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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission file number: 1-10176
MERCURY FINANCE COMPANY
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(Exact Name of Registrant as Specified in Charter)
Delaware 36-3627010
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Field Drive, Suite 340, Lake Forest, Illinois 60045
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(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 295-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
Title of Each Class ON WHICH REGISTERED
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COMMON STOCK ($1.00 PAR VALUE) NONE
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the Registrant (l) 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
requirements for the past 90 days. Yes X No _____
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As of March 2, 1999, 172,497,714 shares of Common Stock were outstanding (net of
Treasury stock).
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates on March 2, 1999, totaled approximately $17.2 million (based on
the closing price of the Registrant's Common Stock on the OTC Bulletin Board).
The following documents are incorporated into this Form 10-K by reference:
None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) 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. [X]
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PART I
ITEM 1 - BUSINESS
GENERAL
Mercury Finance Company ("Mercury" or the "Company") is a consumer finance
concern engaged, through its operating subsidiaries, in the business of
acquiring 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 borrowers
represent a broad cross section of the consumer market. Mercury's loans and
acquired retail installment contracts range for periods from 3 months to 48
months at annual interest rates ranging, with minor exception, from 18% to 40%.
Generally, all loans and acquired retail installment contracts are repayable in
monthly installments.
Mercury was organized in 1988, as a wholly-owned subsidiary of First Illinois
Corporation (an Evanston, Illinois based bank holding company). On April 24,
1989, First Illinois Corporation distributed to its stockholders one share of
Mercury for each two shares of First Illinois Corporation stock held.
Mercury's operating subsidiaries commenced operations in February 1984 for the
purpose of penetrating the market for small dollar amount consumer loans
(average of $3,000 or less). The initial focus was toward small, short term,
direct installment loans made to U.S. military servicemen. Building from this
direct lending niche, Mercury has also built a substantial, diversified consumer
finance portfolio by purchasing individual installment sales finance contracts
from retail vendors and automobile dealers. Substantially all of Mercury's
borrowers are "non-prime" borrowers. These are borrowers which generally would
not be expected to qualify for traditional financing such as that provided by
commercial banks or automobile manufacturers' captive finance companies.
RESTRUCTURING AND CHAPTER 11 PROCEEDINGS
On July 15, 1998, the Company filed a voluntary petition (the "Voluntary Case")
in the United States Bankruptcy Court for the Northern District of Illinois (the
"Bankruptcy Court" or the "Court") for relief under Chapter 11 of Title 11 of
the United States Code (the "Bankruptcy Code") along with a plan of
reorganization. The filing of the Voluntary Case and plan of reorganization
conformed to the terms previously agreed upon between Mercury and substantially
all of its lenders on May 14, 1998. On July 6, 1998, several of the litigants
in the then pending securities lawsuits filed an involuntary petition in the
Bankruptcy Court asking the Court to place the Company into a Chapter 11
proceeding (the "Involuntary Case"). The Involuntary Case was consolidated with
the Voluntary Case and has proceeded under Case No. 98-20763. Mercury continued
to operate its business as a debtor-in-possession under the Bankruptcy Code
after the filing of the Voluntary Case.
None of the Company's subsidiaries were included in the Voluntary Case or the
Involuntary Case. After the filing of the Voluntary Case, the Company continued
to conduct its operations in the normal course through its subsidiaries, and to
pay all trade debt and dealer contracts in the ordinary course, without
interruption.
On March 10, 1999, the Court entered an order confirming the Company's Second
Amended Plan of Reorganization (the "Plan" or "Plan of Reorganization"). The
effective date of the Plan is March 23, 1999 (the "Effective Date"). Under the
Plan, the Company's senior lenders will receive new senior secured notes equal
to 75 percent of the face value of their then current outstanding balance after
the receipt of Excess Cash (as defined in the Plan) and their pro rata share of
9,500,000 (95%) shares of the initial equity of the reorganized company. The
holders of subordinated notes will receive $22.5 million in new junior unsecured
subordinated notes.
The shareholders will receive 500,000 shares (5%) of the initial equity of the
reorganized company and three series of warrants, each exercisable for 580,000
shares of the common stock of the reorganized company, with expiration dates of
three, four and five years, respectively, from the Effective Date. The exercise
price of the Series A Warrants will be $15.34, the exercise price of the Series
B Warrants will be $21.81 and the exercise price of the Series C Warrants will
be $28.27.
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The Plan provides that the Company will transfer to a certain trust established
under the Plan (the "Liquidating Trust"), on the Effective Date, (i) $5 million
in cash, (ii) the Company's claims against KPMG Peat Marwick and (iii) $250,000
in cash for fees and costs to be incurred in connection with the Liquidating
Trust. Holders of Securities Fraud Claims will receive a share of the
beneficial interests in the Liquidating Trust in complete settlement,
satisfaction and discharge of their claims. In accordance with the Plan, the
Company will also pay (i) $13.35 million into funds established for the benefit
of holders of certain indemnification claims against the Company on the
Effective Date and (ii) upon verification, costs and expenses of officers,
agents and employees who are no longer employed by the Company as of the first
day immediately following the Effective Date (other than the claims of the
estate of James A. Doyle and John N. Brincat in respect of which no obligations
shall be assumed), to the extent such costs and expenses are incurred after the
Effective Date in connection with their participation in an agency or government
investigation, which costs and expenses are limited to $250,000 in the
aggregate. The Company has also agreed to (i) pay John N. Brincat $100,000 and
(ii) release Mr. Brincat from all claims the Company may have against him, in
complete settlement, satisfaction and discharge of any claims Mr. Brincat may
have against the Company, subject to the approval of the United States District
Court for the Northern District of Illinois by a final non-appealable order.
The above summary of the Plan does not purport to be complete and is qualified
in its entirety by reference to the Plan which is attached hereto as Exhibit 2.
BACKGROUND
On January 29, 1997, the Company announced the discovery of accounting
irregularities which caused an overstatement of the previously released earnings
for 1995 and 1996. The accounting irregularities were the result of
unauthorized entries being made to the accounting records of the Company.
Immediately following discovery of the accounting irregularities, the Board of
Directors established a Special Committee for the purpose of investigating the
circumstances surrounding these activities. The investigation was undertaken
with the assistance of special legal counsel and auditing experts.
Shortly after the announcement of the accounting irregularities, the Company's
Board of Directors named William A. Brandt, Jr., President and Chief Executive
Officer of the Company. Mr. Brandt is the President and Chief Executive Officer
of Development Specialists, Inc., a firm specializing in providing management,
consulting and turnaround assistance to reorganizing businesses. The Company's
former President and Chief Executive Officer, John Brincat, resigned from both
positions in February, 1997. Mr. Brincat also resigned as a director of the
Company as of December 1, 1997. The Company's Chief Financial Officer before
the Company's announcement of the accounting irregularities, James A. Doyle, was
relieved of his duties in January, 1997.
As a result of the accounting irregularities, the Company was in violation of
certain covenants in its senior note and subordinated debt agreements. In
addition, the Company did not have access to commercial paper markets, which
historically provided a significant portion of the Company's financing.
Consequently, the Company was unable to repay maturing debt and has not repaid
the principal portion of any debt subsequent to announcement of the accounting
irregularities, except as described below.
On February 7, 1997, Mercury and all of its subsidiaries, other than its
insurance subsidiaries (the "Subsidiary Borrowers"), entered into a Loan and
Security Agreement (the "Loan Agreement") with certain financial institutions,
including BankAmerica Business Credit, Inc. ("BankAmerica"), which provided the
Company with a $50 million credit facility. Amounts outstanding under the Loan
Agreement were secured by substantially all of the property and assets of the
Company and its Subsidiary Borrowers other than equipment and real estate. In
addition, the Company pledged to BankAmerica all of the capital stock of each
Subsidiary Borrower. This facility, combined with daily cash flows, provided
the Company with sufficient working capital to operate the business, discharge
significant expenses resulting from the accounting irregularities, and pay
interest on its debt obligations. The facility terminated according to its
terms on January 6, 1998, at which time no amounts remained outstanding.
The Company had a forbearance agreement with its lenders which, including
extensions (the "Forbearance Agreements"), expired July 15, 1998. In connection
with the execution of the last extension to the forbearance agreement, the
participating senior lenders received a fee of 2.25% of the outstanding balance.
The fee, aggregating $15.2 million, was recorded as a non-operating expense in
1998.
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Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum rate
of nine percent (9.0%) and subordinated note holders received interest at a rate
of five and one-half percent (5.5%). In addition, the agreements required the
periodic payment of excess cash to be applied as a reduction of outstanding
principal. Through May 5, 1998, approximately $307 million of principal was
paid to creditors under the Forbearance Agreements, of which $154 million was
paid during 1998. Subsequent to May 5, 1998, no payments of principal have been
made to creditors. Pursuant to the Voluntary Case, no interest has been accrued
or paid on the Company's debt subsequent to July 15, 1998, the date the
Voluntary Case was filed.
On February 6, 1997, the Company suspended payment of the dividend previously
announced on January 14, 1997, of $0.075 per share of Mercury common stock. In
addition, on February 27, 1997, the Company adopted a stockholder rights plan
designed to protect the Company's stockholders from abusive takeover tactics and
from attempts to acquire control of Mercury without offering a fair price to all
of the Company's stockholders. The plan did not preclude the Board of Directors
from considering and accepting an offer if the Board believes it is in the best
interest of the Company, its creditors and stockholders.
On February 18, 1997, the Company advised KPMG Peat Marwick LLP ("KPMG"), its
independent accountants, that the Company was discontinuing KPMG's services.
The Company then engaged Arthur Andersen LLP as the Company's new independent
accountants. See Item 9 "Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures."
On March 28, 1997, Mercury entered into a Stock Purchase Agreement with Frontier
Insurance Group, Inc. to sell the stock of Lyndon Insurance Company ("Lyndon")
for $92 million in cash. Lyndon was acquired by the Company in October, 1995,
from ITT for $72.5 million and the assumption of Lyndon's net liabilities.
Since then, other smaller insurance operations of the Company had been combined
with Lyndon. The sale which closed on June 3, 1997, resulted in a loss to
Mercury of approximately $30 million that was recorded in the first quarter of
1997. In addition, the earnings of Lyndon from the date of the agreement
through the date of sale aggregating approximately $2 million accrued to the
benefit of the buyer. Management determined that it was in the best interest of
the Company to remain in the insurance business and formed a new captive
insurance subsidiary during 1997, MFN Insurance Company. As a result, the sale
of Lyndon was not considered the discontinuation of a business. The loss
associated with the sale of Lyndon was not tax deductible to the Company as a
loss on the sale of a consolidated subsidiary is, under certain circumstances,
not deductible for tax purposes.
On January 10, 1997, Mercury entered into a definitive agreement with Bank of
Boston Corporation for the acquisition by Mercury of Bank of Boston's consumer
finance subsidiary, Fidelity Acceptance Corporation. The agreement called for
Mercury to issue approximately 32,708,000 shares of common stock in
consideration for the acquisition. On January 30, 1997, Bank of Boston
terminated the agreement with Mercury as a result of certain alleged breaches in
the agreement on the part of Mercury. Bank of Boston alleged damages as a
result of the termination of the agreement. Such claims were settled for a cash
payment of $1,600,000 in January, 1998, with a charge to earnings in the fourth
quarter of 1997 of $1,600,000.
See Item 3 "Legal Proceedings" for information regarding legal proceedings
related to the accounting irregularities described above.
BRANCH OFFICE NETWORK/OPERATION
In December, 1997, the Company announced the implementation of its business plan
for 1998 which provided for the exit from non-profitable market areas and the
closing of branches which were considered redundant in consideration of nearby
locations. The existing portfolios of the closed branches were either
transferred to nearby continuing branches or consolidated into 5 branches which
continue to exist in order to collect the remaining portfolio. As of December
31, 1998, Mercury had 157 operating branches.
The continuing branch operations are divided into 21 geographically organized
districts, with each district headed by a regional director. A regional
director is generally responsible for six to twelve offices (depending on size
and
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geographical dispersion). Regional directors report to four Group Vice
Presidents. A summary of the operating branches by state is as follows:
<TABLE>
<CAPTION>
State Office Locations State Office Locations
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<S> <C> <C> <C>
Alabama 1 Nevada 2
Arizona 2 New Mexico 1
Colorado 1 New York 2
Delaware 1 North Carolina 7
Florida 13 Ohio 9
Georgia 6 Oklahoma 1
Illinois 12 Pennsylvania 5
Indiana 5 South Carolina 4
Kansas 1 Tennessee 2
Kentucky 2 Texas 14
Louisiana 32 Virginia 11
Michigan 4 Washington 1
Mississippi 11 Wisconsin 4
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Missouri 3
TOTAL 157
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In addition, Midland Finance Co., a subsidiary of the Company, has one operating
office located in Chicago, Illinois.
Management has developed its workforce by attempting to train experienced
consumer lending professionals. The training program includes actual training
at branch offices and personal interviews by senior operating management of the
Company. The training program which is called the "Pride Program" is
administered by the branch managers and regional directors and is a requirement
for all branch personnel. In addition, the Company also conducts a Manager's
Qualification Program for prospective managers.
Beginning in 1994, the Company began to experience a significant level of
turnover in its branch staff as a result of increased demand for experienced
personnel by competitors. After the announcement of the accounting
irregularities, the Company experienced further difficulty in retaining and
hiring qualified consumer lending professionals. During 1998, the rate of
turnover in management positions has declined and, although still a cause for
concern, management believes that the turnover rate is no greater than that
experienced by the Company prior to discovery of the accounting irregularities.
The business mix of Mercury's branch office network between sales finance
receivables (which constitutes 85% of total gross receivables) and direct
consumer loans (which constitutes 15% of total gross receivables) is generally
consistent within the 21 supervisory districts of the country. The business mix
in any one branch office is dependent upon the location of the office and the
background of an office's loan personnel.
LOAN AND CONTRACT ORIGINATION AND MARKETING
Historically, Mercury originated loans and acquired individual sales finance
contracts through its office network based upon a decentralized approval process
tailored to the market in which its specific offices operated. All credit
extensions were reviewed and approved at the branch level with extensions of
credit in excess of preset limits requiring approval by a regional director. In
1998, Mercury initiated 16 regional centralized purchasing offices that review
and approve the acquisitions of sales finance contracts for a majority of the
Company's volume. Through this process, management believes that underwriting
criteria will be applied more consistently while still allowing for flexibility
to be responsive to local market conditions. In addition, the realignment will
release branch personnel from making credit decisions and will allow for greater
emphasis to be placed on cash collections and expanding dealer relationships.
Installment sales finance receivables which originate with local dealers
(household goods, appliance and automobile) are subjected to the same credit
review and credit worthiness policies as direct consumer loans. A specific
installment sales finance contract is acquired only after objective
investigations of the credit worthiness of
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the borrower and a determination of the underlying value of the asset through
use of industry publications, combined with the subjective assessment by
underwriters. Every sales finance contract is reviewed individually and
extensions of credit are made based upon the credit worthiness of each customer.
Individual sales finance contracts are acquired pursuant to formal agreements
with local merchants. Mercury acquires sales finance contracts from local
franchised and independent used car dealers with which Mercury has established
ongoing relationships. A relationship with a dealer begins only after analysis
of the soundness of their business is completed. 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.
Mercury encourages a decentralized marketing approach which allows each office
to pursue and develop business leads which are unique to individual markets.
Mercury does no national advertising. Branch offices may advertise in local
publications and most branch offices rely on the endorsement of customers to
build a client base. Mercury believes that client service in the form of timely
loan application processing makes customer referrals the most cost effective
primary marketing tool.
INSURANCE OPERATIONS
In conjunction with their lending practices, the consumer finance subsidiaries
offer credit life, accident and health and property insurance to borrowers who
obtain financing directly from the consumer finance subsidiaries, and to
borrowers under sales finance contracts acquired from merchants and automobile
dealers. Notwithstanding the disposition of Lyndon, Mercury continues to offer
a variety of insurance and insurance related products through third party
carriers and MFN Insurance Company.
Lyndon was 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. Prior to disposition, Lyndon Life was licensed in
forty-eight states and Lyndon Property was licensed in forty-seven states.
Lyndon subsidiaries, Mercury Life and Gulfco Life were engaged primarily in the
business of reinsuring and direct writing, respectively, of credit life and
accident and health insurance policies issued to borrowers under finance
receivables and sales finance contracts acquired by Mercury. The policies
insured 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 were 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 holder. As described above, Lyndon (including its subsidiaries) was
disposed of on June 3, 1997. Management has determined that it is in the best
interest of the Company to remain in the insurance business and formed a new
captive insurance subsidiary during 1997, MFN Insurance Company ("MFN"). MFN
provides aggregate coverage for incurred losses in excess of targeted loss
ratios through a reinsurance agreement with the primary carrier. As a result,
the sale of Lyndon is not considered the discontinuation of a business.
SOURCE OF FUNDS
Mercury funds its operations primarily through collections of principal and
interest from finance receivables and the sale of debt securities. At December
31, 1998, Mercury had total debt of $698 million. Of this total, 48.6% was in
commercial paper and notes, 48.2% was in fixed rate senior term notes and 3.2%
was in fixed rate subordinated term notes. In addition, Mercury previously had
a $50 million credit facility which expired on its own terms in January, 1998,
with no amounts then outstanding thereunder.
As indicated above, as a result of the accounting irregularities, the Company's
credit rating has been downgraded and consequently, the Company does not have
access to the commercial paper markets and is not now obtaining additional
financing. Proceeds from the collection of existing sales finance contracts
have provided sufficient working capital for operations, since collections
exceed originations. Lower amounts are being spent on new sales finance
contracts due to the reduction in the number of operating branches and the
stricter underwriting criteria. Additionally, the Company's relief from paying
principal and interest under the Voluntary Case has also provided capital to the
Company.
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COMPETITION
The consumer finance business is intensely competitive. Mercury competes with
other consumer finance companies, personal loan departments of commercial banks,
federally insured credit unions, industrial banks, credit card issuers and
companies which finance the sales of their own merchandise or the merchandise of
others.
In the last two years, a number of Mercury's competitors have announced that
they have exited the sub-prime sales finance industry, have no funds available
to acquire additional sales finance contracts or have tightened credit standards
resulting in lower volumes. While this may be a sign that competitive pressures
should be easing, there still appears to be no shortage of alternatives for auto
dealers attempting to sell sales finance contracts.
EMPLOYEES
As of December 31, 1998, Mercury had approximately 1,380 employees. None of its
employees are represented by a collective bargaining agreement.
GOVERNMENT REGULATION
All consumer finance operations are subject to federal and state regulations.
Personal loan lending laws and laws regulating the acquisition of retail
installment contracts generally require licensing of the lender, limitations on
the amount, duration and charges for various categories of loans, adequate
disclosure of certain contract terms and limitations on certain collection
policies and creditor remedies. Federal consumer credit statutes primarily
require disclosures of credit terms in consumer finance transactions. In
general, the business is conducted under licenses issued by individual states.
Each licensed office is subject to periodic examination by state regulatory
authorities. The state licenses are revocable for cause. Mercury believes that
its current operations comply in all material respects with these regulations.
Mercury is also subject to the provisions of the Federal Consumer Credit
Protection Act and its related regulations.
Credit insurance offered in connection with the direct lending and sales finance
activities of Mercury and the premiums payable by credit customers and
commissions payable by insurers to the originators of such insurance are also
subject to state laws and regulations.
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ITEM 2
PROPERTIES
The executive offices of Mercury are located at 100 Field Drive, Lake Forest,
Illinois 60045, telephone number (847) 295-8600. Mercury occupies approximately
11,750 square feet of a modern office building subject to a lease having a term
expiring on March 31, 2002. Mercury also leases space for all its branch
offices. The leases for the branch offices are generally for terms from 3 to 5
years. Total rent expense for the Company approximated $3,667,000, $4,571,000
and $4,392,000 in 1998, 1997 and 1996, respectively.
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ITEM 3.
LEGAL PROCEEDINGS
On July 15, 1998, the Company filed the Voluntary Case along with its plan of
reorganization. The Court entered an order confirming the Plan on March 10,
1999. See "Item 1 Restructuring and Chapter 11 Proceedings" for more
information.
The Company has been named as a defendant in a variety of lawsuits generally
arising from the Company's announcement on January 29, 1997 that it would
restate its earnings for certain prior periods as a result of the discovery of
accounting irregularities. To date, forty-five actions have been filed against
the Company in the United States District Court for the Northern District of
Illinois, six cases are pending against the Company in Illinois Chancery Court,
and nine cases are pending in Delaware Chancery Court. The complaints seek
compensatory damages, attorneys' fees and costs.
Forty-one of the lawsuits filed in the Northern District of Illinois are class
actions which generally allege claims under Sections 10 and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. These
lawsuits name one or more officers or directors of the Company as additional
defendants. One case pending in the Northern District of Illinois alleges
derivative claims seeking to recover damages on behalf of the Company from
certain of the Company's officers and directors. Thirty-nine of the non-
derivative cases pending in the Northern District of Illinois were consolidated
pursuant to a Stipulation entered on April 30, 1997. Seven of these cases were
dismissed in 1998. In November, 1997, the Minnesota State Board of Investment
was appointed lead plaintiff in the federal class cases. One of the cases
pending in the Northern District of Illinois seeks to represent a class of
participants in Mercury's employee retirement plan and alleges ERISA violations
arising out of the plan's investment in Mercury's allegedly overvalued stock.
Participants in the proposed class may include certain officers and former
officers of the Company. One case pending in the Northern District of Illinois
alleges non-class securities fraud and common law claims. A second case
alleging similar claims was dismissed on September 9, 1998. The ERISA action
and the two non-class securities fraud cases were consolidated in February,
1997, with the cases in which the Minnesota State Board of Investment is lead
plaintiff. Three of the Illinois state court actions are class actions alleging
claims under the Illinois Securities Act, the Illinois Consumer Fraud and
Deceptive Business Practices Act and common law claims of fraud and negligent
misrepresentation. The other Illinois state court actions are derivative
actions which seek to recover damages on behalf of the Company from certain of
the Company's officers and directors. Each of the Delaware state court actions
is a derivative action which seeks to recover damages on behalf of the Company
from certain of the Company's officers and directors. The case pending in
Municipal Court in Hamilton, Ohio, alleges violations of Ohio state securities
laws and common law. Pursuant to Section 362(a) of the Bankruptcy Code, all of
the pending lawsuits against the Company were stayed after the filing of the
Voluntary Case.
Pursuant to the Plan, the Company will transfer to a certain trust established
under the Plan (the "Liquidating Trust"), on the effective date of the Plan, (i)
$5 million in cash, (ii) the Company's claims against KPMG Peat Marwick and
(iii) $250,000 in cash for fees and costs to be incurred in connection with the
Liquidating Trust. Holders of Securities Fraud Claims will receive a share of
the beneficial interests in the Liquidating Trust in complete settlement,
satisfaction and discharge of their claims. In accordance with the Plan, the
Company will also pay (i) $13.35 million into funds established for the benefit
of holders of certain indemnification claims against the Company on the
effective date of the Plan and (ii) upon verification, costs and expenses of
officers, agents and employees who are no longer employed by the Company as of
the first day immediately following the effective date of the Plan (other than
the claims of the estate of James A. Doyle and John N. Brincat in respect of
which no obligations shall be assumed), to the extent such costs and expenses
are incurred after the effective date of the Plan in connection with their
participation in an agency or government investigation, which costs and expenses
are limited to $250,000 in the aggregate. The Company has also agreed to (i)
pay John N. Brincat $100,000 and (ii) release Mr. Brincat from all claims the
Company may have against him, in complete settlement, satisfaction and discharge
of any claims Mr. Brincat may have against the Company, subject to the approval
of the United States District Court for the Northern District of Illinois by a
final non-appealable order.
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The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities. Those events are also under investigation by
the United States Attorney for the Northern District of Illinois and the Federal
Bureau of Investigation. The Company is cooperating fully in these
investigations.
On January 10, 1997, the Company entered into an agreement (the "Agreement")
with BankBoston Corporation ("BankBoston") pursuant to which the Company was to
acquire all of the outstanding stock of Fidelity Acceptance Corporation, a
subsidiary of BankBoston, in return for the issuance of approximately 32.7
million shares of the Company's common stock. On January 30, 1997, BankBoston
notified the Company that it was terminating the Agreement as a result of
breaches of the Agreement resulting from the accounting irregularities described
above. On July 10, 1997, BankBoston notified Mercury that BankBoston intended
to seek appropriate compensation for its damages resulting from such breaches.
Such claims were settled for a cash payment of $1,600,000 in January, 1998 which
was accrued in December, 1997.
In the normal course of its business, Mercury and its subsidiaries are named as
defendants in legal proceedings generally referred to as consumer finance
litigation. A number of such 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.
The Company recognizes the expense for litigation when the incurrance of loss is
probable and the amount of such loss is estimable. Based upon the confirmation
of the Plan, as described above, which provides for the settlement of all claims
and lawsuits against the Company arising out of the financial irregularities in
exchange for payments in the aggregate of $18.950 million, the Company recorded
a provision and related accrual for $18.950 million during 1998. However,
because of the uncertainty that still surrounds the consumer finance litigation,
no accrual has been made for the majority of these lawsuits at December 31,
1998. The costs to defend against this litigation are expensed as incurred.
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ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Mercury Finance Company has been trading on the OTC Bulletin
Board under the symbol "MFNNQ" since May 20, 1998. Prior thereto, the Company's
common stock traded on the New York Stock Exchange. On December 31, 1998,
Mercury had approximately 4,453 holders of record of common stock, exclusive of
holders of shares in "street" or nominee names. The following table sets forth
the high and low closing sale prices as reported on the OTC Bulletin Board and
the New York Stock Exchange, as the case may be, during the last two fiscal
years. The table also indicates the cash dividends declared by the Company per
share during such periods.
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- --------------------------------------
Dividends Dividends
High Low Declared High Low Declared
----------- ------------ ------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter........................ $ .875 $ .5 0 $ 15.75 $1.875 $.075
Second Quarter....................... .6875 .0625 0 2.75 1.5 0
Third Quarter........................ .16 .075 0 2.6875 1.375 0
Fourth Quarter....................... .085 .035 0 1.75 .5 0
</TABLE>
On January 14, 1997, the Board of Directors declared a dividend of $0.075 per
share of Mercury Common Stock to be payable March 3, 1997, to holders of record
at February 17, 1997. On February 6, 1997, the Company suspended payment of
this dividend.
Based on existing defaults and events of default under the Company's Senior and
Subordinated Note Agreements and the filing of the Voluntary Case, no dividends
may be paid on the common stock of the Company. The amount owing as a result of
the declared but unpaid dividend from early 1997 is included in liabilities
subject to compromise under reorganization at December 31, 1998.
-12-
<PAGE>
ITEM 6
SELECTED FINANCIAL DATA
Introduction
- ------------
All financial information included herein reflects the adjustments to correct
for the irregularities described in Item 1, "Business - Background."
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Years ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT
Interest income...................................... $181,093 $ 235,621 $ 271,889 $ 255,066 $ 211,565
Interest expense (Note 1)............................ 38,593 86,529 64,789 57,303 39,375
-------- ---------- ---------- ---------- ----------
Net interest income before provision for 142,500 149,092 207,100 197,763 172,190
Finance credit losses..............................
Provision for finance credit losses.................. 56,790 106,374 215,171 32,641 7,376
-------- ---------- ---------- ---------- ----------
Net interest income/(loss) after provision 85,710 42,718 (8,071) 165,122 164,814
For finance credit losses..........................
Other income......................................... 13,191 47,080 101,985 58,349 40,907
Other expenses....................................... 85,295 128,005 143,297 103,363 64,731
-------- ---------- ---------- ---------- ----------
Operating income/(loss) before income tax 13,606 (38,207) (49,383) 120,108 140,990
provisions/(benefits)..............................
Non-operating expenses............................... (61,176) (52,236) 0 0 0
Income tax provision/(benefit)....................... 6,000 (16,250) (20,415) 45,979 54,445
-------- ---------- ---------- ---------- ----------
Net income/(loss).................................... $(53,570) $ (74,193) $ (28,968) $ 74,129 $ 86,545
======== ========== ========== ========== ==========
Weighted average common shares outstanding:
Basic.............................................. 172,498 172,489 172,768 172,449 173,342
======== ========== ========== ========== ==========
Diluted............................................ 172,498 172,489 172,768 174,109 175,150
======== ========== ========== ========== ==========
Per share net income/(loss) attributable to common
shares
Basic.............................................. $ (0.31) $ (0.43) $ (0.17) $ 0.43 $ 0.50
======== ========== ========== ========== ==========
Diluted............................................ $ (0.31) $ (0.43) $ (0.17) $ 0.43 $ 0.49
======== ========== ========== ========== ==========
Dividend per share declared $ 0 $ .075 $ .30 $ .25 $ .19
======== ========== ========== ========== ==========
SELECTED BALANCES AT YEAR END
Total assets......................................... $798,683 $ 979,404 $1,543,360 $1,598,098 $1,036,403
Total gross finance receivables...................... 793,268 1,175,439 1,396,081 1,441,288 1,272,430
Total finance receivables (Net of unearned charges).. 643,705 971,377 1,160,423 1,197,776 1,039,867
Allowance for finance credit losses.................. 53,485 102,204 97,762 46,366 22,488
Nonrefundable dealer reserves........................ 36,820 52,731 89,378 61,961 66,477
Senior debt, commercial paper and notes.............. 339,340 416,731 525,051 489,990 449,945
Senior debt, term notes.............................. 335,905 412,514 488,625 438,750 265,375
Subordinated debt.................................... 22,500 22,500 22,500 29,500 35,500
Stockholders' equity................................. 29,130 82,700 168,885 259,487 227,514
SELECTED RATIOS
Net income/(loss) to average total assets............ (6.30%) (5.94%) (1.88%) 6.01% 9.71%
Net income/(loss) to average stockholders' equity.... (83.82%) (64.20%) (12.85%) 29.64% 40.23%
Total stockholders' equity to total assets........... 3.65% 8.44% 10.94% 16.24% 21.95%
Earnings to fixed charges (Note 2)................... - - - 3.05 4.48
Deficiency of fixed charges coverage (Note 2)........ $ 57,934 $ 90,443 $ 49,383 N/A N/A
</TABLE>
Note 1. Pursuant to the Voluntary Case, no interest has been accrued or paid on
the Company's debt subsequent to July 15, 1998, the date the Voluntary
Case was filed. This has resulted in the reduction of interest expense
by approximately $27 million from what the Company would have expected
to incur had the Voluntary Case not been filed (assuming default rates
of interest).
