UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A NO. 3
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission file number 1-10176
MERCURY FINANCE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3627010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
100 Field Drive, Suite 340, Lake Forest, Illinois 60045
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 847-295-8600
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($1 par value)
(Title of Class)
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes ___ No X
Indicate by check mark if disclosure statement of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive Proxy or
information statements incorporated by reference in Part III of this form 10-
K or any amendment to this form 10-K. / /
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. Such aggregate market value totaled $1,923,995,444 (based on
the closing price of the Company's common stock on the New York Stock
Exchange, as reported by The Wall Street Journal (Midwest edition for March
26, 1996.))
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common stock, $1 par value 172,583,306 shares outstanding at March 26, 1996
(net of Treasury stock).
Documents incorporated by reference: List the following documents if
incorporated by reference and the part of the form 10-K into which the
document is incorporated:
Portions of the definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders (filed on March 6, 1996) are incorporated herein by reference.
Part I FORM 10-K CROSS REFERENCE INDEXPAGE
Item 3. Legal Proceedings 1
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 2
Item 6. Selected Financial Data 2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 4
Item 8. Financial Statements and Supplemental Data
Independent Auditors' Report 11
Consolidated Balance Sheets 12
Consolidated Statements of Income 13
Consolidated Statements of Changes in
Shareholders' Equity 14
Consolidated Statements of Cash Flows 15
Notes to Consolidated Financial Statements 17
Quarterly Financial Data (Unaudited) 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 34
Part III
Item 10. Directors and Executive Officers of the
Registrant 35
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 35
SIGNATURES 36
EXHIBITS INDEX 37
PART I
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 3.
LEGAL PROCEEDINGS
In the normal course of its business, Mercury and its subsidiaries are named
as defendants in legal proceedings. A number of such actions, including two
cases which have been brought as putative class actions, are pending in the
various states in which subsidiaries of Mercury do business. It is the
policy of Mercury and its subsidiaries to 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. Accordingly, no provision has been
made in the consolidated financial statements for any of the pending
proceedings.
At December 31, 1995, Lyndon was a party to a number of reinsurance
agreements entered into by its former reinsurance operation. These
agreements resulted in Lyndon assuming business on low risk basis primarily
from large and highly rated life and health insurers for the purpose of
providing statutory surplus to the ceding companies. Prior to the
acquisition of Lyndon by Mercury, this business was retroceded to a joint
venture of third party reinsurers under similar terms as the original
agreements. All the risks of this business have been effectively transferred
to the third party reinsurers. ITT Corporation has also agreed to indemnify
Mercury Finance in the event any losses are incurred by Lyndon under the
agreements. There was approximately $567 million of statutory surplus
provided (assumed and ceded) under these agreements as of December 31, 1995.
Virtually all of these reinsurance agreements are expected to be either
terminated or novated during 1996 which will remove Lyndon from any potential
contingent liabilities related to these agreements.
The Company has been named as a defendant in a variety of lawsuits generally
arising from the Company's announcement on January 29, 1997 that it would
restate previously reported financial information for prior years and interim
earnings for 1996 as a result of the discovery of accounting irregularities.
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 for
additional information.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
1995 1994
4th 3rd 2nd Qrtr 1st 4th 3rd 2nd Qrtr 1st Qrtr
Qrtr Qrtr Qrtr Qrtr Qrtr
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Common & Equivalent
Shares Outstanding . . . . . 174,518 175,137 173,764 173,018 173,147 175,792 175,833 175,836
Per Common Share (adjusted for
stock splits)
Net Income . . . . . . . . . . $ .07 $ .12 $ .11 $ .13 $ .14 $ .13 $ .12 $ .11
Cash Dividend . . . . . . . . . .08 .06 .06 .05 .05 .05 .04 .04
Market Price:
High . . . . . . . . . . . . 16-3/8 16-5/8 12-7/8 11-1/4 10-1/8 11-3/4 12-5/8 12-3/4
Low . . . . . . . . . . . . . 11-3/8 12-1/8 9-3/4 8-1/4 7-3/8 9 10-1/8 9-7/8
Close at End of Period . . . 13-1/4 16-1/4 12-7/8 10-5/8 8-5/8 9-5/8 11 11-1/4
The common stock of Mercury Finance Company began trading on the New York Stock Exchange on April 11, 1989 under the symbol
MFN. Mercury common stock is also traded on the Chicago Stock Exchange. On December 31, 1995 Mercury had approximately 4,100
holders of record of common stock, exclusive of holders of shares in "street" or nominee names.
</TABLE>
ITEM 6.
SELECTED FINANCIAL DATA
<TABLE>
FIVE YEAR SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT
Interest income $255,066 $211,565 $165,054 $121,531 $99,199
Interest expense 57,303 39,375 32,933 29,525 28,796
Net interest
income 197,763 172,190 132,121 92,006 70,403
Provision for
finance credit
losses 32,641 7,376 6,392 4,330 3,984
Net 165,122 164,814 125,729 87,676 66,419
Other income 58,349 40,907 29,342 20,345 16,339
Other expenses 103,363 64,731 50,204 34,359 29,256
Income before
income taxes and
cumulative effect
of change in
accounting
principle 120,108 140,990 104,867 73,662 53,502
Income taxes 45,979 54,445 40,174 27,939 20,686
Income before
cumulative effect
of change in
accounting
principle 74,129 86,545 64,693 45,723 32,816
Cumulative effect
of change in
accounting
principle - - 234 - -
Net income 74,129 86,545 64,927 45,723 32,816
Net income per
share .43 .49 .37 .26 .19
Dividends per
share .25 .19 .14 .10 .06
Market value per
share 13.25 8.67 12.75 7.44 6.31
SELECTED BALANCES AT YEAR END
Total assets $1,598,098 $1,036,403 $797,090 $593,703 $498,437
Finance receivables
(gross) 1,441,288 1,272,430 1,004,517 747,573 618,455
Finance receivables
(Net of unearned
charges) 1,197,776 1,039,867 820,287 618,648 514,586
Allowance for
finance credit
losses 46,366 22,488 18,344 13,198 11,334
Nonrefundable
dealer reserves 61,961 66,477 57,241 38,262 28,226
Senior debt,
commercial paper
and other notes 489,990 449,945 260,260 200,000 169,135
Senior debt, term
notes 438,750 265,375 266,000 175,500 143,000
Subordinated debt 29,500 35,500 35,000 41,000 51,000
Shareholders'
equity 259,487 227,514 193,527 144,920 105,089
SELECTED RATIOS
Net income average
assets 6.01% 9.71% 9.12% 8.36% 7.24%
Net income to
average share-
holders' equity 29.64 40.23 38.95 37.62 36.91
Earnings to fixed
charges 3.05 4.48 4.10 3.44 2.82
Shareholders'
equity to assets 16.24 21.95 24.28 24.41 21.08
</TABLE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in tables in thousands)
The following discussion is intended to assist readers in their analysis of
the accompanying consolidated financial statements and notes that are
presented elsewhere in this Annual Report of Mercury Finance Company.
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.
FINANCIAL CONDITION
ASSETS AND FINANCE RECEIVABLES
Total assets of Mercury increased 54% to $1.6 billion at December 31, 1995.
This follows an increase of 30% during 1994. Finance receivables increased
15% to $1.2 billion at December 31, 1995 which compared to an increase of 27%
during 1994. $416 million of the increase in assets was attributable to
Lyndon Insurance Companies, which Mercury acquired in October 1995. The
remaining increases in assets and finance receivables are primarily
attributable to the production of receivables from the increased number of
offices operated by Mercury, the Midland acquisition and increased volume in
existing offices. The Mercury offices in Florida, Texas and Illinois
accounted for approximately 50% of all finance receivables in the 28 states
where Mercury offices are located. The total number of offices was 276 at
December 31, 1995, 247 at December 31, 1994 and 218 at December 31, 1993.
The following tables summarize the composition of finance receivables at
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Sales finance receivables $1,256,631 $1,136,958 $905,223
Direct finance receivables 184,657 135,472 99,294
Total gross finance
receivables 1,441,288 1,272,430 1,004,517
Less: Unearned finance
charges 234,792 222,284 174,440
Unearned commissions,
insurance premiums and
insurance claim reserves 8,720 10,279 9,790
Finance receivables $1,197,776 $1,039,867 $820,287
</TABLE>
<TABLE>
Gross Finance Receivables By Year of Office Openings
1995 1994 1993
<S> <C> <C> <C>
Offices open at 12/31/93 $1,265,617 $1,190,723 $1,004,517
1994 office openings 92,525 41,060 0
1995 office openings 32,946 0 0
1994 Acquisition of Midland 50,200 40,647 0
Total gross finance receivables $1,441,288 $1,272,430 $1,004,517
</TABLE>
ALLOWANCE AND PROVISION FOR FINANCE CREDIT LOSSES
Mercury maintains an allowance for 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 three years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $22,488 $18,344 $13,198
Allowance acquired 0 1,052 2,456
Provision charged to expense 32,641 7,376 6,392
Finance receivables
charged-off (12,846) (6,467) (4,882)
Recoveries 4,083 2,183 1,180
Balance at year end $46,366 $22,488 $18,344
Allowance as a percent of
finance
receivables outstanding 3.87% 2.16% 2.24%
</TABLE>
The increase in the provision and allowance for finance credit losses in 1995
and 1994 is attributable to the increase in finance receivables outstanding
and the increase in net charge-offs, including amounts related to insurance
add-on products. Mercury purchases a majority of its sales finance contracts
from dealers at a discount. A significant portion of the discount represents
anticipated credit losses and, based upon projected loss experience, is
allocated to nonrefundable dealer reserves. Mercury negotiates the amount of
the discount with the dealers based upon various criteria, one of which is
the credit risk associated with the sales finance contracts being purchased.
