expiration dates of three,
four and five years, respectively, from approval of the plan. The exercise
prices will be set at increasing levels. The first series will contain an
exercise price reflective of a market price for the common stock which results
in the senior lender(s) having received total value from both common stock and
senior secured notes equal to 100% of their claims on the effective date of the
plan. The second and third series will contain exercise prices reflective of a
market price for the common stock which translates into a 10% and a 20% premium,
respectively, of the total amount of such claims. Consequently, it is
anticipated that the exercise prices of the warrants will be significantly in
excess of the initial market price of the common stock of the restructured
company. Shareholders as of May 14, 1998 will also have the right to purchase
their pro rata amount of the senior lenders' debt at a price, in cash, equal to
98.5% of the senior lenders' claims, subject to a specific provision detailed
in the restructuring agreement.
In connection with the proposed restructuring arrangement, the Company and its
lenders agreed to extend their existing forbearance agreements to July 15,
1998. Under the extended forbearance agreement, the Company will continue to
keep interest payments current and will make periodic payments to reduce the
principal of the outstanding debt as cash flow permits. In addition, the
Company will pay a forbearance fee of 2.25% of outstanding debt to those senior
lenders who have executed the extended forbearance agreement. In return, the
Company's lenders have agreed not to take action against the Company while the
forbearance agreement is in effect, subject to the terms thereof.
For a complete description of the proposed restructuring arrangement, subject to
the terms thereof, see the Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 15, 1998.
FINANCIAL CONDITION
ASSETS AND FINANCE RECEIVABLES
Total assets of the Company decreased 42% to $872.4 million from $1,495.6
million at March 31, 1997. Total assets declined due to the sale of Lyndon
Insurance Group subsidiaries in June, 1997 and a decrease in sales finance
receivables. Finance receivables decreased 23.6% to $860.6 million at March 31,
1998 from $1,126.1 million at March 31, 1997. During the period from December
31, 1997 through March 31, 1998, total assets and finance receivables decreased
10.9% and 11.4%, respectively. Finance receivables decreased as a result of a
lower level of new volume due to stricter credit standards, a fewer number of
branches and the disruption caused by the accounting irregularities.
The Company's offices in Florida, Texas and Illinois accounted for approximately
16%, 16%, and 11%, respectively, of all sales and direct finance receivables at
March 31, 1998. The total number of offices at March 31, 1998 was 203 compared
to 289 at March 31, 1997 and 218 at December 31, 1997. 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-offs of leasehold improvements, aggregated $325,000.
In December, 1997, Mercury announced the implementation of a business plan that
included the closing of an additional 70 branches. The number of additional
branch closings was subsequently increased to 82. Upon completion of the
program, Mercury is expected to have 180 branches. Branches are being closed
because they are either unprofitable or considered redundant in view of the
location of nearby branches. The additional closings are estimated to result in
a decrease in the loan portfolio of approximately $192 million from the
March 31, 1998 level over the following twelve to fifteen months. The closings
will not be treated as discontinued operations; however, a provision of
$3,400,000 was recorded in the fourth quarter of 1997 to cover the costs of the
closings. See "Restructuring Expenses."
Also in the first quarter of 1998, the Company initiated 15 regional centralized
purchasing offices that review and approve the origination of loans and
acquisitions of sales finance contracts for the 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.
The following table summarizes the composition of finance receivables at the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1998 1997 1997
<S> <C> <C> <C>
DIRECT FINANCE RECEIVABLES
Interest bearing . . . . . . . . . . . . . . . . $ 17,916 $ 23,643 $ 20,504
Precompute . . . . . . . . . . . . . . . . . . . 113,714 128,016 129,120
Total direct finance receivables . . . . . . . . . 131,630 151,659 149,624
SALES FINANCE RECEIVABLES
Total sales finance receivables . . . . . . . . . 837,709 1,117,535 954,319
Total gross finance receivables . . . . . . . . . . 969,339 1,269,194 1,103,943
Less: Unearned Finance Charges . . . . . . . . . . (173,818) (218,428) (200,820)
Unearned commissions, insurance premiums
and insurance claim reserves . . . . . . . . . (2,708) (8,326) (3,242)
Sales and Direct Finance Receivables . . . . . . . 792,813 1,042,440 899,881
CREDIT CARD
Total credit card . . . . . . . . . . . . . . . . 67,772 83,679 71,496
Total finance receivables . . . . . . . . . . . . . $ 860,585 $ 1,126,119 $ 971,377
</TABLE>
The following sets forth a summary of gross originations (including precomputed
interest and prior to deduction for nonrefundable dealer reserves) excluding
activity of the credit card portfolio for the three months ended March 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Direct finance receivables 24,628 40,437
Sales finance receivables 84,846 201,568
109,474 242,005
</TABLE>
A significant portion of the decrease in new volume is a result of the
previously discussed branch closings.
