SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A NO. 1
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarter Ended September 30, 1996 Commission File No. 1-10176
MERCURY FINANCE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-3627010
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
100 FIELD DRIVE, LAKE FOREST, ILLINOIS 60045
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 295-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
Yes No X
Indicate the number of shares outstanding of each issuer's class of common
stock, as of the latest practicable date.
Common Stock - $1 par value: 177,692,798 shares as of November 11, 1996.
Treasury Stock: 5,402,957 shares as of November 11, 1996.
MERCURY FINANCE COMPANY
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Changes in Stockholders' Equity . . . . 3
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . 5
Consolidated Average Balance Sheets . . . . . . . . . . . . . . . . 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . 21
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form . . . . . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
INDEX OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . 23
Exhibit No. 11 - Computation of Net Income Per Shares . . . . . . . 24
Exhibit No. 27 - Financial Data Schedule . . . . . . . . . . . . . 25
PART 1- FINANCIAL INFORMATION
As more fully described in the Notes to Consolidated Financial Statements,
financial information in this Report has been restated to correct improper
adjustments reflected in previous reports which had the effect of overstating
earnings.
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED BALANCE SHEETS (Unaudited) (Restated)
<CAPTION>
September 30 Dec. 31
(Dollars in thousands) 1996 1995 1995
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash.............................................. $13,221 $18,037 $22,967
Investments....................................... 216,344 11,968 242,043
Finance receivables............................... 1,164,532 1,161,381 1,197,776
Less allowance for finance credit losses.......... (112,487) (26,596) (46,366)
Nonrefundable dealer reserves..................... (103,512) (71,379) (61,961)
Finance receivables, net.......................... 948,533 1,063,406 1,089,449
Income tax receivable............................. 51,427 0 0
Deferred income taxes............................. 41,555 9,505 21,353
Furniture, fixtures and equipment, net of
accumulated depreciation...................... 7,594 5,964 7,022
Goodwill.......................................... 14,666 15,476 15,274
Reinsurance receivable............................ 79,043 0 89,962
Deferred acquisition costs........................ 58,896 1,164 23,242
Other assets (including repossessions)............ 80,880 18,629 86,786
TOTAL ASSETS...................................... $1,512,159 $1,144,149 $1,598,098
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper..................... $443,307 $397,311 $489,990
Senior debt, term notes........................... 518,750 398,875 438,750
Subordinated debt................................. 26,000 33,500 29,500
Accounts payable and other liabilities............ 59,244 59,046 70,268
Unearned premium and claim reserves............... 231,257 1,180 195,761
Reinsurance payable............................... 49,703 0 105,081
Income taxes payable.............................. 0 (2,855) 9,261
TOTAL LIABILITIES................................. 1,328,261 887,057 1,338,611
STOCKHOLDERS' EQUITY
Common stock-$1.00 par value:
500,000,000 shares authorized
Sep 30 1996- 177,608,090 shares outstanding
Sep 30 1995- 117,332,000 shares outstanding..
Dec 31 1995- 176,477,520 shares outstanding 177,608 176,464 176,478
Paid in capital................................... 5,798 0 39
Retained earnings................................. 44,804 105,698 118,138
Unrealized appreciation........................... 64 0 1,969
Treasury stock at cost:
Sep 30 1996- 4,566,557 shares
Sep 30 1995- 2.974,657 shares
Dec 31 1995- 3,896,557 shares................ (44,376) (25,070) (37,137)
TOTAL STOCKHOLDERS' EQUITY........................ 183,898 257,092 259,487
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,512,159 $1,144,149 $1,598,098
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited) (Restated)
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands except per share amounts) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
Finance charges and loan fees..................... 63,329 64,805 193,747 185,673
Investment income................................. 3,312 195 9,110 590
Total finance charges, fees and other interest.... $66,641 $65,000 $202,857 $186,263
Interest expense 16,154 14,499 48,174 41,506
Net interest income............................... 50,487 50,001 154,683 144,757
Provision for finance credit losses............... 124,220 3,312 183,329 8,762
Net interest income after provision for
finance credit losses......................... (73,733) 47,189 (28,646) 135,995
OTHER INCOME
Insurance premiums................................ 22,907 1,697 60,335 4,872
Fees, commissions and other....................... 4,115 6,438 12,267 21,713
Total other income................................ 27,022 8,135 72,602 26,585
OTHER EXPENSES
Salaries and employee benefits.................... 13,715 12,248 40,339 35,367
Occupancy expense................................. 1,495 1,241 4,416 3,528
Equipment expense................................. 813 531 2,306 1,496
Data processing expense........................... 671 766 2,021 2,241