The following table sets forth a reconciliation of the changes in
nonrefundable dealer reserves for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $66,477 $57,241 $38,262
Discounts acquired on
new volume 98,559 84,252 71,400
Losses absorbed (96,117) (70,419) (50,281)
Other (6,958) (4,597) (2,140)
Balance at end of year 61,961 66,477 57,241
</TABLE>
DEBT
The primary source for funding Mercury's finance receivables comes from debt
issued by Mercury. At December 31, 1995, Mercury had total debt of $958.2
million, which compares to $750.8 million and $561.3 million at December 31,
1994 and 1993, respectively. During 1995 Mercury issued $200.0 million in
senior term notes at an average rate of 7.2%. The following table represents
Mercury's debt instruments and the corresponding rates on the debt at the end
of the periods indicated:
<TABLE>
<CAPTION>
Dec. 31, 1995 Dec. 31,1994 Dec. 31, 1993
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Senior Debt:
Commercial
paper $489,990 6.0% $449,945 6.4% $260,260 3.5%
Term notes 438,750 7.2 265,375 7.1 266,000 7.2
Subordinated
debt 29,500 10.2 35,500 10.2 35,000 10.2
Total $958,240 6.6% $750,820 6.8% $561,260 5.7%
</TABLE>
The interest rates in the preceding table do not include certain costs
related to the placement of debt associated with debt assumed in the
acquisition of Gulfco, fees associated with the revolving credit facility and
interest associated with interest exchange agreements which are amortized to
interest expense. The effect of such costs which are included in interest
expense in the consolidated financial statements increases the effective
interest rate by approximately 20 basis points in 1995 and 30 basis points in
both 1994 and 1993.
SHAREHOLDERS' EQUITY
The other primary source for funding the growth in finance receivables comes
from the retention of earnings by Mercury. Total shareholders' equity at
December 31, 1995 was $259.5 million which compares with $227.5 million at
December 31, 1994. During the year Mercury had net income of $74.1 million,
paid dividends of $42.8 million and purchased back 1.1 million shares costing
$14.0 million. At December 31, 1995, Mercury's shareholders' equity as a
percent of total assets was 16.24% which compares with 21.95% at December 31,
1994. The decrease in the percentage of shareholders' equity to total assets
resulted from the purchase of the assets of the Lyndon Insurance Companies.
RESULTS OF OPERATIONS
NET INCOME
For the year ended December 31, 1995, Mercury had net income of $74.1
million, which represents a decrease of 14% from the $86.5 million earned in
1994. The 1994 result was an increase of 33% over the $64.9 million earned
in 1993. The decrease in 1995 net income versus 1994 is the result of an
increase in finance charge income and other income more than offset by an
increase in the provision for credit losses and an increase in expenses
relating to the additional offices opened during 1994 and 1995 without a
corresponding increase in net interest income after provision for credit
losses.
INTEREST INCOME AND INTEREST EXPENSE
The largest single component of net income is net interest income which is
the difference between interest income and interest expense before provision
for finance credit losses. For the year ended December 31, 1995, net
interest income was $197.8 million, which compares with $172.2 million and
$132.1 million in 1994 and 1993, respectively. The primary factor
attributable to the growth in net interest income is the volume increase in
finance receivables outstanding. Also impacting growth in interest income was
the investment portfolio of the Lyndon Insurance Companies, acquired in
October 1995. For the year ended December 31, 1995, Mercury's net interest
margin, which is the ratio of net interest income divided by average interest
earning assets, was 16.24%. This compares with a net interest margin of
18.55% and 17.73% in 1994 and 1993, respectively. The change in the net
interest margin is primarily attributable to interest rate changes on
interest earning assets and interest bearing liabilities. The changes in
interest rates are reflective of general interest rate trends in the U.S.
economy.
In addition, the investment portfolio of Lyndon (which yields approximately
7% vs. approximately 23% for the finance receivable portfolio), contributed
to the reduction in the margin percentage in 1995 from 1994. The following
table summarizes net interest income and the net interest margin for the
three years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Average interest earning
assets $1,217,798 $928,060 $745,164
Average interest bearing
liabilities 843,239 612,700 494,590
Net $ 374,559 $315,360 $250,574
Interest income $ 255,066 $211,565 $165,054
Interest expense 57,303 39,375 32,933
Net interest income $ 197,763 $172,190 $132,121
Rate earned 20.94% 22.80% 22.15%
Rate paid 6.80% 6.43% 6.65%
Net 14.15% 16.37% 15.50%
Net interest margin 16.24% 18.55% 17.73%
</TABLE>
OTHER INCOME
In addition to finance charges and interest, Mercury derives commission
income from the sale of other credit related products. These products
include insurance relating to the issuance of credit life, accident and
health and other credit insurance policies to borrowers of Mercury. Other
credit-related sources of revenue are derived from the sale of other products
and services.
Lyndon earns insurance premiums on business it has underwritten through
outside distributors, business in a run-off mode from subsidiaries of its
prior owner, and going forward, through Mercury's branch offices. Insurance
premiums are also earned by Mercury's other insurance subsidiaries as a
reinsurers of credit life and accident and health policies issued through
Mercury branch offices. For the year ended December 31, 1995, Mercury
experienced increases in its insurance premiums which is primarily
attributable to the fourth quarter acquisition of Lyndon. The following
table summarizes the amounts earned from these products for the three years
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Insurance commissions $21,365 $20,507 $12,318
Insurance premiums 29,686 9,056 8,648
Vehicle protection club
memberships 3,242 3,929 3,478
Fees and other 4,056 7,415 4,898
Total $58,349 $40,907 $29,342
Other income as a % of
average interest earning
assets 4.79% 4.41% 3.94%
</TABLE>
OTHER EXPENSES
In addition to interest expense and the provision for finance credit losses,
Mercury incurs other operating expenses in the conduct of its business.
During 1995 other operating expenses increased 60% over 1994, which in turn
had increased 30% over 1993. During the same period, total assets of Mercury
have increased 54% and 30%. During 1994 additional legal fees and settlement
costs were incurred associated with a judgement which was rendered against
one of Mercury's subsidiaries in Alabama. The following table summarizes the
components of other expenses for the three years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Salaries and employee
benefits $48,590 $36,852 $29,058
Incurred insurance claims
expense
and other underwriting
expense 17,703 2,722 3,338
Other operating expenses 37,070 25,157 17,808
Total $103,363 $64,731 $50,204
Operating expenses as a % of
average interest earning
assets 8.49% 6.97% 6.74%
</TABLE>
INCOME TAXES
Income taxes decreased 15% to $46.0 million when compared with $54.4 million
and $40.2 million in 1994 and 1993, respectively. The decrease in income
taxes is primarily attributable to a lower level of pretax earnings during
1995. The effective tax rates on income before income taxes were 38.3%,
38.6% and 38.3% in 1995, 1994 and 1993, respectively.
CREDIT LOSSES AND DELINQUENCIES
Direct finance receivables on which no payment is received within 149 days,
on a recency basis, are charged off. Sales finance receivables which are
contractually delinquent 150 days are charged off monthly before they become
180 days delinquent. Accounts which are deemed uncollectible prior to the
maximum charge-off period are charged off immediately. Management may
authorize an extension if collection appears imminent during the next
calendar month.
The following table sets forth information relating to charge-offs, the
allowance for finance credit losses and dealer reserves (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Loss provision charged to income $32,641 $7,376 $6,392
Charge-offs net of recoveries 8,763 4,284 3,702
Net charge-offs against
nonrefundable dealer reserves 96,117 70,419 50,281
Allowance for finance credit
losses at end of period 46,366 22,488 18,344
Dealer reserves at end of period 61,961 66,477 57,241
RATIOS
1995 1994 1993
Net charge-offs against allowance
to average finance receivables .76% .47% .49%
Net charge-offs against
nonrefundable dealer reserves to
average finance receivables 8.37% 7.69% 6.84%
Allowance for finance credit
losses at end of period 3.87% 2.16% 2.24%
Dealer reserves to net sales
finance receivables at end of
period 6.00% 7.11% 7.65%
</TABLE>
The increase in net charge-offs is attributable to changes in the mix of the
finance receivables portfolio during 1994 and 1995, the decline in economic
conditions of consumer borrowers which is reflective of general trends in the
economy and charge offs resulting from certain insurance add-on products
which were not collected from borrowers.
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 December 31 (dollars in thousands):
<TABLE>
<CAPTION>
60 Days and Over Delinquencies 1995 1994 1993
<S> <C> <C> <C>
Sales finance receivables $13,965 $7,492 $5,366
Direct finance receivables 2,782 2,709 3,099
Total $16,747 $10,201 $8,465
Outstanding
Sales finance receivables $1,256,631 $1,136,958 $905,223
Direct finance receivables 184,657 135,472 99,294
Total $1,441,288 $1,272,430 $1,004,517
Delinquency as a % of
Receivables Outstanding
Sales finance receivables 1.11% .66% .59%
Direct finance receivables 1.51% 2.00% 3.12%
Total 1.16% .80% .84%
</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 Mercury's operations. Mercury endeavors to
maximize its liquidity by diversifying its sources of funds which include (a)
cash from operations, (b) the issuance of short-term commercial paper, and
(c) direct borrowings available from commercial banks and insurance
companies, consisting of short-term lines of credit and long-term senior and
subordinated notes. Most of the assets of Mercury are at fixed rates, and
have an average initial maturity of approximately 24 months. Of Mercury's
total debt, 49% has an original maturity of greater than one year at a fixed
rate of interest.
ACCOUNTING CHANGES
In December 1986, the Financial Accounting Standards Board issued FASB
Statement No. 91 which relates to the accounting for nonrefundable fees and
cost associated with originating or acquiring loans. The statement requires
that loan origination and commitment fees and certain direct loan origination
costs be deferred and amortized as an adjustment to the related loan's yield.
Mercury has not adopted the provisions of this statement because adoption
would not have a material effect on Mercury's reported results of operation
or financial condition. Effective January 1, 1993 Mercury adopted the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, and has reported the cumulative effect of that change in
the method of accounting for income taxes in the 1993 consolidated statement
of income. Under the asset and liability method of Statement 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Prior to adoption of
FASB 109 Mercury accounted for income taxes under APB 11. The Financial
Accounting Standards Board has issued FASB Statement No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.
Statement 121 will be effective for financial statements for the fiscal years
beginning after December 15, 1995. Statement 121 requires entities to perform
separate calculations for long-lived assets to determine whether recognition
of an impairment loss is required and, if so, to measure that impairment.
Management believes that the impact of the adoption of this statement will
not have any impact on the financial position of Mercury.