While management believes that the implementation of the above has significantly
improved the quality of the existing portfolio, the changes have reduced new
volume to a level below that which is required to provide for profitable
operations. Management is hopeful that as Company personnel and the dealers
become accustomed to the new buying organizational structure, volume will
increase, however, at this time, there is no assurance of that occurring.
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.
The Company utilizes 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 charge-offs) into separately
identified pools based upon the period the loans were acquired. Mercury defines
a pool as loans acquired within a given month whereas others in the industry may
use a different basis.
The dealer reserve is amortized and 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 a more
appropriate matching of finance charge income and provision for finance credit
losses.
Reserve requirements for sales finance, direct receivables 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 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.
The following table sets forth a reconciliation of the changes in the allowance
for finance credit losses for the three month periods ended March 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . . . . . . $102,204 $97,762
Provision charged to expense . . . . . . . . . . . . . . . . . . . 12,959 30,462
Finance receivables charged-off, net of recoveries . . . . . . . . (26,972) (16,640)
Balance at March 31 . . . . . . . . . . . . . . . . . . . . . . . . $88,191 $111,584
Allowance as a percent of sales and direct finance
receivables outstanding at end of period . . . . . . . . . . . . 11.12% 10.70%
</TABLE>
The reduction in the amount of provision for credit losses recorded for the
three months ended March 31, 1998 in relation to the same period in 1997 is
primarily due to the decrease in the size of the loan portfolio and an
improvement in the relative delinquency of the remaining portfolio. Management
believes that the change in the relative delinquency of the portfolio
experienced in the first quarter of 1998 is an indication of an overall
improvement in the credit quality of the portfolio due to the implementation of
stricter underwriting standards and a focus on generating volume in the more
profitable regions. Mercury's loss reserving methodology is sensitive to
changes in delinquencies. As such, an improvement in relative delinquencies
will generally have a direct impact on the estimated reserve required as the
amount of loans requiring higher reserve percentages has decreased.
Accordingly, the reduction of the provision for finance credit losses recognized
in the first quarter of 1998 due to the improvement in the relative delinquency
is considered to be a non-recurring event unless significant delinquency changes
are experienced in future periods. The results of this quarter are not
necessarily indicative of future results.
NONREFUNDABLE DEALER RESERVES
Mercury acquires a majority of its sales finance contracts from dealers at a
discount. 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 acquired. The following table sets forth a
reconciliation of the changes in nonrefundable dealer reserves for the three
month periods ended March 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . $ 52,731 $ 89,378
Discounts acquired on new volume . . . . . . . . . . . . . . . . . . . . 5,330 13,994
Losses absorbed, net of recoveries . . . . . . . . . . . . . . . . . . . (14,394) (22,695)
Balance at March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,667 $ 80,677
</TABLE>
The reduction in discounts acquired in 1998 is due primarily to lower new loan
volume.
DEBT
The primary source for funding the Company's finance receivables comes from the
issuance of debt. At March 31, 1998 the Company had total debt of $752.7
million which compares with $1,014.7 million at March 31, 1997.
In addition to the Company's outstanding debt the Company had available through
January 7, 1998 a $50 million revolving credit facility that was secured by all
of Mercury's finance receivables. The Company allowed the facility to expire on
its own terms.
As a result of the 1996 and 1997 net losses, accounting irregularities, and
related matters, Mercury violated its debt covenants permitting the holders of
its Senior Term Notes and Subordinated Debt to accelerate all such debt which,
if accelerated, would result in all of such debt being currently due and
payable. In addition, the Company is no longer permitted by the terms of
certain debt instruments to pay dividends.
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>
MARCH 31, 1998 MARCH 31, 1997 DEC. 31, 1997
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Senior Debt:
Commercial paper and short-term loans $366,980 5.7% $503,619 5.6% $416,731 5.7%
Term notes . . . . . . . . . . . . . . 363,265 7.0% 488,625 7.0% 412,514 7.0%
Subordinated debt . . . . . . . . . . . . 22,500 10.3% 22,500 10.3% 22,500 10.3%
Total . . . . . . . . . . . . . . $752,745 6.5% $1,014,744 6.4% $851,745 6.5%
</TABLE>
The Company has a forbearance agreement with its lenders which, including
extensions (the "Forbearance Agreements"), expires July 15, 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. Through May 5, 1998, approximately $307
million of principal has been paid to creditors under the Forbearance Agreements
of which $154 million was paid during 1998. See Note 10 - Subsequent Events and
the Company's Current Report on Form 8-K filed on May 15, 1998 for more
information regarding the continuation of the Forbearance Agreements.