Note 2. SEC Regulation S-K requires the disclosure of the ratio of earnings to
fixed charges except where the ratio falls below 1, then the deficiency
shall be disclosed in dollar terms.
-13-
<PAGE>
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 report.
OVERVIEW
--------
Mercury continued its financial and operating restructuring in 1998. After
reaching agreement with its senior lenders as to the terms of a formal
restructuring, Mercury filed a voluntary petition (the "Voluntary Case") in the
United States Bankruptcy Court for the Northern District of Illinois for relief
under Chapter 11 of Title 11 of the United States Code on July 15, 1998.
Mercury's financial statements for 1998 have been presented in conformity with
the American Institute of Certified Public Accountants' Statement of Position
90-7 "Financial Reporting By Entities In Reorganization Under The Bankruptcy
Code" ("SOP 90-7"). Therefore, the financial statements as of December 31, 1998
and for the year then ended are not comparable with the prior years and are not
indicative of what the results of operations would have been in the absence of
the filing of the Voluntary Case.
Mercury continued to experience strong competition in 1998. Although the
industry shake-out that occurred in 1997 and 1998 reduced the number of
companies in the sub-prime specialty finance arena, there still exists
sufficient competitors on a national and regional level to continue the pricing
and credit pressures that had been experienced during the past few years.
Mercury had previously responded to the competitive pressures by reducing credit
standards while accepting lower pricing on sales finance contracts and
introducing new products that ultimately proved to be unprofitable. During late
1997 and in 1998, Mercury changed its lending practices by implementing tighter
credit standards and was successful in significantly reducing delinquencies and
charge-offs on new accounts, but at a significantly lower volume of
originations. Delinquencies and charge-offs on the older accounts continue to
be at the higher historical levels.
These factors combined with a high level of employee turnover at the branch
level and interest expense at default rates caused the Company to incur an
operating loss for 1997. Although operating results improved during 1998, the
Company would have incurred an operating loss for the year except that no
interest expense was recorded on the parent company debt since July 15, 1998,
the date the Voluntary Case was filed.
FINANCIAL CONDITION
-------------------
ASSETS AND FINANCE RECEIVABLES
During 1998, total assets of Mercury decreased 18.5% to $798.7 million at
December 31, 1998. The decline of total assets can be attributed to a reduction
in finance receivables and the write-down of the credit card portfolio to its
net realizable value. Total assets decreased 36.5% in 1997 to $979 million at
year end. The decline of total assets in 1997 from 1996 was due to the sale of
Lyndon combined with a decrease in sales finance receivables.
Total finance receivables decreased 33.7% in 1998 compared to 1997 (from $971.4
million to $643.7 million) after a 16.3% decrease in 1997 over 1996 ($1,160.4
million). Finance receivables decreased in 1998 as a result of a lower level of
new volume due to increased credit standards, and a fewer number of branches,
continuing the trend that commenced in 1997. During 1997, disruption caused by
the accounting irregularities also contributed to the lower volume of
originations. The number of branches open at December 31, 1998, 1997 and 1996
were 157, 218 and 287, respectively. The Company's offices in Texas, Florida
and Illinois accounted for approximately 13%, 13% and 12% of gross sales and
direct finance receivables at December 31, 1998.
From late 1997 through 1998, the Company implemented a restructuring plan to
close approximately 110 branches and reduce branch personnel by 260. The
Company recorded a provision in 1997 for the branch restructuring in the
-14-
<PAGE>
amount of $3.7 million of which $2.8 million has been utilized as of December
31, 1998. In addition, $0.3 million has been credited to income in 1998 as the
Company expects that the full amount of the original 1997 estimated provision
will not be required. This reduction in the provision is primarily due to a
change in estimates of employee severance and retention payments based on actual
experience during 1998. For additional information on branch closings, see
"Restructuring Charges."
The following tables summarize the composition of finance receivables at
December 31:
1998 1997
Gross Finance Receivables:
Direct $ 117,136 $ 149,624
Sales 676,132 954,319
--------- ----------
Total gross finance receivables 793,268 1,103,943
Less: Unearned finance charges (146,978) (200,820)
Unearned commissions and other (2,585) (3,242)
--------- ----------
Sales and direct finance receivables 643,705 899,881
Credit card (See below) 0 71,496
--------- ----------
Total finance receivables $ 643,705 $ 971,377
========= ==========
The credit card portfolio had a gross receivables balance of approximately $50.6
million as of December 31, 1998. In December 1998, the Board of Directors
approved the terms of a sale of the credit card portfolio. The sale price was
below the carrying value of the portfolio and accordingly the Company recorded a
$15.8 million charge in 1998 to reduce the portfolio to its net realizable
value. In addition, the portfolio has been classified as assets held for sale
at December 31, 1998. The sale of the credit card portfolio was consummated on
March 2, 1999.
ALLOWANCE AND PROVISION FOR FINANCE CREDIT LOSSES
Mercury originates direct consumer loans, acquires individual sales finance
contracts from third party dealers and provided revolving credit to individuals
through a Visa affiliated program. The Company maintains an allowance for
finance credit losses that are expected to be incurred on receivables that have
demonstrated a risk of loss based upon delinquency or bankruptcy status.
The sales finance contracts are generally acquired at a discount from the
principal amount. This discount is normally referred to as a non-refundable
dealer reserve. The amount of the discount is based upon the credit risk of the
borrower, the note rate of the contract and competitive factors. The 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 an appropriate matching of finance
charge income and provision for finance credit losses.
Each period, the provision for finance credit losses in the income statement
results from the combination of (a) an estimate by management of loan losses
that occurred during the current period and (b) the ongoing adjustment of prior
estimates of losses. As the specific borrower and amount of a loan loss is
confirmed by gathering additional information, taking collateral in full or
partial settlement of the loan, bankruptcy of the borrower, etc., the loan is
charged off, reducing the allowance for finance credit losses. If, subsequent
to a charge off, the Company is able to collect additional amounts from the
borrower or obtain control of collateral worth more than earlier estimated, a
recovery is recorded, decreasing current period charge offs.
In 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 application of the static
pooling methodology increased the 1996 provision for credit losses by $89
million.
Reserve requirements for sales finance, direct 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
-15-
<PAGE>
utilized to determine the projected cash flows from each impaired category. The
projected cash flow is then discounted at the loan's original yield 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 fair
value, less selling costs.
The following is a summary of the activity in the allowance for finance credit
losses for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $102,204 $ 97,762 $ 46,366
Provision charged to expense 56,790 106,374 215,171
Finance receivables charged-off, net of recoveries (99,409) (101,932) (89,326)
Transfer to nonrefundable dealer reserves 0 0 (74,449)
Transfer to credit card portfolio held for sale (6,100) 0 0
-------- --------- --------
Balance at end of year $ 53,485 $ 102,204 $ 97,762
======== ========= ========
Allowance as a percent of total finance receivables outstanding 8.31% 10.52% 8.42%
======== ========= ========
</TABLE>
The decrease in the provision for finance credit losses in 1998 and 1997 is due
to an improvement in the delinquencies and charge-offs as a result of stricter
credit standards combined with an overall reduction in the finance receivable
balances. In addition, the 1996 provision was increased by approximately $89
million as a result of the adoption of the static pooling methodology of
accounting for loss reserves.
NONREFUNDABLE DEALER RESERVES
Mercury acquires a majority of its sales finance contracts from dealers at a
discount. 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 acquired. The following table sets forth a
reconciliation of the changes in nonrefundable dealer reserves for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 52,731 $ 89,378 $ 61,961
Discounts acquired on new volume 24,982 45,010 67,442
Losses absorbed (40,893) (81,657) (114,474)
Transfer from the allowance for finance credit losses 0 0 74,449
-------- -------- ---------
Balance at end of year $ 36,820 $ 52,731 $ 89,378
======== ======== =========
Reserve as a percent of gross sales finance receivables 5.45% 5.53% 7.71%
==== ==== ====
</TABLE>
Under the static pooling methodology, the total balances of nonrefundable dealer
reserves are not available to offset current finance credit losses, but are
amortized and made available to absorb credit losses over the life of the
corresponding pool of receivables. The decrease in the percentage of
nonrefundable dealer reserve is due to a lower percentage of dealer reserve
being obtained on 1998 and 1997 volume as a result of the improvement in the
quality of the new volume.
The discount acquired on new volume decreased in 1998 and 1997 primarily as a
result of lower volume levels.
INCOME TAX ACCOUNTS
At December 31, 1997, the Company had recorded an income tax receivable of $79.9
million. This balance was comprised of three primary items: (i) refund claim
for the amendment of 1995 and prior income tax returns for the accounting
irregularities, (ii) the carryback of the net operating loss for 1996 to prior
periods and (iii) an estimate of the carryback of the net operating loss for
1997 to prior periods. During 1998, the Company received payments of
approximately $78 million.
-16-
<PAGE>
A provision of the Taxpayer Relief Act of 1997, signed into law in August, 1997,
was to reduce the Net Operating Loss (NOL) carryback period from three years to
two years for tax years beginning after August 5, 1997. For financial reporting
purposes, the change in tax law raises a question as to the future realizability
of the deferred tax asset that would be recorded in the financial statements as
of December 31, 1998 and 1997 because as of January 1, 1998, the reversal of the
temporary differences giving rise to the deferred taxes can no longer be carried
back to periods of taxable income. Accordingly, a full valuation allowance on
deferred tax assets has been recorded at December 31, 1998 and 1997.
Mercury elected to be treated as a dealer in securities under Section 475 of the
Internal Revenue Code effective for the year ended December 31, 1996. Pursuant
to this election, Mercury must annually recognize as taxable income or loss the
difference between the fair market value of its securities and the income tax
basis of the securities for the year ended December 31, 1996 and prospectively.
This election has no impact on the recognition of pre-tax income for financial
reporting purposes.
LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION.
THE FOLLOWING TABLE SHOWS THE LIABILITIES SUBJECT TO COMPROMISE UNDER
REORGANIZATION AS OF DECEMBER 31, 1998. THESE LIABILITIES HAVE BEEN RECORDED AT
AMOUNTS THAT THE COURT WAS EXPECTED TO ALLOW AS CLAIMS RATHER THAN ESTIMATES OF
THE AMOUNTS FOR WHICH THE CLAIMS MAY BE SETTLED. THERE WERE NO LIABILITIES
SUBJECT TO COMPROMISE UNDER REORGANIZATION AS OF DECEMBER 31, 1997.
<TABLE>
<CAPTION>
1998
<S> <C>
Senior debt, commercial paper and notes $339,340
Senior debt, term notes 335,905
Subordinated debt 22,500
Dividends payable 12,937
Pre-petition accrued interest 8,393
Restructuring fee 695
--------
Total liabilities subject to compromise under reorganization $719,770
========
</TABLE>
DEBT
As a result of net losses incurred, accounting irregularities, and related
matters, Mercury violated certain covenants permitting the holders of its Senior
Term Notes and Subordinated Debt to accelerate all such debt which, if
accelerated, would result in all of such debt being currently due and payable.
In addition, the Company was no longer permitted by the terms of certain debt
instruments to pay dividends.
The Company had a forbearance agreement with its lenders which, including
extensions, expired July 15, 1998. In connection with the execution of an
extension to the previous forbearance agreement, the participating senior
lenders received a fee of 2.25% of the outstanding balance. The fee,
aggregating $15.2 million was recorded as a non-operating expense in 1998.
Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum rate
of nine percent (9.0%) and subordinated note holders received interest at a rate
of five and one-half percent (5.5%). In addition, the agreements required the
periodic payment of excess cash to be applied as reduction of outstanding
principal. Through May 5, 1998, approximately $307 million of principal was
paid to creditors under the Forbearance Agreements, of which $154 million was
paid during 1998. Subsequent to May 5, 1998, no payments of principal have been
made to creditors.
As described in Note 3 to the Consolidated Financial Statements, all of the
Company's debt is subject to compromise under the Plan of Reorganization.
Therefore, the entire amount of outstanding debt as of December 31, 1998 of
$697.7 million is identified as "Liabilities subject to compromise under
reorganization" in the Company's financial statements.
Pursuant to the Voluntary Case, no interest has been accrued or paid on the
Company's debt subsequent to July 15, 1998, the date the Voluntary Case was
filed. This has resulted in the reduction of interest expense by approximately
-17-
<PAGE>
$27 million from what the Company would have expected to incur had the Voluntary
Case not been filed (assuming default rates of interest).
The following table represents Mercury's debt instruments and the corresponding
stated rates on the debt as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- -----------------
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Senior Debt:
Commercial paper
and notes $339,340 5.7% $416,731 5.7% $ 525,051 5.6%
Term notes 335,905 7.0% 412,514 7.0% 488,625 7.0%
Subordinated debt 22,500 10.3% 22,500 10.3% 22,500 10.3%
-------- ---- -------- ---- ---------- ----
Total $697,745 6.5% $851,745 6.5% $1,036,176 6.4%
======== ==== ======== ==== ========== ====
</TABLE>
LITIGATION ACCRUAL
Based upon the confirmation of the Plan, which provides for the settlement of
all claims and lawsuits against the Company arising out of the financial
irregularities in exchange for payments in the aggregate of $18.950 million, the
Company recorded a liability for such amount at December 31, 1998.
STOCKHOLDERS' EQUITY
Total stockholders' equity at December 31, 1998 was $29.1 million which compares
with $82.7 million at December 31, 1997. During 1998, Mercury had a net loss of
$53.6 million. The Company did not declare any dividends or repurchase any
shares of common stock during the year. At December 31, 1998, Mercury's
stockholders' equity as a percent of total assets was 3.7% which compares with
8.4% at December 31, 1997.
Total stockholders' equity at December 31, 1997 was $82.7 million which compares
with $168.9 million at December 31, 1996. During 1997, Mercury had a net loss
of $74.2 million, and declared, but did not pay, dividends of $12.9 million. At
December 31, 1997, Mercury's stockholders' equity as a percent of total assets
was 8.4% which compares with 10.9% at December 31, 1996.
RESULTS OF OPERATIONS
---------------------
NET LOSS
For the year ended December 31, 1998, Mercury reported a net loss of $53.6
million compared to net losses of $74.2 million and $29.0 million for 1997 and
1996, respectively. Operating results improved in 1998 from 1997 and 1996 due
in part to a lack of interest expense being recorded since July 15, 1998, the
date the Voluntary Case was filed. However, both 1998 and 1997 net results were
negatively impacted by a number of non-operating expenses aggregating $61.2
million and $52.2 million, respectively.
INTEREST INCOME AND INTEREST EXPENSE
The largest single component of Mercury's net loss 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, 1998, net interest
income was $142.5 million, which compares with $149.1 million and $207.1 million
in 1997 and 1996, respectively. For the year ended December 31, 1998, Mercury's
net interest margin, which is the ratio of net interest income divided by
average interest earning assets, was 15.85%. This compares with a net interest
margin of 12.68% and 14.73% in 1997 and 1996, respectively. The increase in net
interest margin in 1998 is due to the Voluntary Case which provided for no
interest to be paid or accrued by the Company after July 15, 1998. The change
in the net interest margin in 1997 was primarily the result of the increase in
interest expense to default levels of interest expense beginning in February,
1997. The interest income rate increased in 1998 and 1997 due to the sale of
-18-
<PAGE>
Lyndon in 1997 which had a substantial amount of investments that earned a
relatively low rate of interest compared to the finance receivables. The
following table summarizes net interest income and the net interest margin for
the three years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Average interest earning assets $ 899,041 $ 1,176,194 $ 1,405,916
Average interest bearing liabilities 739,645 963,431 984,904
---------- ------------ -----------
Net $ 159,396 $ 212,763 $ 421,012
Interest income $ 181,093 $ 235,621 $ 271,889
Interest expense 38,593 86,529 64,789
---------- ------------ -----------
Net interest income before provision for
finance credit losses $ 142,500 $ 149,092 $ 207,100
Rate earned 20.14% 20.03% 19.34%
Rate paid 5.22% 8.98% 6.58%
---------- ----------- ----------
Net 14.92% 11.05% 12.76%
Net interest margin 15.85% 12.68% 14.73%
========= =========== ===========
</TABLE>
OTHER OPERATING INCOME
In addition to finance charges and interest, Mercury derives premiums and
commission income from the sale of other credit related products. These
products include the issuance of credit life, accident and health and other
credit insurance policies to borrowers of Mercury.
During 1996, Mercury earned insurance premiums on business Lyndon had
underwritten through outside distributors, business in a run-off mode from
subsidiaries of its prior owner, and through Mercury's branch offices.
Insurance premiums declined in 1998 and 1997 as a result of the sale of Lyndon
in June 1997. However, Mercury continued to participate in the credit insurance
business through its wholly-owned subsidiary, MFN Insurance, which was formed in
1997. Insurance commission, fees and other income declined during 1998 and 1997
corresponding to the decrease in volume and finance receivables outstanding.
The following table summarizes the amounts earned from these products for the
three years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Insurance premiums $ 4,027 $35,660 $ 83,277
Insurance commissions, fees and other 9,164 11,420 18,708
-------- ------- --------
Total $13,191 $47,080 $101,985
======== ======= ========
Other operating income as a % of average interest
earning assets 1.47% 4.00% 7.25%
======== ======= ========
</TABLE>
19
<PAGE>
OTHER OPERATING EXPENSES (EXCLUDING RESTRUCTURING 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
1998, other operating expenses decreased 31.1% from 1997. During 1997, other
operating expenses decreased 13.3% from 1996. The 1998 and 1997 decrease as
compared to 1996 is the result of the sale of Lyndon as of June 3, 1997 and the
reduction in the number of operating branches. The following table summarizes
the components of other operating expenses for the three years ended December
31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Salaries and employee benefits $49,142 $ 56,799 $ 54,942
Incurred insurance claims expense and other underwriting
expense 1,121 20,466 47,243
Other operating expenses (excluding restructuring expenses) 35,376 47,015 41,112
------- -------- --------
Total $85,639 $124,280 $143,297
======= ======== ========
Operating expenses excluding restructuring charges
as a % of average interest earning assets 9.53% 10.57% 10.19%
======= ======== ========
</TABLE>
RESTRUCTURING CHARGES
During 1997 and 1998, the Company implemented a restructuring plan to close
approximately 110 branches and reduce branch personnel by 260. The Company
recorded a provision in 1997 for the restructuring in the amount of $3.725
million ($0.02 per common share) of which $2.831 million has been utilized by
December 31, 1998. In addition, $0.344 million has been credited in 1998 as the
Company expects that the full amount of the original 1997 estimated provision
will not be required. This reduction in the provision is primarily due to
change in estimates of employee severance and retention payments based on actual
experience during 1998. These charges and their utilization through December
31, 1998 and estimated utilization for 1999 are summarized in the following
table:
<TABLE>
<CAPTION>
Amounts Expected
Amounts Amounts Amounts to be
Charged Utilized Utilized Utilized
In 1997 in 1997 in 1998 In 1999
<S> <C> <C> <C> <C>
Asset and leasehold write-offs $1,200 $200 $1,079 $ 75
Lease buyouts and other expenses 1,025 101 799 100
Employee severance and retention 1,500 0 652 375
------ ---- ------ ----
Total $3,725 $301 $2,530 $550
====== ==== ====== ====
</TABLE>
The Company records restructuring charges against operations and provides a
reserve based on the best information available at the time the commitment is
made to undertake the restructuring action. The reserves are considered
utilized when specific restructuring criteria are met, indicating the planned
restructuring action has occurred. Work-force-related reserves are considered
utilized at payment for termination or acceptance of other contractual
arrangements.
The reserve for lease buyouts is utilized when the remaining lease obligations
are settled or the space has been vacated and made available for sublease. It
is the Company's policy to continue to charge depreciation, rental, and other
operating costs relating to excess space to ongoing operations while they remain
in business use. Salaries and benefits are charged to operations while the
employee is actively employed.
Reserves for assets and leasehold improvements written-off are utilized at the
date of disposal or the final date of the lease.
20
<PAGE>
OTHER NON-OPERATING EXPENSES
Other non-operating expenses are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Corporate counsel $ 2,056 $ 2,836
Investment banking 2,045 2,657
Creditor attorneys and advisors 2,235 2,584
Independent accountants 1,059 2,469
Management consultants 2,336 2,399
Special investigation 0 1,919
Bank line of credit fees 121 1,650
Bank of Boston settlement 0 1,600
Board of Directors representation 1,312 1,132
Forbearance fee 15,176 0
Other 86 1,437
------- -------
Total $26,426 $20,683
======= =======
</TABLE>
INCOME TAXES
The effective rate of tax (provision)/benefit applicable to the net loss in
1998, 1997 and 1996 was (12.6%), 18.0% and 41.3%, respectively.
The negative effective tax rate in 1998 is primarily due to a valuation
adjustment to finance receivables and certain expenses incurred in connection
with the restructuring which were not deductible for tax purposes. The lower
effective tax rate in 1997 is primarily due to the loss on the sale of Lyndon
which was not deductible for tax purposes.
CREDIT LOSSES
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.
21
<PAGE>
The following table sets forth information relating to charge-offs, the
allowance for finance credit losses and dealer reserves:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Loss provision charged to income $56,790 $106,374 $215,171
Net charge-offs against allowance 99,409 101,932 89,326
Net charge-offs against nonrefundable dealer reserves 40,893 81,657 114,474
Allowance for finance credit losses at end of period 53,485 102,204 97,762
Dealer reserves at end of period 36,820 52,731 89,378
RATIOS
1998 1997 1996
Net charge-offs against allowance to average total
finance receivables 12.30% 9.44% 7.54%
Net charge-offs against nonrefundable dealer reserves
to average total finance receivables 5.06% 7.56% 9.66%
Allowance for finance credit losses to total gross
finance receivables at end of period 6.74% 9.26% 7.45%
Dealer reserves to gross sales finance receivables
at end of period 5.45% 5.53% 7.71%
</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 as of December 31 (excluding activity relating to the credit
card portfolio):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Delinquent gross receivables $19,938 $34,430
Bankrupt accounts 23,607 37,037
Repossessed assets 3,836 5,167
------- -------
Total $47,381 $76,634
======= =======
Delinquent gross receivables and bankrupt accounts
to gross finance receivables 5.49% 6.47%
======= =======
Delinquent gross receivables, bankrupt accounts and
repossessed assets to gross finance
receivables plus repossessed assets 5.94% 6.91%
======= =======
</TABLE>
Loan collateral is repossessed when debtors are 120 days late or more on
payments. Automobiles are generally sold within 60 days at auction.
CREDIT CARD PROGRAM
The Company had a portfolio of approximately $50.6 million and $71.5 million of
receivables at December 31, 1998 and 1997, respectively, relating to a credit
card program that had solicitations in 1995 and 1996. This program generated
losses prior to the allocation of interest expense of $3.9 million in 1998, $5.0
million in 1997 and $1.4 million in 1996.
22
<PAGE>
During 1998, the Company negotiated a sale of the credit card portfolio for
$27.9 million, net of selling expenses. As a result, the Company reclassified
these assets at December 31, 1998 as "credit card portfolio held for sale" and
recorded a $15.8 million loss on the sale in 1998. The sale of the credit card
portfolio was consummated on March 2, 1999.
DISPOSITION OF LYNDON
On March 28, 1997, Mercury executed a Stock Purchase Agreement for the sale of
Lyndon in the amount of approximately $92 million. The sale, which closed on
June 3, 1997, resulted in a loss to Mercury of approximately $29.5 million net
of earnings through the date of sale. This loss was reflected on Mercury's 1997
first quarter consolidated statement of income.
Management has determined that it is in the best interest of the Company to
remain in the insurance business and formed a new captive insurance subsidiary
during 1997, MFN Insurance Company. As a result, the sale of Lyndon is not
considered the discontinuation of a business. The loss associated with the sale
of Lyndon was not tax deductible to the Company as a loss on the sale of a
consolidated subsidiary is, under certain circumstances, not deductible for tax
purposes.
LIQUIDITY AND FINANCIAL RESOURCES
---------------------------------
As a result of net losses incurred, accounting irregularities, and related
matters, Mercury violated certain covenants permitting the holders of its Senior
Term Notes and Subordinated Debt to accelerate all such debt which, if
accelerated, would result in all of such debt being currently due and payable.
In addition, the Company was no longer permitted by the terms of certain debt
instruments to pay dividends.
The Company had a forbearance agreement beginning on July 12, 1997 with its
lenders which, including extensions (the "Forbearance Agreements"), expired July
15, 1998. In connection with the execution in 1998 of an extension to a
previous forbearance agreement, the participating senior lenders received a fee
of 2.25% of the outstanding balance. The fee, aggregating $15.2 million, is
included in non-operating expenses.
Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum rate
of nine percent (9.0%) and subordinated note holders received interest at a rate
of five and one-half percent (5.5%). In addition, the agreements required the
periodic payment of excess cash to be applied as reduction of outstanding
principal. Through May 5, 1998, approximately $307 million of principal was
paid to creditors under the Forbearance Agreements, of which $154 million was
paid during 1998. Subsequent to May 5, 1998, no payments of principal have been
made to creditors.
Since February, 1997, the Company has funded its operations, the acquisition of
new finance receivables and periodic payments to creditors from the proceeds
from previous existing finance receivables and the sale of Lyndon. During the
two years ended December 31, 1998, finance receivables, net of unearned
interest, declined approximately $466 million. Prior to the financial
irregularities disclosed in January, 1997, Mercury funded its operations through
the issuance of a combination of short term notes and commercial paper.
As described in Note 3 to the Consolidated Financial Statement, all of the
Company's debt is subject to compromise under the Plan of Reorganization.
Therefore, the entire amount of outstanding debt as of December 31, 1998 of
$697.8 million is included in "Liabilities subject to compromise under
reorganization" in the Company's financial statements.
23
<PAGE>
Pursuant to the Voluntary Case, no interest has been paid on the Company's debt
subsequent to July 15, 1998, the date the Voluntary Case was filed. Under SOP
90-7, post-petition interest expense for 1998 has not been recorded at the
amount that will be paid on the Effective Date that is attributable to the
period ending December 31, 1998 as provided by the Plan. The following table
represents Mercury's debt instruments and the corresponding stated rates at the
end of the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Senior Debt:
Commercial paper and short-term loans $339,340 5.7% $416,731 5.7%
Term notes 335,905 7.0% 412,514 7.0%
Subordinated debt 22,500 10.3% 22,500 10.3%
-------- ---- -------- ----
Total $697,745 6.5% $851,745 6.5%
======== ==== ======== ====
</TABLE>
YEAR 2000 COMPLIANCE
--------------------
The Company has undertaken a review of its exposure to computer malfunctions
relating to the year 2000 ("Y2K"). The Y2K issue exists because many computer
systems and applications currently use two digit date fields to designate a
year. As the century date change occurs, date sensitive systems may recognize
the year 2000 as 1900 or not at all. This inability to recognize or properly
treat the Y2K issue may cause systems to process critical financial and
operational information incorrectly.
The Company has several systems that it considers critical to operations
including the branch loan system, the operating systems, and the financial
accounting systems. In addition, Mercury has other less significant systems in
use by the human resources and legal departments. Mercury has evaluated all of
these systems to determine the specific risks related to the year 2000 and has
implemented changes to all of these systems to address any risks. As a result
of these efforts, all of the Company's systems are currently Y2K compliant or
are in the process of being tested to ensure that the Y2K issue will not affect
their operation. Those systems which have not yet been fully tested will be
completed in the first quarter of 1999 and are anticipated to be fully Y2K
compliant. Mercury also utilizes computer software maintained by external
vendors and has received written assurances from these vendors that Y2K
compliant upgrades are or will be available to the Company in sufficient time
for an orderly transition.