Insurance claims expense.......................... 14,181 315 30,736 445
Other operating expenses.......................... 7,154 5,275 21,450 20,570
Total other expenses.............................. 38,029 20,376 101,268 63,647
Income (loss) before income taxes................. (84,740) 34,948 (57,312) 98,933
Applicable income taxes/(benefits)................ (32,115) 13,093 (22,863) 37,119
NET INCOME (LOSS) ($52,625) $21,855 ($34,449) $61,814
NET INCOME (LOSS) PER COMMON SHARE (adjusted for
all stock splits)............................. ($0.30) $0.12 ($0.20) $0.36
Weighted average number of common and common
share equivalents outstanding................. 173,526 175,137 173,740 173,973
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited) (Restated)
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of period.................... $177,403 $117,332 $176,478 $116,080
Stock options exercised........................... 205 311 1,392 1,739
Stock traded in to exercise stock options......... 0 0 (262) (176)
Stock split....................................... 0 58,821 0 58,821
Balance at end of period.......................... $177,608 $176,464 $177,608 $176,464
PAID IN CAPITAL
Balance at beginning of period.................... $4,113 $13,769 $39 $6,384
Stock options exercised........................... 1,685 2,289 1,941 3,712
Tax benefit from stock options exercised.......... 0 1,376 3,818 7,338
Transfer from Retained Earnings................... 0 41,387 0 41,387
Stock split....................................... 0 (58,821) 0 (58,821)
Balance at end of period.......................... $5,798 $0 $5,798 $0
RETAINED EARNINGS
Balance at beginning of period.................... $110,428 $148,618 $118,138 $128,157
Net income........................................ (52,625) 21,855 (34,449) 61,814
Dividends......................................... (12,999) (23,388) (38,885) (42,886)
Transfer to Paid in Capital....................... 0 (41,387) 0 (41,387)
Balance at end of period.......................... $44,804 $105,698 $44,804 $105,698
UNREALIZED APPRECIATION
Balance at beginning of period.................... (130) 0 1,969 0
Change during the period.......................... 194 0 (1,905) 0
Balance at end of period.......................... $64 $0 $64 $0
TREASURY STOCK
Balance at beginning of period.................... ($38,225) ($25,070) ($37,137) ($23,107)
Purchases......................................... (6,151) 0 (7,239) (1,963)
Retirements....................................... 0 0 0 0
Balance at end of period.......................... ($44,376) ($25,070) ($44,376) ($25,070)
Total stockholders' equity at end of period....... $183,898 $257,092 $183,898 $257,092
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND NINE MONTHS ENDED SEPTEMBER 30 (Unaudited) (Restated)
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss)................................. $(52,625) $21,855 $(34,449) $61,814
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Provision for finance credit losses............. 124,220 3,312 183,329 8,762
Credit for deferred income taxes................ (14,009) (658) (20,202) (2,215)
Change in income tax payable/receivable......... (37,173) 366 (60,688) (7523)
Depreciation.................................... 1,290 293 3,105 815
Amortization.................................... 203 202 608 608
Net change in reinsurance receivable............ (18,016) 0 10,919 0
Net change in unrealized appreciation/
(depreciation) in securities held for resale.. 194 0 (1,905) 0
Net change in deferred acquisition costs and
present value of future profits............... (13,384) 0 (35,654) 0
Net change in other assets...................... (2,013) (1,490) (15,167) 12,402
Net change in reinsurance payable............... 3,552 0 (55,378) 0
Net change in unearned premium and
claim reserves................................ 29,258 0 35,496 0
Net change in other liabilities................. 1,869 15,013 (11,024) (901)
Net change in nonrefundable dealer reserves..... 49,862 635 41,551 4,902
Net cash provided/(used) in
operating activities........................ 73,228 39,528 61,614 78,664
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance receivables........ 241,721 224,733 722,570 633,714
Finance receivables originated or acquired........ 297,228 (251,453) 806,534 (759,892)
Net change in investments......................... (4,571) (2) 25,699 2,217
Net purchase of premises and equipment............ (948) (1,758) 3,677 (3,287)
Net cash provided by investing activities..... (61,026) 28,480 (61,942) 127,238
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of senior debt, commercial paper
and notes....................................... 13,389 15,598 29,817 78,866
Treasury stock acquired........................... (6,151) 0 (7,239) (1,963)
Dividends paid.................................... (12,999) (23,388) (38,885) (42,886)
Stock options exercised........................... 1,890 3,976 6,889 12,614
Net cash provided/(used) in financing
activities.................................. (3,871) (3,814) (9,418) 46,631
Net increase/(decrease) in cash............... 8,331 7,234 (9,746) (1,943)
CASH AT BEGINNING OF PERIOD....................... 4,890 10,803 22,967 19,980
CASH AT END OF PERIOD............................. $13,221 $18,037 $13,221 $18,037
SUPPLEMENTAL DISCLOSURES
Income taxes paid to federal and state
governments...................................... $40,910 $14,109 $14,305 $40,714
Interest paid to creditors........................ $10,833 $14,499 $23,765 $40,384
See accompanying notes to consolidated financial statements.