The Financial Accounting Standards Board has issued FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123 allows companies to
retain the current approach for recognizing stock-based expense in the
financial statements; however, companies are encouraged to adopt a new
accounting method based on the estimated fair value of employee stock
options. Companies that do not elect the new fair value based method will be
required to provide expanded disclosures in the footnotes. Statement 123 is
effective for fiscal years beginning after December 15, 1995. At this time
management expects to comply with the disclosure alternative provide by
Statement 123.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
MERCURY FINANCE COMPANY:
We have audited the accompanying consolidated balance sheets of Mercury
Finance Company and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1995. These consolidated financial statements are the responsibility of
Mercury Finance Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercury
Finance Company and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 12, 1996, except as to notes 1, 4, 7, 12, 14, 15 and 16,
which are dated as of October 27, 1997.
Chicago, Illinois
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash $22,967 $19,980
Investments available-for-sale at fair value 229,418 -
Investments to be held-to-maturity
(fair value of $12,909 and $13,942) 12,625 14,184
Finance receivables 1,197,776 1,039,867
Less allowance for finance credit losses (46,366) (22,488)
Less nonrefundable dealer reserves (61,961) (66,477)
Finance receivables, net 1,089,449 950,902
Deferred income taxes 21,353 7,290
Premises and equipment (at cost less
accumulated depreciation of $7,247 and
$6,158) 7,022 3,492
Goodwill 15,274 15,404
Reinsurance receivable 89,962 -
Deferred acquisition costs and present
value of future profits 23,242 243
Other assets (including repossessions) 86,786 24,908
TOTAL ASSETS 1,598,098 1,036,403
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper and notes $489,990 $449,945
Senior debt, term notes 438,750 265,375
Subordinated debt 29,500 35,500
Accounts payable and other liabilities 70,268 52,635
Unearned premium and claim reserves 195,761 766
Reinsurance payable 105,081 -
Income taxes payable 9,261 4,668
TOTAL LIABILITIES 1,338,611 808,889
SHAREHOLDERS' EQUITY
Common stock - $1.00 par value:
300,000,000 shares authorized
1995 - 176,477,520 shares outstanding
1994 - 116,079,703 shares outstanding 176,478 116,080
Paid in capital 39 6,384
Retained earnings 118,138 128,157
Unrealized appreciation on available-for-
sale securities, net of tax 1,969 -
Treasury stock, 3,896,557 and 1,839,705
shares at cost (37,137) (23,107)
TOTAL SHAREHOLDERS' EQUITY 259,487 227,514
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,598,098 1,036,403
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
<CAPTION>
Years ended December 31,
Text 1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME
Finance charges and loan
fees $249,913 $210,891 $164,572
Investment income 5,153 674 482
Total finance charges, fees
and investment income 255,066 211,565 165,054
Interest expense 57,303 39,375 32,933
Net interest income 197,763 172,190 132,121
Provision for finance credit
losses 32,641 7,376 6,392
Net interest income after
provision for finance
credit losses 165,122 164,814 125,729
OTHER INCOME
Insurance commissions 21,365 20,507 12,318
Insurance premiums 29,686 9,056 8,648
Fees and other 7,298 11,344 8,376
Total other income 58,349 40,907 29,342
OTHER EXPENSES
Salaries and employee
benefits 48,590 36,852 29,058
Occupancy expense 4,880 3,730 3,216
Equipment expense 2,041 1,665 1,244
Data processing expense 3,071 2,551 1,984
Incurred insurance claims
and other underwriting
expense 17,703 2,722 3,338
Other operating expenses 27,078 17,211 11,364
Total other expenses 103,363 64,731 50,204
Income before income taxes
and cumulative effect of
change in accounting
principle 120,108 140,990 104,867
Applicable income taxes 45,979 54,445 40,174
Income before cumulative
effect of change in
accounting principle 74,129 86,545 64,693
Cumulative effect of change
in accounting principle - - 234
NET INCOME 74,129 86,545 64,927
NET INCOME PER SHARE $ .43 $ .49 $ .37
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands except per share amounts)
<CAPTION>
Common Paid in Retained Unrealized Treasury
Stock Capital Earnings Appreciation Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1993 $86,125 $5,274 $53,692 $0 ($171) $144,920
1993 net income 64,927 64,927
Stock options
exercised 703 6,328 7,031
Cash dividends
($.14 per share) (23,351) (23,351)
Transfer to Paid
in Capital 20,075 (20,075) -
Two for one stock
split 28,821 (28,821) -
Balance at December
31, 1993 115,649 2,856 75,193 0 (171) 193,527
1994 net income 86,545 86,545
Stock options
exercised 431 3,528 3,959
Cash dividends
($.19) per share (33,581) (33,581)
Treasury stock
acquired (22,936) (22,936)
Balance at December
31, 1994 116,080 6,384 128,157 0 (23,107) 227,514
1995 net income 74,129 74,129
Stock options
exercised 1,573 11,181 12,754
Cash dividends
($.25) per share (42,849) (42,849)
Transfer to Paid
in Capital 41,299 (41,299) -
Three for two
stock split 58,825 (58,825) -
Unrealized
appreciation on
available-for-
sale securities
net of tax 1,969 1,969
Treasury stock
acquired (14,030) (14,030)
BALANCE AT
DECEMBER 31,
1995 $176,478 $39 $118,138 $1,969 ($37,137) $259,487
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Dollars in thousands) Years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $74,129 $86,545 $64,927
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for finance credit losses 32,641 7,376 6,392
Provision for deferred income taxes (10,595) (1,779) (1,305)
Depreciation 1,153 902 673
Amortization of goodwill and purchase
accounting adjustments 3,208 596 385
Gain on sale of investment securities (19) (24) (28)
Net (increase) decrease in
reinsurance receivable (37,476) - -
Net (increase) decrease in deferred
acquisition costs and present value
of future profits (2,176) (220) (23)
Net (increase) decrease in other
assets (14,044) (13,008) (1,166)
Net increase (decrease) in
reinsurance payable (14,116) - -
Net increase (decrease) in
unearned premium and claim reserves 10,970 10 (157)
Increase in taxes payable 4,593 1,441 909
Net increase (decrease) in other
liabilities 3,120 13,478 5,493
Net increase (decrease)in
nonrefundable dealer
reserves (4,516) 5,727 18,979
Net cash provided by operating
activities 46,872 101,044 95,079
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance
receivables 825,779 690,508 569,290
Finance receivables originated or
acquired (992,450)(887,902)(724,104)
Purchases of investment securities (24,010) (7,896) (3,646)
Proceeds from sales of investment
securities 55,694 3,938 2,165
Proceeds from maturities of
investment securities 3,413 331 2,320
Purchase of premises and equipment (4,683) (1,456) (1,032)
Assets acquired (393,318)(26,014) (55,504)
Liabilities assumed 310,519 16,866 43,746
Net assets acquired (82,799) (9,148) (11,758)
Purchase price less than (in excess
of) fair value of net assets
acquired 10,299 (5,905) (10,498)
Net cash used in investing
activities (208,757)(217,530)(177,263)
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in senior
debt, commercial paper 40,045 184,485 55,289
Senior debt, term notes retired (26,625) (35,125) (79,500)
Subordinated debt retired (6,000) (2,320) (6,000)
Senior debt, term notes issued 200,000 30,000 135,000
Stock options exercised 12,754 3,959 7,031
Dividends paid (42,849) (33,581) (23,351)
Treasury stock acquired (14,030) (22,936) -
Net cash provided by financing
activities 163,295 124,482 88,469
Net increase (decrease) in cash
and cash equivalents 1,410 7,996 6,285
CASH AT BEGINNING OF YEAR 19,980 11,621 4,820
CASH ACQUIRED 1,577 363 516
CASH AT END OF YEAR $22,967 $19,980 $11,621
Supplemental Disclosures
Income taxes paid to federal and
state governments $51,967 $53,262 $39,160
Interest Paid to Creditors $57,797 $39,502 $33,038
See accompanying notes to consolidated financial statements
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993 (Dollars in thousands except per share
amounts)
1) Organization and Affiliations
Mercury Finance Company ("Mercury"), through its predecessor companies,
commenced operations in February 1984 and through December 31, 1995
established consumer finance subsidiaries in 28 states, doing business in 276
offices under the Mercury Finance Company, MFC Finance Company, MERC Finance
Company, Gulfco Finance Company and Midland Finance Co. names. On April 1,
1993 Mercury acquired all the shares of Gulfco Investment Inc. for $22.3
million in cash. Gulfco Investment Inc. was the parent company which owned
all of the stock of Gulfco Finance Company and Gulfco Life Insurance Company.
Gulfco Finance Company conducted its consumer finance business through a
branch network of 62 offices located in Louisiana, Mississippi and Texas.
On September 30, 1994 Mercury acquired all the shares of Midland Finance Co.
for $15.1 million in cash and the assumption of its net liabilities. Midland
Finance Co. conducted its consumer finance business through a central office
in Chicago, Illinois. The acquisitions were accounted for under the purchase
method of accounting. Accordingly their results of operations have been
included in the consolidated statements of income and statements of cash flow
since the dates of acquisition. The excess of cost over fair value of net
assets acquired (goodwill) relating to the acquisitions is being amortized
over twenty years on the straight line method.
On October 20, 1995 Mercury acquired all the shares of ITT Lyndon Property
and ITT Lyndon Life Insurance Company for $72.5 million in cash and the
assumption of their net liabilities. ITT Lyndon Property and ITT Lyndon Life
Insurance Company conducted their business through a central office in St.
Louis, Missouri. Following the acquisition, the names of the companies were
changed to Lyndon Property and Lyndon Life Insurance Companies "Lyndon". The
acquisition was accounted for under the purchase method of accounting.
Accordingly their results of operations have been included in the
consolidated statements of income and statements of cash flow since the date
of acquisition. The excess of fair value over cost of net assets acquired
negative goodwill of $10,299) relating to the acquisition was offset against
the present value of future profits of acquired insurance in force. The
balance of the present value of future profits was $16.6 million at December
31, 1995 and is being amortized over an approximate three year period.