To date, the costs associated with becoming Y2K compliant have been minimal
(i.e., less than $50,000). These costs have been expensed as incurred, while
the cost of new software is capitalized and amortized over the software's useful
life. The overall costs of any additional upgrades and changes necessary for
compliance with Y2K is not expected to be material.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS 133 and 134, "Accounting for Derivative
Instruments and Hedging Activities" and "Accounting for Mortgage-Backed
Derivative Securities Retained After the Securitization of Mortgage Loans Held
For Sale by a Mortgage Banking Enterprise", effective for fiscal years beginning
after June 15, 1999 and December 15, 1998, respectively. Management does not
expect these statements to have a material impact on either the financial
position, results of operations or financial statement disclosures of the
Company.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
24
<PAGE>
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Mercury Finance Company:
We have audited the accompanying consolidated balance sheets of Mercury Finance
Company and subsidiaries (the "Company") as of December 31, 1998 and 1997, and
the related consolidated statements of income and comprehensive income, changes
in stockholders' equity and cash flows for the each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Mercury Finance Company and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred losses in 1996 through 1998 and is
continuing to incur losses in 1999. Furthermore, as described in Note 1, on
July 15, 1998, the Company filed a voluntary petition in the United States
Bankruptcy Court for the Northern District of Illinois for relief under Chapter
11 of Title 11 of the United States Code. Under the Second Amended Plan of
Reorganization (the "Plan"), which was confirmed by order of the Court on March
10, 1999, a portion of the outstanding debt will be converted to equity, the
remaining debt will be restructured and the litigation pending related to the
financial irregularities will be settled. Upon the effective date of the Plan,
the Company will adopt fresh-start accounting and continuation of the business
thereafter is dependent on the Company's ability to achieve sufficient cash flow
to meet its restructured debt obligations. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 10, 1999
25
<PAGE>
MERCURY FINANCE COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Cash and cash equivalents $186,350 $ 53,896
Finance receivables: 643,705 971,377
Less allowance for finance credit losses (53,485) (102,204)
Less nonrefundable dealer reserves (36,820) (52,731)
-------- ---------
FINANCE RECEIVABLES, NET 553,400 816,442
Income taxes receivable 8,599 79,941
Premises and equipment (at cost, less accumulated
depreciation of $9,836 and $10,750) 3,709 5,899
Goodwill, net of amortization 12,745 13,604
Credit card portfolio held for sale, at net realizable value 27,894 0
Other assets (including repossessions) 5,986 9,622
-------- ---------
TOTAL ASSETS $798,683 $ 979,404
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Liabilities not subject to compromise under reorganization:
Income taxes currently payable $ 12,000 $ 0
Other liabilities not subject to compromise 18,833 0
-------- ---------
Total liabilities not subject to compromise 30,833 0
-------- ---------
Liabilities subject to compromise under reorganization (Note 3) 719,770 0
Senior debt, commercial paper and notes 0 416,731
Senior debt, term notes 0 412,514
Subordinated debt 0 22,500
Accounts payable and other liabilities 0 44,959
Litigation accrual (Note 13) 18,950 0
-------- ---------
TOTAL LIABILITIES 769,553 896,704
-------- ---------
STOCKHOLDERS' EQUITY
Common stock - $1.00 par value per share:
300,000,000 shares authorized
177,900,671 shares outstanding 177,901 177,901
Paid in capital 8,244 8,244
Accumulated deficit (103,351) (49,781)
Treasury stock - 5,402,957 shares, at cost (53,664) (53,664)
-------- ---------
TOTAL STOCKHOLDERS' EQUITY 29,130 82,700
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $798,683 $ 979,404
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
MERCURY FINANCE COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
INTEREST INCOME
<S> <C> <C> <C>
Finance charges and loan fees $178,897 $228,028 $258,602
Investment income 2,196 7,593 13,287
-------- -------- --------
Total finance charges, loan fees and investment income 181,093 235,621 271,889
Interest expense (See Note 6) 38,593 86,529 64,789
-------- -------- --------
Net interest income before provision for finance credit 142,500 149,092 207,100
losses
Provision for finance credit losses 56,790 106,374 215,171
-------- -------- --------
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR FINANCE CREDIT LOSSES 85,710 42,718 (8,071)
-------- -------- --------
OTHER OPERATING INCOME
Insurance premiums 4,027 35,660 83,277
Insurance commissions, fees and other 9,164 11,420 18,708
-------- -------- --------
TOTAL OTHER OPERATING INCOME 13,191 47,080 101,985
-------- -------- --------
OTHER OPERATING EXPENSES
Salaries and employee benefits 49,142 56,799 54,942
Occupancy expense 4,592 5,897 5,923
Equipment expense 3,291 3,870 3,158
Data processing expense 1,898 2,059 2,366
Incurred insurance claims and other underwriting expense 1,121 20,466 47,243
Restructuring charges (344) 3,725 0
Reorganization expenses, net 3,259 0 0
Other operating expenses 22,336 35,189 29,665
-------- -------- --------
TOTAL OTHER OPERATING EXPENSES 85,295 128,005 143,297
-------- -------- --------
OPERATING INCOME/(LOSS) 13,606 (38,207) (49,383)
NON-OPERATING EXPENSES
Loss on sale of Lyndon 0 (29,528) 0
Loss on credit card portfolio held for sale (15,800) 0 0
Income from Lyndon due to buyer 0 (2,025) 0
Provision for litigation (18,950) 0 0
Other non-operating expenses, net (26,426) (20,683) 0
-------- -------- --------
Total non-operating expenses (61,176) (52,236) 0
-------- -------- --------
LOSS BEFORE INCOME TAXES (47,570) (90,443) (49,383)
Provision/(benefit) for income taxes 6,000 (16,250) (20,415)
-------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHARES $(53,570) $(74,193) $(28,968)
OTHER COMPREHENSIVE LOSS
Unrealized depreciation on available for sale securities 0 (942) (1,027)
-------- -------- --------
COMPREHENSIVE LOSS $(53,570) $(75,135) $(29,995)
======== ======== ========
Weighted average common shares outstanding:
Basic 172,498 172,489 172,768
Diluted 172,498 172,489 172,768
Per share net loss attributable to common shares:
Basic $ (0.31) $ (0.43) $ (0.17)
Diluted $ (0.31) $ (0.43) $ (0.17)
Dividends per share declared $ .00 $ .075 $ .30
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
MERCURY FINANCE COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Retained
Common Paid in Earnings/ Unrealized Treasury
Stock Capital (Deficit) Appreciation Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $176,478 $ 39 $ 118,138 $ 1,969 $(37,137) $259,487
1996 net loss (28,968) (28,968)
Stock options exercised 1,241 6,500 7,741
Dividends declared ($.30 per share) (51,821) (51,821)
Unrealized depreciation on
available-for-sale securities,
net of tax (1,027) (1,027)
Treasury stock acquired (16,527) (16,527)
-------- ------ --------- ------- --------- ---------
Balance at December 31, 1996 177,719 6,539 37,349 942 (53,664) 168,885
1997 net loss (74,193) (74,193)
Stock options exercised 182 1,705 1,887
Dividends declared ($0.075 per
share) (Note 8) (12,937) (12,937)
Unrealized depreciation on or sale
of
available-for-sale securities,
net of tax (942) (942)
-------- ------ --------- ------- --------- --------
Balance at December 31, 1997 177,901 8,244 (49,781) 0 (53,664) 82,700
1998 net loss (53,570) (53,570)
-------- ------ --------- ------- --------- --------
Balance at December 31, 1998 $177,901 $8,244 $(103,351) $ 0 $(53,664) $ 29,130
======== ====== ========= ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
MERCURY FINANCE COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (53,570) $ (74,193) $ (28,968)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on credit card portfolio held for sale 15,800 0 0
Provision for litigation settlement 18,950 0 0
Loss on sale of Lyndon 0 29,528 0
Provision for finance credit losses 56,790 106,374 215,171
Provision (benefit) for deferred income taxes 0 38,964 (11,432)
Depreciation and amortization 2,537 2,842 5,207
Gain on sale of investment securities 0 0 (769)
Net increase in reinsurance receivable 0 (6,287) (3,496)
Net (increase)/decrease in deferred acquisition costs and
Present value of future profits 0 15,473 (39,567)
Net (increase)/decrease in taxes receivable 71,342 (26,177) (53,764)
Net decrease in other assets 3,636 29,412 15,739
Net increase/(decrease) in reinsurance payable 0 12,582 (87,637)
Net increase/(decrease) unearned premium and claim reserves 0 (12,388) 43,812
Net increase/(decrease) in taxes payable 12,000 0 (9,261)
Net decrease in other liabilities (2,199) (45,526) (1,920)
--------- --------- ---------
Net cash provided by operating activities 125,286 70,604 43,115
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on finance receivables 589,034 772,650 860,190
Principal originated or acquired on finance receivables (427,299) (722,183) (959,195)
Purchases of short term and available for sale investment 0 (44,169) (83,816)
securities
Purchases of held to maturity investment securities 0 (2,552) (8,480)
Proceeds from sales and maturities of short term and
available for sale investment securities 0 46,786 104,774
Proceeds from maturities of held to maturity investment 0 6,476 13,393
securities
Net proceeds from the sale of Lyndon, net of cash sold 0 88,884 0
Net purchase of premises and equipment (567) (616) (2,254)
--------- --------- ---------
Net cash provided by/(used in) investing activities 161,168 145,276 (75,388)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings/(repayments) of commercial paper and notes (77,391) (108,320) 35,061
Borrowings of senior debt, term notes 0 0 90,000
Repayments of senior debt, term notes (76,609) (76,111) (40,125)
Repayments of subordinated notes 0 0 (7,000)
Stock options exercised 0 1,490 7,741
Cash dividends paid 0 0 (38,887)
Treasury stock acquired 0 0 (16,527)
--------- --------- ---------
Net cash provided by/(used in) financing activities (154,000) (182,941) 30,263
--------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 132,454 32,939 (2,010)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 53,896 20,957 22,967
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 186,350 $ 53,896 $ 20,957
========= ========= =========
Supplemental Disclosures
Income taxes paid to federal and state governments $ 1,563 $ 5,138 $ 40,092
Interest paid to creditors $ 36,874 $ 84,118 $ 62,079
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(dollars in tables in thousands, except per share amounts)
1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mercury Finance Company ("Mercury" or the "Company") is a consumer finance
company doing business in 27 states through its operating subsidiaries (the
"consumer finance subsidiaries"). The Company also offered certain insurance
services through its former subsidiary, Lyndon Property Insurance Company and
subsidiaries ("Lyndon") and now offers such services through MFN Insurance
Company ("MFN Insurance"), a subsidiary. The Company's borrowers generally
would not be expected to qualify for traditional financing, such as that
provided by commercial banks or automobile manufacturers' captive finance
companies.
BASIS OF PRESENTATION
The accounting and reporting policies of Mercury conform to generally accepted
accounting principles for the finance and insurance industries. The
consolidated financial statements include the accounts of the Company, the
consumer finance subsidiaries, Lyndon and MFN Insurance. All significant
intercompany accounts and transactions have been eliminated. Certain amounts
from prior years have been reclassified to conform to the 1998 presentation. In
addition, see Note 2 for information regarding the Company's voluntary petition
(the "Voluntary Case") in the United States Bankruptcy Court for the Northern
District of Illinois (the "Court") for relief under Chapter 11 of Title 11 of
the United States Code (the "Code"). The Voluntary Case was filed with the
Court by the Company on July 15, 1998. The Company's Second Amended Plan of
Reorganization (the "Plan" or "Plan of Reorganization") was confirmed by order
of the Court on March 10, 1999. The effective date of the Plan is March 23,
1999 (the "Effective Date").
Since the date of the filing of the Voluntary Case, the Company has been
operating as a debtor-in-possession in accordance with the Code. As a debtor-
in-possession, the Company is authorized to operate its business, but may not
engage in transactions outside the normal course of business without approval,
after notice and hearing, of the Court.
The Company's financial statements as of December 31, 1998 have been presented
in conformity with the American Institute of Certified Public Accountants'
("AICPA") Statement of Position 90-7 "Financial Reporting By Entities In
Reorganization Under The Bankruptcy Code" ("SOP 90-7"). Accordingly, during the
Voluntary Case, all pre-petition liabilities of the Company that are subject to
compromise, as defined by Note 3, are listed in the Company's consolidated
balance sheet as "Liabilities subject to compromise under reorganization".
These liabilities are recorded at amounts expected to be allowed as claims by
the Court rather than estimates of amounts for which the claims may be settled
as a result of approval of the Plan of Reorganization by the Court. All
liabilities incurred since the filing of the petition, as well as pre-petition
liabilities not subject to compromise according to the Plan are listed on the
balance sheet as "Liabilities not subject to compromise under reorganization".
In addition, as required by SOP 90-7, all income and expenses associated with
the Voluntary Case are listed as reorganization expenses in the Company's
statement of income and comprehensive income for the year ended December 31,
1998. See Note 7 for more information and description of these amounts.
The Company will adopt, as of the Effective Date of the Plan, "fresh start"
reporting pursuant to SOP 90-7. Under fresh start reporting, the reorganization
fair value of the Company is allocated to the entity's assets, the Company's
accumulated deficit is eliminated, and the equity in the new Company is issued
according to the Plan. As a result of adopting fresh start reporting and
emerging from Chapter 11 status, the Company's financial statements will not be
comparable with those prepared before the Plan is confirmed, including the
historical financial statements included in this annual report.
As prescribed by SOP 90-7, prior period's balances have not been reclassified to
conform with the current period's balances. The most significant difference
between prior period and current presentations is the reclassification of all of
the Company's outstanding debt to "Liabilities subject to compromise under
reorganization". See Note 3 for a detailed description of liabilities subject
to compromise at December 31, 1998.
30
<PAGE>
REVENUE RECOGNITION - CONSUMER FINANCE SUBSIDIARIES
Finance charges on precomputed loans and sales finance contracts (collectively
referred to as "precompute accounts") 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 effective interest method to produce
constant rates of interest (yields). If a precompute account becomes greater
than 60 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 when an account is 60 or more days contractually delinquent. Late
charges and deferment charges on all contracts are taken into income as
collected. 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 Lyndon (through the date of its sale) and unaffiliated insurers,
offer credit life, accident and health and property insurance to borrowers who
obtain direct consumer loans directly from the consumer finance subsidiaries,
and to borrowers under sales finance contracts and financing contracts acquired
from merchants and automobile dealers. Commissions on credit life, accident and
health and property 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 was engaged in the business of reinsuring and direct writing of credit
life, accident and health and various other property and casualty insurance
policies issued to borrowers under direct consumer loan and sales finance
contracts originated by Mercury and other companies. 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. Insurance
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.
Lyndon had established policy liabilities and claim reserves. The claim
reserves were based upon accumulated estimates of claims reported, plus
estimates of incurred but unreported claims.
Lyndon was sold during the second quarter of 1997. Also during the second
quarter of 1997, the Company formed a captive insurance company, MFN Insurance
Company ("MFN"), to participate in the Company program which provides insurance
to Mercury's customers who do not provide proof of coverage on automobiles that
are collateral for the outstanding loans. MFN provides aggregate coverage for
incurred losses in excess of targeted loss ratios through a reinsurance
agreement with the primary carrier.
FINANCE RECEIVABLES, ALLOWANCE FOR FINANCE CREDIT LOSSES AND NONREFUNDABLE
DEALER RESERVES
Mercury originates direct consumer loans and acquires individual sales finance
contracts from third party dealers. Finance receivables consist of
contractually scheduled payments from sales finance contracts net of unearned
finance charges, direct finance receivables and credit card receivables. The
Company's borrowers typically have limited access to traditional sources of
consumer credit due to past credit history or insufficient cash to make the
required down payment on an automobile. As a result, receivables originated or
acquired by the Company are generally considered to have a higher risk of
default and loss than those of other consumer financings.
Statement of Financial Accounting Standards ("SFAS") 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases," 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 the
Company's reported results of operations or financial condition.
Unearned finance charges represent the balance of finance income (interest)
remaining from the capitalization of the total interest to be earned over the
original term of the related precompute account.
31
<PAGE>
Mercury acquires a majority of its sales finance contracts from dealers at a
discount. The level of discount is based on, among other things, the credit
risk of the borrower. The discount, which is the difference between the amount
financed and the acquisition cost, represents nonrefundable dealer reserves
which are available to absorb future credit losses over the life of the acquired
loan. Historical loss experience on the Company's sales finance receivables has
shown that the acquisition discount recorded as nonrefundable dealer reserves is
not adequate to cover potential losses over the life of the loans. In 1996,
Mercury adopted a reserving methodology commonly referred to as "static
pooling". The method previously used by the Company analyzed reserve adequacy
on a total portfolio basis. The static pooling reserving methodology allows
Mercury to stratify components of its sales finance receivables portfolio (i.e.,
nonrefundable dealer reserves, principal loan balances, and related loan charge-
offs) into separately identified and chronologically ordered monthly pools. A
portion of the dealer reserve is made available to cover estimated credit losses
for each identified monthly pool based on a pro rata calculation over the term
of each specific account.
Each period, the provision for finance credit losses in the income statement
results from the combination of (a) an estimate by management of loan losses
that occurred during the current period and (b) the ongoing adjustment of prior
estimates of losses occurring in prior periods.
The allowance for finance credit losses is maintained by direct charges to
operations in amounts that are intended to provide adequate reserves on the
Company's finance receivables portfolio to absorb possible credit losses
incurred on finance receivables that are considered to be impaired (in excess of
the available nonrefundable dealer reserves for sales finance accounts).
Management evaluates the allowance requirements by examining current
delinquencies, the characteristics of the accounts, the value of the underlying
collateral, the availability of the nonrefundable dealer reserves to absorb
credit losses on impaired loans and general economic conditions and trends.
As the specific borrower and amount of a loan loss is confirmed by gathering
additional information, taking collateral in full or partial settlement of the
loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the
allowance for finance credit losses. If, subsequent to a chargeoff, the Company
is able to collect additional amounts from the borrower or obtain control of
collateral worth more than earlier estimated, a recovery is recorded, increasing
the allowance for finance credit losses.
The Company applies SFAS 114 and 118, which address the accounting by creditors
for impairment of a loan and related income recognition and disclosures. In
accordance with SFAS 114, the Company's approach for estimating losses results
in a measure of impairment based on discounting expected future cash flows
(including the anticipated proceeds from repossessed collateral) at the loan's
original yield. If the measure of the impaired receivable is less than the net
recorded investment in the receivable, the Company recognizes an impairment by
creating an additional allowance for finance credit losses in excess of the
nonrefundable dealer reserves available to absorb losses, with a corresponding
charge to provision for finance credit losses. Generally, the Company considers
receivables more than 60 days contractually delinquent to be impaired.
Direct installment loans on which no payment is received within 149 days, on a
recency basis, are charged off. Sales finance accounts (net of unearned finance
charges) 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 a temporary extension beyond the maximum charge off policy if
collection appears imminent during the next calendar month.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes readily marketable securities with original
maturities of three months or less.
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.
32
<PAGE>
REINSURANCE ACTIVITIES
In the normal course of business, Lyndon assumed and ceded 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 insurance risk. Lyndon monitored the financial condition of its
reinsurers on a periodic basis. This risk was assumed by the buyer after the
date of sale.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return
and individual state tax returns in most states.
Mercury recognizes deferred tax assets and liabilities 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. 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.
The Company evaluates deferred tax assets to determine whether they are likely
to be realized. In making its determination, management considers the possible
recovery of taxes already paid but does not assume the generation of additional
taxable income in the future. See Note 15 for a discussion of the valuation
reserve at December 31, 1998 and 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Assets to be Disposed of," requires that
long-lived assets and certain identifiable intangibles that are used in
operations be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets might not be
recoverable. For additional information on asset dispositions, see Note 4.
At each balance sheet date, the Company evaluates the realizability of goodwill
(and other intangibles) based on expectations of non-discounted cash flows and
operating income for each subsidiary having a material goodwill balance. The
Company believes that no material impairment of goodwill existed at December 31,
1998 or 1997.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation," ("SFAS 123") defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting. The Company has elected, as
permitted under SFAS 123, to continue to measure compensation cost for its plan
using the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25. For additional information, see Note
12.
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 include the allowance for finance credit losses as more fully
discussed in Note 5. Actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS 133 and 134, "Accounting for Derivative
Instruments and Hedging Activities" and "Accounting for Mortgage-Backed
Derivative Securities Retained After the Securitization of Mortgage Loans Held
For Sale by a Mortgage Banking Enterprise", effective for fiscal years beginning
after June 15, 1999 and
33
<PAGE>
December 15, 1998, respectively. Management does not expect these statements to
have a material impact on either the financial position, results of operations
or financial statement disclosures of the Company.
2) GOING CONCERN
The Company incurred losses in the years 1996 through 1998 and continues to
incur losses in 1999. As a result, the Company has experienced a significant
reduction in capital. All of its outstanding debt is subject to acceleration or
has matured by its terms as a result of the Company's defaults of its various
lending agreements. In addition, the Company is currently a defendant in
various litigation arising from the restatement of previously reported financial
information for 1995 and interim periods in 1996.
Pursuant to the Plan of Reorganization, which was confirmed by order of the
Court on March 10, 1999, a portion of the outstanding debt will be converted to
equity, the remaining debt will be restructured and the litigation pending
related to the financial irregularities will be settled. However, there can be
no assurances that the reorganized entity will return to profitable operations.
Thus, there is substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements have been prepared on the
basis that the Company is a going concern and do not include any adjustments
that might result from the outcome of this uncertainty.
3) LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION.
The following table shows the liabilities subject to compromise under
reorganization as of December 31, 1998. These liabilities have been recorded at
amounts that the Court is expected to allow as claims rather than estimates of
the amounts for which the claims may be settled. There were no liabilities
subject to compromise under reorganization as of December 31, 1997.
<TABLE>
<CAPTION>
1998
<S> <C>
Senior debt, commercial paper and notes $339,340
Senior debt, term notes 335,905
Subordinated debt 22,500
Dividends payable 12,937
Pre-petition accrued interest 8,393
Restructuring fee 695
--------
Total liabilities subject to compromise under reorganization $719,770
========
</TABLE>
4) DISPOSITIONS
On March 28, 1997, Mercury executed a Stock Purchase Agreement between Mercury
Finance Company and Frontier Insurance Group, Inc. ("Frontier") for the sale of
Lyndon to Frontier for $92 million. The sale, which closed on June 3, 1997,
resulted in a loss to Mercury of approximately $30 million. In addition, the
earnings of Lyndon from the date of the agreement through the date of sale
aggregating approximately $2 million accrued to the benefit of the buyer.
Management determined that it was in the best interest of the Company to remain
in the insurance business and formed a new captive insurance subsidiary during
1997, MFN Insurance Company. As a result, the sale of Lyndon was not considered
the discontinuation of a business. The loss associated with the sale of Lyndon
was not tax deductible to the Company as a loss on the sale of a consolidated
subsidiary is, under certain circumstances, not deductible for tax purposes.
In December 1998, the Board of Directors approved the terms of a sale of the
credit card portfolio. The sale price was below the carrying value of the
portfolio and accordingly the Company recorded a $15.8 million charge in 1998 to
reduce the portfolio to its net realizable value. In addition, the portfolio
has been classified as assets held for sale at December 31, 1998. The sale of
the credit card portfolio was consummated on March 2, 1999.
5) 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
34
<PAGE>
discount basis and generally have terms of 18 to 36 months with maximum terms of
48 months. Mercury Card receivables are mainly unsecured balances. The Company's
finance receivables are primarily with individuals located in the southeastern,
central and western United States. As of December 31, 1998, approximately 13%,
13% and 12% of gross sales and direct finance receivables were from branches
located in Texas, Florida and Illinois, respectively. Loans outstanding at
December 31, 1998 and 1997 were as follows:
1998 1997
DIRECT FINANCE RECEIVABLES
Interest bearing $ 17,123 $ 20,504
Precompute 100,013 129,120
--------- ----------
Total direct finance receivables 117,136 149,624
SALES FINANCE RECEIVABLES
Total sales finance receivables 676,132 954,319
--------- ----------
Total gross finance receivables 793,268 1,103,943
Less: Unearned finance charges (146,978) (200,820)
Unearned commissions and other (2,585) (3,242)
--------- ----------
Sales and direct finance receivables 643,705 899,881
CREDIT CARD
Total credit card 0 71,496
--------- ----------
Total finance receivables $ 643,705 $ 971,377
========= ==========
The credit card portfolio had a gross receivables balance of approximately $50.6
million as of December 31, 1998 and has been classified as assets held for sale.
Included in finance receivables at December 31, 1998 and 1997 were approximately
$43.5 million and $79.0 million, respectively, of receivables for which interest
accrual had been suspended. Contractual maturities of the finance receivables
by year are not readily available at December 31, 1998 and 1997, but experience
has shown that such information is not an accurate forecast of the timing of
future cash collections due to the amount of renewals, conversions,
repossessions, or payoffs prior to actual maturity.
Repossessed assets, classified as other assets, primarily consists of vehicles
held for resale and vehicles which have been sold for which payment has not been
received. Repossessed assets are carried at estimated fair value. At December
31, 1998 and 1997, repossessed assets totaled approximately $3.8 million and
$5.2 million, respectively.
Principal cash collections (excluding finance charges earned) for the years
ended December 31, 1998 and 1997, were as follows:
1998 1997
DIRECT FINANCE RECEIVABLES
Principal cash collections $122,192 $136,004
Percent of average net balances 109% 107%
SALES FINANCE RECEIVABLES
Principal cash collections $436,277 $599,977
Percent of average net balances 66% 69%
CREDIT CARD RECEIVABLES
Principal cash collections $ 30,565 $ 36,669
Percent of average balances 50.5% 47.2%
Effective in 1996, the Company adopted a static pooling methodology for
computing the allowance for finance credit losses. During 1996, Mercury
converted to a more sophisticated portfolio manager software system, which
enabled the Company to analyze performance criteria on a static
35
<PAGE>
pool basis. In management's view, the static pooling methodology was preferable
to the method previously used. If static pooling had not been adopted in 1996,
the 1996 provision for finance credit losses would have been decreased by
approximately $89 million.
As a part of its adoption of the static pooling reserving methodology, the
Company adjusted its newly identified nonrefundable dealer reserve pools to
eliminate any negative pools, (i.e., those where related loan charge offs
exceeded available nonrefundable dealer reserve pool balances), and to reflect
certain previous sales finance charge offs as reductions in dealer reserves as
opposed to reductions in the allowance for finance credit losses. The net
effect of these adjustments was to increase nonrefundable dealer reserves by $74
million and decrease the allowance for finance credit losses by a corresponding
amount. A summary of the activity in the allowance for finance credit losses
for the years ended December 31, was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $102,204 $ 97,762 $ 46,366
Provision for finance credit losses 56,790 106,374 215,171
Finance receivables charged off, net of recoveries (99,409) (101,932) (89,326)
Transfer to credit card portfolio held for sale (6,100) 0 0
Transfer to non-refundable dealer reserves 0 0 (74,449)
-------- --------- ---------
Balance at end of year $ 53,485 $ 102,204 $ 97,762
======== ========= =========
</TABLE>
A summary of the activity in nonrefundable dealer reserves for the years ended
December 31, was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 52,731 $ 89,378 $ 61,961
Discounts acquired on new volume 24,982 45,010 67,442
Transfer from the allowance for finance credit losses 0 0 74,449
Losses absorbed (40,893) (81,657) (114,474)
-------- --------- ---------
Balance at end of year $ 36,820 $ 52,731 $ 89,378
======== ========= =========
</TABLE>
Under the static pooling methodology, the total balances of nonrefundable dealer
reserves are not available to offset current finance credit losses, but instead
are amortized and made available to absorb credit losses over the life of the
corresponding pool of receivables.
6) SENIOR AND SUBORDINATED DEBT AND LINES OF CREDIT
As a result of net losses incurred, accounting irregularities, and related
matters, Mercury violated certain covenants permitting the holders of its Senior
Term Notes and Subordinated Debt to accelerate all such debt which, if
accelerated, would have resulted in all of such debt being currently due and
payable. In addition, the Company was no longer permitted by the terms of
certain debt instruments to pay dividends.
The Company had a forbearance agreement beginning on July 12, 1997 with its
lenders which, including extensions (the "Forbearance Agreements"), expired July
15, 1998. In connection with the execution in 1998 of an extension to a
previous forbearance agreement, the participating senior lenders received a fee
of 2.25% of the outstanding balance. The fee, aggregating $15.2 million, was
paid in 1998 and recorded as a non-operating expense.
Under the terms of the Forbearance Agreements, the Company made interest
payments on senior debt at default rates of interest, subject to a maximum rate
of nine percent (9.0%) and subordinated note holders received interest at a rate
of five and one-half percent (5.5%). In addition, the agreements required the
periodic payment of excess cash to be applied as reduction of outstanding
principal. Through May 5, 1998, approximately $307 million of principal was
paid to creditors under the Forbearance Agreements, of which $154 million was
paid during 1998. Subsequent to May 5, 1998, no payments of principal have been
made to creditors.
As described in Note 3 all of the Company's debt is subject to compromise under
the Plan of Reorganization. Therefore, the entire amount of outstanding debt as
of December 31, 1998 of $697.7 million is included in "Liabilities subject to
compromise under reorganization" in the Company's financial statements.
36
<PAGE>
Pursuant to the Voluntary Case, no interest has been paid or recorded on the
Company's debt subsequent to July 15, 1998, the date the Voluntary Case was
filed. Interest expense for the year would have amounted to approximately $66
million if the Company had not been relieved from paying interest under the
Voluntary Case. The following table represents Mercury's debt instruments and
the corresponding stated rates at the end of the periods indicated:
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
Balance Rate Balance Rate
Senior debt:
Commercial paper and notes $339,340 5.7% $416,731 5.7%
Term notes 335,905 7.0% 412,514 7.0%
Subordinated debt 22,500 10.3% 22,500 10.3%
-------- --------
Total $697,745 6.5% $851,745 6.5%
======== ========
7) REORGANIZATION EXPENSES
Reorganization expenses for the year ended December 31, 1998 are as follows:
1998
Professional fees $ 5,206
Interest income (1,947)
-------
Total $ 3,259
=======
The Company has estimated the amount of professional fees which relate
specifically to the Voluntary Case that the Company is currently undergoing.
The Company has adopted SOP 90-7 which requires interest earned on funds held on
deposit that would have been paid to senior debt holders if the Company had not
filed the Voluntary Case, to be set-off against expenses related to the
Voluntary Case.
8) DIVIDEND RESTRICTIONS
On February 6, 1997, the Company suspended payment of the dividend previously
declared on January 14, 1997 of $0.075 per share of Mercury common stock. The
Company has not been permitted to pay dividends since the filing of the
Voluntary Case. The amount owing as a result of the declared but unpaid
dividend is included under liabilities subject to compromise in the
December 31, 1998 balance sheet.
9) COMMON STOCK
The Company has implemented the provisions of SFAS No. 128 "Earnings Per Share".
This standard requires the presentation of basic and diluted earnings per share
as opposed to primary and fully diluted earnings per share under APB Opinion 15.
This standard also prescribes that when computing the dilution of options, the
Company is to use its average stock price for the period, rather than the more
dilutive greater of the average share price or end-of-period share price
required by APB Opinion 15 for fully diluted earnings per share.