</TABLE>
MERCURY FINANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation.
The consolidated financial statements of Mercury Finance Company and
Subsidiaries are unaudited, but in the opinion of management reflect all
necessary adjustments, consisting only of normal recurring accruals, for a fair
presentation of results as of the dates and for the periods covered by the
financial statements. The results for the interim periods are not necessarily
indicative of the results of operations that may be expected for the fiscal
year. It is suggested that the unaudited interim consolidated financial
statements contained herein be used in conjunction with the financial statements
and the accompanying notes to the financial statements included in the Company's
Amendment No. 3 to the Annual Report on Form 10-K for the year ended
December 31, 1995.
2. Per Share Amounts.
Net income per common share amounts are based on the average number of common
shares and common stock equivalents outstanding. All per share amounts have been
adjusted to reflect all stock splits declared by the Company.
3. Reclassifications.
Certain data from the prior year has been reclassified to conform to the 1996
presentation.
4. Restatement of Financial Statements.
In January 1997, Mercury discovered that certain improper adjustments had been
made to overstate earnings in previously issued financial statements. As a
result, a Special Committee of the Board of Directors commenced an investigation
of the misstatements of previously issued financial statements. As a result of
this investigation, Mercury has restated the financial statements for the three
and nine months ended September 30, 1996 as follows:
<TABLE>
<CAPTION>
Three Nine
Months Months
<S> <C> <C>
Decrease in finance charges, fees
and other interest (12,598) (26,655)
Increase in interest expense (468) (469)
Increase in provision for credit losses(*) (79,654) (133,046)
Decrease in other income (6,964) (9,714)
Increase in other expense (10,278) (19,717)
Decrease in provision for income taxes 41,440 72,579
Decrease in net income (68,522) (117,022)
Decrease in beginning retained earnings (73,276) (24,778)
Adjustment to dividends 2
Decrease in ending retained earnings (141,798) (141,798)
Decrease in net income per share ($0.39) ($0.67)
(*) Includes the adoption of "static pooling" methodology for determining the provision for finance credit losses. The new
methodology had the effect of increasing the provision for credit losses by approximately $104 million through the third quarter
of 1997 versus $33 million previously disclosed.
</TABLE>
See the Company's Annual Report on Form 10-K for the year ended December 31,
1996, for more information regarding the impact of the overstatement of earnings
and the restatement of previously issued financial statements.
5. Adoption in 3rd Quarter 1996 of "Static Pooling" Method for Determining
Finance Credit Losses
Sales finance contracts are generally acquired at a discount from the principal
amount. This discount is normally referred to as a non-refundable dealer
reserve. The amount of the discount is based upon the credit risk of the
borrower, the note rate of the contract and competitive factors. In 1994 and
prior, the non-refundable dealer reserve was considered to be adequate to absorb
the majority of losses on the acquired receivables. However, as the sub-prime
market has evolved and become more competitive, the dealer reserve has proven to
be inadequate to absorb all of the credit losses. Through the second quarter of
1996, it was the Company's policy to maintain a balance of the combined non-
refundable dealer reserves and allowance for finance credit losses in an amount
sufficient to cover losses that were expected to be incurred on receivables that
had demonstrated a risk of loss based upon delinquency or bankruptcy status.
In the third quarter of 1996, Mercury adopted a loss reserving methodology
commonly referred to as "static pooling." The static pooling methodology
provides that the Company stratify the components of its sales finance
receivable portfolio (i.e. dealer reserve, principal loan balances and related
chargeoffs) into separately identified pools based upon the period the loans
were acquired (monthly). Under Mercury's application of static pooling, the
dealer reserve is amortized and made available to absorb credit losses over the
life of the pool of receivables. The dealer reserve cannot be utilized to
offset provision for finance for credit losses immediately, but must be held to
offset future losses.
Management believes that this method provides for a more appropriate matching of
finance charge income and provision for credit losses. The adoption of static
pooling increased the provision for finance credit losses in the third quarter
of 1996 by approximately $104 million and for the year ended December 31, 1996
by approximately $89 million. See the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, for more information regarding the impact of
the Company's adoption of the static pooling methodology.