The following table presents unaudited, proforma financial results for the
years ended December 31, 1995 and 1994, as though Lyndon had been acquired on
January 1, 1994. These proforma results have been prepared for comparative
purposes only and are not indicative of the results of operations which
actually would have resulted had the combination been in effect on the dates
indicated, or which may result in the future. The business which was
acquired by Mercury was substantially different than the business Lyndon had
been conducting prior to the acquisition. Lyndon is no longer underwriting
certain business it previously conducted with current and prior subsidiaries
of ITT Corporation.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net interest income & other income $371,092 $318,824
Net income 92,372 121,979
Net income per share $ .53 $ .70
</TABLE>
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounting and reporting policies of Mercury conform to generally
accepted accounting principles and to the general practice within the finance
and insurance industries. The consolidated financial statements include the
accounts of the consumer finance subsidiaries, Mercury Life Insurance
Company("Mercury Life"), Gulfco Investment Inc. ("Gulfco"), Midland Finance
Co. ("Midland"), Gulfco Life Insurance Company ("Gulfco Life") and Lyndon
Property and Lyndon Life Insurance Companies ("Lyndon"). In addition certain
data from prior years has been reclassified to conform to the 1995
presentation.
REVENUE RECOGNITION
CONSUMER FINANCE SUBSIDIARIES
Finance charges on precomputed loans and sales finance contracts are credited
to unearned finance charges at the time the loans and sales finance contracts
are made or acquired. Interest income is calculated using the interest
method. If a precompute account becomes 60 or more days contractually
delinquent and no full contractual payment is received in the month the
account attains such delinquency status, the accrual of income is suspended
until one or more full contractual monthly payments are received. Interest
on interest bearing loans and sales finance contracts is calculated on a
360-day year basis and recorded on the accrual basis; accrual is suspended
during the time an account is 60 or more days contractually delinquent. Late
charges and deferment charges on all contracts are taken into income as
collected. Extension fees are taken into income on the same basis as finance
charges.
Fees and other income are derived from the sale of other products and
services.
INSURANCE OPERATIONS
In conjunction with their lending practices, the consumer finance
subsidiaries, as agents for Gulfco Life, Lyndon and unaffiliated insurers,
offer credit life, accident and health and property insurance to borrowers
who obtain finance receivables directly from the consumer finance
subsidiaries, and to borrowers under sales finance contracts and financing
contracts purchased from merchants and automobile dealers. Commissions on
credit life insurance and credit accident and health insurance from
unaffiliated insurers are earned by Mercury over the average terms of the
related policies on the sum-of-the months digits method.
Lyndon is engaged in the business of direct writing of credit life, accident
and health and various other credit related insurance policies for customers
of Mercury and other companies. Lyndon Life is licensed in forty-eight (48)
states and Lyndon Property is licensed in forty-seven (47) states. Mercury
Life and Gulfco Life are engaged primarily in the business of reinsuring and
direct writing, respectively, of credit life and accident and health
insurance policies issued to borrowers of finance receivables and sales
finance contracts originated by Mercury. The policies insure the holder of a
sales finance contract or other debt instrument for the outstanding balance
payable in the event of death or disability of the debtor. Premiums are
earned over the life of the contracts principally using pro-rata and
sum-of-the months digits methods or in relation to anticipated benefits to
the policy holders.
Mercury Life, Gulfco Life and Lyndon have established policy liabilities and
claim reserves. The claim reserves are based upon accumulated estimates of
claims reported, plus estimates of incurred but unreported claims.
ALLOWANCE FOR FINANCE CREDIT LOSSES
Mercury maintains an allowance for finance credit losses at a level which, in
the opinion of management, provides adequately for current and possible
future losses that may develop in the present 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 (losses on sales finance contracts are primarily
charged off against nonrefundable dealer reserves). A provision for losses is
charged to earnings in an amount sufficient to maintain the allowance.
Direct installment loans on which no payment is received within 149 days, on
a recency basis, are charged off. Sales finance 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.
INVESTMENTS
Mercury accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES (Statement 115). Statement 115 addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values, and all investments in debt securities.
Mercury classifies its debt securities into one or more of three categories
specified by Statement 115: held-to-maturity, available-for-sale, or trading.
Held-to-maturity securities are those which management has the positive
intent and ability to hold to maturity. Available-for-sale securities are
those securities which management may sell prior to maturity as a result of
changes in interest rates, prepayment factors, or as part of Mercury's
overall asset and liability strategy. Trading securities are those
securities bought and held principally for the purpose of selling them in the
near term. Mercury has no securities designated as trading.
Held-to-maturity securities are recorded at cost adjusted for amortization of
premium and accretion of discount to the earlier of the call date or maturity
date using the level yield method.
Available-for-sale securities are recorded at fair value. Unrealized gains
and losses, net of the related income tax effect, are excluded from income
and reported as a separate component of shareholders' equity. If a decrease
in the market value of a security is expected to be other than temporary, the
security is written down to its fair value through a charge to income.
Realized gains and losses on the sale of investment securities are recorded
using the specific identification method.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
are depreciated on a straight-line basis over their estimated useful lives.
NONREFUNDABLE DEALER RESERVES
Mercury purchases a majority of its sales finance contracts from dealers at a
discount. A significant portion of this discount represents anticipated
credit losses and, based upon projected loss experience, is allocated to
nonrefundable dealer reserves. Mercury negotiates the amount of the
discounts with the dealers based upon various criteria, one of which is the
credit risk associated with the sales finance contracts being purchased.
REINSURANCE ACTIVITIES
The balance sheet includes approximately $90 million and $105 million of
reinsurance receivable and reinsurance payable, respectively. These amounts
relate to certain reinsurance agreements entered into by Lyndon Insurance
Companies' former reinsurance operations (prior to acquisition by Mercury).
The business assumed by Lyndon under these agreements has been retroceded to
third parties under similar terms as the original agreements, resulting in
offsetting receivable and payable amounts (the difference represents cash
received by Lyndon). Prior to the acquisition of Lyndon by Mercury, Lyndon's
reinsurance operations were ceded to third party reinsurers. The majority of
these reinsurance agreements are expected to be either terminated or novated
to the third parties during 1996 as part of the sale agreement and the
corresponding assets and liabilities will be removed from Mercury's financial
statements.
In the normal course of business, the insurance companies assume and cede
reinsurance on both a pro rata and excess basis. Reinsurance provides
greater diversification of business and limits the maximum net loss potential
arising from large claims. Although the ceding of reinsurance does not
discharge an insurer from its primary legal liability to a policy holder, the
reinsuring company assumes the related liability. Lyndon monitors the
financial condition of its reinsurers on a periodic basis.
DEFERRED ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
Policy acquisition costs, representing commissions, premium taxes and certain
other underwriting expenses, are deferred and amortized over policy terms.
Estimates of future revenues, including investment income and tax benefits,
are compared to estimates of future costs, including amortization of policy
acquisition costs, to determine if business currently in force is expected to
result in a net loss. No revenue deficiencies have been determined in the
periods presented. The present value of future profits represents the
portion of the purchase price of Lyndon allocated to the future profits
attributable to the insurance in force at the date of acquisition. The
present value of future profits is amortized in relationship to the expected
emergence of such future profits and is discounted at rates between 12-15%.
INTEREST EXCHANGE AGREEMENTS
The interest differential to be paid or received on interest exchange
agreements is accrued monthly and is recognized over the life of the
agreement.
INCOME TAXES
The consumer finance subsidiaries are members of Mercury's consolidated
Federal income tax group. The consumer finance subsidiaries file individual
state income tax returns. Lyndon Insurance Companies, Mercury Life and Gulfco
Life file their own tax returns and are not part of Mercury's consolidated
tax group for Federal and state income tax purposes.
Effective January 1, 1993 Mercury adopted the provisions of Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, and has
reported the cumulative effect of that change in the method of accounting for
income taxes in the 1993 consolidated statement of income. Under the asset
and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. The accounts which are subject to such estimation
techniques most significantly include the allowance for finance credit losses
and insurance claim reserves. Actual results could differ from these
estimates.
3) INVESTMENTS
The amortized cost, gross unrealized gains and losses and approximate fair
values for available-for-sale and held-to-maturity securities by major
security type at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
December 31, 1995
Amortized Cost Gross Unrealized Gross Unrealized Approximate
Gains Losses Fair Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury securities
and obligations of
U.S. Government
agencies and
corporations $10,802 $75 $3 $10,874
Obligations
of States
and political
subdivisions 50,864 853 142 51,575
Corporate 139,786 2,246 1 142,031
Mortgage backed
securities 14,238 37 18 14,257
Other securities 10,681 0 0 10,681
Total available-
for-sale 226,371 3,211 164 229,418
HELD-TO-MATURITY:
U.S. Treasury
securities and
obligations of
U.S. Government
agencies and
corporations 1,950 27 3 1,974
Obligations of
States and
political sub-
divisions 2,994 77 1 3,070
Corporate 1,046 70 0 1,116
Other securities 6,320 0 0 6,320
Equity securities 315 121 7 429
Total held-to-
maturity 12,625 295 11 12,909
TOTAL $238,996 $3,506 $175 $242,327
December 31, 1994
Amortized Cost Gross Unrealized Gross Unrealized Approximate
Gains Losses Fair Value
HELD-TO-MATURITY:
U.S. Treasury
securities and
obligations of
U.S. Government
agencies and
corporations $1,424 $5 $87 $1,342
Obligations of
States and
political
subdivisions 1,912 0 120 1,792
Corporate 1,096 2 45 1,053
Other securities 9,311 0 43 9,268
Equity securities 441 55 9 487
Total held-to-
maturity $14,184 $62 $304 $13,942
</TABLE>
Other securities include mutual fund and money market investments. Proceeds
from the sale of investment securities, gross realized gains and losses were
as follows during the years ended December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Proceed from sales $55,694 $3,938 $2,165
Gains 73 42 31
Losses 54 18 4
</TABLE>
Maturities of investment securities were as follows at December 31, 1995.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Equity securities are excluded from the table.
<TABLE>
<CAPTION>
Amortized Cost Approximate Fair
Value
<S> <C> <C>
AVAILABLE-FOR-SALE:
Due in one year or less $81,977 $81,785
Due after one thru
five years 61,091 62,177
Due after five thru ten
years 51,411 52,806
Due after ten years 31,892 32,650
TOTAL AVAILABLE-FOR-SALE
SECURITIES 226,371 229,418
HELD-TO-MATURITY:
Due in one year or less $6,496 $6,496
Due after one thru five
years 2,807 2,833
Due after five thru ten
years 2,144 2,246
Due after ten years 863 905
TOTAL HELD-TO-MATURITY
DEBT SECURITIES 12,310 12,480
TOTAL $238,681 $241,898
</TABLE>
To comply with state regulatory requirements, the company has securities
totaling $9,685 and $110 pledged to meet depository requirements of various
state insurance departments at December 31, 1995 and 1994, respectively.