37
<PAGE>
Earnings per share is computed by dividing net income/(loss) by the total of
weighted average common shares and common stock equivalents outstanding during
the periods. The calculated averages were as follows:
1998 1997 1996
Weighted Average:
Common Shares 177,900,671 177,892,453 177,129,351
Treasury Shares (5,402,957) (5,402,957) (4,361,499)
----------- ----------- -----------
Basic Shares 172,497,714 172,489,496 172,767,852
Common Equivalents 0 0 0
----------- ----------- -----------
Diluted Shares 172,497,714 172,489,496 172,767,852
=========== =========== ===========
In February, 1997, following the announcement of the discovery of accounting
irregularities which caused the overstatement of the previously released
earnings for 1995 and 1996, the market value of the Company's common stock was
significantly reduced. Since the announcement, the market value of the common
stock has not exceeded the exercise price of the stock options granted or
regranted under the revised stock option program (See Note 12). As a result,
the calculation of the common share equivalents becomes meaningless for the
years ended December 31, 1998 and 1997.
The calculation of common stock equivalents for the year ended December 31, 1996
can be completed as the market value of common stock was in excess of the
exercise price of the stock options outstanding, however, as the Company
incurred a net loss for the year ended December 31, 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.
10) RESTRUCTURING CHARGES
During 1997 and 1998, the Company closed a number of branches and implemented a
plan to close additional branches for a total closure of approximately 110
branches and a reduction of approximately 260 branch personnel. The amount
charged during 1997 was $3.725 million ($0.02 per common share) of which $2.831
million has been utilized to date. In addition, $0.344 million has been
credited in 1998 as the Company expects that the full amount of the original
1997 estimated provision will not be required. This reduction in the provision
is primarily due to change in estimates of employee severance and retention
payments based on actual experience during 1998. These charges and their
utilization through December 31, 1998 and estimated utilization for 1999 are
summarized in the following table:
Amounts Amounts Amounts Amounts to be
Charged Utilized Utilized Utilized
In 1997 in 1997 in 1998 In 1999
Asset and leasehold write-offs $1,200 $200 $1,079 $ 75
Lease buyouts and other expenses 1,025 101 799 100
Employee severance and retention 1,500 0 652 375
------ ---- ------ ----
Total $3,725 $301 $2,530 $550
====== ==== ====== ====
The Company records restructuring charges against operations and provides a
reserve based on the best information available at the time the commitment is
made to undertake the restructuring action. The reserves are considered
utilized when specific restructuring criteria are met, indicating the planned
restructuring action has occurred. Work-force-related reserves are considered
utilized at payment for termination or acceptance of other contractual
arrangements.
The reserve for lease buyouts is utilized when the remaining lease obligations
are settled or the space has been vacated and made available for sublease. It
is the Company's policy to continue to charge depreciation, rental, and other
operating costs relating to excess space to ongoing operations while they remain
in business use. Salaries and benefits are charged to operations while the
employee is actively employed.
Reserves for assets and leasehold improvements written-off are utilized at the
date of disposal or the final date of the lease.
38
<PAGE>
11) OTHER NON-OPERATING EXPENSES
Other non-operating expenses are as follows:
1998 1997
Corporate counsel $ 2,056 $ 2,836
Investment banking 2,045 2,657
Creditor attorneys and advisors 2,235 2,584
Independent accountants 1,059 2,469
Management consultants 2,336 2,399
Special investigation 0 1,919
Bank line of credit fees 121 1,650
Bank of Boston settlement 0 1,600
Board of Directors representation 1,312 1,132
Forbearance fee 15,176 0
Other 86 1,437
------- -------
Total $26,426 $20,683
======= =======
12) STOCK OPTIONS
Under the terms of Mercury's 1989 Stock Option and Incentive Compensation Plan
(the "1989 Option 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 and expire after ten years.
Shares available for future grants totaled 5,482,965, 4,895,091 and 134,055 at
December 31, 1998, 1997 and 1996, respectively.
The information provided below has been prepared as of December 31, 1998.
Subsequent to this date and as a result of the events described in Note 1, the
Company's Plan of Reorganization will result in the cancellation and
extinguishment of all stock options outstanding prior to the Effective Date of
the Plan.
Activity with respect to stock options is as follows for the years ended
December 31, (adjusted for all stock splits):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Outstanding January 1 3,025,659 7,967,919 8,714,492
Options granted (average price of $3.00 in 1998, 10,000 3,420,318 1,300,250
$3.36 in 1997 and $11.10 in 1996)
Forfeited/cancelled (597,874) (8,181,354) (543,250)
Options exercised (average price of $8.21 in 1997 and
$4.48 in 1996) 0 (181,224) (1,503,573)
--------- ---------- ----------
Outstanding December 31 2,437,785 3,025,659 7,967,919
========= ========== ==========
</TABLE>
The average option price under the plan was $3.03, $3.23 and $10.53 at December
31, 1998, 1997 and 1996, respectively. On June 13, 1997, the Company cancelled
and reissued 2,385,443 options at a new exercise price of $3.00. New options
were also granted to certain employees with an exercise price equal to $3.00 per
share. 31,602 and 2,001 of the 2,437,785 options outstanding at December 31,
1998 have an exercise price of $1.90 and $1.93, respectively. The remaining
2,404,182 options have exercise prices between $3.00 and $8.87, with a weighted
average exercise price of $3.20 and a weighted contractual life of approximately
10 years. 2,255,910 of these options are exercisable.
The Company applies APB Opinion 25 in accounting for its Plan, and accordingly,
no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined
39
<PAGE>
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's 1998 and 1997 net losses and loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C>
Net Loss As reported $ (53,570) $ (74,193)
Pro forma $ (53,581) $ (78,564)
Basic and Diluted Loss per Share As reported $ (0.31) $ (0.43)
Pro forma $ (0.31) $ (0.46)
</TABLE>
The weighted average fair value of the options granted, using the Black-Scholes
method, was $2.60 and $2.41 per option in 1998 and 1997, respectively. The full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net loss amounts presented above because
compensation cost is reflected over the options' vesting period of eighteen
months.
Upon the announcement of the discovery of the accounting irregularities and
financial statement restatement in January, 1997, the market value of the
Company's common stock declined dramatically. Management thus believes that the
market value of the Company's common stock during 1996 is overstated. Because a
key component of the fair value calculation (and the related pro forma net
income and earnings per share disclosures) is the market value of the Company's
stock, the fair value and other disclosures required under SFAS 123 for 1996 is
not considered meaningful.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for the option grants in 1998: risk-free interest rate of 5.48
percent, expected dividend yield of 0 percent, expected life of 10 years and
expected volatility of 84.97 percent.
13) CONTINGENCIES AND LEGAL MATTERS
On July 15, 1998, the Company filed the Voluntary Case along with its plan of
reorganization. The Court entered an order confirming the Plan of
Reorganization on March 10, 1999. See "Item 1 Restructuring and Chapter 11
Proceedings" for more information.
The Company has been named as a defendant in a variety of lawsuits generally
arising from the Company's announcement on January 29, 1997 that it would
restate its earnings for certain prior periods as a result of the discovery of
accounting irregularities. To date, forty-five actions have been filed against
the Company in the United States District Court for the Northern District of
Illinois, six cases are pending against the Company in Illinois Chancery Court,
and nine cases are pending in Delaware Chancery Court. The complaints seek
compensatory damages, attorneys' fees and costs.
Forty-one of the lawsuits filed in the Northern District of Illinois are class
actions which generally allege claims under Sections 10 and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. These
lawsuits name one or more officers or directors of the Company as additional
defendants. One case pending in the Northern District of Illinois alleges
derivative claims seeking to recover damages on behalf of the Company from
certain of the Company's officers and directors. Thirty-nine of the non-
derivative cases pending in the Northern District of Illinois were consolidated
pursuant to a Stipulation entered on April 30, 1997. Seven of these cases were
dismissed in 1998. In November, 1997, the Minnesota State Board of Investment
was appointed lead plaintiff in the federal class cases. One of the cases
pending in the Northern District of Illinois seeks to represent a class of
participants in Mercury's employee retirement plan and alleges ERISA violations
arising out of the plan's investment in Mercury's allegedly overvalued stock.
Participants in the proposed class may include certain officers and former
officers of the Company. One case pending in the Northern District of Illinois
alleges non-class securities fraud and common law claims. A second case
alleging similar claims was dismissed on September 9, 1998. The ERISA action
and the two non-class securities fraud cases were consolidated in February,
1997, with the cases in which the Minnesota State Board of Investment is lead
plaintiff. Three of the Illinois state court actions are class actions alleging
claims under the Illinois Securities Act, the Illinois Consumer Fraud and
Deceptive Business Practices Act and common law claims of fraud and negligent
misrepresentation. The other Illinois state court actions are derivative
actions which seek to recover damages on behalf of the Company from certain of
the Company's officers
40
<PAGE>
and directors. Each of the Delaware state court actions is a derivative action
which seeks to recover damages on behalf of the Company from certain of the
Company's officers and directors. The case pending in Municipal Court in
Hamilton, Ohio, alleges violations of Ohio state securities laws and common law.
Pursuant to Section 362(a) of the Bankruptcy Code, all of the pending lawsuits
against the Company were stayed after the filing of the Voluntary Case.
Pursuant to the Plan, the Company will transfer to a certain trust established
under the Plan (the "Liquidating Trust"), on the effective date of the Plan, (i)
$5 million in cash, (ii) the Company's claims against the Company's previous
auditors and (iii) $250,000 in cash for fees and costs to be incurred in
connection with the Liquidating Trust. Holders of Securities Fraud Claims will
receive a share of the beneficial interests in the Liquidating Trust in complete
settlement, satisfaction and discharge of their claims. In accordance with the
Plan, the Company will also pay (i) $13.35 million into funds established for
the benefit of holders of certain indemnification claims against the Company on
the effective date of the Plan and (ii) upon verification, costs and expenses of
officers, agents and employees who are no longer employed by the Company as of
the first day immediately following the effective date of the Plan (other than
the claims of the estate of James A. Doyle and John N. Brincat in respect of
which no obligations shall be assumed), to the extent such costs and expenses
are incurred after the effective date of the Plan in connection with their
participation in an agency or government investigation, which costs and expenses
are limited to $250,000 in the aggregate. The Company has also agreed to (i)
pay John N. Brincat $100,000 and (ii) release Mr. Brincat from all claims the
Company may have against him, in complete settlement, satisfaction and discharge
of any claims Mr. Brincat may have against the Company, subject to the approval
of the United States District Court for the Northern District of Illinois by a
final non-appealable order.
The Securities and Exchange Commission is investigating the events giving rise
to the accounting irregularities. Those events are also under investigation by
the United States Attorney for the Northern District of Illinois and the Federal
Bureau of Investigation. The Company is cooperating fully in these
investigations.
On January 10, 1997, the Company entered into an agreement (the "Agreement")
with BankBoston Corporation ("BankBoston") pursuant to which the Company was to
acquire all of the outstanding stock of Fidelity Acceptance Corporation, a
subsidiary of BankBoston, in return for the issuance of approximately 32.7
million shares of the Company's common stock. On January 30, 1997, BankBoston
notified the Company that it was terminating the Agreement as a result of
breaches of the Agreement resulting from the accounting irregularities described
above. On July 10, 1997, BankBoston notified Mercury that BankBoston intended
to seek appropriate compensation for its damages resulting from such breaches.
Such claims were settled for a cash payment of $1.6 million in January, 1998
which was accrued in December, 1997.
In the normal course of its business, Mercury and its subsidiaries are named as
defendants in legal proceedings generally referred to as consumer finance
litigation. A number of such 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.
The Company recognizes the expense for litigation when the incurrance of loss is
probable and the amount of such loss is estimable. Based upon the confirmation
of the Plan, which provides for the settlement of all claims and lawsuits
against the Company arising out of the financial irregularities in exchange for
payments in the aggregate of $18.950 million, the Company recorded a provision
and related accrual for $18.950 million during 1998. However, because of the
uncertainty that still surrounds the consumer finance litigation, no accrual has
been made for the majority of these lawsuits at December 31, 1998. The costs to
defend against this litigation are expensed as incurred.
14) PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Substantially all employees of Mercury are covered by non-contributory defined
benefit pension plans.
41
<PAGE>
The following table sets forth the status of Mercury's qualified plans and
amounts recognized in the 1998, 1997 and 1996 consolidated financial statements:
<TABLE>
<CAPTION>
1998 1997
CHANGE IN PROJECTED BENEFIT OBLIGATION
<S> <C> <C>
Projected Benefit Obligation, Beginning of Year $ 14,097,933 $ 10,685,989
Service Cost 1,737,610 1,332,275
Interest Cost 1,018,962 846,104
Plan Amendments 0 0
Curtailments (187,247) 0
Actuarial Gain 400,837 1,478,000
Benefits Paid (339,916) (244,435)
--------------- ----------------
Projected Benefit Obligation, End of Year $ 16,728,179 $ 14,097,933
============== ===============
CHANGE IN PLAN ASSETS
Plan Assets at Fair Value, Beginning of Year $ 16,667,300 $ 13,638,037
Actual Return on Plan Assets 683,824 3,273,698
Company Contributions 0 0
Benefits Paid (339,916) (244,435)
--------------- ---------------
Plan Assets at Fair Value, End of Year $ 17,011,208 $ 16,667,300
============== ===============
RECONCILIATION OF ACCRUED PENSION COST
AND TOTAL AMOUNT RECOGNIZED
Funded status of the Plan $ 283,029 $ 2,569,367
Unrecognized Net Gain (2,591,821) (3,834,800)
Unrecognized Prior Service Cost (21,363) (44,360)
Unrecognized Net Transition Obligation (Asset) (188,606) (202,462)
----------- -----------
Accrued Pension Cost $(2,518,761) $(1,512,255)
=========== ===========
WEIGHTED-AVERAGE ASSUMPTION
Discount Rate 6.75% 7.25%
Expected Return on Plan Assets 8.50% 8.50%
Rate of Compensation Increase 5.50% 5.50%
TOTAL COST
Service Cost $ 1,737,610 $ 1,332,275
Interest Cost 1,018,962 846,104
Expected Return on Plan Assets (1,395,111) (1,139,181)
Amortization of:
Unrecognized Net Gain (72,150) (86,787)
Unrecognized Prior Service Cost 2,797 2,797
Unrecognized Net Asset (50,720) (50,720)
Prior Service Cost 2,635 3,489
Recognized actuarial Gain (58,705) (6,667)
----------- -----------
Net Periodic Pension Cost $ 1,185,318 $ 901,310
Amount recognized due to curtailment (178,812) 0
----------- -----------
Total benefit cost $ 1,006,506 $ 901,310
=========== ===========
</TABLE>
Mercury has a tax deferred Retirement Savings Plan ("401(k) Plan"). Employees
are eligible to participate in these 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.
42
<PAGE>
15) INCOME TAXES
The components of the 1998, 1997 and 1996 income tax provisions (benefits) were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INCOME TAX PROVISION/(BENEFIT):
Current Taxes:
Federal $ 4,100 $(55,214) $ (8,274)
State 1,900 0 (709)
------- -------- --------
Total Current Taxes 6,000 (55,214) (8,983)
Deferred income tax provision/(benefit) 0 38,964 (11,432)
------- -------- --------
INCOME TAX PROVISION/(BENEFIT) $ 6,000 $(16,250) $(20,415)
======= ======== ========
</TABLE>
The differences between the U.S. federal statutory income tax rate and the
Company's effective rate are:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory federal income tax 35.0 % 35.0% 35.0%
Loss on sale of Lyndon 0 (11.4) 0
Income from Lyndon due to buyer 0 (.8) 0
Valuation of finance receivables (24.1) 0 0
Deferred tax valuation allowance (12.8) (.7) 0
Nondeductible restructuring expenses (4.5) 0 0
State income taxes, net of federal tax benefit (2.6) (2.1) 3.0
Other, net (3.6) (2.0) 3.3
------- -------- --------
Company's effective tax rate (12.6)% 18.0% 41.3%
======= ======== ========
</TABLE>
The total income tax benefit reflected in stockholders' equity for stock options
exercised was $397 and $4,400 in 1997 and 1996, respectively. No stock options
were exercised in 1998. Temporary differences between the amounts reported in
the financial statements and the tax basis of assets and liabilities result in
deferred taxes. A full valuation allowance was recorded against the deferred tax
asset balances at December 31, 1998 and 1997 because there is no assurance that
such assets can be realized as reductions in future taxable income nor carried
back to periods of taxable income. Deferred tax assets and liabilities at
December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowances for finance receivables $ 1,402 $ 0
Accrued non-operating expenses 6,826 1,758
Capitalized restructuring expenses 858 0
Other 1,012 1,095
------- ------
Deferred tax assets 10,098 2,853
------- ------
DEFERRED TAX LIABILITIES:
Allowances for finance receivables 0 2,196
Imputed interest during bankruptcy proceeding 3,348 0
------- ------
Deferred tax liabilities 3,348 2,196
------- ------
Net deferred tax assets before valuation allowance 6,750 657
Less: Valuation allowance (6,750) (657)
------- ------
NET DEFERRED TAX ASSETS $ 0 $ 0
======= ======
</TABLE>
Mercury has elected to be treated as a dealer in securities under section 475 of
the Internal Revenue Code. Pursuant to this election, Mercury must recognize as
taxable income or loss the difference between the fair market value of its
securities and the income tax basis of its securities. This election has no
impact on the recognition of pre-tax income for financial reporting purposes.
43
<PAGE>
16) LEASES
Mercury and its subsidiaries lease office space generally under cancelable
operating leases expiring in various years through 2004. 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,
1998:
Year Amount
1999 $ 2,978
2000 2,053
2001 1,332
2002 605
2003 and after 153
--------
Total $ 7,121
========
The Company has announced its intention to close branches and expects to settle
commitments for less than the current lease contracts on the closed branches.
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 $3,667, $4,571 and $4,392 in 1998, 1997 and 1996, respectively.
17) DISCLOSURES OF 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,
and matters of significant judgment and, therefore, cannot be determined with
precision. Fair value estimates assume the continuation of Mercury as a going
concern.
CASH AND CASH EQUIVALENTS
Due to the short term nature of these items, management believes that the
carrying amount is a reasonable estimate of fair value.
FINANCE RECEIVABLES
Finance receivables have been valued based upon an estimate of future cash flows
discounted at an imputed weighted average cost of capital.
SENIOR DEBT, COMMERCIAL PAPER AND NOTES
The fair value has been computed based upon a valuation provided by the
Company's investment banking advisors and verified by pricing of recent trades.
SENIOR DEBT, TERM NOTES
The fair value has been computed based upon a valuation provided by the
Company's investment banking advisors and verified by pricing of recent trades.
SUBORDINATED DEBT
The fair value has been computed based upon pricing of recent trades.
44
<PAGE>
The estimated fair values of Mercury's financial instruments at December 31, are
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $186,350 $186,350 $ 53,896 $ 53,896
Finance receivables, net 553,400 553,724 816,442 731,038
-------- -------- -------- --------
Total $739,750 $740,074 $870,338 $784,934
======== ======== ======== ========
FINANCIAL LIABILITIES:
Senior debt, commercial paper and notes $339,340 $305,406 $416,731 $354,221
Senior debt, term notes 335,905 302,315 412,514 350,637
Subordinated debt 22,500 16,875 22,500 16,875
-------- -------- -------- --------
Total $697,745 $624,596 $851,745 $721,733
======== ======== ======== ========
</TABLE>
The above estimates do not include any adjustments to reflect the substantial
negative impact for the events disclosed in Note 2.
18) BUSINESS SEGMENT DATA
The Finance Segment consists of the noninsurance segment of Mercury. The
Insurance Segment consists of Lyndon through date of disposition and MFN
Insurance thereafter. Included in revenues is interest income before provision
for finance credit losses and total other income. Operating profit represents
income before income taxes and includes interest expense, as financing costs are
an integral part of 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. The following table
presents the business segment data of Mercury for the year ended December 31,
1996. Following the sale of Lyndon in 1997, the operations of the insurance
segment are not a material segment of the Company's operations and are therefore
not disclosed in the following table:
(in millions)
<TABLE>
<CAPTION>
1996
<S> <C>
REVENUES
Finance $ 203.2
Insurance 105.9
--------
Total $ 309.1
========
OPERATING PROFITS (LOSSES)
Finance $ (89.4)
Insurance 40.0
--------
Total $ (49.4)
========
NET INCOME (LOSS)
Finance $ (56.0)
Insurance 27.0
--------
Total $ (29.0)
========
IDENTIFIABLE ASSETS
Finance $1,123.4
Insurance 420.0
--------
Total $1,543.4
========
</TABLE>
45
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
BALANCE SHEET AVERAGE FOR THE QUARTER 1998
(Amounts in thousands, except per share)
<TABLE>
<CAPTION>
4th Qrtr 3rd Qrtr 2nd Qrtr 1st Qrtr
<S> <C> <C> <C> <C>
ASSETS
Cash $144,189 $ 74,507 $ 56,141 $ 59,596
Finance Receivables 686,479 757,192 822,858 915,981
Allowance for Credit Losses (60,287) (72,952) (83,503) (95,198)
Nonrefundable Dealer Reserves (36,691) (37,705) (41,258) (48,199)
Other Assets 68,126 77,999 78,533 93,726
-------- -------- -------- --------
Total Assets $801,816 $799,041 $832,771 $925,906
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise under
reorganization (Note 1) $ 34,153 $ 20,908 $ 24,400 $ 28,764
Liabilities subject to compromise under
reorganization (Note 1) 719,422 714,879 738,182 815,182
Total Stockholders' Equity 48,241 63,254 70,189 81,960
-------- -------- -------- --------
Liabilities and Stockholders' Equity $801,816 $799,041 $832,771 $925,906
======== ======== ======== ========
INCOME STATEMENT
Interest Income $ 40,820 $ 43,153 $ 45,979 $ 51,141
Interest Expense 721 2,766 16,509 18,597
-------- -------- -------- --------
Net Interest Income 40,099 40,387 29,470 32,544
Provision for Credit Losses 17,099 11,467 15,265 12,959
-------- -------- -------- --------
Net Interest Income after Credit Losses 23,000 28,920 14,205 19,585
Other Income 3,260 3,095 2,910 3,926
Other Expenses (20,160) (22,089) (20,347) (22,699)
Non-Operating Expenses, net (38,321) (1,731) (18,834) (2,290)
-------- -------- -------- --------
Income (loss) Before Income Taxes (32,221) 8,195 (22,066) (1,478)
Applicable Income Taxes 6,000 0 0 0
-------- -------- -------- --------
Net Income/(loss) $(38,221) $ 8,195 $(22,066) $ (1,478)
======== ======== ======== ========
Average Common & Equivalent
Shares Outstanding 172,498 172,498 172,498 172,498
Net Income/(loss) per Common Share (adjusted
for stock splits) $ (.22) $ 0.05 $ (0.13) $(0.01)
Cash Dividend Declared (Per Share) $ 0 $ 0 $ 0 $ 0
Market Price (Per Share):
High 0.085 .16 11/16 7/8
Low 0.035 0.075 1/16 1/2
Close at End of Period .045 .08 .13 3/4
RATIOS
Net Interest Margin 19.15% 19.27% 13.45% 13.53%
Net Income/(loss) to Average Total Assets (4.77%) 1.03% (2.65%) (0.16%)
Net Income/(loss) to Average
Stockholders' Equity (79.23%) 12.96% (31.44%) (1.80%)
</TABLE>
(1) Average amounts have been computed based upon classifications as if the
Voluntary Case had been filed at the beginning of 1998.
46
<PAGE>
BALANCE SHEET AVERAGE FOR THE QUARTER 1997
(Amounts in thousands, except per share)
<TABLE>
<CAPTION>
4th Qrtr 3rd Qrtr 2nd Qrtr 1st Qrtr
<S> <C> <C> <C> <C>
ASSETS
Cash $ 28,844 $ 67,351 $ 78,350 $ 23,374
Investments 23,368 23,368 110,711 217,189
Finance Receivables 1,008,767 1,070,968 1,110,949 1,143,272
Allowance for Credit Losses (111,168) (121,868) (117,594) (104,673)
Nonrefundable Dealer Reserves (57,019) (66,336) (76,021) (85,028)
Other Assets 121,486 141,484 231,814 325,366
---------- ---------- ---------- ----------
Total Assets $1,014,278 $1,114,967 $1,338,209 $1,519,500
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior Debt, Commercial Paper $ 431,305 $ 469,749 $ 498,619 $ 514,335
Senior Debt, Term Notes 426,939 464,995 488,625 488,625
Subordinated Debt 22,500 22,500 22,500 22,500
Other Liabilities 48,289 56,151 209,234 348,042
Total Stockholders' Equity 85,245 101,572 119,231 145,998
---------- ---------- ---------- ----------
Liabilities and Stockholders' Equity $1,014,278 $1,114,967 $1,338,209 $1,519,500
========== ========== ========== ==========
INCOME STATEMENT
Interest Income $ 47,950 $ 57,588 $ 62,505 $ 66,780
Interest Expense (20,710) (21,554) (23,549) (20,716)
---------- ---------- ---------- ----------
Net Interest Income 28,039 36,034 38,956 46,064
Provision for Credit Losses (24,288) (27,080) (24,544) (30,462)
---------- ---------- ---------- ----------
Net Interest Income after Credit Losses 3,750 8,954 14,412 15,602
Other Operating Income 4,089 3,329 12,939 26,723
Other Operating Expenses (28,501) (23,818) (32,684) (43,001)
Non-operating Expenses (7,088) (3,013) (7,478) (34,657)
---------- ---------- ---------- ----------
Income/(loss) Before Income Taxes (27,750) (14,548) (12,811) (35,333)
Applicable Income Taxes/(Credit) (22,661) 13,018 (4,442) (2,165)
---------- ---------- ---------- ----------
Net Income/(loss) $ (5,089) $ (27,566) $ (8,369) $ (33,168)
========== ========== ========== ==========
Average Common & Equivalent
Shares Outstanding 172,498 172,498 172,948 172,465
Per Common Share (adjusted for stock splits) $(0.03) $(0.16) $(0.05) $(0.19)
Net Income/(Loss) $ (5,089) $ (27,566) $ (8,369) $ (33,168)
Cash Dividend Declared Per Share $ 0 $ 0 $ 0 $0.075
Market Price:
High 1 11/16 2 11/16 2 3/4 15 3/4
Low 9/16 1 3/8 1 1/2 1 7/8
Close at End of Period 9/16 1 3/8 2 7/16 2 1/2
Ratios
Net Interest Margin 10.84% 13.06% 12.79% 13.73%
Net Income/(loss) to Average Total Assets (1.99)% (9.81)% (2.51)% (8.85)%
Net Income/(loss) to Average
Stockholders' Equity (23.68)% (107.67)% (28.15)% (92.13)%
</TABLE>
Please refer to the "Income Taxes" section of Management's Discussion and
Analysis for more information concerning the Company's income taxes and
benefits.
47
<PAGE>
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
On February 18, 1997, the Company advised KPMG Peat Marwick LLP ("KPMG") that
the Company was discontinuing KPMG's services as the Company's independent
accountants and was engaging Arthur Andersen LLP ("Arthur Andersen") as the
Company's independent accountants. The decision to discontinue KPMG and to
engage Arthur Andersen was approved by the Audit Committee of the Board of
Directors as well as by the Board of Directors as a whole.
On January 29, 1997, the Company announced the discovery of accounting
irregularities with respect to previously reported results for fiscal years 1993
through 1996. Results for 1996 had recently been announced by the Company, but
KPMG had not completed its audit of the 1996 financial statements. In
connection with KPMG's incomplete audit, KPMG advised the Company that
information had come to its attention that the Company's previously announced
unaudited results for 1996 were materially misstated. In addition, KPMG advised
the Company that information had come to its attention that materially impacted
the fairness and reliability of the Company's previously issued 1995 financial
statements and the related audit report. KPMG further informed the Company that
information had come to its attention that, subject to further investigation,
may have caused KPMG to have been unwilling to rely on representations of
management employed at the time of discovery of the accounting irregularities.
As a result of its dismissal, KPMG did not complete such further investigation.
KPMG's reports on the financial statements of the Company for the fiscal years
ended December 31, 1994 and 1995 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
To the knowledge of the present executive management and the Board of Directors
of the Company, in connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31, 1994 and 1995,
and in the subsequent interim period, there were no disagreements with KPMG on
any matters of accounting principles or practices, financial statement
disclosure or auditing scope and procedure which, if not resolved to the
satisfaction of KPMG, would have caused KPMG to make reference to the matter in
its reports.
Arthur Andersen was engaged by legal counsel to the Special Committee of the
Board of Directors in connection with the investigation of the previously
announced accounting irregularities at the Company.
Subsequent to the discontinuation of KPMG's services described above, KPMG
reissued their opinion on the Company's restated 1995 financial statements.
There has been no disagreements with Arthur Andersen LLP on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope and procedure, since they were engaged as independent accountants by the
Company.
48
<PAGE>
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of Position With Principal Occupation for Last Five Years
Director Age the Company and Directorships
- ---------------------- ------- ------------------------------- ------------------------------------------
<S> <C> <C> <C>
Dennis H. Chookaszian 55 Director since 1993 Chairman, Executive Committee of CNA
Financial. Chairman and Chief Executive
Officer of CNA Insurance Companies from
1992 until February, 1999. President and
Chief Operating Officer of CNA from 1990
to 1992. Vice President and Chief
Financial Officer of CNA prior to 1990.
Also a director of Loews Corporation.
William C. Croft 81 Director since 1989 Chairman of the Board, Clements National
Company (manufacturer of electrical
products). Also a director of Methode
Electronics, Inc.
Clifford R. Johnson 75 Director since 1989 Consultant since 1986, after retirement as
Executive Vice President, Jewel Companies,
Inc. and American Stores Properties, Inc.
(retail food and drug stores).
Andrew McNally IV 59 Director since 1989 Retired Chairman and Chief Executive
Officer of Rand McNally & Co. (printer and
publishing). Director of Rand McNally &
Co., Hubbell, Inc., Zenith Electronics
Corporation, Morgan Stanley Funds and Borg
Warner Security.