<TABLE>
MERCURY FINANCE COMPANY
CONSOLIDATED AVERAGE BALANCE SHEETS
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited) (Restated)
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
ASSETS
Cash.............................................. $9,056 $13,913 $11,532 $15,650
Investments....................................... 214,059 11,885 223,089 13,058
Finance receivables............................... 1,179,475 1,162,846 1,190,961 1,094,169
Less allowance for finance credit losses........ (93,073) (25,123) (70,423) (24,980)
Less nonrefundable dealer reserves.............. (78,581) (73,160) (69,321) (69,705)
Finance receivables, net........................ 1,007,821 1,064,563 1,051,217 999,484
Income tax receivable............................. 35,337 - 16,119 -
Deferred income taxes............................. 34,551 8,892 27,419 8,592
Furniture, fixtures and equipment, net of
accumulated depreciation........................ 7,765 5,042 7,602 4,275
Reinsurance receivable............................ 70,035 - 69,794 -
Deferred acquisition costs and present value
of future profits............................... 52,204 - 41,232 -
Other assets (including repossessions & goodwill). 92,144 36,997 94,383 34,687
TOTAL ASSETS.................................. $1,522,972 $1,141,292 $1,542,387 $1,075,746
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior debt, commercial paper..................... 429,113 $363,360 453,086 $436,869
Senior debt, term notes........................... 526,250 419,708 491,250 317,575
Subordinated debt................................. 26,000 33,833 27,750 34,944
Accounts payable and other liabilities............ 58,310 54,014 65,412 60,913
Unearned premium and claim reserve................ 216,628 - 204,313 -
Reinsurance payable............................... 47,927 - 61,076 -
Income taxes payable.............................. - 5,962 - (2,746)
TOTAL LIABILITIES............................. 1,304,228 876,877 1,302,887 847,555
STOCKHOLDER'S EQUITY
Common stock...................................... 177,506 117,481 177,017 116,898
Paid in capital................................... 4,956 15,446 2,643 11,361
Retained earnings................................. 77,616 156,558 98,770 124,893
Unrealized appreciation........................... (33) - 561 -
Treasury stock.................................... (41,301) (25,070) (39,491) (24,961)
TOTAL STOCKHOLDERS' EQUITY.................... 218,744 264,415 239,500 228,191
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $1,522,972 $1,141,292 $1,542,387 $1,075,746
NUMBER OF DAYS 92 92 274 273
MONTHS COMPLETED 3 3 9 9
RATIOS
Return on average equity.......................... (95.71)% 33.06% (19.21)% 31.17%
Return on average assets.......................... (13.75)% 7.66% (2.98)% 7.22%
Yield on earning assets........................... 19.02 % 22.13% 19.16 % 21.14%
Rate on interest bearing liabilities.............. 6.55 % 7.04% 6.62 % 6.79%
Net interest margin............................... 14.41 % 17.24% 14.61 % 16.42%
</TABLE>
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As more fully described in the Notes to Consolidated Financial Statements,
financial information in this Report has been restated to correct improper
adjustments reflected in previous reports which had the effect of overstating
earnings.
Mercury Finance Company ("Mercury") ("Company") is a consumer finance concern
engaged, through its operating subsidiaries, in the business of acquiring
individual installment sales finance contracts from automobile dealers and
retail vendors, extending short-term installment loans directly to consumers
and selling credit insurance and other related products.
Mercury's operating subsidiaries commenced operations in February 1984 for the
purpose of penetrating the market for small dollar amount consumer loans
(average of $3,000 or less). The initial focus was toward small, short term,
direct installment loans made to the U.S. military servicemen. Building on
this direct lending niche, Mercury has also built a substantial, diversified
consumer finance portfolio by acquiring individual installment sales finance
contracts from retail vendors and automobile dealers.
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 financial statements of income and statements of
cash flow since the dates of acquisitions. 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 nets 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.
Mercury's sales finance contracts and loans range for periods from 3 months to
48 months at annual interest rates ranging, with minor exception, from 18% to
40%. Generally all loans are repayable in monthly installments. Generally late
payment fees are assessed to accounts which fail to make their scheduled
payments within 10 days of the scheduled due date.
Direct finance receivables on which no payment is received within 149 days, on
a recency basis, are charged off. Sales finance receivables which are
contractually delinquent 150 days are charged off in the month before they
become 180 days delinquent. Accounts which are deemed uncollectible prior to
the maximum charge off period are charged off immediately. Management may
authorize an extension if collection appears imminent during the next calendar
month. Accounts which become 60 or more days contractually delinquent and no
full contractual payment is received in the month the account attains such
delinquency status cease earning interest.
The following is management's discussion and analysis of the consolidated
financial condition of the Company at September 30, 1996 (unaudited) when
compared with September 30, 1995 (unaudited) and December 31, 1995 and the
results of operations for the three and nine months ended September 30, 1996 and
1995 (unaudited). Reports previously filed by the Company have restated results
for fiscal 1995 and each of the 1995 quarters as a result of the overstatement
of earnings described above. This discussion, which reflects both the
restatement contained herein and the 1995 restatement, should be read in
conjunction with the Company's consolidated financial statements and notes
thereto appearing elsewhere in this quarterly report.