4) FINANCE RECEIVABLES
Direct loans generally have terms of 12 to 24 months with maximum terms of 36
months; secured loans are generally collateralized by real or personal
property. Sales finance contracts are generally accounted for on a discount
basis and generally have terms of 18 to 36 months with maximum terms of 48
months. Loans outstanding at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
Text 1995 1994
<S> <C> <C>
DIRECT FINANCE RECEIVABLES
Interest bearing $72,394 $34,191
Precompute 112,263 101,281
Total direct finance
receivables 184,657 135,472
SALES FINANCE RECEIVABLES 1,256,631 1,136,958
Total gross finance receivables 1,441,288 1,272,430
Less: Unearned finance charges 234,792 222,284
Unearned commissions,
insurance premiums
and insurance claim
reserves 8,720 10,279
Finance receivables $1,197,776 $1,039,867
</TABLE>
Included in finance receivables at December 31, 1995 and 1994 were $41,249
and $10,201, respectively, of receivables for which interest accrual had been
suspended. Repossessed assets totaled $10,621 and $8,258 at December 31,
1995 and 1994, respectively. Contractual maturities of the finance
receivables by year are not readily available at December 31, 1995 and 1994,
but experience has shown that such information is not significant in that
receivables may be renewed, converted, or paid in full prior to actual
maturity.
Principal cash collections (excluding finance charges earned) for the years
ended December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
DIRECT FINANCE RECEIVABLES
Principal cash collections $105,901 $70,892
Percent of average net balances 85% 82%
SALES FINANCE RECEIVABLES
Principal cash collections $728,641 $623,990
Percent of average net balances 72% 72%
</TABLE>
A summary of the activity in the allowance for finance credit losses for the
years ended December 31, was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $22,488 $18,344 $13,198
Allowance acquired - 1,052 2,456
Provision for finance credit losses 32,641 7,376 6,392
Finance receivables charged off (12,846) (6,467) (4,882)
Recoveries 4,083 2,183 1,180
Balance at end of year $46,366 $22,488 $18,344
</TABLE>
A summary of the activity in nonrefundable dealer reserves for the years
ended December 31, was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $66,477 $57,241 $38,262
Discounts acquired on new volume 98,559 84,252 71,400
Losses absorbed (96,117) (70,419) (50,281)
Other (6,958) (4,597) (2,140)
Balance at end of year $61,961 $66,477 $57,241
</TABLE>
5) SENIOR AND SUBORDINATED DEBT, LINES OF CREDIT AND COMMITMENT FEES
Senior and Subordinated debt at December 31, 1995 and 1994,
consisted of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
SENIOR DEBT, COMMERCIAL PAPER AND NOTES $489,990 $449,945
SENIOR DEBT, TERM NOTES
Due 1995 - interest rate 9.02% $0 $10,000
Due 1995 - interest rate 5.88% 0 15,000
Due 1995 - interest rate 7.13% 0 125
Due 1996 - interest rate 9.00% 25,000 25,000
Due 1996 - interest rate 6.41% 15,000 15,000
Due 1996 - interest rate 7.13% 125 125
Due 1997 - interest rate 7.67% 15,000 15,000
Due 1997 - interest rate 8.15% 17,500 17,500
Due 1997 - interest rate 6.29% 24,000 24,000
Due 1997 - interest rate 7.13% 125 125
Due 1997 - interest rate 6.86% 0 1,500
Due 1997 - interest rate 6.41% 40,000 0
Due 1998 - interest rate 6.70% 35,000 35,000
Due 1998 - interest rate 6.16% 76,000 76,000
Due 1998 - interest rate 8.62% 20,000 20,000
Due 1998 - interest rate 8.50% 10,000 10,000
Due 1998 - interest rate 7.13% 1,000 1,000
Due 1998 - interest rate 7.16% 25,000 0
Due 1999 - interest rate 7.33% 30,000 0
Due 2000 - interest rate 7.42% 58,000 0
Due 2001 - interest rate 7.50% 30,000 0
Due 2002 - interest rate 7.59% 17,000 0
TOTAL SENIOR DEBT, TERM NOTES $438,750 $265,375
1995 1994
SUBORDINATED DEBT
Due 1995 - interest rate 9.76% $0 $4,000
Due 1995 - interest rate 10.86%. 0 1,500
Due 1996 - interest rate 9.76% 4,000 4,000
Due 1996 - interest rate 10.86% 3,000 3,000
Due 1997 - interest rate 9.76% 12,000 12,000
Due 1997 - interest rate 10.86%. 3,000 3,000
Due 1998 - interest rate 10.86%. 7,500 7,500
Due 1998 - interest rate 7.38% 0 500
TOTAL SUBORDINATED DEBT $29,500 $ 35,500
</TABLE>
The following table sets forth information with respect to maturities of
senior and subordinated debt at December 31, 1995.
<TABLE>
<CAPTION>
Senior debt
commercial Senior debt Subordinated
Paper & Notes Term Notes Debt Total
<S> <C> <C> <C> <C>
1996 $489,990 $40,125 $7,000 $537,115
1997 0 96,625 15,000 111,625
1998 0 167,000 7,500 174,500
1999 0 30,000 0 30,000
2000 0 58,000 0 58,000
2001 0 30,000 0 30,000
2002 0 17,000 0 17,000
TOTAL $489,990 $438,750 $29,500 $958,240
</TABLE>
Credit facilities extended by banks and related commitment fees at December
31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Unused bank lines $0 $ 20,000
Revolving credit facilities 500,000 400,000
Total lines of credit $500,000 $420,000
Commitment fees (charged to
interest expense) $884 $928
</TABLE>
The revolving credit facilities have commitment periods through August 31,
1998 and are subject to annual extension for additional one year periods at
the request of Mercury with the consent of each of the banks in the facility.
Currently the facilities carry a weighted average annual commitment fee of 17
basis points of the total amount. Outstanding borrowings bear interest at
floating rates, at Mercury's option, either equal to the reference bank's
prime rate, or 1/2 of 1% above LIBOR rate.
6) INTEREST EXCHANGE AGREEMENTS
In the past Mercury had entered into interest exchange agreements ranging in
maturity from one to five years. These agreements called for Mercury to pay
interest at a fixed rate and receive interest at a floating rate on notional
amounts. The net (income) expense associated with these agreements, which is
included in interest expense in the accompanying consolidated statements of
income, was $0, $192 and $1,497 in 1995, 1994 and 1993, respectively.
At December 31, 1995 Mercury was not a party to any open interest exchange
agreements.
7) DIVIDEND RESTRICTIONS
Payment of dividends by Mercury is subject to certain limitations in the
various debt agreements and the revolving credit facilities. Under the most
restrictive provisions of these agreements, no amounts were available for
distribution as of December 31, 1995. Payment of dividends by the insurance
subsidiaries to Mercury from statutory- basis retained earnings (surplus) in
excess of defined limits (generally, the lesser of statutory-basis net gain
from operations or 10% of prior year-end statutory-basis surplus) is subject
to approval by state regulatory authorities. The amount available for
payment of dividends to Mercury by its insurance subsidiaries without
regulatory approval, totaled $6,135 at December 31, 1995.
8) COMMON STOCK
During the period since Mercury became an independent publicly traded company
the following stock splits have been distributed:
<TABLE>
<CAPTION>
Dates Type
<S> <C>
December 28, 1989 4 for 3 split
October 31, 1990 4 for 3 split
June 10, 1991 4 for 3 split
December 5, 1991 4 for 3 split
June 19, 1992 2 for 1 split
June 22, 1993 4 for 3 split
October 31, 1995 3 for 2 split
</TABLE>
Earnings per share is computed by dividing net income by the total of
weighted average common shares and common stock equivalents outstanding
during the periods, adjusted for all stock splits. The calculated averages
were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Weighted Average:
Common Shares 175,631,175 173,864,469 172,976,916
Treasury Shares (3,182,283) (522,158) (94,808)
Common Equivalents 1,660,524 1,808,034 2,567,556
Total 174,109,416 175,150,345 175,449,664
</TABLE>
9) STOCK OPTIONS
Under the terms of Mercury's 1989 Stock Option and Incentive Compensation
Plan, 24,837,036 common shares were reserved for the future granting of
options to officers, non-employee directors and other key employees. Options
become exercisable in whole or in part up to two years after the date of
grant at the closing price of Mercury's common stock on the date of grant.
Options are forfeited upon termination of employment. Shares available for
future grants totaled 891,055 and 2,044,680 at December 31, 1995 and 1994
respectively.
Activity with respect to stock options follows:
(As adjusted for all stock splits)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Outstanding January 1 10,183,320 6,252,314
Options granted (average price
of $11.38 in
1995 and $11.17 in 1994) 1,582,375 4,622,625
Forfeited (428,750) (45,000)
Options exercised (average
price of $3.12 in
1995 and $3.74 in 1994) (2,622,453) (646,619)
Outstanding December 31 8,714,492 10,183,320
</TABLE>
The average option price under the plans was $9.45 and $7.53 at December 31,
1995 and 1994 respectively.
10) CONTINGENCIES AND LEGAL MATTERS
In the normal course of its business, Mercury and its subsidiaries are named
as defendants in legal proceedings. A number of such actions, including two
cases which have been brought as putative class actions, are pending in the
various states in which subsidiaries of Mercury do business. It is the
policy of Mercury and its subsidiaries to 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. Accordingly, no provision has been made in
the consolidated financial statements for any of the pending proceedings.
At December 31, 1995, Lyndon was a party to a number of reinsurance
agreements entered into by its former reinsurance operation. These
agreements resulted in Lyndon assuming business on a low risk basis primarily
from large and highly rated life and health insurers for the purpose of
providing statutory surplus to the ceding companies. Prior to the acquisition
of Lyndon by Mercury, this business was retroceded to a joint venture of
third party reinsurers under similar terms as the original agreements. All
the risks of this business have been effectively transferred to the third
party reinsurers. ITT Corporation has also agreed to indemnify Mercury
Finance in the event any losses are incurred by Lyndon under the agreements.