Bruce I. McPhee 54 Director since 1993 Vice Chairman of Kimball Homes, Inc. since
1993. President and Chief Executive
Officer of Banc One Illinois Corporation
from 1992 to 1993. President and Chief
Executive Officer of First Illinois
Corporation from 1989 to 1992. Also a
Director of A.J. Gerrard & Co.
Fred G. Steingraber 60 Director since 1993 Chief Executive Officer and Director, A.T.
Kearney, Inc. Also a Director of Maytag
Corporation, the Southeastern Thrift and
Bank Fund and Lawter International.
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C>
Philip J. Wicklander 60 Director since 1989 Chairman and Chief Executive Officer of
Wicklander Printing Corporation.
===========================================================================================================
</TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Position with the Company;
Principal Occupation
Name Age for Last Five Years
- ----------------------------------------- --------- ------------------------------------------------------------
<S> <C> <C>
William A. Brandt, Jr. 49 President and Chief Executive Officer of the Company since
February, 1997. Also President and Chief Executive Officer
of Development Specialists, Inc. ("DSI"), a firm
specializing in providing management, consulting and
turnaround assistance to reorganizing businesses, since
1978.
Fred C. Caruso 43 Acting Chief Operating Officer since 1997. Also a
consultant with DSI since 1982.
Patrick J. O'Malley 39 Acting Principal Financial and Accounting Officer since
1997. Also a consultant with DSI since 1991.
Edward G. Stautzenbach 60 Vice President, Marketing since 1991. Formerly Assistant
Vice President from 1988.
Steven G. Gould 42 Vice President Operations of the Company since July 1994.
Formerly Assistant Vice President/Regional Director of
Company and First Illinois Finance Company (the Company's
predecessor) from 1986.
George R. Carey 58 Vice President - Operations of the Company since June 1995.
Formerly Assistant Vice President/Regional Director of
Company from September 1992.
Sheila M. Tilson 48 Vice President - Operations and Assistant Secretary since
April 1995. Assistant Vice President Operations from
January 1987.
John N. Brincat, Jr. 38 Vice President - Operations of the Company since July 1994.
Formerly Assistant Vice President/Regional Director of
Company from 1991.
Michael Caul 55 Vice President - Operations of the Company since January,
1997. Formerly Vice President - Operations of General
Acceptance Corporation for two years. Prior thereto,
Assistant Vice President/Regional Director of the Company
since 1988.
David Joseph Peters 40 Vice President - Operations of the Company since March,
1997. Formerly Assistant Vice President/Regional Director
of the Company since 1993, and prior thereto, branch
manager since 1987.
</TABLE>
50
<PAGE>
Position With Company
Principal Occupation
Name of Age for Last Five Years
- ---------------------- ---- ------------------------------------------
Charles H. Lam 47 Vice President - Operations of the Company
since February, 1996. Formerly Assistant
Vice President/Regional Director of
Company from October 1990. Branch Manager
prior thereto.
Al Green 40 Vice President Insurance and Portfolio
Management since May, 1997. Prior thereto,
Regional Director/Assistant Vice President
of the Company since 1992.
- --------------------------------------------------------------------------------
51
<PAGE>
ITEM 11
EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table sets forth information regarding compensation paid by the
Company for services rendered in all capacities to the Company and its
subsidiaries by the Company's Chief Executive Officer and the other four most
highly compensated executive officers (the "Named Executive Officers") for the
1998, 1997 and 1996 fiscal years. Certain executive officers of the Company are
employed by Development Specialists, Inc. and are not included in the table
below. See "Item 13 - Certain Relationships and Related Transactions" for more
information regarding the relationship between the Company and Development
Specialists, Inc.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
------------ -------------------
Securities
Name and Principal Underlying All Other
Position Year Base Salary Bonus Options (#) Compensation(1)
- --------------------------------------- ------------ -------------- ------------ ------------------- -----------------------
<S> <C> <C> <C> <C> <C>
William A. Brandt, Jr. 1998 $750,000 $ 0 0 $ 0
President and Chief Executive Officer 1997 750,000 0 0 0
1996 - - - -
John N. Brincat, Jr. 1998 134,000 70,500 0 8,000
Vice President-Operations 1997 130,000 50,000 10,000 7,625
1996 118,385 20,000 20,000 7,304
Steven G. Gould 1998 136,000 45,500 0 3,129
Vice President-Operations 1997 132,000 27,500 10,000 7,745
1996 134,000 30,000 20,000 7,396
George R. Carey 1998 127,000 50,500 0 7,555
Vice President-Operations 1997 123,000 20,000 10,000 7,265
1996 117,000 20,000 20,000 7,027
Charles H. Lam 1998 134,000 38,000 0 8,340
Vice President-Operations 1997 130,000 45,000 10,000 7,624
1996 132,000 40,000 15,000 6,923
</TABLE>
(1) Represents the Company matching contribution to the 401K Plan.
OPTIONS GRANTED IN THE LAST FISCAL YEAR
No options were granted during 1998 to the Named Executive Officers.
52
<PAGE>
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR
AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised Unexercised In-the-Money
Shares Options at Year End Options at Year End
Acquired Value
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- -------- -------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William A. Brandt, Jr. 0 $0 0 - $0 $ -
John N. Brincat, Jr. 0 $0 117,079 - $0 $ -
Steven G. Gould 0 $0 26,666 - $0 $ -
George R. Carey 0 $0 49,166 - $0 $ -
Charles H. Lam 0 $0 21,666 - $0 $ -
</TABLE>
RETIREMENT PLAN
The Company has a defined benefit Retirement Plan (The "Retirement Plan")
covering eligible employees who are at least 21 years of age and have completed
at least 1 year of service. The amount of the Company's annual contribution to
the Retirement Plan is determined for the total of all participants covered by
such Retirement Plan, and the amount of payment in respect of a specified person
is not and cannot readily be separated or individually calculated by the regular
actuaries for the Retirement Plan. The remuneration covered by the Retirement
Plan ("pension based pay") is the highest average monthly total compensation for
any 5 consecutive years out of the employee's last 10 years of employment. The
normal retirement benefit at age 65 equals 70% of pension base pay minus 50% of
the participant's primary Social Security benefit. This amount is reduced by
1/35th for each year by which the participant has fewer than 35 years of
participation in the Retirement Plan. Benefits are also available to
participants who terminate employment before age 65 after completing 5 or more
years of service or due to total and permanent disability.
53
<PAGE>
The following table sets forth estimated annual benefits upon retirement,
payable on a straight life annuity basis, for employees in the specified pension
base pay (shown on an annual basis) and years of participation classifications,
and is based upon the assumption that the Retirement Plan will be continued and
that the employee will continue with the Company until his normal retirement age
of 65:
Number of Years of Participation
<TABLE>
Remuneration** 5 10 15 20 25 30 35
- ------------------ ------- ------- ------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 100,000 $ 8,930 $17,860 $26,790 $35,720 $44,650 $ 53,580 $ 62,510
$ 110,000 $ 9,930 $19,860 $29,790 $39,720 $49,650 $ 59,580 $ 69,510
$ 120,000 $10,930 $21,860 $32,790 $43,720 $54,650 $ 65,580 $ 76,510
$ 130,000 $11,930 $23,860 $35,790 $47,720 $59,650 $ 71,580 $ 83,510
$ 140,000 $12,930 $25,860 $38,790 $51,720 $64,650 $ 77,580 $ 90,510
$ 150,000 $13,930 $27,860 $41,790 $55,720 $69,650 $ 83,580 $ 97,510
$ 160,000 $14,930 $29,860 $44,790 $59,720 $74,650 $ 89,580 $ 104,510
$ 170,000 $15,930 $31,860 $47,790 $63,720 $79,650 $ 95,580 $ 111,510
$ 180,000 $16,930 $33,860 $50,790 $67,720 $84,650 $101,580 $ 118,510
$ 190,000 $17,930 $35,860 $53,790 $71,720 $89,650 $107,580 $ 25,510 *
$ 200,000 $18,930 $37,860 $56,790 $75,720 $94,650 $113,580 $ 32,510 *
</TABLE>
____________________
* The annual retirement benefits are subject to maximum limitations ($130,000
at December 31, 1998) under the Internal Revenue Code.
**The annual limit on remuneration for purposes of pension plan benefit
calculation was $160,000 at December 31, 1998 under the Internal Revenue Code.
The credited years of participation for the individuals named in the above
compensation table are as follows: John N. Brincat, Jr., 13 years; Steven G.
Gould, 14 years; George R. Carey, 8 years; and Charles H. Lam, 11 years. Mr.
Brandt does not participate in the Plan.
DIRECTOR COMPENSATION
The compensation of Directors is based upon standard fee arrangements for the
Company which provide for non-management directors' fees consisting of an annual
retainer of $3,000 payable quarterly, plus an attendance fee of $200 for each
board and committee meeting of the Company attended.
The Company has a Deferred Compensation Plan for Directors ("Deferred
Compensation Plan"). Pursuant to the provisions of the Deferred Compensation
Plan, any director of the Company may elect to defer all or any portion of the
compensation due him as a director. Interest shall be computed on and credited
to any deferred compensation at the prevailing market rate for 6 month
Individual Retirement Account Certificates of Deposit. The rate is adjusted on
January 1 and July 1 each year. Payments of the amount of deferred compensation
and interest earned thereon shall commence as of the first day in May after a
director ceases to be a director of the Company. Payment may be made in a lump
sum or in any number of installments (maximum of 5 annually), equal or
otherwise, as the Executive Committee shall determine. All directors elected to
defer their compensation beginning in 1997. All claims for such compensation
will be discharged on the Effective Date pursuant to the Plan.
EMPLOYMENT AGREEMENTS
In February, 1997, the Company entered into an employment agreement with Mr.
Brandt, President and Chief Executive Officer of Development Specialists, Inc.,
employing Mr. Brandt as President and Chief Executive Officer of the Company.
The annual salary under the employment contract is $750,000. The Company may
terminate the employment agreement with 90 days notice of termination or
immediately with continuation of compensation for 90 days. Mr. Brandt may
terminate the employment agreement with 30 days notice. Pursuant to an
amendment to
54
<PAGE>
Mr. Brandt's employment agreement, the Company will pay Mr. Brandt $1 million on
the Effective Date. See "Item 13 - Certain Relationships and Related
Transactions" for more information regarding the relationship between the
Company and Development Specialists, Inc.
Until the Plan's Effective Date, it is expected that William A. Brandt, Jr.,
Fred C. Caruso, Patrick J. O'Malley and the balance of the management team from
DSI will continue to provide for the management of the Company.
Mr. Brincat, the Company's former President and Chief Executive Officer,
resigned from both positions in February, 1997. Mr. Brincat also resigned as an
employee and director of Mercury effective as of December 1, 1997. Pursuant to
a separation agreement which was consummated in the first quarter of 1998, Mr.
Brincat returned $1 million of bonus compensation which he previously received
and waived rights to certain other benefits.
In 1998, the Company conducted an active search for a permanent Chief Executive
Officer and management team. In early November, the Company, with the consent
of the Creditors' Committee, selected Edward G. Harshfield to be the new
President and Chief Executive Officer of the Company upon confirmation and
effectiveness of the Plan. The Company is employing Mr. Harshfield as a
consultant until the Effective Date of the Plan. The terms of Mr. Harshfield's
consulting arrangement is set forth in the Consulting Agreement which is filed
as Exhibit 10AZ hereto.
55
<PAGE>
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based on information within the Company's possession including Schedules 13D and
13G filed with the Securities and Exchange Commission, as of December 31, 1998,
there were not any persons or entities known by the Company to be the beneficial
owner of more than five percent of the Company's voting securities.
The following table sets forth, with respect to the Company's Common Stock,
shares believed by the Company to be beneficially owned as of March 1, 1999 by
(i) all directors, (ii) the executive officers named in the Summary Compensation
Table, and (iii) the directors and all executive officers as a group. The
information is based on data within the Company's possession.
<TABLE>
<CAPTION>
Beneficial Shares Owned Unexercised
Before Exercisable Options Exercisable Percent
Stock Options (1) within 60 days Total of Class
--------------------------- ---------------------- -------------- --------------
<S> <C> <C> <C> <C>
DIRECTORS
Dennis H. Chookaszian........ 1,500 20,000 21,500 *
William C. Croft............. 660,363 20,000 680,363 *
Clifford R. Johnson(2)....... 573,037 31,602 604,639 *
Andrew McNally IV............ 375,968 20,000 395,968 *
Bruce I. McPhee.............. 303,259 20,000 323,259 *
Fred G. Steingraber.......... 6,000 20,000 26,000 *
Philip J. Wicklander(3)...... 217,790 20,000 237,790 *
OTHER EXECUTIVE OFFICERS:
William A. Brandt, Jr........ 0 0 0 0
John N. Brincat, Jr.......... 8,000 117,079 125,079 *
Steven G. Gould.............. 0 26,666 26,666 *
George R. Carey.............. 0 49,166 49,166 *
Charles H. Lam............... 0 21,666 21,666 *
Directors and Executive
Officers as a Group........ 2,151,422 583,925 2,735,347 1.6%
</TABLE>
____________________
*Less than one percent.
(1) Nature of beneficial ownership of securities is direct unless otherwise
indicated by footnote. Beneficial ownership as shown in the table arises
from sole voting power and sole investment power unless otherwise indicated
by footnote.
(2) Includes 216,984 shares held by Mr. Johnson's wife, as to which Mr. Johnson
disclaims beneficial interest.
(3) Does not include 1,500 shares held by minor children.
56
<PAGE>
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Item 11-Employment Agreements."
The Consulting firm of Development Specialists, Inc. ("DSI"), owned by William
A. Brandt, Jr., was engaged to fill certain positions of executive management
including Chief Operating Officer, Chief Financial and Accounting Officer and
Chief Credit Officer. In addition, DSI staff members have provided additional
support in the accounting and finance area. These services are being provided
based upon time spent performing such functions at the individuals' customary
hourly billing rates. For the year ended December 31, 1998, the Company paid
$2,788,707 of fees relating to services rendered by DSI. In addition, DSI was
paid $1.6 million in early 1999 which was accrued as of December 31, 1998.
57
<PAGE>
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Filed in this Annual Report on Form 10-K
- ---------------------------------------------------------------------
Report of Arthur Andersen LLP
Consolidated Balance Sheets as of December 31, 1998, and December 31, 1997.
Consolidated Statements of Income for the years ended December 31, 1998, 1997,
and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996.
Consolidated Statement of Cash Flows for the years ended December 31, 1998,
1997, and 1996.
Notes to Consolidated Financial Statements for the years ended December 31,
1998, 1997, and 1996.
Quarterly Financial Data (unaudited)
(a)(2) Financial Statement Schedules
- -------------------------------------
None
(a)(3) Exhibits
- ----------------
2 Mercury Finance Company's Second Amended Plan of Reorganization.
3A Certificate of Incorporation, as amended, incorporated herein by
reference to Exhibit Number 3A to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
3B Bylaws, incorporated herein by reference to Exhibit Number 3B to the
Company's Form 10 filed February 1, 1989.
10A 1989 Mercury Finance Company Stock Option Plan, incorporated herein by
reference to Exhibit Number 10A to the Company's Form 10 filed February
1, 1989.
10B Mercury Finance Company Employee Stock Purchase Plan, incorporated
herein by reference to Exhibit Number 10B to the Company's Form 10
filed February 1, 1989.
10C Mercury Finance Company Retirement Plan and Retirement Trust,
incorporated herein by reference to Exhibit Number 10C to the Company's
Form 10 filed February 1, 1989.
10D Mercury Finance Company Deferred Compensation Plan for Directors,
incorporated herein by reference to Exhibit Number 10D to the Company's
Form 10 filed February 1, 1989.
10E Mercury Finance Company Dividend Reinvestment Plan, incorporated herein
by reference to Exhibit Number 10E to the Company's Form 10 filed
February 1, 1989.
10F Form of Mercury Finance Company Commercial Paper Note, incorporated
herein by reference to Exhibit Number 10T to the Company's Form 10
filed February 1, 1989.
10G 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,
58
<PAGE>
incorporated herein by reference to Exhibit Number AM to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
10H 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,
incorporated herein by reference to Exhibit Number AF to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
10I Issuing and Paying Agent Agreement between Security Pacific National
Trust Company (New York) and Mercury Finance Company dated August 1,
1990, incorporated herein by reference to Exhibit 10I to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
10J Commercial Paper Dealer Agreement dated as of March 25, 1991, between
Mercury Finance Company and Paine Webber Inc., as successor to Kidder,
Peabody & Co, incorporated herein by reference to Exhibit Number 10J to
the Company Annual Report on Form 10-K for the year ended December 31,
1997.
10K Loan Agreement Dated October 30, 1991 Between Mercury Finance Company
and Allomon Funding Corporation (Uncommitted Credit Facility),
incorporated herein by reference to Exhibit Number AJ to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
10L Senior Note Agreement Dated March 1, 1992 Between Mercury Finance
Company and Principal Mutual Life Insurance Company, incorporated
herein by reference to Exhibit Number 10AK to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
10M Senior Note Agreement Dated May 1, 1992 Between Mercury Finance Company
and:
- Allstate Life Insurance Company
- State Mutual Life Assurance Company of America,
incorporated herein by reference to Exhibit Number 10AL to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
10N Senior Note Agreement Dated March 1, 1993 Between Mercury Finance
Company and Principal Mutual Life Insurance Company, incorporated
herein by reference to Exhibit Number 10AS to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
10O Purchase Agreement Dated April 1, 1993 Between Mercury Finance Company
and Independent Life Insurance Company, incorporated herein by
reference to Exhibit Number 10AR to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
10P Senior Note Agreement Dated July 1, 1993 Between Mercury Finance
Company and Pacific Mutual Life Insurance Company, incorporated herein
by reference to Exhibit Number 10AT to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
10Q 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,
59
<PAGE>
incorporated herein by reference to Exhibit Number 10AU to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1993.
10R Letter Agreement dated March 23, 1994, between NationsBanc Capital
Markets, Inc. and Mercury Finance Company, incorporated hereby by
reference to Exhibit 10S to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
10S Dealer Agreement dated as of October 24, 1994 between BA Securities,
Inc. and Mercury Finance Company, incorporated herein by reference to
Exhibit 10U to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
10T Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
Company and Norddeutsche Landesbank Girozentrale, incorporated herein
by reference to Exhibit Number 10AZ to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
10U Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
Company and The Long-Term Credit Bank of Japan, Ltd., incorporated
herein by reference to Exhibit Number 10BA to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
10V 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,
incorporated herein by reference to Exhibit Number 10BB to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
10W Senior Note Agreement Date October 3, 1995 Between Mercury Finance
Company and Bank of America Illinois, incorporated herein by reference
to Exhibit Number 10BC to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
10X Purchase Agreement Dated October 20, 1995 Between Mercury Finance
Company and ITT Corporation, incorporated herein by reference to
Exhibit Number 10BE to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
10Y Senior Note Agreement, dated as of April 5, 1996, as amended, among
Mercury Finance Company and the noteholders party thereto, incorporated
herein by reference to Exhibit 10AA to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
10Z Demand Promissory Note dated January 29, 1997, made by Mercury Finance
Company in favor of Bank of America Illinois, incorporated herein by
reference to Exhibit 10AB to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
60
<PAGE>
10AA Employment Agreement between Mercury Finance Company and William A.
Brandt, Jr. dated February 1, 1997, incorporated herein by reference
to Exhibit 10AC to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.*
10AB Form of Limited Waiver Agreement entered into between Mercury Finance
Company and senior noteholders on or about February 7, 1997,
incorporated herein by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K dated March 13, 1997.
10AC Limited Waiver Agreement entered into between Mercury Finance Company
and Paine Webber Inc. dated February 7, 1997 under Commercial Paper
Dealer Agreement, incorporated herein by reference to Exhibit 99.4 to
the Company's Current Report on Form 8-K dated March 13, 1997.
10AD Loan and Security Agreement (the "Loan Agreement"), dated as of
February 7, 1997 between Mercury Finance Company and all of its
subsidiaries, other than its insurance company subsidiaries and
BankAmerica Business Credit, Inc., incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
February 13, 1997.
10AE First Amendment to Loan Agreement dated February 14, 1997, between
Mercury Finance Company and BankAmerica Business Credit, Inc.,
incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated March 11, 1997.
10AF Rights Agreement dated as of February 27, 1997 between Mercury Finance
Company and Harris Trust and Savings Bank as Rights Agent, which
includes as Exhibit A the Forms of Rights Certificates, and as Exhibit
B the Form of Rights Summary, incorporated herein by reference to
Exhibit 1 to the Company's Form 8-A dated March 18, 1997.
10AG Form of Second Limited Waiver Agreement entered into between Mercury
Finance Company and senior noteholders on or about March 10, 1997,
incorporated herein by reference to Exhibit 99.3 to the Company's
Current Report on Form 8-K dated March 13, 1997.
10AH Limited Waiver Agreement entered into between Mercury Finance Company
and Paine Webber Inc. dated March 10, 1997 under Commercial Paper
Dealer Agreement, incorporated herein by reference to Exhibit 99.5 to
the Company's Current Report on Form 8-K dated March 13, 1997.
10AI Second Amendment to Loan Agreement dated March 12, 1997, between
Mercury Finance Company and BankAmerica Business Credit, Inc.,
incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated March 13, 1997.
10AJ Form of Limited Waiver Agreement entered into between Mercury Finance
Company and Credit Suisse First Boston Corporation, holder of Mercury
commercial paper dated on or about February 7, 1997, incorporated
herein by reference to Exhibit 99.6 to the Company's Current Report on
Form 8-K dated March 13, 1997.
10AK Limited Waiver Agreement entered into between Mercury Finance Company
and Credit Suisse First Boston Corporation, holder of Mercury
commercial paper dated as of March 10, 1997, incorporated herein by
reference to Exhibit 99.7 to the Company's Current Report on Form 8-K
dated March 13, 1997.
10AL Limited Waiver Agreement entered into between Mercury Finance Company
and Credit Suisse First Boston Corporation, holder of Mercury
Subordinated Notes dated as of March 10, 1997, incorporated herein by
reference to Exhibit 99.8 to the Company's Current Report on Form 8-K
dated March 13, 1997.
_________________
* Management Contract.
61
<PAGE>
10AM Letter Agreement of Mercury Finance Company to the Paying Agent and
Holders of Commercial Paper of Mercury Finance Company dated March 12,
1997, incorporated herein by reference to Exhibit 99.9 to the
Company's Current Report on Form 8-K dated March 13, 1997.
10AN Stock Purchase Agreement between Mercury Finance Company and Frontier
Insurance Group, Inc. dated March 28, 1997, incorporated herein by
reference to Exhibit 99.2 to the Company's Current Report on Form 8-K
dated March 28, 1997.
10AO Forbearance Agreement dated as of July 11, 1997, between Mercury
Finance Company and the persons listed on the signature pages thereto,
incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated July 16, 1997.
10AP Forbearance Agreement dated as of July 11, 1997, between Mercury
Finance Company and the persons listed on the signature pages thereto,
incorporated herein by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K dated July 16, 1997.
10AQ Forbearance and Third Limited Waiver Agreement dated as of July 11,
1997, between Mercury Finance Company and Credit Suisse First Boston
Management Corporation, incorporated herein by reference to Exhibit
99.3 to the Company's Current Report on Form 8-K dated July 16, 1997.
10AR Third Amendment to Loan and Security Agreement dated as of July 9,
1997, among certain financial institutions, BankAmerica Business
Credit, Inc., Mercury Finance Company, and certain other borrowers,
incorporated herein by reference to Exhibit 99.4 to the Company's
Current Report on Form 8-K dated July 16, 1997.
10AS First Amendment to Forbearance Agreement dated as of November 6, 1997
between the Company and certain lenders, incorporated herein by
reference to Exhibit 99.3 to the Company's Current Report on Form 8-K
dated November 6, 1997.
10AT Fourth Limited Waiver Agreement dated as of November 6, 1997 between
the Company and certain lenders, incorporated herein by reference to
Exhibit 99.4 to the Company's Current Report on Form 8-K dated
November 6, 1997.
10AU Fourth Limited Waiver Agreement dated as of November 6, 1997 between
the Company and Credit Suisse First Boston Management, incorporated
herein by reference to Exhibit 99.5 to the Company's Current Report on
Form 8-K dated November 6, 1997.
10AV Fourth Limited Waiver Agreement dated as of November 6, 1997 between
the Company and Painewebber, Inc., incorporated herein by reference to
Exhibit 99.6 to the Company's Current Report on Form 8-K dated
November 6, 1997.
10AW Forbearance and Fourth Limited Waiver Agreement dated as of November
6, 1997 between the Company and Credit Suisse First Boston Management
Corporation, incorporated herein by reference to Exhibit 99.7 to the
Company's Current Report on Form 8-K dated November 6, 1997.
10AX Separation Agreement between the Company and John N. Brincat dated
December 30, 1997, incorporated herein by reference to Exhibit 10AZ to
the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
10AY Retention and Letter of Engagement between the Company and Development
Specialists, Inc. dated February 5, 1997, incorporated herein by
reference to Exhibit BA to the Company's Annual Report on form 10-K
for the year ended December 31, 1997.
10AZ Consulting Agreement dated November 5, 1998 between the Company and
Edward G. Harshfield.
62
<PAGE>
10BA First Amendment to Retention and Letter of Engagement of Development
Specialists, Inc. dated as of July 14, 1998, between the Company and
DSI.
10BB First Amendment to Employment Agreement dated July 14, 1998, between
the Company and William A. Brandt, Jr.
10BC Retention Agreement dated July 14, 1998 by and among DSI and certain
subsidiaries of the Company.
11 Computation of Net Income Per Share
12 Ratio of Earnings to Fixed Charges
16 Letter dated February 25, 1997, from KPMG Peat Marwick LLP to the
Securities and Exchange Commission, incorporated herein by reference
to Exhibit 16 to the Company's Current Report on Form 8-K dated
February 25, 1997.
21 Subsidiaries of Mercury Finance Company
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
- ------------------------
The Company filed the following Current Reports on Form 8-K during the fourth
quarter of 1998:
(i) Item 5 and Item 7 8-K dated November 24, 1998; and
(ii) Item 5 and Item 7 8-K dated December 29, 1998.
63
<PAGE>
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)
Date: March 19, 1999
By:/s/ William A. Brandt, Jr.
--------------------------------------------
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 persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ William A. Brandt, Jr. March 19, 1999
- --------------------------
William A. Brandt, Jr.
President and Chief Executive Officer
/s/ Patrick J. O'Malley March 19, 1999
- -----------------------
Patrick J. O'Malley
Principal Financial and Accounting Officer
/s/ Dennis H. Chookaszian Director March 19, 1999
- -------------------------
Dennis H. Chookaszian
/s/ William C. Croft Director March 19, 1999
- --------------------
William C. Croft
/s/ Clifford R. Johnson Director March 14, 1999
- -----------------------
Clifford R. Johnson
/s/ Andrew McNally IV Director March 19, 1999
- ---------------------
Andrew McNally IV
/s/ Bruce I. McPhee Director March 16, 1999
- -------------------
Bruce I. McPhee
/s/ Fred G. Steingraber Director March 19, 1999
- -----------------------
Fred G. Steingraber
/s/ Philip J. Wicklander Director March 19, 1999
- ------------------------
Philip J. Wicklander
</TABLE>
64
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2 Mercury Finance Company's Second Amended Plan of Reorganization.
3A Certificate of Incorporation, as amended, incorporated herein by
reference to Exhibit 3A to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
3B Bylaws, incorporated herein by reference to Exhibit Number 3B to the
Company's Form 10 filed February 1, 1989.
10A 1989 Mercury Finance Company Stock Option Plan, incorporated herein by
reference to Exhibit Number 10A to the Company's Form 10 filed
February 1, 1989.
10B Mercury Finance Company Employee Stock Purchase Plan, incorporated
herein by reference to Exhibit Number 10B to the Company's Form 10
filed February 1, 1989.
10C Mercury Finance Company Retirement Plan and Retirement Trust,
incorporated herein by reference to Exhibit Number 10C to the
Company's Form 10 filed February 1, 1989.
10D Mercury Finance Company Deferred Compensation Plan for Directors,
incorporated herein by reference to Exhibit Number 10D to the
Company's Form 10 filed February 1, 1989.
10E Mercury Finance Company Dividend Reinvestment Plan, incorporated
herein by reference to Exhibit Number 10E to the Company's Form 10
filed February 1, 1989.
10F Form of Mercury Finance Company Commercial Paper Note, incorporated
herein by reference to Exhibit Number 10T to the Company's Form 10
filed February 1, 1989.
10G 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,
incorporated herein by reference to Exhibit Number AM to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989.
10H 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,
incorporated herein by reference to Exhibit Number AF to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990.
10I Issuing and Paying Agent Agreement between Security Pacific National
Trust Company (New York) and Mercury Finance Company dated August 1,
1990, incorporated herein by reference to Exhibit 10I to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
10J Commercial Paper Dealer Agreement dated as of March 25, 1991, between
Mercury Finance Company and Paine Webber Inc., as successor to Kidder,
Peabody & Co., incorporated herein by reference to Exhibit 10J to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
65
<PAGE>
10K Loan Agreement Dated October 30, 1991 Between Mercury Finance Company
and Allomon Funding Corporation (Uncommitted Credit Facility),
incorporated herein by reference to Exhibit Number AJ to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
10L Senior Note Agreement Dated March 1, 1992 Between Mercury Finance
Company and Principal Mutual Life Insurance Company, incorporated
herein by reference to Exhibit Number 10AK to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
10M Senior Note Agreement Dated May 1, 1992 Between Mercury Finance
Company and:
- Allstate Life Insurance Company
- State Mutual Life Assurance Company of America,
incorporated herein by reference to Exhibit Number 10AL to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.