FINANCIAL CONDITION
ASSETS AND FINANCE RECEIVABLES
Total assets of the Company increased 32% to $1,512.2 million from $1,144
million one year ago. Finance receivables increased marginally to $1,164.5
million at September 30, 1996. The increase in assets was primarily the result
of the October 1995 acquisition of Lyndon.
The Company's offices in Florida, Texas and Louisiana accounted for
approximately 44% of all gross earned finance receivables, with the remainder
being originated in the other 28 states where offices are located. The total
number of offices at September 30, 1996 was 287 compared to 260 at
September 30, 1995 and 276 at December 31, 1995.
The following table summarizes the composition of finance receivables at the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
SEP. 30, 1996 SEP. 30, 1995 DEC. 31, 1995
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
<S> <C> <C> <C> <C> <C> <C>
Gross Finance Receivables
Sales $1,220,336 89% $1,267,466 90% $1,256,631 89%
Direct 147,868 11% 144,924 10% 152,125 11%
Total gross finance
receivables 1,368,204 100% 1,412,390 100% 1,408,756 100%
Unearned finance charges (234,913) (243,161) (234,792)
Unearned insurance
commissions, insurance
premiums and insurance
reserves (7,698) (7,848) (8,720)
Gross earned finance
receivables $1,125,593 $1,161,381 $1,165,244
Credit card 38,939 0 32,532
Total finance
receivables 1,164,532 1,161,381 1,197,776
</TABLE>
ALLOWANCE AND PROVISION FOR FINANCE CREDIT LOSSES
Mercury originates direct consumer loans, acquires individual sales finance
contracts from third party dealers and provides revolving credit to individuals
through a Visa affiliated program.
The company historically and continues to maintain an allowance for the direct
and credit card receivables to cover finance credit losses that are expected to
be incurred on receivables that have demonstrated a risk of loss based upon
delinquency or bankruptcy status.
The sales finance contracts are generally acquired at a discount from the
principal amount. This discount is normally referred to as a non-refundable
dealer reserve. The amount of the discount is based upon the credit risk of the
borrower, the note rate of the contract and competitive factors. In 1994 and
prior, the non-refundable dealer reserve was considered to be adequate to absorb
the majority of losses on the acquired receivables. However, as the sub-prime
market has evolved and become more competitive, the dealer reserve has proven to
be inadequate to absorb all of the credit losses. In 1995 and prior, the
company maintained a balance of the combined non-refundable dealer reserves and
allowance for finance credit losses in an amount sufficient to cover losses that
were expected to be incurred on receivables that had demonstrated a risk of loss
based upon delinquency or bankruptcy status.
In the third quarter of 1996, Mercury adopted a loss reserving methodology
commonly referred to as "static pooling." The static pooling methodology
provides that the company stratify the components of its sales finance
receivable portfolio (i.e., dealer reserve, principal loan balances and related
chargeoffs) into separately identified pools based upon the period the loans
were acquired. Mercury defines a pool as loans acquired within a given month.
The dealer reserve is made available to absorb credit losses over the life of
the pool of receivables. The dealer reserve cannot be utilized to offset
provision for finance credit losses immediately, but must be held to offset
future losses. Management believes this method provides for a more appropriate
matching of finance charge income and provision for finance credit losses.
Reserve requirements for sales finance, direct receivables and credit card
receivables are calculated based on the estimated losses inherent in each
category of delinquency (i.e. 30, 60, 90 and 120 days past due). These assumed
losses are utilized to determine the projected cash flows from each impaired
category. The projected cash flow is then discounted to estimate the net
present value of the impaired loans. A reserve is established in an amount
sufficient to reduce the book value of the impaired receivable to its net
present value. Repossessed collateral is valued at an estimate of its net
realizable value.
The use of the static pooling methodology as described above, increased the
provision for finance credit losses by approximately $104 million for the nine
months ended September 30, 1996, and by approximately $89 million for the year
ended December 31, 1996.
The following table sets forth a reconciliation of the changes in the allowance
for finance credit losses for the nine month periods ended September 30 (dollars
in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at beginning of period $46,366 $22,488
Provision charged to expense 183,329 8,762
Finance receivables charged-off,
net of recoveries (42,759) (4,654)
Transfer to nonrefundable
dealer reserves (74,449) 0
Balance at September 30 $112,487 $26,596
Allowance as a percent of gross
earned finance receivables
outstanding at end of period 9.99% 2.29%
</TABLE>
The increase in the provision and allowance for finance credit losses in 1996 is
attributable to the adoption of the static pool method of accounting for loss
reserves, and an increase in delinquencies and charge-offs combined with a lower
level of acquired nonrefundable dealer reserves.