STOCKHOLDERS' EQUITY
Total stockholders' equity at March 31, 1998 was $81.2 million which compares
with $123.1 million at March 31, 1997 and $82.7 million at December 31, 1997.
For the three months ended March 31, 1998 the Company had a net loss of $1.5
million compared with a net loss of $33.2 million for the three months ended
March 31, 1997. The Company experienced a net loss of $74.2 million for the
fiscal year ended December 31, 1997.
On January 14, 1997, the Company declared dividends of $12.9 million. Payment
of such dividends was subsequently suspended on February 6, 1997. Under the
provisions of the forbearance agreement the Company entered into and by specific
terms of certain instruments, the Company is no longer permitted to pay
dividends.
At March 31, 1998 stockholders' equity stated as a percent of total assets was
9.3% which compares with 8.2% at March 31, 1997 and 8.4% at December 31, 1997.
RESULTS OF OPERATIONS
NET LOSS
For the three months ended March 31, 1998 the Company had a net loss of $1.5
million compared to a net loss of $33.2 million for the three months ended
March 31, 1997. The decrease in net loss is primarily attributable to the
inclusion in 1997 of a charge for the loss on the sale of Lyndon of $29.5
million.
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 months ended March 31, 1998 the Company's net
interest income decreased 29% to $32.5 million when compared with $46.1 million
in 1997. The net interest margin (annualized) which is the ratio of net
interest income before provision for finance credit losses divided by average
interest earning assets was 14.41% in the first quarter of 1998 compared with
13.73% in the first quarter of 1997. The change in net interest margin is
primarily attributable to the sale of Lyndon as the return on Lyndon investments
was approximately 7% while the return on the loan portfolio is approximately
21%. The interest expense percentage increased in 1998 over 1997 due to the
accrual of default rates of interest beginning on February 10, 1997. The
following table summarizes the amount of the net interest margin for the three
months ended March 31 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1998 1997
Annualized Annualized
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>
Interest bearing assets . . . . $915,981 $51,141 22.64% $1,360,461 $66,780 19.91%
Interest bearing liabilities . 802,246 18,597 9.4% 1,025,460 20,716 8.19%
Net . . . . . . . . . . . . . . $113,735 $32,544 13.24% $335,001 $46,064 11.72%
Net interest margin as a
percentage of average interest
earning assets . . . . . . . . 14.41% 13.73%
</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.
For the three months ended March 31, 1998, the Company experienced substantial
decreases in its insurance premiums compared to the comparable year earlier
period due to the sale of Lyndon. The following table summarizes the amounts
earned from these products for the three months ended March 31 (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1998 1997
<S> <C> <C>
Insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,357 23,220
Fees, commissions and other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,569 3,503
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,926 $26,723
Other income as a % of average interest
earning assets (Annualized) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.74% 7.97%
</TABLE>
OTHER EXPENSES (EXCLUDING RESTRUCTURING CHARGES)
In addition to interest expense and the provision for finance credit losses, the
Company incurs other operating expenses in the conduct of its business.
During the first quarter of 1998 other operating expenses decreased 47.2% versus
the first quarter of 1997. The decrease was primarily related to the sale of
Lyndon. The following table summarizes the components of other expenses for the
three months ended March 31 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1998 1997
<S> <C> <C>
Salaries and employees benefits . . . . . . . . . . . . . . . . . . . . . . . . . $13,002 $14,644
Insurance claims expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 732 16,715
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,965 11,642
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,699 $43,001
Other expenses as a % of average interest
earning assets (Annualized) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.05% 12.82%
</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 ended December 31, 1997 was $3.725 million ($0.02 per common share) of
which $1.45 million has been utilized to date. These charges and their
utilization to March 31, 1998 are summarized in the following table (dollars in
thousands):
<TABLE>
<CAPTION>
Amounts Amounts Amounts Amounts to be
Charged Utilized Utilized Utilized Subsequent
in 1997 in 1997 in 1998 to March, 31, 1998
<S> <C> <C> <C> <C>
Asset and leasehold write-offs $ 1,200 $ 200 $ 732 $ 268
Lease buyouts and other expenses 1,025 101 379 545
Employee severance and retention 1,500 0 0 1,500
$ 3,725 $ 301 1,111 $ 2,313
</TABLE>
The Company believes that the amounts provided in 1997 remain adequate to
complete the reductions as planned. Further, the Company does not believe that
reclassification of any amounts are required as of March 31, 1998.