10N Senior Note Agreement Dated March 1, 1993 Between Mercury Finance
Company and Principal Mutual Life Insurance Company, incorporated
herein by reference to Exhibit Number 10AS to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
10O Purchase Agreement Dated April 1, 1993 Between Mercury Finance Company
and Independent Life Insurance Company, incorporated herein by
reference to Exhibit Number 10AR to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
10P Senior Note Agreement Dated July 1, 1993 Between Mercury Finance
Company and Pacific Mutual Life Insurance Company, incorporated herein
by reference to Exhibit Number 10AT to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
10Q 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,
incorporated herein by reference to Exhibit Number 10AU to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
10R Letter Agreement dated March 23, 1994, between NationsBanc Capital
Markets, Inc. and Mercury Finance Company, incorporated herein by
reference to Exhibit 10S to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
10S Dealer Agreement dated as of October 24, 1994 between BA Securities,
Inc. and Mercury Finance Company, incorporated herein by reference to
Exhibit 10U to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
10T Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
Company and Norddeutsche Landesbank Girozentrale, incorporated herein
by reference to Exhibit Number 10AZ to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
10U Senior Note Agreement Dated December 15, 1994 Between Mercury Finance
Company and The Long-Term Credit Bank of Japan, Ltd., incorporated
herein by reference to Exhibit Number 10BA to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
10V Senior Note Agreement Dated June 29, 1995 Between Mercury Finance
Company and:
66
<PAGE>
- 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,
incorporated herein by reference to Exhibit Number 10BB to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
10W Senior Note Agreement Date October 3, 1995 Between Mercury Finance
Company and Bank of America Illinois, incorporated herein by reference
to Exhibit Number 10BC to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
10X Purchase Agreement Dated October 20, 1995 Between Mercury Finance
Company and ITT Corporation, incorporated herein by reference to
Exhibit Number 10BE to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
10Y Senior Note Agreement, dated as of April 5, 1996, as amended, among
Mercury Finance Company and the noteholders party thereto,
incorporated herein by reference to Exhibit 10AA to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
10Z Demand Promissory Note dated January 29, 1997, made by Mercury Finance
Company in favor of Bank of America Illinois, incorporated herein by
reference to Exhibit 10AB to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
10AA Employment Agreement between Mercury Finance Company and William A.
Brandt, Jr. dated February 1, 1997, incorporated herein by reference
to Exhibit 10AC to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
10AB Form of Limited Waiver Agreement entered into between Mercury Finance
Company and senior noteholders on or about February 7, 1997,
incorporated herein by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K dated March 13, 1997.
10AC Limited Waiver Agreement entered into between Mercury Finance Company
and Paine Webber Inc. dated February 7, 1997 under Commercial Paper
Dealer Agreement, incorporated herein by reference to Exhibit 99.4 to
the Company's Current Report on Form 8-K dated March 13, 1997.
10AD Loan and Security Agreement (the "Loan Agreement"), dated as of
February 7, 1997 between Mercury Finance Company and all of its
subsidiaries, other than its insurance company subsidiaries and
BankAmerica Business Credit, Inc., incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
February 13, 1997.
10AE First Amendment to Loan Agreement dated February 14, 1997, between
Mercury Finance Company and BankAmerica Business Credit, Inc.,
incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated March 11, 1997.
67
<PAGE>
10AF Rights Agreement dated as of February 27, 1997 between Mercury Finance
Company and Harris Trust and Savings Bank as Rights Agent, which
includes as Exhibit A the Forms of Rights Certificates, and as Exhibit
B the Form of Rights Summary, incorporated herein by reference to
Exhibit 1 to the Company's Form 8-A dated March 18, 1997.
10AG Form of Second Limited Waiver Agreement entered into between Mercury
Finance Company and senior noteholders on or about March 10, 1997,
incorporated herein by reference to Exhibit 99.3 to the Company's
Current Report on Form 8-K dated March 13, 1997.
10AH Limited Waiver Agreement entered into between Mercury Finance Company
and Paine Webber Inc. dated March 10, 1997 under Commercial Paper
Dealer Agreement, incorporated herein by reference to Exhibit 99.5 to
the Company's Current Report on Form 8-K dated March 13, 1997.
10AI Second Amendment to Loan Agreement dated March 12, 1997, between
Mercury Finance Company and BankAmerica Business Credit, Inc.,
incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated March 13, 1997.
10AJ Form of Limited Waiver Agreement entered into between Mercury Finance
Company and Credit Suisse First Boston Corporation, holder of Mercury
commercial paper dated on or about February 7, 1997, incorporated
herein by reference to Exhibit 99.6 to the Company's Current Report on
Form 8-K dated March 13, 1997.
10AK Limited Waiver Agreement entered into between Mercury Finance Company
and Credit Suisse First Boston Corporation, holder of Mercury
commercial paper dated as of March 10, 1997, incorporated herein by
reference to Exhibit 99.7 to the Company's Current Report on Form 8-K
dated March 13, 1997.
10AL Limited Waiver Agreement entered into between Mercury Finance Company
and Credit Suisse First Boston Corporation, holder of Mercury
Subordinated Notes dated as of March 10, 1997, incorporated herein by
reference to Exhibit 99.8 to the Company's Current Report on Form 8-K
dated March 13, 1997.
10AM Letter Agreement of Mercury Finance Company to the Paying Agent and
Holders of Commercial Paper of Mercury Finance Company dated March 12,
1997, incorporated herein by reference to Exhibit 99.9 to the
Company's Current Report on Form 8-K dated March 13, 1997.
10AN Stock Purchase Agreement between Mercury Finance Company and Frontier
Insurance Group, Inc. dated March 28, 1997, incorporated herein by
reference to Exhibit 99.2 to the Company's Current Report on Form 8-K
dated March 28, 1997.
10AO Forbearance Agreement dated as of July 11, 1997, between Mercury
Finance Company and the persons listed on the signature pages thereto,
incorporated herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated July 16, 1997.
10AP Forbearance Agreement dated as of July 11, 1997, between Mercury
Finance Company and the persons listed on the signature pages thereto,
incorporated herein by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K dated July 16, 1997.
10AQ Forbearance and Third Limited Waiver Agreement dated as of July 11,
1997, between Mercury Finance Company and Credit Suisse First Boston
Management Corporation, incorporated herein by reference to Exhibit
99.3 to the Company's Current Report on Form 8-K dated July 16, 1997.
10AR Third Amendment to Loan and Security Agreement dated as of July 9,
1997, among certain financial institutions, BankAmerica Business
Credit, Inc., Mercury Finance Company, and certain other borrowers,
incorporated herein by reference to Exhibit 99.4 to the Company's
Current Report on Form 8-K dated July 16, 1997.
68
<PAGE>
10AS First Amendment to Forbearance Agreement dated as of November 6, 1997
between the Company and certain lenders, incorporated herein by
reference to Exhibit 99.3 to the Company's Current Report on Form 8-K
dated November 6, 1997.
10AT Fourth Limited Waiver Agreement dated as of November 6, 1997 between
the Company and certain lenders, incorporated herein by reference to
Exhibit 99.4 to the Company's Current Report on Form 8-K dated
November 6, 1997.
10AU Fourth Limited Waiver Agreement dated as of November 6, 1997 between
the Company and Credit Suisse First Boston Management, incorporated
herein by reference to Exhibit 99.5 to the Company's Current Report on
Form 8-K dated November 6, 1997.
10AV Fourth Limited Waiver Agreement dated as of November 6, 1997 between
the Company and Painewebber, Inc., incorporated herein by reference to
Exhibit 99.6 to the Company's Current Report on Form 8-K dated
November 6, 1997.
10AW Forbearance and Fourth Limited Waiver Agreement dated as of November
6, 1997 between the Company and Credit Suisse First Boston Management
Corporation, incorporated herein by reference to Exhibit 99.7 to the
Company's Current Report on Form 8-K dated November 6, 1997.
10AX Separation Agreement between the Company and John N. Brincat dated
December 30, 1997, incorporated herein by reference to Exhibit 10AZ to
the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
10AY Retention and Letter of Engagement between the Company and Development
Specialists, Inc. dated February 5, 1997, incorporated herein by
reference to Exhibit 10BA to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
10AZ Consulting Agreement dated November 5, 1998, between the Company and
Edward G. Harshfield.
10BA First Amendment to Retention and Letter of Engagement of Development
Specialists, Inc. dated as of July 14, 1998, between the Company and
DSI.
10BB First Amendment to Employment Agreement dated July 14, 1998, between
the Company and William A. Brandt, Jr.
10BC Retention Agreement dated July 14, 1998 by and among DSI and certain
subsidiaries of the Company.
11 Computation of Net Income Per Share
12 Ratio of Earnings to Fixed Charges
16 Letter dated February 25, 1997, from KPMG Peat Marwick LLP to the
Securities and Exchange Commission, incorporated herein by reference
to Exhibit 16 to the Company's Current Report on Form 8-K dated
February 25, 1997.
21 Subsidiaries of Mercury Finance Company
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
69
<PAGE>
EXHIBIT 2
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In re: )
)
MERCURY FINANCE COMPANY, ) Case No. 98 B 20763
)
a Delaware corporation, ) Chapter 11
)
Debtor. ) Honorable Erwin I. Katz
SECOND AMENDED PLAN OF REORGANIZATION
OF
MERCURY FINANCE COMPANY
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
<PAGE>
INTRODUCTION
MERCURY FINANCE COMPANY, A DELAWARE CORPORATION ("MERCURY" OR THE
"DEBTOR"), PROPOSES THE FOLLOWING PLAN OF REORGANIZATION (THE "PLAN") FOR THE
RESOLUTION OF ALL CLAIMS AGAINST AND EQUITY INTERESTS IN THE DEBTOR. REFERENCE
IS MADE TO THE DEBTOR'S DISCLOSURE STATEMENT FILED CONTEMPORANEOUSLY WITH THE
PLAN (THE "DISCLOSURE STATEMENT"), FOR A DISCUSSION OF THE DEBTOR'S HISTORY,
BUSINESSES, PROPERTIES, RESULTS OF OPERATIONS AND PROJECTIONS FOR FUTURE
OPERATIONS, AND FOR A SUMMARY AND ANALYSIS OF THE PLAN AND CERTAIN RELATED
MATTERS. THE DEBTOR IS THE PROPONENT OF THE PLAN WITHIN THE MEANING OF SECTION
1129 OF THE BANKRUPTCY CODE, 11 U.S.C. (S) 1129. ALL HOLDERS OF CLAIMS AGAINST
AND INTERESTS IN THE DEBTOR ENTITLED TO VOTE ON THE PLAN ARE ENCOURAGED TO READ
THE PLAN AND THE DISCLOSURE STATEMENT IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT
OR REJECT THE PLAN. SUBJECT TO CERTAIN RESTRICTIONS AND REQUIREMENTS SET FORTH
IN THE PLAN, THE DEBTOR RESERVES THE RIGHT TO ALTER, AMEND, MODIFY, REVOKE OR
WITHDRAW THE PLAN PRIOR TO ITS CONSUMMATION.
ARTICLE I
DEFINITIONS, RULES OF INTERPRETATION,
COMPUTATION OF TIME AND GOVERNING LAW
A. DEFINITIONS.
Certain capitalized terms used throughout the Plan are defined in this
Article I. Other capitalized terms found in the Plan shall have the meaning
ascribed to such terms in the Bankruptcy Code or the Bankruptcy Rules (and shall
be construed in accordance with the rules of construction thereunder).
ADMINISTRATIVE CLAIM means a Claim for payment of an administrative expense
of a kind specified in section 503(b) of the Bankruptcy Code and referred to in
section 507(a)(1) of the Bankruptcy Code, including, without limitation, the
actual, necessary costs and expenses incurred after the Petition Date of
preserving the Estate and operating the business of the Debtor, including wages,
salaries or commissions for services, compensation for legal, financial
advisory, accounting and other services and reimbursement of expenses awarded or
allowed under sections 330(a) or 331 of the Bankruptcy Code, and all fees and
charges assessed against the Estate under chapter 123 of title 28, United States
Code.
ALLOWED ADMINISTRATIVE CLAIM means all or that portion of an Administrative
Claim which either (a) has been allowed by a Final Order as an Administrative
Claim, or (b) was incurred by the Debtor in the ordinary course of business
during its Reorganization Case and is determined to be due, owing, valid and
enforceable by the Debtor.
ALLOWED CLAIM or ALLOWED UNSECURED CLAIM means that portion of any Claim,
other than an Administrative Claim, (a) as to which (x) no proof of claim has
been filed with the Court and (y) the liquidated and noncontingent amount of
which is scheduled by the Debtor pursuant to the Bankruptcy Code as undisputed,
or (b) as to which a proof of claim has been timely filed in a liquidated amount
with the Court pursuant to the Bankruptcy Code or any order of the Court, or
late filed with leave of the Court after notice and a hearing, provided that (x)
no objection to the allowance of such Claim or motion to expunge such claim has
been interposed before any final date for the filing of such objections or
motions set forth in the Confirmation Order or other Court order or (y) if such
objection or motion has been filed, such objection or motion has been overruled
by a Final Order (but only to the extent such objection or motion has been
overruled), or (c) as to which a Final Order has been entered allowing such
Claim; except with respect to Claims in Class 7B which shall be liquidated and
allowed in accordance with the procedures substantially similar to those set
forth in Exhibit U attached to the Disclosure Statement.
ALLOWED CLASS 7B CLAIM means a Class 7B Claim which is allowed in
accordance with the consensual allowance or arbitration procedures set forth in
Section 8.15 and in the Class 7B Liquidating Trust.
Allowed Equity Interest means an Equity Interest that is of record as of
the Distribution Record Date in a stock register that is maintained by or on
behalf of the Debtor.
<PAGE>
ALLOWED INDEMNIFICATION CLAIM means an Indemnification Claim (a) as to
which (x) no proof of claim has been filed with the Court and (y) the liquidated
and noncontingent amount of which is scheduled by the Debtor pursuant to the
Bankruptcy Code as undisputed, or (b) as to which a proof of claim has been
timely filed in a liquidated amount with the Court pursuant to the Bankruptcy
Code or any order of the Court, or late filed with leave of the Court after
notice and a hearing, provided that (x) no objection to the allowance of such
Claim or motion to expunge such claim has been interposed before any final date
for the filing of such objections or motions set forth in the Confirmation Order
or other Court order or (y) if such objection or motion has been filed, such
objection or motion has been overruled by a Final Order (but only to the extent
such objection or motion has been overruled), or (c) which has been assumed by
the Debtor, including, but not limited to, claims against the Reliance Policies.
AMENDED AND RESTATED BY-LAWS means the Amended and Restated By-laws of the
Reorganized Debtor which shall be substantially in the form set forth in Exhibit
I attached to the Disclosure Statement.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION means the Amended and
Restated Certificate of Incorporation of the Reorganized Debtor which shall be
substantially in the form set forth in Exhibit I attached to the Disclosure
Statement.
Ballots means the ballots accompanying the Disclosure Statement upon which
holders of Impaired Claims or Impaired Interests entitled to vote on the Plan
shall indicate their acceptance or rejection of the Plan in accordance with the
instructions regarding voting.
Bankruptcy Code means title 11 of the United States Code, as now in effect
or hereafter amended.
BANKRUPTCY RULES means, collectively, the Federal Rules of Bankruptcy
Procedure, as amended, promulgated under 28 U.S.C. (S) 2015 and the general and
local rules of the Court, as applicable from time to time in the Reorganization
Case.
Bar Date means the bar date for Filing proofs of claim against the Debtor
as established by order of the Court.
Beneficial Holder means the entity holding the beneficial interest in a
Claim or Interest.
BENEFICIARIES means the holders of Allowed Indemnification Claims other
than the estate of James A. Doyle and John N. Brincat.
BENEFITS CLAIM means any Unsecured Claim against the Debtor arising from or
with respect to any benefits plan, but excluding any Claim alleged in or arising
from the facts and circumstances alleged in the action styled as Ferre v.
--------
Mercury Finance Company, et al., No. 97C 5245 (N.D. Ill.).
- ----------------------- ------
Business Day means any day except a Saturday, Sunday or "legal holiday" (as
defined in Bankruptcy Rule 9006(a)).
CAPITAL EXPENDITURE RESERVE means an amount to be agreed upon between the
Debtor and the Creditors' Committee.
Cash means cash and cash equivalents.
Claim means a claim against the Debtor, whether asserted or not asserted,
as defined in section 101(5) of the Bankruptcy Code.
Class means a category of holders of Claims or Interests as defined in
Article III of the Plan.
CLASS 7B BAR DATE means the date set forth in Section 6.01(a) of the Class
7B Liquidating Trust Agreement which is the bar date for filing requests for
allowance against the Debtors in order for such Requests to be considered in the
allocation/allowance procedure under the Class 7B Liquidating Trust Agreement.
-2-
<PAGE>
CLASS 7B LIQUIDATING TRUST means the trust established under section 8.15
of the Plan and governed by to the Class 7B Liquidating Trust Agreement.
CLASS 7B LIQUIDATING TRUST AGREEMENT means the Class 7B Liquidating Trust
Agreement in substantially the form set forth in Exhibit U to the Disclosure
Statement.
COMPANY KPMG CLAIMS means all of the Debtor's, the Estate's and the
Reorganized Debtor's rights, title, and interests in and to any and all of their
respective claims against KPMG Peat Marwick, including without limitation those
relating to, arising from, or on account of: (a) the announcement on January 29,
1997 that the Debtor would restate its earnings for certain periods as a result
of accounting irregularities, (b) such accounting irregularities, and (c) the
actions or non-action of KPMG Peat Marwick with respect to the foregoing or with
respect to its role as auditor of and provider of other services, including
accounting, to the Debtor prior to and at the time of the announcement of the
accounting irregularities, together with complete and exclusive control of the
prosecution and/or settlement of all such clams against KPMG Peat Marwick and
the sole right to prosecute the same on behalf of and in the name of the Debtor,
the Reorganized Debtor and the Estate, subject, in each such case, to any
defenses, rights of setoff, or counterclaims that KPMG Peat Marwick may have or
be entitled to assert against the Debtor in respect of such claims.
CONFIRMATION DATE means the date on which the Court enters the Confirmation
Order on its docket, within the meaning of Bankruptcy Rules 5003 and 9021.
CONFIRMATION ORDER means the order of the Court confirming the Plan
pursuant to section 1129 of the Bankruptcy Code.
CONSENT AGREEMENT means the agreement dated May 14, 1998 and attached as
Exhibit L to the Disclosure Statement.
CONSUMER LITIGATION CLAIMS means all claims against the Debtor incurred in
the ordinary course of business which are asserted under lawsuits or complaints
and are pending as of the commencement of the Reorganization Case in state or
federal court set forth in Exhibit 1 attached to the Plan, excluding the
Securities Fraud Claims and derivative actions pending against the Debtor set
forth in Exhibit 2 attached to the Plan.
CONSUMMATION means the occurrence of the Effective Date.
CORPORATE INDEMNITIES means any obligations of the Debtor, pursuant to its
corporate charter and by-laws or agreements entered into any time prior to the
Effective Date, to indemnify directors, officers, agents and/or employees with
respect to all present and future actions, suits and proceedings against the
Debtor or such directors, officers, agents and/or employees, based upon any act
or omission related to service with, or for or on behalf of the Debtor.
COURT means the United States Bankruptcy Court for the Northern District of
Illinois and, to the extent it may exercise jurisdiction in the Reorganization
Case, the United States District Court for the Northern District of Illinois, or
if either such Court ceases to exercise jurisdiction over the Reorganization
Case, such other court that exercises jurisdiction over the Reorganization Case.
CREDITORS' COMMITTEE means the Official Creditors' Committee appointed
pursuant to section 1102 of the Bankruptcy Code in the Reorganization Case.
D&O COMPANY RELEASE means release and waiver of (i) any and all claims
against the Debtor and Reorganized Debtor for indemnification or contribution
arising under any contract, arrangement or statute in excess of the amounts set
forth in Section 12.03 and (ii) interests of the Beneficiaries in the Debtor and
the Reorganized Debtor.
DEBTOR means Mercury Finance Company.
-3-
<PAGE>
DELAWARE GENERAL CORPORATION LAW means title 8 of the Delaware Code, as now
in effect or hereafter amended.
DISCLOSURE STATEMENT means the Debtor's Disclosure Statement Filed with the
Court on July 15, 1998, as it may be amended, modified or supplemented (and all
exhibits or schedules annexed thereto or referenced therein), which relates to
the Plan and which has been prepared and distributed in accordance with sections
1125 and 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018.
DISTRIBUTION RECORD DATE means the Business Day immediately preceding the
Confirmation Date.
DIVIDEND CLAIMS means any and all Claims relating to the Old Common Stock
for declared but unpaid dividends or rights.
EFFECTIVE DATE means a date selected by the Debtor that is no more than ten
Business Days following the date on which all conditions to the Effective Date
set forth in Section 10.02 have been satisfied or, if capable of being waived,
duly and expressly waived.
EMPLOYMENT AGREEMENT means the Employment Agreement, dated as of the
Effective Date by and between the Reorganized Debtor and Edward Harshfield.
ENTITY means an entity as defined in section 101(15) of the Bankruptcy
Code.
EQUITY HOLDERS' COMMITTEE means the Official Committee of Equity Holders
appointed by the Court.
EQUITY INTERESTS means the rights of holders of Old Common Stock, including
redemption rights, and liquidation preferences.
ESTATE means the estate created for the Debtor in its Reorganization Case
pursuant to section 541 of the Bankruptcy Code.
EXCESS CASH means, as of the day immediately preceding the Effective Date,
the ending book cash balance of the Debtor on a fully consolidated basis, which
cash shall include overnight investments, cash, corporate accounts, credit card
cash, and branch cash including cash of Midland (but only to the extent such
branch cash in the aggregate exceeds $3,000,000) minus the sum of (a)
-----
$20,000,000 or such greater amount to be agreed to by the Debtor and the
Creditors' Committee, (b) the Interest Reserve, (c) the Capital Expenditure
Reserve, (d) the Professional Fee Reserve, (e) the Signing Bonus and (f) the
aggregate amount of cash to be distributed under the Plan to all Classes other
than to Class 4.
EXCHANGE ACT means the Securities and Exchange Act of 1934, as amended.
EXCHANGE AGENT means an entity to be designated by the Debtor not less than
ten days prior to the hearing on confirmation of the Plan.
EXPIRATION DATE means 5:00 p.m. eastern standard time on February 12, 1999,
the date fixed by the Court after which Ballots with respect to the Plan may no
longer be accepted by the Debtor without leave of Court.
FILE, FILED OR FILING means file, filed or filing with the Court in the
Reorganization Case.
FINAL ORDER means an order of the Court (a) as to which the time to appeal,
petition for certiorari, or move for reargument, rehearing or new trial has
expired and as to which no appeal, petition for certiorari, or other proceedings
for reargument, rehearing or new trial shall then be pending; (b) as to which
any right to appeal, petition for certiorari, reargue, rehear or retry shall
have been waived in writing in form and substance satisfactory to the Debtor; or
(c) in the event that an appeal, writ of certiorari, reargument, rehearing or
new trial has been sought, as to which (i) such order of the Bankruptcy Court
shall have been affirmed by the highest court to which such order was appealed;
(ii) certiorari has been denied as to such order; or (iii) reargument or
rehearing or new trial from such
-4-
<PAGE>
order shall have been denied, and the time to take any further appeal, petition
for certiorari or move for reargument, rehearing or new trial shall have expired
without such actions have been taken.
IMPAIRED means when used with reference to a Claim or Interest, a Claim or
Interest that is impaired within the meaning of section 1124 of the Bankruptcy
Code.
INDEMNIFICATION CLAIMS means all Claims, if any, as to which the claimant
asserts rights based upon Corporate Indemnities.
INDEMNIFICATION SETTLEMENT FUND means a fund of $13 million (such amount to
be deducted from the ending book cash balance of the Debtor on a consolidated
basis) for the benefit of the Beneficiaries.
INTERESTS means Equity Interests and Old Options.
INTEREST RESERVE means an amount in cash equal to the aggregate amount of
interest accrued on the New Senior Secured Notes and the New Junior Subordinated
Notes prior to the Effective Date.
LETTER OF TRANSMITTAL means the documentation required to be provided to
the Exchange Agent as set forth in Sections 6.04 and 6.05 of the Plan.
MERCURY means Mercury Finance Company, a Delaware corporation.
NET SENIOR DEBT CLAIM means with respect to any holder of Senior Debt (i)
the Allowed Senior Debt Claim of such holder, less (ii) such holder's pro rata
share of the Excess Cash distributed to Class 4 pursuant to the Plan.
NEW COLLATERAL DOCUMENTS means the Company Security Agreement, Company
Pledge Agreement, Subsidiaries Guaranty Agreement, Subsidiaries Security
Agreement, each substantially in the form of the Group Exhibit D attached to the
Disclosure Statement.
NEW COMMON STOCK means the 25,000,000 shares of Common Stock par value
$0.01 per share of the Reorganized Debtor authorized pursuant to the Amended and
Restated Certificate of Incorporation, 10,000,000 shares of which are to be
issued and distributed in accordance with the Plan constituting 100% of the
total number of shares of such Common Stock to be issued and outstanding
immediately after the Effective Date.
NEW INDENTURES means the New Senior Secured Note Indenture and the New
Junior Subordinated Note Indenture.
NEW JUNIOR SUBORDINATED NOTES means the Junior Subordinated Notes of the
Reorganized Debtor, dated as of the Effective Date and issued pursuant to the
New Junior Subordinated Note Indenture substantially in the form of Exhibit E
attached to the Disclosure Statement, the total principal amount not to exceed
$22,500,000.
NEW JUNIOR SUBORDINATED NOTE INDENTURE means the indenture under which the
New Junior Subordinated Notes will be issued, and which shall be substantially
in the form set forth in Exhibit F attached to the Disclosure Statement.
NEW SENIOR SECURED NOTES means the Senior Secured Notes of the Reorganized
Debtor, dated as of the Effective Date and issued pursuant to the New Senior
Secured Note Indenture, substantially in the form of Exhibit B attached to the
Disclosure Statement.
NEW SENIOR SECURED NOTE INDENTURE means the indenture under which the New
Senior Notes will be issued, and which shall be substantially in the form set
forth in Exhibit C attached to the Disclosure Statement.
NEW SECURITIES means, collectively, (a) the New Senior Secured Notes, (b)
the New Junior Subordinated Notes, (c) the New Common Stock, and (d) the New
Warrants.
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<PAGE>
NEW WARRANT AGREEMENT means the New Warrant Agreement in substantially the
form set forth in Exhibit H attached to the Disclosure Statement.
NEW WARRANT AGENT means the agent appointed to act as such under the New
Warrant Agreement.
NEW WARRANTS means the warrants, each to purchase one share of New Common
Stock, to be issued by the Reorganized Debtor having the terms and conditions
set forth in the New Warrant Agreement and issued in accordance with the Plan to
holders of Allowed Interests in Class 7A. Three series of New Warrants shall be
issued under the New Warrant Agreement, each series representing the right to
purchase 580,000 shares of New Common Stock or 1,740,000 shares in the
aggregate.
NONDEBTOR SUBSIDIARIES means, collectively, Mercury Finance Corporation of
Alabama; Mercury Finance Company of Arizona; Merc Finance Company of California;
Mercury Finance Company of Colorado; Mercury Finance Company of Delaware;
Mercury Finance Company of Florida; Mercury Finance Company of Georgia; Mercury
Finance Company of Idaho; Mercury Finance Company of Illinois; Mercury Finance
Company of Indiana; Mercury Finance Company of Iowa; Mercury Finance Company of
Kansas; Mercury Finance Company of Kentucky; Mercury Finance Company of
Louisiana; Mercury Finance Company of Michigan; Mercury Finance Company of
Mississippi; Mercury Finance Company of Missouri; Mercury Finance Company of
Nevada; Mercury Finance Company of New Mexico; Mercury Finance Company of New
York; Mercury Finance Company of North Carolina; Mercury Finance Company of
Ohio; MFC Finance Company of Oklahoma; Mercury Finance Company of Oregon;
Mercury Finance Company of Pennsylvania; Mercury Finance Company of South
Carolina; Mercury Finance Company of Tennessee; MFC Finance Company of Texas;
Mercury Finance Company of Utah; Mercury Finance Company of Virginia; Mercury
Finance Company of Washington; Mercury Finance Company of Wisconsin; Filco
Marketing Company; MFC Financial Services, Inc.; Gulfco Finance Company; Gulfco
Investment Company; Midland Finance Co.; MFN Insurance Company.
OLD COMMON STOCK means the common stock issued by Debtor and outstanding
immediately prior to the Distribution Record Date, including the associated
share purchase rights.
OLD OPTIONS means the options outstanding immediately prior to the
Effective Date to purchase Old Common Stock.
OUTSIDE DIRECTORS RESERVE means a fund of $350,000 deposited into a
segregated account by the Debtor to be used for purposes of reimbursement of
continuing indemnification costs of current outside directors for a period of
two years, with any remaining balance (in such account at the expiration of such
two-year period) thereafter reverting to the Reorganized Debtor.
PERSON shall have the meaning set forth in the Bankruptcy Code.
PETITION DATE means July 15, 1998.
PLAN means this Second Amended Plan of Reorganization for the Debtor and
all exhibits annexed hereto or referenced herein, as it may be amended or
modified by the Debtor from time to time in accordance with the Bankruptcy Code
and the Bankruptcy Rules, and the terms and conditions of section 14.02 of the
Plan.
PRIORITY CLAIM means an Allowed Claim for an amount entitled to priority
under section 507(a) of the Bankruptcy Code, other than an Administrative Claim
or a Tax Claim.
PROFESSIONAL FEE RESERVE means an amount in cash equal to the Debtor's good
faith estimate of the aggregate amount of accrued and unpaid professional fees
payable to professional persons entitled to reimbursement of fees and expenses
from the Debtor.