NONREFUNDABLE DEALER RESERVES
Mercury acquires a majority of its sales finance contracts from dealers at a
discount. Mercury negotiates the amount of the discounts with the dealers based
upon various criteria, one of which is the credit risk associated with the sales
finance contracts being acquired. The following table sets forth a
reconciliation of the changes in nonrefundable dealer reserves for the nine
month periods ended September 30 (dollars in thousands).
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at beginning of period 61,961 66,477
Discounts acquired on new volume 53,981 72,161
Losses absorbed (86,879) (67,259)
Transfer from allowance for
finance credit losses
to reflect adoption of static
pooling 74,449 0
Balance at September 30 $103,512 $71,379
</TABLE>
DEBT
The primary source for funding the Company's finance receivables comes from the
issuance of debt. At September 30, 1996 the Company had total debt of $988.1
million which compares with $829.7 million at September 30, 1995.
In addition to the Company's outstanding debt the Company has revolving credit
facilities and a back up line of credit which total $600 million. The revolving
credit facilities and the back up line are totally available for use by the
Company and at September 30, 1996 nothing was outstanding under these
arrangements.
The following table presents the Company's debt instruments and the stated
interest rates on the debt at the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
SEP. 30, 1996 SEP. 30, 1995 DEC. 31, 1995
BALANCE RATE BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C>
Senior Debt:
Commercial
paper $443,307 5.6% $397,311 6.1% $489,990 6.0%
Term notes 518,750 7.0% 398,875 7.2% 438,750 7.2%
Subordinated
debt 26,000 10.3% 33,500 10.2% 29,500 10.2%
Total $988,057 6.4% $829,686 6.8% $958,240 6.6%
</TABLE>
STOCKHOLDERS' EQUITY
Total stockholders' equity at September 30, 1996 was $183.9 million which
compares with $257.1 million at September 30, 1995 and $259.5 million at
December 31, 1995. For the nine months ended September 30, 1996 the Company had
a net loss of $34.4 million and paid cash dividends of $38.9 million. In
addition, eligible employees of the Company exercised options to purchase shares
resulting in $6.9 million also being added to the equity of the Company. The
Company also repurchased 670,000 shares during the year totaling $7.2 million.
At September 30, 1996 stockholders' equity stated as a percent of total assets
was 12.16% which compares with 22.5% at September 30, 1995 and 16.24% at
December 31, 1995.
RESULTS OF OPERATIONS
NET INCOME
For the three and nine months ended September 30, 1996 the Company had a net
loss of $52.6 million and $34.4 million compared with the $21.9 million and
$61.8 million earned in 1995. The decrease in net income is primarily
attributable to the increase in the provision for finance credit losses.
INTEREST INCOME AND INTEREST EXPENSE
The largest single component of net income is net interest income which is the
difference between interest earned on finance receivables and interest paid on
borrowings. For the three and nine months ended September 30, 1996 the
Company's net interest income was $50.5 million and $154.7 million being
consistent with the three months ended September 30, 1995 and an increase of
6.86% for the nine months ended September 30, 1995. The net interest margin
which is the ratio of net interest income divided by average interest earning
assets was 14.41% for the three months ended September 30, 1996 and 14.61% for
the nine months ended September 30, 1996. This compares with a net interest
margin of 17.24% and 16.42% for the three and nine months ended September 30,
1995.
The change in net interest margin is primarily attributable to lower yielding
investment assets associated with the Lyndon acquisition and interest rate
changes on the Company's various debt instruments. The changes in interest
rates are reflective of general interest rate trends in the U.S. economy. The
following tables summarize the amount of the net interest margin for the three
and six months ended September 30 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
Annualized Annualized
THREE MONTHS ENDED Average Interest Rate Average Interest Rate
Out- Income/ Earned Out- Income/ Earned
standing Expense and Paid standing Expense and Paid
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets . . . . $1,393,534 $66,641 19.02% $1,174,731 $65,000 22.13%
Interest bearing liabilities . 981,363 16,154 6.55% 816,901 14,499 7.10%
Net . . . . . . . . . . . . . . $412,171 $50,487 12.48% $357,830 $50,501 15.03%
Net interest margin as a
percentage of average
interest earning assets . . . 14.41% 17.20%
1996 1995
Annualized Annualized
NINE MONTHS ENDED Average Interest Rate Average Interest Rate
Out- Income/ Earned Out- Income/ Earned
standing Expense and Paid standing Expense and Paid
Interest earning assets . . . . $1,414,050 $202,857 19.16% $1,107,227 $186,263 21.14%
Interest bearing liabilities . 972,086 48,174 6.62% 789,388 41,506 6.77%
Net . . . . . . . . . . . . . . $441,964 $154,683 12.54% $317,839 $144,757 14.37%
Net interest margin as a
percentage of average
interest earning assets . . . 14.61% 16.43%
</TABLE>
OTHER INCOME
In addition to finance charges and interest, the Company derives commission
income from the sale of other credit related products. These products include
insurance relating to the issuance of credit life, accident and health and other
credit insurance policies to borrowers of the Company. Other credit-related
sources of revenue are derived from the sale of other products and services.