There was approximately $567 million of statutory surplus provided (assumed
and ceded) under these agreements as of December 31, 1995. Virtually all of
these reinsurance agreements are expected to be either terminated or novated
during 1996 which will remove Lyndon from any potential contingent
liabilities related to these agreements.
11) PENSION PLAN AND OTHER EMPLOYEE BENEFITS
Substantially all employees of Mercury are covered by a non-contributory
defined benefit pension plan. Total pension expense aggregated $317, $654
and $554 in 1995, 1994 and 1993 respectively. The following table sets forth
the funded status of Mercury's qualified plan amounts recognized in the 1995,
1994 and 1993 consolidated financial statements.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Actuarial present value of
benefit obligation:
Accumulated benefit
obligations, including
vested benefits of $5,631,
$4,407, and $4,296 $6,430 $4,973 $4,905
Projected benefit
obligation for service
rendered to date $(9,763) $(7,596) $(8,193)
Plan assets at fair value 11,542 9,303 9,685
Plan assets in excess of
projected benefit
obligation. 1,779 1,707 1,492
Unrecognized net asset
as of December 31, being
recognized over 22 years (442) (830) (337)
Unrecognized net loss (gain)(1,397) (437) (185)
Unrecognized prior service
cost 106 67 70
Prepaid pension expense $46 $507 $1,040
Components of net pension
expense:
Service cost-benefits
earned during the period $884 $964 $764
Interest cost on projected
benefit obligation 601 567 416
Actual return on plan
assets (1,743) 321 (1,809)
Net amortization and
deferral 575 (1,198) 1,183
Net periodic pension
expense $317 $654 $554
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.50%, 8.25% and 7.25% at
December 31, 1995, 1994 and 1993 respectively. The rates of increase in
future compensation were 5.5% - 7% at December 31, 1995, 1994 and 1993. The
expected long-term rate of return on plan assets in 1995, 1994 and 1993 was
9%.
Mercury also maintains a nonqualified, unfunded pension benefit plan for
certain employees whose calculated benefit payments under the qualified plan
are expected to exceed the limits imposed by Federal tax law. The projected
benefit obligations of the plan, and the expenses related to this plan, are
not material.
Mercury has an employee stock purchase plan and a tax deferred Retirement
Savings Trust (401-k) plan; employees are eligible to participate in the
plans after having attained specified terms of service. Both plans cover
substantially all full time employees of Mercury and provide for employee
contributions and partial matching contributions by Mercury. The expenses
related to these plans are not material.
12) INCOME TAXES
The components of the 1995, 1994 and 1993 provisions were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
CURRENT INCOME TAX EXPENSE
Federal $47,858 $48,365 $35,792
State 8,716 7,859 5,453
Total 56,574 56,224 41,245
Deferred income tax benefit (10,595) (1,779) (1,305)
Total income tax provision $45,979 $54,445 $39,940
</TABLE>
The effective tax rates on income before income taxes were 38.3%, 38.6% and
38.3% in 1995, 1994, and 1993 respectively. State income taxes accounted for
the difference between the effective income tax rate and the statutory
Federal tax rate of 35% for 1995, 1994 and 1993. The total income tax
benefit reflected in shareholders' equity for stock options exercised was
$7,363, $1,535 and $2,698 in 1995, 1994 and 1993 respectively. Temporary
differences between the amounts reported in the financial statements and the
tax basis of assets and liabilities result in deferred taxes. Deferred tax
assets and liabilities at December 31, were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for finance credit
losses and prepaid pension expense $17,885 $8,048
Purchase accounting adjustments $4,830 $0
Deferred tax assets $22,715 $8,048
DEFERRED TAX LIABILITIES:
Unrealized appreciation on
available-for-sale securities $1,362 $0
Premises and equipment
depreciation and other miscellaneous
items 0 758
Net deferred tax assets $21,353 $7,290
</TABLE>
No valuation allowance for deferred tax assets has been recorded at December
31, 1995 and 1994 as Mercury believes it is more likely than not that the tax
deferred tax assets will be realized in the future.
As discussed in note 1, Mercury adopted Statement 109 as of January 1, 1993.
The cumulative effect of this change in accounting for income taxes of $234
is determined as of January 1, 1993 and is reported separately in the
consolidated statement of income for the year ended December 31, 1993.
13) LEASES
Mercury and its subsidiaries lease offices generally under cancelable
operating leases expiring in various years through 2001. Most of these leases
are renewable for periods ranging from three to five years. Future minimum
payments, by year and in the aggregate, under operating leases with initial
or remaining terms of one year or more consisted of the following at December
31,
1995:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1996 $ 3,920
1997 3,323
1998 2,470
1999 1,204
2000 and after 394
Total $11,311
</TABLE>
It is expected that in the normal course of business, office leases that
expire will be renewed or replaced by leases on other properties. Total rent
expense approximated $4,176, $3,169, and $2,619 in 1995, 1994 and 1993
respectively.
14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value. Fair value estimates are made at a specific point in time for
Mercury's financial instruments; they are subjective in nature and involve
uncertainties, matters of significant judgment and, therefore, cannot be
determined with precision. Fair value estimates do not reflect the total
value of Mercury as a going concern.
INVESTMENTS
For bonds the estimated fair value is based on quoted market price. For other
investments, which consist primarily of short-term money market instruments,
the carrying amount is a reasonable estimate of fair value.
FINANCE RECEIVABLES
The fair value of finance receivables is computed using estimated market
rates of return desired by bulk purchasers.
SENIOR DEBT, COMMERCIAL PAPER
The debt consists principally of short term commercial paper for which the
carrying amount is a reasonable estimate of fair value.
SENIOR AND SUBORDINATED DEBT, TERM NOTES
Rates currently available to Mercury for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
The estimated fair values of Mercury's financial instruments at December 31,
were as follows:
<TABLE>
<CAPTION>
1995
Carrying Fair
Amount Value
<S> <C> <C>
FINANCIAL ASSETS:
Cash $ 22,967 $22,967
Investments 242,043 242,327
Finance Receivables 1,197,776 1,251,422
Less Allowance for Finance Credit Losses (46,366) (46,366)
Less Nonrefundable Dealer Reserves (61,961) (61,961)
Total $1,354,459 $1,408,389
FINANCIAL LIABILITIES:
Senior Debt, Commercial Paper $489,990 $489,990
Senior Debt, Term Notes 438,750 443,437
Subordinated Debt 29,500 30,715
Total $958,240 $964,142
1994
Carrying Fair
Amount Value
FINANCIAL ASSETS
Cash $19,980 $19,980
Investments 14,184 13,942
Finance Receivables 1,039,867 1,096,249
Less Allowance for Finance Credit Losses (22,488) (22,488)
Less Nonrefundable Dealer Reserves (66,477) (66,477)
Total $985,066 $1,041,206
FINANCIAL LIABILITIES:
Senior Debt, Commercial Paper $449,945 $449,945
Senior Debt, Term Notes 265,375 255,618
Subordinated Debt 35,500 35,746
Total $750,820 $741,309
</TABLE>
15) BUSINESS SEGMENT DATA
The Finance segment consists of the noninsurance segment of Mercury. The
insurance segment consists of Mercury's insurance subsidiaries including
Gulfco Life, Mercury Life and the Lyndon Insurance Companies. Included in
revenues are net interest income and other income. Operating profit
represents income before income taxes but includes interest expense, as
financing costs are integral to the Company's operations. Income by segment
assumes each business services its own debt (including acquisition debt).
The segments generally provide for income taxes as if separate returns were
filed subject to certain consolidated return limitations and benefits.
Equity is allocated to the business segments based on underlying regulatory
and business requirements. The following table presents the business segment
data of Mercury (in millions).