RELIANCE POLICIES means any and all policies providing the Debtor with
insurance for Corporate Indemnities, including without limitation, the
Directors' and Officers' Liability Policy Number NDA 1494742-96 issued by
Reliance Insurance Company, together with any applicable extended reporting
period.
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REORGANIZATION CASE means the Debtor's case under chapter 11 of the
Bankruptcy Code.
REORGANIZED DEBTOR means the Debtor on and after the Effective Date.
SCHEDULES means, collectively, the: (a) schedules of assets and liabilities
and the statements of financial affairs, if any, Filed by the Debtor in the
Reorganization Case, pursuant to section 521 of the Bankruptcy Code, the
Bankruptcy Rules and the Official Bankruptcy Forms; and (b) schedule of
unliquidated, disputed or contingent Claims, as required by any local rule of
the Court, as such requirements may be modified by any order of the Court.
SECURED CLAIM means a Claim that is secured by a lien on property in which
the Estate has an interest or that is subject to setoff under section 553 of the
Bankruptcy Code, to the extent of the value of the Claim holder's interest in
the Estate's interest in such property or to the extent of the amount subject to
setoff, as applicable, as determined pursuant to section 506(a) of the
Bankruptcy Code.
SECURITIES ACT means the Securities Act of 1933, 15 U.S.C. (S)(S) 77a-77aa,
as now in effect or hereafter amended.
SECURITIES CLAIMANTS' COMMITTEE means the Official Committee of Securities
Fraud Claimants appointed by the Court.
SECURITIES FRAUD CLAIMS means all claims, including unknown claims,
demands, rights, liabilities and causes of action of any kind whatsoever, known
or unknown, asserted or which might have been asserted in a direct, derivative
or other capacity against any person or entity, including, without limitation,
claims arising out of, relating to, or in connection with (i) the purchase, sale
or other decision or action made or taken, or declined, failed or refused to be
made or taken, or otherwise foregone, concerning or relating to Equity
Interests, (ii) the facts, transactions, events, occurrences, acts,
representations, disclosure, statements, omissions, or failures to act which
were alleged or could have been alleged in the pending litigation asserted
against the Debtor and other persons and entities, whether asserted individually
or on behalf of a class of plaintiffs which generally arise from the Debtor's
accounting practices and announcement of accounting irregularities, including
the litigation set forth on Exhibit 2 attached to the Plan, (iii) the adversary
proceeding, No. 98-A-01580, in the Debtor's bankruptcy against any and all
defendants other than KPMG, KPMG-related individuals, John N. Brincat and the
Estate of James A. Doyle, and (iv) the purchase, ownership or sale of the common
stock or other securities of the Debtor, (v) accounting irregularities or
alleged accounting errors relating to the Debtor, (vi) any restatements of the
Debtor's financial statements or results of operations; and (vii) the conduct of
the Debtor's restructuring process and bankruptcy proceeding, including all
decisions, actions, inactions and alleged negligence or misconduct relating
thereto.
SENIOR DEBT CLAIMS means Claims arising from or with respect to amounts due
under the Debtor's commercial paper, short-term loans or senior term notes
against the Debtor or under any note issued by the Debtor in connection with the
purchase of Gulfco Finance Company or Gulfco Investment Company, including any
claim arising out of or in connection with such debt as against the Debtor, but
excluding Claims arising from or with respect to amounts due under the
Subordinated Notes, in an aggregate amount equal to the outstanding principal
amounts due under such agreements (approximately $678,000,000 as of the Petition
Date), plus all accrued and unpaid interest thereon and any unpaid amounts
payable under the Consent Agreement. All other claims, including, but not
limited to, make-whole payments or any additional interest payments or fees, are
waived against the Debtor for enforcement or collection by holders of Senior
Debt Claims; but reserved solely for purposes of calculating and allocating
distributions by and among the holders of Class 4 Claims.
SIGNING BONUS means the amounts designated as a signing bonus and payable
to the new Chief Executive Officer under the Employment Agreement.
STEERING COMMITTEE means the pre-petition Ad Hoc Steering Committee of the
holders of Senior Debt Claims.
SUBORDINATED NOTEHOLDER means the holder of any Subordinated Notes.
SUBORDINATED NOTES means the $22,500,000 principal amount of outstanding
Mercury subordinated notes.
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TAX CLAIM means an Allowed Claim for an amount entitled to priority under
section 507(a)(8) of the Bankruptcy Code.
TRADE CLAIM means any unsecured Claim against the Debtor arising from or
with respect to the sale of goods or services to the Debtor, including Allowed
Claims based on rejection of executory contracts or unexpired leases, prior to
the Petition Date, in the ordinary course of the Debtor's business, including
but not limited to, any Claim of an employee that is not a Priority Claim or an
Indemnification Claim and any Claim of a Nondebtor Subsidiary against the
Debtor, but excluding any claim by KPMG Peat Marwick, whether arising by
contract or for contribution or indemnity.
TRADE CLAIMANT means any holder of a Trade Claim.
UNIMPAIRED CLAIM means a Claim that is not impaired within the meaning of
section 1124 of the Bankruptcy Code.
UNSECURED CLAIM means any Claim which is not an Administrative Claim,
Secured Claim, Priority Claim, Tax Claim, Senior Debt Claim, Claim arising from
the Subordinated Notes, or Securities Fraud Claims.
B. RULES OF INTERPRETATION, COMPUTATION OF TIME AND GOVERNING LAW.
1. RULES OF INTERPRETATION. For purposes of the Plan: (a) whenever from
the context it is appropriate, each term, whether stated in the singular or the
plural, shall include both the singular and the plural; (b) any reference in the
Plan to a contract, instrument, release, indenture or other agreement or
document being in a particular form or on particular terms and conditions means
that such document shall be substantially in such form or substantially on such
terms and conditions; (c) any reference in the Plan to an existing document or
Exhibit Filed or to be Filed means such document or Exhibit, as it may have been
or may be amended, modified or supplemented; (d) if the Plan's description of
the terms of an Exhibit is inconsistent with the terms of the Exhibit, the terms
of the Exhibit shall control; (e) unless otherwise specified, all references in
the Plan to Articles, Sections, Clauses and Exhibits are references to Articles,
Sections, Clauses and Exhibits of or to the Plan; (f) the words "herein" and
"hereto" refer to the Plan in its entirety rather than to a particular portion
of the Plan; (g) captions and headings to Articles and Sections are inserted for
convenience of reference only and are not intended to be a part of or to affect
the interpretation of the Plan; (h) the rules of construction set forth in
section 102 of the Bankruptcy Code shall apply to the extent such rules are not
inconsistent with any other provision in this Section 1.B.1.
2. COMPUTATION OF TIME. In computing any period of time prescribed or
allowed by the Plan, the provisions of Bankruptcy Rule 9006(a) shall apply.
3. GOVERNING LAW. Except to the extent that the Bankruptcy Code or
Bankruptcy Rules are applicable, and subject to the provisions of any contract,
instrument, release, indenture or other agreement or document entered into in
connection with the Plan, the rights and obligations arising under the Plan
shall be governed by, and construed and enforced in accordance with, the laws of
the State of Illinois, without giving effect to the principles of conflicts of
law thereof.
ARTICLE II
ADMINISTRATIVE AND TAX CLAIMS
In accordance with section 1123(a)(1) of the Bankruptcy Code,
Administrative Claims and Tax Claims, as described below, have not been
classified.
2.01 ADMINISTRATIVE CLAIMS. Unless otherwise agreed to by the parties,
each holder of an Allowed Administrative Claim shall receive cash equal to the
unpaid portion of such Allowed Administrative Claim on the later of (a) the
Effective Date and (b) the date on which such Claim becomes an Allowed
Administrative Claim; provided, however, that the Administrative Claims that
represent liabilities incurred by the Debtor in the ordinary course of its
business during the Reorganization Case shall be paid in the ordinary course of
business and in accordance with any terms and conditions of any agreements
relating thereto.
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2.02 BAR DATE FOR ADMINISTRATIVE CLAIMS.
(a) Pre-Confirmation Date Claims and Expenses. All applications for final
compensation of professional persons for services rendered and reimbursement of
expenses incurred on or before the Confirmation Date and all other requests for
payment of administrative costs and expenses incurred on or before the
Confirmation Date under section 507(a)(1) or 507(b) of the Bankruptcy Code
(except only for Trade Claims incurred in the ordinary course of business and
claims under 28 U.S.C. (S) 1930) shall be filed no later than 45 days after the
Confirmation Date.
(b) Effect of Failure to Timely File Claim or Request for Payment. Any
request for payment of an Administrative Claim which is not filed by the
applicable deadline set forth above shall be barred. Under no circumstance will
the applicable deadlines set forth above be extended by order of the Court or
otherwise. Any holders of Administrative Claims who are required to file a
claim or request for payment of such Claims or expenses and who do not file such
claims or requests by the applicable bar date shall be forever barred from
asserting such Claims or expenses against the Debtor, any property of the Debtor
or any distributions under the Plan.
2.03 TAX CLAIMS. Unless otherwise agreed to by the parties, each holder
of a Tax Claim will receive cash equal to the unpaid portion of such Tax Claim
on or as soon as practical after the later of (i) the Effective Date, and (ii)
the date on which such Claim becomes an Allowed Claim; provided, however, that
at the option of the Reorganized Debtor, the Reorganized Debtor may pay Tax
Claims over a period not exceeding six (6) years after the date of assessment of
the Tax Claim as provided in subsection 1129(a)(9)(C) of the Bankruptcy Code.
If the Reorganized Debtor elects this option as to any Tax Claim, then the
payment of such Tax Claim shall be made in equal semiannual installments with
the first installment due on the latest of: (i) the Effective Date, (ii) 30
calendar days after the date on which an order allowing such Tax Claim becomes a
Final Order, and (iii) such other time as may be agreed to by the holder of such
Tax Claim and the Reorganized Debtor. Each installment shall include simple
interest on the unpaid portion of such Tax Claim, without penalty of any kind,
at the statutory rate of interest provided for such taxes under applicable
nonbankruptcy law; provided, however, that the Reorganized Debtor shall reserve
the right to pay any Tax Claim, or any remaining balance of such Tax Claim, in
full, at any time on or after the Effective Date, without premium or penalty.
ARTICLE III
CLASSIFICATION OF CLAIMS AGAINST AND INTERESTS IN THE DEBTOR
The classification of the Claims and Interests listed below shall be for
all purposes, including voting, confirmation and distribution pursuant to the
Plan. A Claim or Interest is in a particular class only to the extent that the
Claim or Interest is an Allowed Claim or Allowed Interest in that Class and has
not been paid, released, or otherwise satisfied before the Effective Date; a
Claim or Interest which is not an Allowed Claim or Interest is not in any class.
3.01 CLASS 1 PRIORITY CLAIMS. Class 1 consists of all Priority Claims,
not otherwise treated as unclassified in Article II above.
3.02 CLASS 2 - SECURED CLAIMS. Class 2 consists of all holders of Secured
Claims.
3.03 CLASS 3 TRADE CLAIMS, CONSUMER LITIGATION CLAIMS, BENEFITS CLAIMS
AND UNSECURED CLAIMS. Class 3 consists of all holders of Trade Claims, Consumer
Litigation Claims, Benefits Claims and Unsecured Claims.
3.04 CLASS 4 SENIOR DEBT CLAIMS. Class 4 consists of all holders of
Senior Debt Claims.
3.05 CLASS 5 SUBORDINATED NOTEHOLDER CLAIMS. Class 5 consists of all
holders of Subordinated Notes.
3.06 CLASS 6 INDEMNIFICATION CLAIMS. Class 6 consists of all holders of
Indemnification Claims.
3.07 CLASS 7A EQUITY INTERESTS. Class 7A consists of all holders of Old
Common Stock.
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3.08 CLASS 7B SECURITIES FRAUD CLAIMS AND DIVIDEND CLAIMS. Class 7B
consists of all holders of Securities Fraud Claims and Dividend Claims.
3.09 CLASS 8 - OLD OPTIONS. Class 8 consists of all holders of Old
Options.
3.10 SUMMARY OF CLAIMS AND INTERESTS.
<TABLE>
<CAPTION>
CLASS DESCRIPTION STATUS
- ----- ----------- ------
<S> <C> <C>
Class 1 Priority Claims Unimpaired; deemed to have accepted
the Plan
Class 2 Secured Claims Unimpaired; deemed to have accepted
the Plan
Class 3 Trade Claims, Consumer Litigation Unimpaired; deemed to have accepted
Claims, Benefits Claims and the Plan
Unsecured Claims
Class 4 Senior Debt Claims Impaired; entitled to vote
Class 5 Subordinated Noteholder Claims Impaired; entitled to vote
Class 6 Indemnification Claims Impaired; entitled to vote
Class 7A Equity Interests Impaired; entitled to vote
Class 7B Securities Fraud Claims and Impaired; entitled to vote
Dividend Claims
Class 8 Old Options Impaired; deemed to have rejected the
Plan
</TABLE>
ARTICLE IV
TREATMENT OF CLASSES UNIMPAIRED UNDER THE PLAN
4.01 CLASS 1 PRIORITY CLAIMS. Allowed Class 1 Claims are Unimpaired.
Unless otherwise agreed to by the parties, each holder of an Allowed Claim in
Class 1 shall be paid the allowed amount of such Claim in full in cash on the
later of (a) the Effective Date, and (b) the date such Claim becomes an Allowed
Claim.
4.02 CLASS 2 SECURED CLAIMS. Allowed Class 2 Claims are Unimpaired.
Each Class 2 Claimant shall retain, unaltered, the legal, equitable and
contractual rights, including, without limitation, any liens that secure such
Allowed Claims, to which such Allowed Claim entitles Claimant; provided,
however, that each Claimant holding an Allowed Claim in Class 2 may only
exercise such rights and remedies with respect to the assets and property that
secure such Allowed Claim, without recourse of any kind against the Debtor. Any
Allowed Claim in Class 2 based on any deficiency claim by a Class 2 Claimant
shall become, and shall be treated for all purposes under this Plan as an
Allowed Trade Claim and shall be classified as a Class 3 Claim.
4.03 CLASS 3 TRADE CLAIMS, CONSUMER LITIGATION CLAIMS, BENEFITS CLAIMS
AND UNSECURED CLAIMS. Allowed Claims in Class 3 are Unimpaired. The legal,
equitable and contractual rights of holders of Allowed Claims in Class 3 shall
not be affected by the Reorganization Case, and each holder shall be entitled to
payment of the full amount of its Allowed Claim in complete settlement,
satisfaction and discharge of its Class 3 Claim.
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ARTICLE V
TREATMENT OF CLASSES IMPAIRED UNDER THE PLAN
5.01 CLASS 4 SENIOR DEBT CLAIMS. Allowed Class 4 Claims are Impaired.
Each holder of an Allowed Class 4 Claim shall receive, in complete settlement,
satisfaction and discharge of its Class 4 Claim: (i) its pro rata share of
Excess Cash; (ii) New Senior Secured Notes in the principal amount of 75% of its
Net Senior Debt Claims; and (iii) its pro rata share of 9,500,000 shares of the
New Common Stock.
5.02 CLASS 5 SUBORDINATED NOTEHOLDER CLAIMS. Allowed Claims in Class 5
are Impaired. Each holder of an Allowed Claim in Class 5 shall receive, in
complete settlement, satisfaction and discharge of its Class 5 Claims, its pro
rata share of the New Junior Subordinated Notes.
5.03 CLASS 6 INDEMNIFICATION CLAIMS. Allowed Indemnification Claims in
Class 6 are Impaired. Each holder of an Allowed Indemnification Claim shall be
entitled to (i) continue to assert such Claims against the Debtor to the extent
of coverage under the Reliance Policies and (ii) the Debtor's cooperation in
aiding the Class 6 Claimants in pursuing their rights under the Reliance
Policies.
5.04 CLASS 7A EQUITY INTERESTS. Interests in Class 7A are Impaired.
Each holder of an Allowed Equity Interest in Class 7A shall be enjoined from
pursuing any Claim against the Debtor or Reorganized Debtor (including any
Securities Fraud Claim) and, subject to Section 8.14, shall receive, in complete
settlement, satisfaction and discharge of its Equity Interest, its pro rata
share of (i) 500,000 shares of the New Common Stock and (ii) all of the New
Warrants subject to the terms and conditions of the New Warrant Agreement.
5.05 CLASS 7B SECURITIES FRAUD CLAIMS AND DIVIDEND CLAIMS. Claims in
Class 7B are Impaired. Each holder of an Allowed Claim in Class 7B (as
determined by procedures set forth in Section 8.15 and in the Class 7B
Liquidating Trust Agreement attached as Exhibit U to the Disclosure Statement
(the "Class 7B Liquidating Trust Agreement")) shall be enjoined from pursuing
any Claim against the Debtor or Reorganized Debtor (including any Securities
Fraud Claim) and, shall receive, in complete settlement, satisfaction and
discharge of its Class 7B Claims, a share of the beneficial interests in the
Class 7B Liquidating Trust. On the Effective Date, the Debtor shall transfer to
the Class 7B Liquidating Trust: (i) $5 million in cash (to be deducted from the
ending book cash balance of the Debtor on a consolidated basis); (ii) the
Company KPMG Claims; and (iii) $250,000 in cash for fees and costs to be
incurred in connection with the administration of the Class 7B Liquidating
Trust.
5.06 CLASS 8 OLD OPTIONS. Holders of Old Options are Impaired. The
holders of Old Options shall receive no distributions under the Plan. On the
Effective Date, all of the Old Options shall be cancelled and extinguished.
ARTICLE VI
GENERAL PROVISIONS REGARDING TREATMENT OF CLAIMS AND
INTERESTS AND DISTRIBUTIONS UNDER THE PLAN
6.01 DISTRIBUTION DATE. Except as otherwise provided in the Plan,
property to be distributed under the Plan to an Impaired Class (a) shall be
distributed on or as soon as practicable after the Effective Date to each holder
of an Allowed Claim of that Class that is an Allowed Claim as of the Effective
Date, and (b) shall be distributed to each holder of an Allowed Claim of that
Class that is allowed after the Effective Date, to the extent allowed, as soon
as practicable after the order of the Court allowing the Claim becomes a Final
Order. Property to be distributed under the Plan to a Class that is not
Impaired or on account of an Administrative Claim shall be distributed on the
latest of (i) the distribution dates specified in the preceding sentence, or
(ii) the date on which the distribution to the holder of the Claim would have
been due and payable in the ordinary course of business or under the terms of
the Claim in the absence of the Reorganization Case.
6.02 DISTRIBUTION RECORD DATE--SENIOR DEBT CLAIMS AND SUBORDINATED
NOTEHOLDER CLAIMS. As of the close of business on the Distribution Record Date,
the respective transfer registers for the Senior Debt Claims and holders of
Subordinated Note Claims as maintained by the Debtor, or their respective
agents, shall be closed.
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6.03 EXCHANGE AGENT. The Debtor may designate an entity or entities to
serve as Exchange Agent to distribute all the property to be distributed under
the Plan, including, without limitation the delivery of the New Common Stock,
the New Senior Secured Notes, and the New Junior Subordinated Notes and the New
Warrants.
6.04 SURRENDER OF INSTRUMENTS AND RECEIPT OF DISTRIBUTIONS--SENIOR DEBT
CLAIMS AND SUBORDINATED NOTEHOLDER CLAIMS. As a condition to participation
under the Plan, each holder of a Senior Debt Claim or a Subordinated Noteholder
Claim is required to provide evidence of the securities evidencing the Senior
Debt Claims and Subordinated Noteholders Claims ("Old Securities") by (i)
completing and returning a Letter of Transmittal to the Exchange Agent, together
with certificates (to the extent such exist) representing their Old Securities
(the "Tendered Certificates"), or (ii) completing the book-entry confirmation
procedure, promptly after the Confirmation Date. Holders of Senior Debt Claims
relating to commercial paper need not tender any certificates, as no such
certificates exist evidencing the commercial paper. Promptly following the
Effective Date, the Exchange Agent will mail to those persons who have properly
completed and returned Letters of Transmittal and Tendered Certificates or
completed the book-entry confirmation procedure, certificates representing the
New Senior Secured Notes, the New Junior Subordinated Notes and/or the New
Common Stock to be issued in accordance with the Plan. HOLDERS OF OLD
SECURITIES WHO HAVE NOT PROPERLY COMPLETED AND RETURNED TO THE EXCHANGE AGENT
LETTERS OF TRANSMITTAL OR COMPLETED THE BOOK-ENTRY CONFIRMATION PROCEDURE WITHIN
TWO YEARS OF THE EFFECTIVE DATE, TOGETHER WITH THE TENDERED CERTIFICATES, WILL
NOT RECEIVE THE CERTIFICATES OR CASH TO WHICH THEY ARE OTHERWISE ENTITLED
PURSUANT TO THE PLAN NOR WILL THEY BE ENTITLED TO ANY OTHER DISTRIBUTION UNDER
THE PLAN. The Debtor selected two years as opposed to the five year period
permitted (but not required) under section 1143 of the Bankruptcy Code because
the securities mature in less than five years and the Debtor believes that the
cost and expense of establishing an escrow fund for delinquent tenders outweighs
the risk that substantial holders of Old Securities will fail to surrender their
certificates within one year.
Book-Entry Transfer. The Exchange Agent will establish an account with
respect to the Old Securities at DTC. Any tendering financial institution that
is a participant in DTC's book-entry transfer facility system must make a book-
entry delivery of the Old Securities by causing DTC to transfer such Old
Securities into the Exchange Agent's account at DTC in accordance with DTC's
Automated Tender Offer Program ("ATOP") procedures for transfers. Such holder
of Old Securities using ATOP should transmit its acceptance to DTC on or prior
to the Expiration Date (or comply with the guaranteed delivery procedures set
forth below), DTC will verify such acceptance, execute a book-entry transfer of
the tendered Old Securities Notes into the Exchange Agent's account at DTC and
then send to the Exchange Agent confirmation of such book-entry transfer,
including an agent's message confirming that DTC has received an express
acknowledgment from such holder that such holder has received and agrees to be
bound by the Letter of Transmittal and that the company may enforce the Letter
of Transmittal against such holder (a "book-entry confirmation").
A beneficial owner of Old Securities that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial owner
wishes to participate.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Letters of Transmittal. Signatures on a Letter of Transmittal must be
guaranteed by an Eligible Institution (as defined below), unless the Old
Securities tendered pursuant thereto are tendered for the account of an Eligible
Institution. If signatures on a Letter of Transmittal are required to be
guaranteed, such guarantees must be by a member firm of a registered national
securities exchange in the United States, a member of the National Association
of Securities Dealers, Inc., or by a commercial bank or trust company having an
office or a correspondent in the United States (each of which is an "Eligible
Institution"). If Old Securities are registered in the name of a person other
than the person signing the Letter of Transmittal, in order to be validly
tendered, the Old Securities must be endorsed or accompanied by properly
completed power of authority, with signature guaranteed by an Eligible
Institution.
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<PAGE>
Holders of Old Securities who are not holders of record should:
(i) obtain a properly completed Letter of Transmittal (or facsimile
thereof) from the record holder,
(ii) obtain and include with the Letter of Transmittal a properly
competed stock or bond power, as the case may be, from the
record holder, or
(iii) effect a record transfer of their Old Securities prior to
delivery of the Letter of Transmittal.
If a holder desires to tender Old Securities pursuant to the Letter of
Transmittal but is unable to locate the Tendered Certificates, such holder
should write to or telephone the Exchange Agent about procedures for obtaining
replacement certificates for Old Securities or arranging for indemnification.
ALL QUESTIONS AS TO THE VALIDITY, FORM, ELIGIBILITY (INCLUDING TIME OF
RECEIPT), AND ACCEPTANCE OF BALLOTS, LETTERS OF TRANSMITTAL AND TENDERED
CERTIFICATES WILL BE RESOLVED BY THE DEBTOR, WHOSE DETERMINATION WILL BE FINAL
AND BINDING, SUBJECT ONLY TO REVIEW BY THE COURT UPON APPLICATION WITH DUE
NOTICE TO ANY AFFECTED PARTIES IN INTEREST. THE DEBTOR RESERVES THE RIGHT TO
REJECT ANY AND ALL BALLOTS, LETTERS OF TRANSMITTAL AND TENDERED CERTIFICATES NOT
IN PROPER FORM, OR LETTERS OF TRANSMITTAL AND TENDERED CERTIFICATES, THE
DEBTOR'S ACCEPTANCE OF WHICH WOULD, IN THE OPINION OF THE DEBTOR OR ITS COUNSEL,
BE UNLAWFUL.
6.05 DISTRIBUTION RECORD--OLD COMMON STOCK. At the close of business on
the Distribution Record Date, the transfer ledgers for the Old Common Stock
shall be closed, and there shall be no further changes in the record holders of
the Old Common Stock. The Debtor shall have no obligation to recognize any
transfer of the Old Common Stock occurring on or after the Distribution Record
Date. The Debtor shall be entitled instead to recognize and deal for all
purposes hereunder with only those record holders stated on the transfer ledgers
as of the close of business on the Distribution Record Date.
As a condition to participation under the Plan, each holder of a Equity
Interest is required to provide evidence of the securities evidencing the Equity
Interest ("Old Securities") by (i) completing and returning a Letter of
Transmittal to the Exchange Agent, together with certificates (to the extent
such exist) representing their Old Securities (the "Tendered Certificates").
Promptly following the Effective Date, the Exchange Agent will mail to those
persons who have properly completed and returned Letters of Transmittal and
Tendered Certificates, certificates representing the New Common Stock and New
Warrants to be issued in accordance with the Plan. HOLDERS OF OLD SECURITIES
WHO HAVE NOT PROPERLY COMPLETED AND RETURNED TO THE EXCHANGE AGENT LETTERS OF
TRANSMITTAL WITHIN TWO YEARS OF THE EFFECTIVE DATE, TOGETHER WITH THE TENDERED
CERTIFICATES, WILL NOT RECEIVE THE CERTIFICATES TO WHICH THEY ARE OTHERWISE
ENTITLED PURSUANT TO THE PLAN NOR WILL THEY BE ENTITLED TO ANY OTHER
DISTRIBUTION UNDER THE PLAN. The Debtor selected two years as opposed to the
five year period permitted (but not required) under section 1143 of the
Bankruptcy Code because the securities mature in less than five years and the
Debtor believes that the cost and expense of establishing an escrow fund for
delinquent tenders outweighs the risk that substantial holders of Old Securities
will fail to surrender their certificates within one year.
Letters of Transmittal. Signatures on a Letter of Transmittal must be
guaranteed by an Eligible Institution (as defined below), unless the Old
Securities tendered pursuant thereto are tendered for the account of an Eligible
Institution or such signature guarantee if not otherwise required by applicable
law. If signatures on a Letter of Transmittal are required to be guaranteed,
such guarantees must be by a member firm of a registered national securities
exchange in the United States, a member of the National Association of
Securities Dealers, Inc., or by a commercial bank or trust company having an
office or a correspondent in the United States (each of which is an "Eligible
Institution"). If Old Securities are registered in the name of a person other
than the person signing the Letter of Transmittal, in order to be validly
tendered, the Old Securities must be endorsed or accompanied by properly
completed power of authority, with signature guaranteed by an Eligible
Institution.
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Holders of Old Securities who are not holders of record should:
(i) obtain a properly completed Letter of Transmittal (or facsimile
thereof) from the record holder,
(ii) obtain and include with the Letter of Transmittal a properly
competed stock or bond power, as the case may be, from the
record holder, or
(iii) effect a record transfer of their Old Securities prior to
delivery of the Letter of Transmittal.
If a holder desires to tender Old Securities pursuant to the Letter of
Transmittal but is unable to locate the Tendered Certificates, such holder
should write to or telephone the Exchange Agent about procedures for obtaining
replacement certificates for Old Securities or arranging for indemnification.
ALL QUESTIONS AS TO THE VALIDITY, FORM, ELIGIBILITY (INCLUDING TIME OF
RECEIPT), AND ACCEPTANCE OF BALLOTS, LETTERS OF TRANSMITTAL AND TENDERED
CERTIFICATES WILL BE RESOLVED BY THE DEBTOR, WHOSE DETERMINATION WILL BE FINAL
AND BINDING, SUBJECT ONLY TO REVIEW BY THE COURT UPON APPLICATION WITH DUE
NOTICE TO ANY AFFECTED PARTIES IN INTEREST. THE DEBTOR RESERVES THE RIGHT TO
REJECT ANY AND ALL BALLOTS, LETTERS OF TRANSMITTAL AND TENDERED CERTIFICATES NOT
IN PROPER FORM, OR LETTERS OF TRANSMITTAL AND TENDERED CERTIFICATES, THE DEBTORS
ACCEPTANCE OF WHICH WOULD, IN THE OPINION OF THE DEBTOR OR ITS COUNSEL, BE
UNLAWFUL.
6.06 Accrual of Interest. Pursuant to the terms of the New Senior Secured
Note Indenture and the New Junior Subordinated Note Indenture, interest on the
New Senior Secured Notes and the New Junior Subordinated Notes shall begin to
accrue at the respective rates set forth in the New Senior Secured Notes and the
New Junior Subordinated Notes on the ninety-first day following the Petition
Date and shall be payable as set forth therein, respectively.
6.07 Unclaimed Distributions. If any holder of a Claim or Interest
entitled to a distribution directly from the Exchange Agent under the Plan
cannot be located on the Effective Date, such distributions shall be set aside
and maintained by the Exchange Agent. If such person is located within two
years of the Effective Date, such distributions shall be distributed to such
person. If such person cannot be located within two years of the Effective
Date, any such securities shall become the property of and shall be released to
the Reorganized Debtor; provided, however, that nothing contained in this Plan
shall require the Reorganized Debtor to attempt to locate such person.
6.08 TAX PROVISIONS. Pursuant to section 1146(c) of the Bankruptcy Code,
the issuance, transfer or other exchange of a security, or the making or
delivery of an instrument of transfer under the Plan shall not be taxed under
any state or local law imposing a stamp tax, transfer tax, or similar tax or
fee.