Insurance premiums are earned by the life insurance subsidiaries as direct
writers and reinsurers of credit life and accident and health policies issued
through the Company's branch offices.
For the three and nine months ended September 30, 1996, the Company experienced
increases in its insurance premiums which are primarily attributable to the
acquisition of Lyndon Insurance Companies in 1995. Commission income decreased
as a result of premiums being earned by Lyndon in lieu of commissions being
earned by the Company. The following table summarizes the amounts earned from
these products for the three and nine months ended September 30 (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEP. 30 SEP. 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Insurance premiums $22,907 $1,697 $60,335 $4,872
Fees, commissions
and other 4,115 6,438 12,267 21,713
Total $27,022 $8,135 $72,602 $26,585
Other income as a %
of average interest
earnings assets
(Annualized) 7.71% 2.77% 6.86% 3.02%
</TABLE>
OTHER EXPENSES
In addition to interest expense and the provision for finance credit losses, the
Company incurs other operating expenses in the conduct of its business. The
increase in these expenses primarily relate to the acquisition of Lyndon. The
following table summarizes the components of other expenses for the three and
nine months ended September 30 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEP. 30 SEP. 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Salaries and employees
benefits $13,715 $12,248 $40,339 $35,367
Insurance claims expense 14,181 315 30,736 445
Other operating expenses 10,133 7,813 30,193 27,835
Total $38,029 $20,376 $101,268 $63,647
Other expenses as a % of
average interest
earning assets
(Annualized) 10.86% 6.94% 9.57% 7.22%
</TABLE>
INCOME TAXES
Income taxes increased due to a higher level of pretax income in 1996. The
effective tax rate for the quarter was 37.9% in 1996 and 37.5% in 1995.
CREDIT LOSSES AND DELINQUENCIES
CREDIT LOSSES
Direct finance receivables on which no payment is received within 149 days, on a
recency basis, are charged off. Sales finance receivable accounts which are
contractually delinquent 150 days are charged off monthly before they become 180
days delinquent. Accounts which are deemed uncollectible prior to the maximum
charge off period are charged off immediately. Management may authorize an
extension if collection appears imminent during the next calendar month. The
following table sets forth information relating to charge-offs, the allowance
for finance credit losses and dealer reserves (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEP. 30 SEP. 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Loss provision charged
to income $124,220 $3,312 $183,329 $8,762
Net charge-offs
against allowance 10,943 1,926 42,759 4,654
Net charge-offs against
nonrefundable dealer
reserves 39,695 26,102 86,879 67,259
Allowance for finance
credit losses at end
of period 112,487 26,596
Dealer reserves at end
of period 103,512 73,179
Ratios:
Net charge offs
(annualized) against
allowance to average
total finance
receivables 3.69% 0.66% 4.80% 0.55%
Net charge offs
(annualized) against
nonrefundable dealer
reserves to average
total finance
receivables 13.39% 8.91% 9.74% 8.22%
Allowance for finance
credit losses to total
gross finance receivables
at end of period 8.22% 1.88%
Dealer reserves to
gross sales finance
receivables at end
of period 8.48% 5.63%
</TABLE>
DELINQUENCIES AND REPOSSESSIONS
The Company generally suspends the accrual of interest when an account becomes
60 days or more contractually delinquent and no full contractual payment is
received in the month the account obtains such status or if the borrower has
filed for bankruptcy protection. The following table sets forth certain
information with respect to the contractually delinquent receivables and
repossessed assets (in thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
<S> <C> <C>
Delinquent gross receivables 61,340 46,467
Bankrupt accounts 36,412 16,906
Repossessed assets 6,758 10,621
Total 104,510 73,994
Delinquent gross receivables and
bankrupt accounts to gross
finance receivables 7.14% 4.50%
Delinquent gross receivables, bankrupt accounts
and repossessed assets to gross finance
receivables plus repossessed assets 7.60% 5.21%
</TABLE>
Loan collateral is repossessed when debtors are 120 days late or more on
payments. Automobiles are generally sold within 60 days at auction.