Year Ended December 31
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
REVENUES
Finance $218.3 $203.5 $152.4
Insurance 37.8 9.6 9.1
Total $256.1 $213.1 $161.5
OPERATING PROFITS
Finance $107.7 $137.9 $102.5
Insurance 12.4 3.1 2.4
Total $120.1 $141.0 $104.9
NET INCOME
Finance $66.3 $84.4 $63.3
Insurance 7.8 2.1 1.6
Total $74.1 $86.5 $64.9
IDENTIFIABLE ASSETS
Finance $1,168.1 $1,025.1 $789.0
Insurance 430.0 11.3 8.1
Total $1,598.1 $1,036.4 $797.1
</TABLE>
16) SUBSEQUENT EVENTS - RESTATEMENT OF 1995 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>
<S> <C>
Decrease in finance charges and loan fees $15,350
Increase in provision for finance credit losses 1,800
Decrease in other income 19,562
Increase in other expenses 2,130
Decrease in income before income taxes 38,842
Decrease in provision for income taxes 14,064
Decrease in net income for 1995 and decrease in
retained earnings as of December 31, 1995 $24,778
Decrease in net income per common share $0.14
</TABLE>
<TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
BALANCE SHEET AVERAGE FOR THE QUARTER 1995
<CAPTION>
4th Qrtr 3rd Qrtr 2nd Qrtr 1st Qrtr
<S> <C> <C> <C> <C>
Cash $22,266 $13,913 $15,252 $17,786
Investments 260,312 11,885 14,048 13,240
Finance Receivables 1,174,398 1,162,846 1,126,064 1,064,352
Allowance for Credit
Losses (28,459) (25,123) (24,313) (22,955)
Nonrefundable Dealer
Reserves (64,270) (73,160) (70,573) (67,931)
Other Assets 184,875 50,931 45,667 48,839
Total Assets $1,549,122 $1,141,292 $1,106,145 $1,053,331
LIABILITIES AND
SHAREHOLDERS' EQUITY
Senior Debt, Short
Term $432,291 $363,360 $493,654 $453,593
Senior Debt, Long
Term 432,104 419,708 267,641 265,375
Subordinated Debt 32,167 33,833 35,500 35,500
Other Liabilities 378,836 59,976 65,377 71,527
Total Shareholders'
Equity 273,724 264,415 243,973 227,336
Liabilities and
Shareholders'
Equity $1,549,122 $1,141,292 $1,106,145 $1,053,331
INCOME STATEMENT
Interest Income $68,803 $65,000 $61,993 $59,270
Interest Expense 15,797 14,499 13,897 13,110
Net Interest Income 53,006 50,501 48,096 46,160
Provision for Credit
Losses 23,879 3,312 3,026 2,424
Net Interest Income
after Credit Losses 29,127 47,189 45,070 43,736
Other Income 31,765 8,135 8,068 10,382
Other Expenses 39,716 20,376 24,241 19,030
Income Before Income
Taxes 21,176 34,948 28,897 35,088
Applicable Income
Taxes 8,861 13,093 10,578 13,448
Net Income 12,315 21,855 18,319 21,640
Average Common &
Equivalent
Shares Outstanding 174,518 175,137 173,764 173,018
Per Common Share
(adjusted for
stock splits)
Net Income $.07 $.12 $.11 $.13
Cash Dividend .08 .06 .06 .05
Market Price:
High 16 3/8 16 5/8 12 7/8 11 1/4
Low 11 3/8 12 1/8 9 3/4 8 1/4
Close at End of
Period 13 1/4 16 1/4 12 7/8 10 5/8
Ratios
Net Interest Margin 14.81% 17.24% 16.86% 17.07%
Net Income to
Average Assets 3.18% 7.66% 6.62% 8.22%
Net Income to
Average
Shareholders'
Equity 18.00% 33.06% 30.03% 38.08%
BALANCE SHEET AVERAGE FOR THE QUARTER 1994
4th Qrtr 3rd Qrtr 2nd Qrtr 1st Qrtr
ASSETS
Cash $14,742 $13,859 $12,629 $13,464
Investments $12,600 $12,448 $11,746 $11,248
Finance Receivables $1,000,640 $932,434 $892,076 $839,051
Allowance for Credit
Losses (22,002) (20,331) (19,617) (18,681)
Nonrefundable Dealer
Reserves (71,261) (68,829) (65,818) (59,675)
Other Assets 48,356 34,910 30,153 29,805
Total Assets 983,075 904,491 861,169 815,212
LIABILITIES AND
SHAREHOLDERS' EQUITY
Senior Debt, Short
Term $385,243 $316,070 $288,452 $258,582
Senior Debt, Long
Term 264,533 265,167 266,000 266,000
Subordinated Debt 35,750 35,000 35,000 35,000
Other Liabilities 67,888 64,814 61,044 58,820
Total Shareholders'
Equity 229,661 223,440 210,673 196,810
Liabilities and
Shareholders' Equity $983,075 $904,491 $861,169 $815,212
INCOME STATEMENT
Interest Income $59,531 $53,399 $50,818 $47,816
Interest Expense 11,575 9,969 9,302 8,528
Net Interest Income 47,956 43,430 41,516 39,288
Provision for Credit
Losses 2,543 1,657 1,409 1,766
Net Interest Income
After Credit Losses 45,413 41,773 40,107 37,522
Other Income 13,575 10,228 8,588 8,516
Other Expenses 20,653 15,362 14,523 14,192
Income Before
Income Taxes 38,335 36,639 34,172 31,846
Applicable Income
Taxes 14,827 14,158 13,170 12,290
Net Income 23,508 22,481 21,002 19,556
Average Common and
Equivalent Shares
Outstanding 173,147 175,792 175,833 175,836
Per Common Share
(adjusted for stock
splits)
Net Income $.14 $.13 $.12 $.11
Cash Dividend .05 .05 .04 .04
Market Price:
High 10 1/8 11 3/4 12 5/8 12 3/4
Low 7 3/8 9 10 1/8 9 7/8
Close at End of
Period 8 5/8 9 5/8 11 11 1/4
Ratios:
Net Interest Margins 18.97% 18.42% 18.36% 18.43%
Net Income to
Average Assets 9.57 9.94 9.76 9.60
Net Income to Ave
rage Shareholders'
Equity 40.94 40.25 39.88 39.75
</TABLE>
The common stock of Mercury Finance Company began trading on The New York
Stock Exchange on April 11, 1989 under the symbol MFN. Mercury common stock
is also traded on The Chicago Stock Exchange. On December 31, 1995 Mercury
had approximately 4,100 holders of record of common stock, exclusive of
holders of shares in "street" or nominee names.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
See Current Report on Form 8-K filed on February 25, 1997 regarding changes
in Registrant's certifying accountant.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is contained in Mercury's 1996 Proxy and
information regarding executive officers is set forth in Item 1 herein.
Certain executive officers and directors of the Company have been
delinquent in the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Financial Statements Filed Under Item 8 of this Report
Consolidated Balance Sheets as of December 31, 1995 and 1994.
Consolidated Statements of Income for the Three Year Period Ended December
31, 1995, 1994 and 1993.
Consolidated Statements of Changes in Shareholders' Equity for the Three Year
Period Ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the Three Year Period Ended
December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements for the Three Year Period Ended
December 31, 1995, 1994 and 1993.
Independent Auditors' Report.
Quarterly Financial Data (Unaudited)
FINANCIAL STATEMENT SCHEDULE
None. All schedules omitted are inappropriate or the information required is
shown in the consolidated financial statements or notes hereto.
Reports on Form 8-K
Mercury filed a report on Form 8-K on November 10, 1995. In that report,
Mercury disclosed that on October 23, 1995, it had acquired all the stock of
ITT Life Insurance Company and ITT Lyndon Property Insurance Company for
$72.5 million in cash. Financial statements were filed for this acquisition
in a subsequent report on Form 8-K January 9, 1996.
Exhibits
A list of all exhibits included as part of this report is set forth in the
Exhibit Index accompanying this report, which is included herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Mercury Finance Company
(Registrant)
/s/ William A. Brandt, Jr. 01/07/98
William A. Brandt, Jr.
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
registrant and in the capacity and on the date indicated.
/s/ William A. Brandt, Jr. 01/07/98
William A. Brandt, Jr.
President and
Chief Executive Officer
The following exhibits required by Item 601 of Regulation S-K are not
contained herein (except exhibits 11, 12, 13, 22 and 23) but are filed
separately with this Form 10-K filing and are incorporated by reference to
previous filings as indicated:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS ENCLOSED SEQUENTIAL
PAGE
NUMBERS
3A *Certificate of Incorporation
3B *Bylaws
10A *1989 Stock Option Plan
10B *Employee Stock Purchase Plan
10C *Retirement Plan and Trust
10D *Deferred Compensation Plan for Directors
10E *Dividend Reinvestment Plan
10G *Employment Agreement Dated as of January 1, 1989, Between
First Illinois Corporation and John N. Brincat
10H **Employment Agreement Dated as of February 20, 1989,
Between Mercury Finance Company and Charely A. Pond
10J *Lease Dated December 6, 1985 Between Teachers Realty
Corporation and First Illinois Finance Company
10K *Life Reinsurance Agreement Between American Bankers Life
Assurance Company of Florida and First Illinois Finance
Company
10L *Accident and Health Reinsurance Agreement Between
American Bankers Life Assurance Company of Florida and
First Illinois Finance Company Dated as of June 1, 1986.
10M *Agency Agreement Dated February 1, 1985 Between American
Bankers Insurance Group and First Illinois Finance
Company
10N *Form of Mercury Finance Company Commercial Paper Note
10O *$200,000,000 Credit Agreement Dated as of December 23,
1988 Among Mercury Finance Company and Harris Trust and
Savings Bank
10P **First Amendment Dated as of December 18, 1989 to
$200,000,000 Credit Agreement Dated as of December 23,
1988 Among Mercury Finance Company and Harris Trust and
Savings Bank as agent for the Bank Parties thereto
10Q **Second Amendment Dated as of December 31, 1989 to
$200,000,000 Credit Agreement Dated as of December 23,
1988 Among Mercury Finance Company and Harris Trust and
Savings Bank as agent for the Bank Parties thereto
10R Third Amendment Dated as of May 14, 1990 to
$200,000,000 Credit Agreement Dated as of December 23,
1988 Among Mercury Finance Company and Harris Trust and
Savings Bank as agent for the Bank Parties thereto
10S Fourth Amendment Dated as of December 23, 1990 to
$200,000,000 Credit Agreement Dated as of December 23,
1988 Among Mercury Finance Company and Harris Trust and
Savings Bank as agent for the Bank Parties thereto
10T *Senior Subordinated Note Dated as of March 3, 1989
Between Australia and New Zealand Banking Group Limited
and First Illinois Finance Company
10U *Note Purchase Agreement Dated as of May 30, 1986 Between
First Illinois Finance Company and American Bankers Life
Assurance Company of Florida
10V *Note Purchase Agreement Dated as of May 30, 1986 Between
First Illinois Finance Company and American Bankers Life
Assurance Company of Florida
10W *Interest Rate Swap Agreement Dated as of May 10, 1988
Between Continental Illinois National Bank and Trust
Company of Chicago and First Illinois Finance Company
10X *Master Interest Rate Swap Agreement Dated as of June 18,
1986 Between Harris Trust and Savings Bank and First
Illinois Finance Company
10Y **Term Loan Agreement Dated as of September 27, 1989
Between Mercury Finance Company and National Westminster
Bank, U.S.A
10Z **Term Loan Agreement Dated as of September 28, 1989
Between Mercury Finance Company and Northern Trust Company
10AA **Term Loan Agreement Dated as of September 29, 1989
Between Mercury Finance and Mellon Bank, N.A.