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 INCOME AND EXPENSES
Other non-operating expenses of $4.3 million for the first quarter of 1998 are
15.7% lower than the $5.1 million for the three months ended March 31, 1997 and
include the costs of the investigation of the accounting irregularities,
professional fees related to the negotiations with creditors, legal defense of
the Company with respect to the class action and derivative lawsuits, 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. The first quarter of 1998 included non-operating income of
approximately $2.0 million related to the termination agreement with the prior
chief executive officer.
INCOME TAXES
The Company recorded a benefit for income taxes for the first quarter of 1997
due to reporting a pre-tax loss that was able to be carried back to previous
periods of taxable income to generate tax refunds. The effective tax rate was
6.1% for the first quarter of 1997 which is significantly lower than the
statutory rate as the loss recorded on the sale of Lyndon was not deductible for
tax purposes. The Company recorded a full valuation allowance related to the
tax benefit for the loss recorded during the first quarter of 1998 as the
Company is unable to carryback the losses to prior periods of taxable income.
In the third quarter of 1997, Mercury 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 years ended December 31, 1996 and December 31, 1997.
Accordingly, in the third quarter of 1997 for financial reporting purposes, a
portion of the previously recorded deferred taxes were reclassified as currently
refundable. During the first quarter of 1998, the Company received $27.4
million in tax refunds, but is unable to provide an estimate as to the expected
date of receipt of the remaining tax receivable at March 31, 1998 of $52.4
million.
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
MARCH 31
1998 1997
<S> <C> <C>
Loss provision charged to income . . . . . . . . . . . . . . . . . . . . . . . . $12,959 $30,462
Net charge-offs against allowance . . . . . . . . . . . . . . . . . . . . . . . . 26,972 16,640
Net charge offs against nonrefundable dealer reserves . . . . . . . . . . . . . . 14,394 22,695
Allowance for finance credit losses at end of period . . . . . . . . . . . . . . 88,191 111,584
Dealer reserves at end of period . . . . . . . . . . . . . . . . . . . . . . . . 43,667 80,677
Ratios:
Net charge offs annualized against allowance
to average total finance receivables . . . . . . . . . . . . . . . . . . . . . 11.94% 5.90%
Net charge offs annualized against nonrefundable dealer
reserves to average total finance receivables . . . . . . . . . . . . . . . . . 6.37% 8.05%
Allowance for finance credit losses to total gross finance
receivables at end of period . . . . . . . . . . . . . . . . . . . . . . . . . 9.10% 8.79%
Dealer reserves to gross sales finance receivables
at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.21% 7.22%
</TABLE>
DELINQUENCIES AND REPOSSESSIONS
If a borrower has filed for bankruptcy protection or 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
contractually delinquent accounts at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997 December 31, 1997
<S> <C> <C> <C>
Delinquent gross receivables $35,819 $40,331 $41,970
Bankrupt accounts 35,255 41,036 37,037
Repossessed assets 4,221 5,688 5,167
Total $75,295 $87,055 $84,174
Delinquent gross receivables and
bankrupt accounts to gross
finance receivables 7.33% 6.41% 7.16%
Delinquent gross receivables,
bankrupt accounts and repossessed
assets to gross finance
receivables plus repossessed assets 7.73% 6.83% 7.59%
</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 $68 million of receivables relating
to a credit card program that had originations in both late 1995 and late 1996.
This program generated a loss of $.9 million prior to the allocation of interest
expense during the first quarter of 1998 compared to losses of $1.0 million in
the first quarter of 1997.
LIQUIDITY AND FINANCIAL RESOURCES
The Company has been acquiring loans by using the cash flow from cash
collections on finance receivables. Prior to January 1997, Mercury also used
commercial paper extensively to fund its operations.
The primary debt of the Company is in the form of senior commercial paper,
senior term notes and subordinated debt, which totaled $753 million at March 31,
1998, $852 million at December 31, 1997 and $1,075 million at March 31, 1997.
As a result of the Company's announcement regarding the discovery of the
accounting irregularities, the Company is in default of its credit agreements.