LIQUIDITY AND FINANCIAL RESOURCES
Because the consumer finance business involves the purchase and carrying of
receivables, a relatively high ratio of borrowings to net worth is customary and
is an important element in the Company's operations. The Company endeavors to
maximize its liquidity by diversifying its sources of funds which include (a)
cash from operations, (b) the issuance of short term commercial paper, and (c)
direct borrowings available from commercial banks and insurance companies,
consisting of short term lines of credit and long term senior and subordinated
notes. Most of the assets are at fixed rates, and have an average initial
maturity of approximately 26 months. Of the Company's total debt, 55% has an
original maturity of greater than one year at a fixed rate of interest.
The Company also maintains back up revolving credit facilities totaling $600
million. At September 30, 1996 the Company had no debt outstanding under these
credit arrangements.
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 ten 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.
See Item 3 in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, for more information regarding the litigation arising from
the overstatement of earnings and the restatement of previously issued
financial statements.
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.
RECENT DEVELOPMENTS
In January 1997, Mercury discovered that certain improper adjustments had been
made to overstate earnings in previously issued financial statements. As a
result, a Special Committee of the Board of Directors commenced an investigation
of the misstatements of previously issued financial statements. As a result of
this investigation, Mercury has restated the financial statements for fiscal
1995, each of the 1995 quarters, and for the first three quarters of 1996. See
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
for more information regarding the impact of the overstatement of earnings and
the restatement of previously issued financial statements.
PART II OTHER INFORMATION
Item 1. Legal Proceedings - See the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - See the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not Applicable
Item 6. (a) Exhibits - See Exhibit Index following the signature page
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the third quarter of 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to the Quarterly Report to be signed
on its behalf by the undersigned thereunto duly authorized.
MERCURY FINANCE COMPANY
(Registrant)
Date: February 19, 1998 /s/ William A. Brandt, Jr.
William A. Brandt, Jr.
President & Chief
Executive Officer
INDEX OF EXHIBITS
Exhibit No. Description
11. Computation of Net Income Per Share
27. Financial Data Schedule
MERCURY FINANCE COMPANY
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Net income per share is computed by dividing net income by the total of the
weighted average common shares and common stock equivalents outstanding during
the period. Average common shares and common stock equivalents have been
adjusted to reflect the four- for- three stock splits of Mercury Finance Company
distributed to stockholders on December 28, 1989, October 31, 1990, June 10,
1991 and December 5, 1991, the two- for- one stock split distributed on June 19,
1992, the four- for- three split distributed on June 22, 1993 and the
three-for-two stock split distributed on October 31, 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands except per share amounts) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
INCOME DATA:
1. Net income/(loss) Mercury Finance Company.... $(52,625) $ 21,855 $(34,449) $ 61,814
2. Weighted average common shares
outstanding (adjusted for stock split)....... 177,506 176,233 176,936 175,351
3. Treasury stock............................... (4,266) (2,974) (4,087) (2,974)
EFFECT OF COMMON STOCK EQUIVALENTS (C.S.E.):
4. Weighted average shares reserved for
stock options................................ 0 1,878 0 1,596
NET INCOME PER COMMON SHARE:
5. Weighted average common share and
common stock equivalents (line 2+3+4)........ 173,240 175,137 172,849 173,973
6. Mercury Finance Company income before
cumulative affect of accounting change and
net income per share (line 1 / line 5 )...... ($0.30) $0.12 ($0.20) $0.36
</TABLE>
As the Company incurred a net loss for the three months and nine months ended
September 30, 1996, common share equivalents totaling 923,236 would be anti-
dilutive to earnings per share and have not been included in the weighted
average shares calculation.
The Company has determined that the implementation of SFAS 128 "Earnings Per
Share", would have had no effect on the calculated earnings per share for the
three months and nine months ended September 30, 1996. This standard prescribes
that when computing the dilution of options, the Company is to use its average
stock price for the period, rather than the more dilutive greater of the average
share price or end-of-period share price required by APB Opinion 15. As the
options are excluded from the calculation due to the anti-dilutive
characteristics indicated above, there is no effect on the earnings per share
calculation.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 13,221
<SECURITIES> 39,014
<RECEIVABLES> 1,164,532
<ALLOWANCES> (215,999)
<INVENTORY> 0
<CURRENT-ASSETS> 1,212,118
<PP&E> 16,185
<DEPRECIATION> (8,591)
<TOTAL-ASSETS> 1,512,159
<CURRENT-LIABILITIES> 1,328,261
<BONDS> 0
0
0
<COMMON> 177,608
<OTHER-SE> 6,290
<TOTAL-LIABILITY-AND-EQUITY> 1,512,159
<SALES> 66,641
<TOTAL-REVENUES> 93,663
<CGS> 0
<TOTAL-COSTS> 38,029
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 124,220
<INTEREST-EXPENSE> 16,154
<INCOME-PRETAX> (84,740)
<INCOME-TAX> (32,115)
<INCOME-CONTINUING> (52,625)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,625)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