10AB **Subordinated Note Agreement Dated as of October 17,
1989, Between Mercury Finance Company and State Bank of
South Australia
10AC **Amendment Dated December 1, 1989 to Subordinated Note
Agreement Dated as of October 17, 1989 Between Mercury
Finance Company and State Bank of South Australia
10AD **Senior Note Agreement Series A and B Dated as of
December 1, 1989 Between Mercury Finance Company and:
- Insurance Company of North America
- Life Insurance Company of North America
- The Lincoln National Life Insurance Company
- First-Penn Pacific Life Insurance Company
- The Mutual Life Insurance Company
- Phoenix Mutual Life Insurance Company
- Provident Mutual Life Insurance Company
- SMA Life Assurance Company
- State Mutual Life Assurance Company
- State Mutual Life Assurance Company of America
10AE **Senior Subordinated Note Agreement Series C Dated as of
December 1, 1989 Between Mercury Finance Company and:
- Cigna Property and Casualty Insurance Company
- Connecticut General Life Insurance Company
- Life Insurance Company of North America
- Phoenix Mutual Life Insurance Company
10AF ***Senior Subordinated Note Agreement Series D Dated as of
May 15, 1990 Between Mercury Finance Company and:
- Cigna Property and Casualty Company
_ Connecticut General Life Insurance Company
10AG ***Senior Note Agreement Dated as of September 1, 1990
Between Mercury Finance Company and Aetna Life Insurance
Company
10AH ****Senior Note Agreement Dated as of June 1, 1991 Between
Mercury Finance Company and Allstate Insurance Company
10AI ****Senior Note Agreement Dated as of September 1, 1991
Between Mercury Finance Company and Principal Mutual Life
Insurance Company
10AJ ****Loan Agreement Dated October 30, 1992 Between mercury
Finance Company and Allomon Funding Corporation
(Uncommitted Credit Facility)
10AK *****Senior Note Agreement Dated march 1, 1992 Between
Mercury Finance Company and Principal Mutual Life
Insurance Company
10AL *****Senior Note Agreement Dated may 1, 1992 Between
Mercury Finance Company and:
- Allstate Life Insurance Company
- State Mutual Life Assurance Company of America
10AM *****Interest Rate Swap Transaction Dated July 2, 1992
Between Mercury Finance Company and Continental Bank N.A.
10AN *****Senior Note Agreement Dated September 1, 1992 Between
Mercury Finance Company and The Equitable Life Assurance
Society of the United States
10AO *****Senior Note Agreement Dated September 15, 1992
Between Mercury Finance Company and The Equitable Life
Assurance Society of the United States
10AP *****Credit Agreement Dated September 15, 1992 Between
Mercury Finance Company and:
*****Credit Agreement Dated September 15, 1992 Between
Mercury Finance Company and:
- Harris Trust and Savings Bank
- Continental Bank N.A.
- Canadian Imperial Bank of Commerce
- The Northern Trust Company
- The Daiwa Bank, Ltd.
- Mellon Bank, N.A.
- Bank One, Evanston, N.A.
- NBD Bank, N.A.
- First Wisconsin national Bank of Milwaukee
- Dresdner Bank AG/Chicago Branch/Grand Cayman Branch
- Bank Hapoalim B.M.
- Bank of Hawaii
10AQ *****Credit Agreement Dated September 15, 1992 Between
Mercury Finance Company and:
- Harris Trust and Savings Bank
- Continental Bank N.A.
- Canadian Imperial Bank of Commerce
- The Northern Trust Company
- The Daiwa Bank, Ltd.
- Mellon Bank, N.A.
- Bank One, Evanston, N.A.
- NBD Bank, N.A.
- First Wisconsin National Bank of Milwaukee
- Dresdner Bank AG/Chicago Branch/Grand Cayman Branch
- Bank Hapoalim B.M.
- Bank of Hawaii
10AR ******Purchase Agreement Dated April 1, 1993 Between
Mercury Finance Company and Independent Life Insurance
Company
10AS ******Senior Note Agreement Dated March 1, 1993 Between
Mercury Finance Company and Principal Mutual Life
Insurance Company
10AT ******Senior Note Agreement Dated July 1, 1993 Between
Mercury Finance Company and Pacific Mutual Life Insurance
Company
10AU ******Senior Note Agreement Dated December 1, 1993 Between
Mercury Finance Company and:
- American United Life Insurance Company
- MONY Capital Management
- Pacific Mutual Life Insurance Company
- Principal Mutual Life Insurance Company
10AV ******Second Amendment to Revolving Credit Agreement Dated
July 15, 1993 Between Mercury Finance Company and:
- Harris Trust and Savings Bank
- Continental Bank N.A.
- Canadian Imperial Bank of Commerce
- The Northern Trust Company
- The Daiwa Bank, Ltd.
- Mellon Bank, N.A.
- Bank One, Evanston, N.A.
- NBD Bank, N.A.
- First Wisconsin National Bank of Milwaukee
- Dresdner Bank AG/Chicago Branch/Grand Cayman Branch
- Bank Hapoalim B.M.
- Bank of Hawaii
10AW ******Third Amendment to Revolving Credit Agreement Dated
July 15, 1993 Between Mercury Finance Company and:
- Harris Trust and Savings Bank
- Continental Bank N.A.
- Canadian Imperial Bank of Commerce
- The Northern Trust Company
- The Daiwa Bank, Ltd.
- Mellon Bank, N.A.
- Bank One, Evanston, N.A.
- NBD Bank, N.A.
- First Wisconsin National Bank of Milwaukee
- Dresdner Bank AG/Chicago Branch/Grand Cayman Branch
- Bank Hapoalim B.M.
- Bank of Hawaii
10AX *******Purchase Agreement Dated September 30, 1994 Between
Mercury Finance Company and Midland Finance Co.
10AY ********Employment Agreement Dated January 1, 1994 Between
Mercury Finance Company and John N. Brincat
10AZ ********Senior Note Agreement Dated December 15, 1994
Between Mercury Finance Company and Norddeutsche
Landesbank Girozentrale
10BA ********Senior Note Agreement Dated December 15, 1994
Between Mercury Finance Company and The Long-Term Credit
Bank of Japan, Ltd.
10BB +Senior Note Agreement Dated June 29, 1995 Between Mercury
Finance Company and:
- Allstate Life Insurance Company
- Allstate Insurance Company
- Metropolitan Life Insurance Company
- Principal Mutual Life Insurance Company
- Pacific Mutual Life Insurance Company
- PM Group Life Insurance Company
- TMG Life Insurance Company
- Lincoln-Security Life Insurance Company
- Security-Connecticut Life Insurance Company
- Oxford Life Insurance Company
- London Life International Reinsurance Corporation
- American States Life Insurance Company
- Phoenix Home Life Mutual Insurance Company
- Phoenix American Life Insurance Company
- American Guardian Life Assurance Company
10BC +Senior Note Agreement Date October 3, 1995 Between Mercury
Finance Company and Bank of America Illinois
10BD +Fourth Amendment to Revolving Credit Agreement Date July
15, 1993 Between Mercury Finance Company and:
- Nations Bank
- Bank One
- Harris Trust and Savings Bank
- Bank of America Illinois
- NBD Bank
- Westdeutsche Landesbank Girozentale
- The Daiwa Bank, Ltd.
- Mellon Bank, N.A.
- Dresdner Ban AG
- Bank Hapoalim B.M.
- Union Bank
- The Northern Trust Company
- Credit Lyonnais New York Branch
- LaSalle National Bank
- Bank of Hawaii
- First Interstate Bank of California
- The Boatmen's National Bank of St. Louis
- Firststar Bank Milwaukee, N.A.
- First National Bank of Chicago
10BE +Purchase Agreement Dated October 20, 1995 Between Mercury
Finance Company and ITT Corporation
11 Computation of Net Income Per Share
12 Ratio of Earnings to Fixed Charges
22 +Subsidiaries of Mercury Finance Company
23 Consent of KPMG Peat Marwick LLP
* Incorporated by reference to the Form 10K filed by
Mercury Finance Company 1989
** Incorporated by reference to the 1989 Form 10K filed by
Mercury Finance Company
*** Incorporated by reference to the 1990 Form 10K filed by
Mercury Finance Company
**** Incorporated by reference to the 1991 Form 10K filed by
Mercury Finance Company
***** Incorporated by reference to the 1992 Form 10K filed by
Mercury Finance Company
****** Incorporated by reference to the 1993 Form 10K filed by
Mercury Finance Company
******* Incorporated by reference to the 1994 Form 10K filed by
Mercury Finance Company
+ Incorporated by reference to the 1995 Form 10-K originally filed by Mercury
Finance Company.
EXHIBIT 11
MERCURY FINANCE COMPANY
<TABLE>
COMPUTATION OF NET INCOME PER SHARE
<CAPTION>
Year Ended December 31 (dollars in thousands except per share amounts)
1995 1994 1993
<S> <C> <C> <C>
Income Data:
1. Net Income $74,129 $86,545 $64,927
2. Weighted average common
shares outstanding, adjusted
for stock splits 175,631 173,864 172,977
3. Weighted average shares of
treasury stock outstanding,
adjusted for stock splits 3,182 522 95
4. Weighted average shares reserved
for stock options (utilizing the
treasury stock method) 1,660 1,808 2,568
NET INCOME PER COMMON SHARE
5. Common Shares Outstanding 174,109 175,150 175,450
(Line 2-3+4)
6. Net income per common shares $.43 $.49 $.37
(Line 1 - 5)
DIVIDEND DATA
1. Dividends Declared $42,849 $33,581 $23,351
2. Average common shares
outstanding on dividend
record date 172,548 173,694 173,019
3. Dividends per common share $.25 $.19 $.14
</TABLE>
EXHIBIT 12
MERCURY FINANCE COMPANY
<TABLE>
RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Year Ended December 31 (dollars in thousands)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net Income $74,129 $86,545 $64,927 $45,723 $32,816
Added fixed charges:
Cost of Borrowing 57,303 39,375 32,993 29,525 28,796
One-third of rentals 1,370 1,056 873 635 536
Total fixed charges: $58,673 $40,431 $33,806 $30,160 $29,332
Provisions for
income taxes:
Federal 38,895 46,797 34,634 23,914 17,429
State 7,084 7,648 5,306 4,025 3,257
Total income taxes $45,979 $54,445 $39,940 $27,939 $20,686
Total "earnings"
(net income,
fixed charges and
income taxes) $178,781 $181,421 $138,673 $103,822 $82,834
Ratio of "earnings" to fixed
charges 3.05 4.49 4.10 3.44 2.82
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Mercury Finance Company:
RE: REGISTRATION STATEMENTS ON FORM S-8
o Employee Stock Purchase Plan
o 1989 Stock Option and Incentive Compensation Plan
o 401(k) Plan
We consent to incorporation by reference in the subject Registration Statements
(filed with the Securities and Exchange Commission on May 3, 1989, May 11, 1989
and June 26, 1989) of Mercury Finance Company of our report dated February 12,
1996 except as to notes 1, 4, 7, 12, 14, 15, and 16 which are dated as of
October 27, 1997, relating to the consolidated balance sheets of Mercury Finance
Company and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995,
which report appears in the December 31, 1995 annual report on Form 10-K, as
amended, of Mercury Finance Company.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
December 30, 1997