The Company has a forbearance agreement with its lenders which, including
extensions (the "Forbearance Agreements"), expires July 15, 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. Through May 5, 1998, approximately $307
million of principal has been paid to creditors under the Forbearance Agreements
of which $154 million was paid during 1998. See Note 10 - Subsequent Events and
the Company's Current Report on Form 8-K filed on May 15, 1998 for information
regarding the continuation of the Forbearance Agreements.
In February, 1997, Mercury entered into a separate agreement with Bank of
America Business Credit wherein Bank of America agreed to provide a $50 million
line of credit collateralized by all of the finance receivables. At March 31,
1997, $10 million was outstanding. The $10 million was repaid in the second
quarter of 1997 and Mercury permitted the facility to expire according to its
terms in January, 1998.
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 on
sale of approximately $29.5 million which was recorded in the first quarter of
1997. 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.
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 its earnings for certain prior periods 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.
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. 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 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 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. 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.
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.
See Item 3 in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, for more information regarding the litigation arising from
the overstatement of earnings and the restatement of previously issued financial
statements.
The Company recognizes the expense for litigation when the incurrence 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - See "Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations - Contingencies and
Legal Matters" which is incorporated herein by reference.
Item 2. Changes in Securities - Not Applicable.
Item 3. Defaults Upon Senior Securities - See "Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of
Operations" which is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index following the signature page
(b) Reports on Form 8-K - The following Current Reports on Form
8-K were filed during the first quarter of 1998:
(i) Item 5 and Item 7 Current Report on Form 8-K filed
January 9, 1998. Mercury's Consolidated Financial
Statements for the three month and nine month periods
ended September 30, 1997 were filed as Exhibit 99.1 thereto.
(ii) Item 5 and Item 7 Current Report on Form 8-K filed
February 17, 1998.
(iii) Item 7 Current Report on Form 8-K filed February 19,
1998. Mercury's Unaudited Pro Forma Consolidated
Condensed Balance Sheet as of March 31, 1997, Unaudited
Pro Forma Consolidated Condensed Income Statement for
the year ended December 31, 1996 and the Unaudited Pro
Forma Consolidated Condensed Income Statement for the
quarter ended March 31, 1997 were filed as Exhibits
thereto.
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: May 14, 1998 /s/ William A. Brandt, Jr.
William A. Brandt, Jr.
President and
Chief Executive Officer
Date: May 14, 1998 /s/ Patrick J. O'Malley
Patrick J. O'Malley
Principal Financial and
Accounting Officer
INDEX OF EXHIBITS
Exhibit No. Description
11. Computation of Net Income Per Share
27. Financial Data Schedule
MERCURY FINANCE COMPANY
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
THREE MONTHS ENDED MARCH 31
(Unaudited)
Net income per share is computed by dividing net income by the total of the
weighted average common shares and common stock equivalents outstanding during
the period. Average common shares and common stock equivalents have been
adjusted to reflect the four-for-three stock splits of Mercury Finance Company
distributed to stockholders on December 28, 1989, October 31, 1990, June 10,
1991 and December 5, 1991, the two-for-one stock split distributed on June 19,
1992, the four-for-three stock split distributed on June 22, 1993 and the three-
for-two stock split distributed on October 31, 1995.
<TABLE>
<CAPTION>
Three Months Ended
(Dollars in thousands except per share amounts) 1998 1997
<S> <C> <C>
INCOME DATA:
1. Net income/(loss) Mercury Finance Company . . . . . . . . . . . . . . . . ($1,478) ($33,168)
2. Weighted average common shares
outstanding (adjusted for stock split) . . . . . . . . . . . . . . . . . . 177,901 177,868
3. Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,403) (5,403)
EFFECT OF COMMON STOCK EQUIVALENTS (C.S.E.):
4. Weighted average shares reserved for
stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0
NET INCOME PER COMMON SHARE:
5. Weighted average common share and
common stock equivalents (line 2+3+4) . . . . . . . . . . . . . . . . . . 172,498 172,465
6. Mercury Finance Company
net income/(loss) per share (line 1 / line 5) . . . . . . . . . . . . . . ($0.01) ($0.19)
</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 interim earnings for 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. As a
result, the calculation of the common share equivalents becomes meaningless for
the quarter ended March 31, 1998. For the quarter ended March 31, 1997, common
share equivalents would have been anti-dilutive to earnings per share and were
not included in the weighted average shares calculation. Therefore, for both
periods, the Company's basic and diluted weighted average common shares
outstanding are the same.
<TABLE> <S> <C>
<ARTICLE> 5
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