6.09 SETOFFS. Except with respect to Senior Debt Claims, the Debtor may,
but shall not be required to, setoff against any Claim (for purposes of
determining the allowed amount of such Claim on which distribution shall be
made), any claims of any nature whatsoever that the Debtor may have against the
claimant, but neither the failure to do so nor the allowance of any Claim
hereunder shall constitute a waiver or release by the Debtor of any such claim
the Debtor may have against such claimant.
ARTICLE VII
PROVISIONS FOR TREATMENT OF DISPUTED, CONTINGENT AND
UNLIQUIDATED CLAIMS AND ADMINISTRATIVE EXPENSES
7.01 Characterization of Disputed Claims. Except for Class 7B Claims for
which Requests for Allowance must be filed on or before the Class 7B Bar Date
and which will be allowed or disallowed pursuant to the procedures set forth in
Section 8.15 and in the Class 7B Liquidating Trust Agreement, pursuant to
subsection 1111(a) of the Bankruptcy Code, a proof of a Claim is deemed filed
under section 501 of the Bankruptcy Code if that Claim is included in the
schedules filed under section 1106(a)(2) of the Bankruptcy Code, except if the
Claim is scheduled as disputed, contingent, or unliquidated. Such a disputed,
contingent, or unliquidated claim must be
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asserted by its holder, or an indenture trustee representing such holder, by the
timely filing of a proof of claim. If a proof of claim is not filed in a timely
manner, the Claim may be deemed to be disallowed.
7.02 RESOLUTION OF CONTESTED CLAIMS AND INTERESTS. The Debtor shall have
the right to object to and contest the allowance of any Claim or Interest Filed
or deemed Filed with the Court, whether or not such Claim was scheduled as
disputed, contingent or unliquidated. The Senior Debt Claims shall be deemed
allowed.
ARTICLE VIII
IMPLEMENTATION OF THE PLAN
8.01 CONTINUED CORPORATE EXISTENCE AND VESTING OF ASSETS IN THE
REORGANIZED DEBTOR. The Debtor shall, as the Reorganized Debtor, continue to
exist after the Effective Date as a separate corporate entity, with all powers
of a corporation under the laws of the State of Delaware and without prejudice
to any right to alter or terminate such existence (whether by merger or
otherwise) under such applicable state law. Except as otherwise expressly
provided in the Plan on the Confirmation Date, the Reorganized Debtor shall be
vested with all of the property of the Estate free and clear of all claims,
liens, encumbrances, charges and other interests of creditors and equity
security holders, and may operate its business free of any restrictions imposed
by the Bankruptcy Code or by the Court, including, without limitation, any
contracts or leases entered into or assumed by the Debtors after the Petition
Date; provided, however, that the Reorganized Debtor shall continue as a debtor
in possession under the Bankruptcy Code until the Effective Date, and
thereafter, subject to the terms of this Plan, the Reorganized Debtor may
operate its business free of any restriction imposed by the Bankruptcy Code or
the Court.
8.02 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION. On the Effective
Date, the Reorganized Debtor shall file its Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware in accordance
with Section 103 of the Delaware General Corporation Law. The Amended and
Restated Certificate of Incorporation will, among other things, provide (to the
extent necessary to effectuate the terms of the Plan) for (i) the prohibition of
the issuance of non-voting equity securities, and (ii) the authorization of
25,000,000 shares of the New Common Stock, and which encompasses the shares to
be issued upon exercise of the New Warrants; the shares to be issued upon the
exercise of stock options granted for the establishment of a stock option plan
for management of the Reorganized Debtors. Confirmation of the Plan shall
constitute an election by the Debtor not to be governed by Section 203 of the
Delaware General Corporation Law.
8.03 AMENDED AND RESTATED BY-LAWS. The Reorganized Debtor shall adopt and
effect the Amended and Restated By-laws in accordance with Section 109 of the
Delaware General Corporation Law.
8.04 NEW SECURITIES. On the Effective Date, the Reorganized Debtor (i)
shall issue, in accordance with the provisions of Article V, the New Senior
Secured Notes, the New Junior Subordinated Notes, the New Common Stock and the
New Warrants, and (ii) shall execute and deliver the New Collateral Documents,
the New Indentures, and the New Warrant Agreement. In addition, the Nondebtor
Subsidiaries will issue the Subsidiaries Guaranty Agreement and the Subsidiaries
Security Agreement.
8.05 SETTLEMENT AND COMPROMISE. On the Effective Date, in exchange for
the D&O Company Release:
(i) the Debtor shall create the Indemnification Settlement Fund, to
be established and administered in accordance with the
provisions of the Confirmation Order;
(ii) the Debtor shall create the Outside Directors Reserve, to be
established as a segregated escrow account in accordance with
the provisions of the Confirmation Order;
(iii) the Debtor shall assume the indemnification obligations set
forth in Section 12.03, subject to the limits stated therein;
and
(iv) the Debtor shall give the release set forth in Section 11.03.
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The entry of the Confirmation Order shall constitute the Court's finding
that such compromise or settlement is in the best interest of the Debtor, and is
fair, equitable and reasonable and that it is made in good faith.
8.06 CANCELLATION OF SECURITIES AND AGREEMENTS. Except as expressly
provided in the Plan or in the Confirmation Order, on the Effective Date, the
Debtor's commercial paper, short-term notes, senior notes, the Gulfco notes,
Subordinated Notes, Old Common Stock, options, shareholder's rights plans and
all the documentation relating thereto shall be cancelled and all obligations of
the Debtor under or in respect of any of the foregoing shall be terminated.
8.07 MANAGEMENT OF THE REORGANIZED DEBTOR. Upon the Effective Date, the
operation of the Reorganized Debtor shall become the general responsibility of
the board of directors who shall, thereafter, have the responsibility for the
management, control and operation of the Reorganized Debtor. The board of
directors of the Reorganized Debtor shall be comprised of eleven (11) persons,
seven of whom will be designated by the Creditors' Committee, one of whom shall
be the new CEO, two of whom shall be nominated by the new CEO and shall be
reasonably acceptable to the Creditors' Committee, and one of whom will be
nominated by the Equity Holders' Committee and shall be reasonably acceptable to
the Creditors' Committee and the new CEO. The identity of each of the nominees
shall be announced prior to hearing on the Confirmation Date of the Plan. Such
persons shall be deemed elected pursuant to the Confirmation Order, and such
elections shall be effective on and after the Effective Date, without any
requirement of further action by stockholders of the Reorganized Debtor. The
initial chairman of the board of directors of the Reorganized Debtor shall be
chosen by the board of directors of the Reorganized Debtor after the Effective
Date. Upon the Effective Date, the Employment Agreement shall be executed and
delivered by the Reorganized Debtor and the new CEO and shall then become
effective.
8.08 OFFICERS. On the Effective Date, the existing officers of the
Reorganized Debtor shall be retained and shall remain as officers and shall
continue to serve until such time as they may resign, be removed or replaced by
the board of directors of the Reorganized Debtor.
8.09 SATURDAY, SUNDAY OR LEGAL HOLIDAY. If any payment or act under the
Plan is required to be made or performed on a date that is not a Business Day,
then the making of such payment or the performance of such act may be completed
on the next succeeding Business Day, but shall be deemed to have been completed
as of the required date.
8.10 OTHER DOCUMENTS AND ACTIONS. The Debtor and the Reorganized Debtor
may execute such documents and take such other action as is necessary to
effectuate the transactions provided for in the Plan.
8.11 CORPORATE ACTIONS. The issuance of the New Common Stock and the New
Warrants, the adoption of the Amended and Restated Certificate of Incorporation
and By-laws by the Reorganized Debtor, the selection of certain directors and
officers of the Reorganized Debtor, the execution and delivery of any documents
to be executed and delivered under the Plan (including the Employment
Agreement), and other matters under the Plan involving the corporate structure
of the Debtor or corporate action by the Debtor shall be deemed to have occurred
and be effective on and after the Effective Date without any requirement of
further action by stockholders or directors of the Debtor pursuant to and in
accordance with Section 303 of the Delaware General Corporation Law. Without
limiting the foregoing, upon entry of the Confirmation Order by the Clerk of the
Court, the Filing by the Debtor or the Reorganized Debtor of the Amended and
Restated Certificate of Incorporation and By-laws shall be authorized and
approved in all respects. On the Effective Date, or as soon thereafter as is
practicable, pursuant to applicable state law, the Reorganized Debtor shall file
with the applicable state governmental agencies or offices the respective
Certificates of Incorporation and By-laws.
8.12 REGISTRATION RIGHTS. The Reorganized Debtor shall use its reasonable
best efforts to register the New Senior Secured Notes, New Junior Subordinated
Notes and the New Common Stock pursuant to the Registration Rights Agreement.
8.13 LISTING OF THE NEW COMMON STOCK AND WARRANTS. The Reorganized Debtor
shall use its reasonable best efforts to list each series of the New Warrants
and the New Common Stock on the Nasdaq National Market.
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8.14 FRACTIONAL SHARES - DISTRIBUTION OF NEW COMMON STOCK AND NEW
WARRANTS. No fractional shares of New Common Stock or New Warrants shall be
distributed under the Plan. Rather, Interests that would otherwise receive a
fractional share or Warrant shall be treated as follows:
(a) On the date of final distribution of New Common Stock to the holders
of Class 7A Equity Interests, the aggregate of all fractional shares of New
Common Stock that would otherwise be distributed to such persons shall instead
be placed in a separate pool (hereinafter, the "Fractional New Common Stock
Pool"). All holders of Allowed Equity Interests entitled to a fractional
interest in New Common Stock shall be placed on a list (the "New Common Stock
Distribution List") in descending order according to the size of the fractional
interest in the New Common Stock to which each such holder is entitled. In the
event two or more holders of Allowed Equity Interests are entitled to the same
fractional interest (rounded to six decimal places) in New Common Stock, their
relative ranking on the New Common Stock Distribution List shall be determined
by lot. Based upon the New Common Stock Distribution List, a whole share of New
Common Stock shall be distributed to holders entitled to the largest fractions
of New Common Stock until all of the whole shares of New Common Stock in the
Fractional New Common Stock Pool shall have been distributed. The fractional
New Common Stock shall be carried to six decimal places, with the number five
(5) being rounded down.
(b) On the date of the final distribution of New Warrants to the holders
of Class 7A Equity Interests, the aggregate of all fractional New Warrants that
would otherwise be distributed to such persons shall instead be placed in a
separate pool (hereinafter, the "Fractional New Warrants Pool"). All holders of
Allowed Interests entitled to a fractional interest in New Common Stock shall be
placed on a list (the "New Warrants Distribution List") in descending order
according to the size of the fractional interest in the New Warrants to which
each such holder is entitled. In the event two or more holders of Allowed
Equity Interests are entitled to the same fractional interest (rounded to six
decimal places) in New Warrants, their relative ranking on the New Warrants
Distribution List shall be determined by lot. Based upon the New Warrants
Distribution List, a whole New Warrant shall be distributed to holders entitled
to the largest fractions of New Warrants until all of the whole New Warrants in
the Fractional New Warrants Pool shall have been distributed. The fractional New
Warrants shall be carried to six decimal places, with the number five (5) being
rounded down.
8.15 Administration of the Class 7B Liquidating Trust. On the Effective
Date: (i) the Debtor shall duly execute two originals of the Class 7B
Liquidating Trust Agreement, a copy of which is attached to the Disclosure
Statement as Exhibit U, (ii) deliver one signed original thereof to the Trustees
identified below, thereby establishing a trust which shall be known as the Class
7B Liquidating Trust, and (iii) file one fully executed original of the Class 7B
Liquidating Trust Agreement with the clerk of the Court.
The provisions of the Class 7B Liquidating Trust Agreement are incorporated
into the Plan, as if the same were fully set forth herein. The operation of the
Class 7B Liquidating Trust shall be governed by the provisions of the Class 7B
Liquidating Trust Agreement and this Section 8.15 of the Plan. Reference should
be made to the Class 7B Liquidating Trust Agreement for a complete statement of
the terms and conditions governing the operation of the Class 7B Liquidating
Trust and the administration of the assets of the Class 7B Liquidating Trust
since not all of such terms and conditions are set forth in this Section 8.15.
It is the intent of the Plan that the provisions of the Class 7B Liquidating
Trust Agreement shall be consistent with the provisions of this Section 8.15 of
the Plan. To the extent, if any, that the provisions of the Class 7B
Liquidating Trust Agreement and the provisions of this Section 8.15 of the Plan
may be inconsistent, the provisions of this Section 8.15 of the Plan shall
govern.
The Trustees. Initially the current members of the Securities Claimants'
------------
Committee shall serve as Trustees. The Trustees shall serve for the duration of
the Class 7B Liquidating Trust, subject to earlier death, resignation, mandatory
disqualification, or removal. If at any time subsequent to the Effective Date
there are less than three (3) Trustees, within ten (10) days thereof the
remaining Trustees shall elect a successor Trustee or Trustees, subject to the
Court's approval. For purposes of the Class 7B Liquidating Trust Agreement,
"mandatory disqualification" of a Trustee will occur in the event that the Class
7B Claim asserted by such Trustee is disallowed in its entirety or is allocated
a distribution in an amount less than Fifteen Thousand Dollars ($15,000),
whether by virtue of a consensual allowance/allocation approved by the Court or
a decision by the Arbitrator.
Initial Trust Assets. On the Effective Date, the Reorganized Debtor shall
--------------------
transfer and assign to the Class 7B Liquidating Trust, to be held in trust, for
the holders of Allowed Class 7B Claims all of the Debtor's, the
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Reorganized Debtor's, and the Estate's rights, title, and interest in and to all
of the following (collectively, the "INITIAL TRUST ASSETS"): (a) the sum of Five
Million Dollars ($5,000,000) in cash which sum shall be transferred pursuant to
the wire transfer instructions provided by the Securities Claimant's Committee;
and (b) the Company KPMG Claims, as that term is defined above in Article I.A.
of the Plan, together with complete and exclusive control of the prosecution
and/or settlement of the Company KPMG Claims and (c) $250,000 in cash for fees
and costs to be incurred in connection with the administration of the Class 7B
Liquidating Trust. The Company KPMG Claims and attendant prosecution rights
shall be deemed to be assets of the Class 7B Liquidating Trust as of the
Effective Date. Upon delivery of the distributions to the Class 7B Liquidating
Trust required to be made by the Debtor pursuant to Section 5.05 and this
paragraph, the Debtor and the Reorganized Debtor shall have no obligation or
liability to the Trust or any of the Beneficiaries of the Trust, other than to
cause the claims administrator to forward Requests for Allowance to the Class 7B
Claims Administrator and to cooperate with the Trustees, as set forth in Section
2.04 of the Class 7B Liquidating Trust, in the prosecution of the Company KPMG
Claims.
Subsequent Trust Assets. In addition to the Initial Trust Assets, other
-----------------------
assets may be transferred to the Class 7B Liquidating Trust. These assets may
and shall include any proceeds received by the Class 7B Liquidating Trust as a
result of the Company KPMG Claims as well as any proceeds or claims received by
the Class 7B Liquidating Trust pursuant to the settlement agreement which is
attached as Exhibit T to the Disclosure Statement ("Class Settlement Agreement")
or otherwise pursuant to the Plan or agreements implementing the Plan. All
assets transferred to the Class 7B Liquidating Trust which are not included
within the definition of the Initial Trust Assets are referred to herein as the
"Subsequent Trust Assets." The Initial Trust Assets and the Subsequent Trust
Assets are collectively referred to herein as the "Trust Assets."
Powers of Trustees. Pursuant to the Class 7B Liquidating Trust Agreement,
------------------
the Trustees will have the power and authority to do, among other actions, the
following:
A. Receive and hold the Trust Assets and invest the same, from time to
time, in accordance with the parameters set forth in the Class 7B Liquidating
Trust Agreement;
B. Take such actions on behalf of the Class 7B Liquidating Trust as may be
required in connection with the Class Settlement Agreement;
C. Devise, implement, supervise, modify, and administer procedures for the
allowance of Class 7B Claims and the allocation of the assets of the Class 7B
Liquidating Trust among the holders of Allowed Class 7B Claims, subject to the
limitations imposed by Class 7B Liquidating Trust Agreement or the Plan;
D. Utilize and distribute the Trust Assets to satisfy Allowed Class 7B
Claims in accordance with procedures set forth in the Class 7B Liquidating Trust
Agreement and the Plan;
E. Hire such employees, administrative personnel or claims administrators
and engage such legal, financial, accounting, investment, and other advisors,
custodians of assets, including without limitation the Arbitrator and a
Mediator, if any, as those terms are defined in the Class 7B Liquidating Trust
Agreement, and agents as the business of the Class 7B Liquidating Trust
requires, and to delegate to such Persons such powers, authority, and discretion
as the Trustees in their discretion deem advisable or necessary to carry out the
terms of the Class 7B Liquidating Trust (this provision E. is not intended to,
and shall not, include the hiring of any legal, financial, accounting, or any
other type of advisors or experts, by any Class 7B claimant or group of Class 7B
claimants for purposes of proving a Claim, defending objections thereto, or
asserting objections thereto);
F. Compensate, utilizing the Trust Assets, such employees, legal,
financial, accounting, investment, and other advisors, and agents, described in
E. above, provided, however, that accountants, lawyers, and investment advisors
engaged by the Trustees on behalf of the Class 7B Liquidating Trust to represent
interests of the Class 7B Liquidating Trust shall be compensated only with the
approval of the Court after such notice and hearing as the Court may require
(this provision F is not intended to, and shall not, include the utilization of
any Trust Assets to compensate any legal, financial, accounting, or any other
type of advisors or experts, retained by any Class 7B claimant, any group of
Class 7B claimants, any individual members of the Securities Claimants'
Committee, or individual Trustees for the purpose(s) of representing their own
respective interests);
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G. Make such decisions as they may deem appropriate, and in accordance
with the voting procedures set forth in Section 4.03 of the Class 7B Liquidating
Trust Agreement, in connection with the prosecution, non-prosecution, or
resolution of the Company KPMG Claims or claims constituting Trust Assets; and
H. Apply to the Court for instructions to the Trustees as they may deem
proper or necessary in connection with the administration of the Class 7B
Liquidating Trust or the performance of their duties.
Except as otherwise provided by applicable law: (i) no Trustee shall be
liable to the Class 7B Liquidating Trust or to any Person holding a Class 7B
Claim, except for his, her, or its own willful misconduct; and (ii) except to
the extent any act or failure to act on the part of a Trustee shall constitute
willful misconduct; (a) no Trustee shall be liable for any act or omission of
any Co-Trustee or any officer, agent, or employee of the Class 7B Liquidating
Trust; (b) the Trustees shall be entitled to rely upon the advice of counsel or
other advisors to the Class 7B Liquidating Trust or the Trustees, reports
prepared by the Class 7B Claims Administrator, and information provided by any
other Person employed by the Class 7B Liquidating Trust; and (c) all actions
taken and determinations made by the Trustees, unless otherwise expressly
provided in the Class 7B Liquidating Agreement, the Plan, or an order of the
Court, shall be final and binding upon all Persons having any interest in the
Class 7B Liquidating Trust.
Each Trustee shall be reimbursed by the Class 7B Liquidating Trust for his,
her, or its reasonable expenses incurred in the performance of his, her, or its
duties ad Trustee under the Class 7B Liquidating Trust Agreement, provided that
any request for such reimbursement is approved by the Court after such notice
and hearing as the Court may require, and provided, further, that any legal fees
and costs incurred by an individual Trustee, or any other Class 7B claimant, on
its own account and not on behalf of the Class 7B Liquidating Trust shall not be
paid from Trust Assets but shall be paid from the allocation such Trustee or
Class 7B claimant receives pursuant to the allowance/allocation procedures set
forth in the Class 7B Liquidating Trust Agreement.
Company KPMG Claims-Other Claims Constituting Subsequent Trust Assets. The
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Debtor will use its best efforts to obtain a tolling of the statute of
limitations for the Company KPMG Claims until sixty (60) days after the
allowance and allocation process set forth below and in the Class 7B Liquidating
Trust Agreement has become final. Thereafter, control and all decisions
regarding the Company KPMG Claims or other claims constituting Subsequent Trust
Assets, including without limitation the filing (or non-filing), prosecution,
and settlement thereof, shall be made by the vote of the representative(s) of
the holders of Allowed Class 7B Claims holding at least a majority in dollar
amount of all Allowed Class 7B Claims (singly a "REPRESENTATIVE" or collectively
"REPRESENTATIVES") which Representative(s) may be, but is/are not required to
be, a Trustee or Trustees of the Class 7B Liquidating Trust, provided, however,
that any decision (i) to release, or (ii) to settle the Company KPMG Claims or
claim constituting a Subsequent Trust Asset, in whole or in part, or (iii) to
dismiss such claims, if suit has been filed, shall be submitted to the Court for
approval after notice and hearing as the Court may require, and provided,
further, that all proceeds recovered, if any, as a result of the resolution of
the Company KPMG Claims or claims constituting Subsequent Trust Assets shall
remain Trust Assets and be distributed in accordance with Section 6.04 of the
Class 7B Liquidating Trust Agreement, all of which remains subject to the
judgment reduction provisions contained within the Class Settlement Agreement.
The Representative(s) shall provide status reports to the Trustees no less
frequently than semi-annually regarding actions taken and decisions made with
respect to the Company KPMG Claims and claims constituting Subsequent Trust
Assets.
Procedures for Claims' Allowance and Allocation.
-----------------------------------------------
Request for Allowance/Allocation. In connection with confirmation of the
--------------------------------
Plan, the Debtor shall seek approval of the Court for the form of notice to be
sent to parties who may hold Claims in Class 7B ("Notice"), as well as the form,
the timing, and the place for publication of such notice, and shall cause such
notice to be sent and published as ordered by the Court. Prior to seeking such
approval from the Court, the Debtor shall obtain the review and approval from
the Securities Claimants' Committee of the forms of notice and the place for
publication hereof. The forms of notice, among other things, shall advise Class
7B claimants that to be eligible to participate in the consensual allowance
process described below or obtain any allocation or distribution from the Class
7B Liquidating Trust, they, or their representatives (if they are a member of a
class described in a class action pending against the Debtor on the Petition
Date or are individual holders of Class 7B claims whose claims arise from their
purchase of Old Common Stock before January 29, 1997 and who continue to hold
such Old Common Stock as of the Distribution Record Date (the "Old and Cold
Holders")) must submit a Request for Allowance/Allocation prior to
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the date set forth below and in accordance with procedures set forth below. In
addition, the Notice shall advise Class 7B Claimants that if they are members of
a group included within the Class set forth in the Notice: (1) there is no need
to take any affirmative steps or submit any information at this time to
participate in the partial settlement, (2) their rights are already being
represented in the allowance process by the designated counsel for the group in
which the class member's claim falls, (3) a representative of that group will be
permitted to file a Request for Allowance on behalf of that entire group, (4)
counsel for the designated class representative of each group within the class
receiving an allocation from the settlement fund will, subject to approval of
the court in which the claims asserted by that group were initiated, issue a
supplemental Notice to members of the group which will provide information
regarding the outcome of the allocation procedure, the estimate of the average
per share recovery that will be achieved by members of the group as a result of
the settlement, and (5) the plan of allocation approved by the court pursuant in
which the proceeds of the settlement will be ultimately distributed to members
of the group.
Date before which Request for Allowance/Allocation must be Filed. In
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addition to the provisions which the Court may require, the notice shall notify
such parties that in order to be eligible for any allocation or distribution
from the Class 7B Liquidating Trust, (i) they (or their representatives if they
are either a member of a class described in a class action pending against the
Debtor on the Petition Date or an Old and Cold Holder) must file a Request for
Allowance/Allocation in the form approved by the Court (a "REQUEST FOR
ALLOWANCE") with the Claims Center on or before April 9, 1999. For purposes of
the filing of a Request for Allowance, a representative of a class may include
the class representative, or if the class has not been certified or no such
representative has been appointed, lead counsel for plaintiffs in such class
action. For purposes of the filing of a Request for Allowance except to the
extent that the Court determines at the time of the confirmation of the Plan
that the interests of the Old and Cold Holders are represented in pending class
actions, a representative of the Old and Cold Holders shall be approved by the
Court at the time of confirmation of the Plan and may file a Request for
Allowance on behalf of the class of Old and Cold Holders.
Evidence to Accompany Request for Allowance. Any Request for Allowance
-------------------------------------------
filed on behalf of an individual holder of a Class 7B Claim shall be accompanied
by true and correct copies of confirmations, brokerage account statements, or
other sufficient evidence of: (i) the date(s) of purchase(s), (ii) the purchase
price(s), (iii) the date(s) of sale(s), (iv) the sale price(s), and (v) the
number of shares of stock purchased or sold on such date(s) and at such
price(s). Any Request for Allowance filed on behalf of a class of holders of
Class 7B Claims or by the representative of the Old and Cold Holders shall be
accompanied by evidence sufficient to allow the Arbitrator described below to
determine the basis for an award with respect to allowance and/or allocation of
the Class 7B Claims contained in such class.
No Priority; No Automatic Allowance. The filing of a Request for Allowance
-----------------------------------
will not automatically result in the allowance of the Class 7B Claim described
therein. No Allowed Class 7B Claim shall be afforded any priority over any
other Allowed Class 7B claim in distribution. All Claims for which a Request
for Allowance is filed shall be subject to objection and the claims allowance
and allocation process in accordance with the procedures established by the
Trustees.
Forwarding Requests for Allowance. As soon as practicable after April 9,
---------------------------------
1999, the Reorganized Debtor shall cause the Claims Center to forward copies of
all Requests for Allowance filed on behalf of claimants asserting a right to be
included in Class 7B to the Trustees, c/o the Class 7B claims administrator
selected by the Securities Claimants' Committee (the "CLASS 7B CLAIMS
ADMINISTRATOR"). Prior to or on the Confirmation Date, the Securities
Claimants' Committee will select the Class 7B Claims Administrator and provide
notice of the selection to the Debtor, the United States Trustee, counsel for
the Creditors' Committee, and counsel for the Equity Committee.
Selection of Arbitrator. Prior to or on the Confirmation Date, the
-----------------------
Securities Claimants' Committee (i) will select an arbitrator (the "ARBITRATOR")
to serve in connection with allowance of Class 7B Claims and the allocation of
the Trust Assets among the various classes of claimants represented in class
actions which were pending against the Debtor on the Petition Date and other
holders of Allowed Claims in Class 7B, and (ii) will provide notice of the
selection to the Debtor, the United States trustee, counsel for the Unsecured
Creditors' Committee, and counsel for the Equity Committee. At confirmation of
the Plan, the selection of the Arbitrator will be presented to the Court for
approval. The reasonable expenses of the Arbitrator as well as such fees as may
be agreed upon between the Arbitrator and the Trustees in writing shall be paid
first from the funds provided by this Section 8.15 of the Plan and,
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if such funds have been exhausted, then from the Trust Assets. The arrangements
relating to the compensation and reimbursement of the Arbitrator will be
presented to the Court for approval at the hearing on confirmation of the Plan.
Allowance/Allocation/Arbitration Procedures. Within fifteen (15) days of
-------------------------------------------
the Confirmation Date, the Trustees shall establish: (i) a procedure for
resolving, on a consensual basis, the allowance of Class 7B Claims and
allocation of Trust Assets among holders of the Allowed Class 7B Claims, and
(ii) a process for the arbitration of allowance of Class 7B Claims and
allocation of Trust Assets among holders of the Allowed Class 7B Claims in the
event that there is no resolution on a consensual basis. If the Trustees
determine that the services of a mediator (a "MEDIATOR") would be of assistance
in the efforts to attain a consensual allowance ad allocation, they may engage a
Mediator for that purpose.
Consensual Allowance and Allocation. If, as a result of the efforts of the
-----------------------------------
Trustees, a Mediator if any, and any claimants who indicated on their Request
for Allowance a desire to provide input regarding a consensual allowance, a
proposal with respect to a consensual allowance of Class 7B Claims and
allocation of Trust Assets on account of such Claims is accepted by a unanimous
vote of the Trustee then in office, in accordance with procedures adopted by the
Trustees, then the agreement shall be submitted by the Trustees to the Court for
approval, upon such notice as the Court shall order.
No Consensus; Arbitration. If, on or before May 14, 1999, or such later
-------------------------
date as the Trustees shall establish, no motion is filed with the Court seeking
approval of a consensual allowance of Class 7B Claims and allocation of Trust
Assets on account of such Claims, then an arbitration of any unresolved issues
relating to the allowance of Claims in Class 7B and the allocation of Trust
Assets shall be conducted by the Arbitrator as soon as practicable, in
accordance with such rules as the Arbitrator shall establish to the extent that
the Trustees have not done so. The arbitration shall be completed on or before
July 31, 1999.
Binding Arbitration. The arbitration shall be binding in nature, and the
-------------------
only grounds of any application to vacate or modify any decision or award of the
Arbitrator shall be that the Arbitrator was other than a neutral party, that the
award was obtained by fraud, or that the award constituted an abuse of
discretion or violated public policy.
Post-Award Proceedings. Any application to vacate or modify an award of
----------------------
the Arbitrator shall be only to the Court, and any notice of appeal from such an
award must be filed within fourteen (14) days after the Arbitrator shall have
provided a copy of his award to the Trustees and any party to the arbitration,
via facsimile to each of the Trustees and via overnight delivery service in a
method requiring a receipt therefor or via certified mail return receipt
requested to any other party to the arbitration. In the event such an
application is filed, with respect thereto the Arbitrator may, utilizing Trust
Assets, engage counsel to defend the award in connection with any such
application.
Expenses of Post-Award Proceedings. A party filing an application to
----------------------------------
vacate or modify the award of the Arbitrator shall be responsible for his, her,
or its own costs, expenses and attorneys' fees. In addition, if an application
is unsuccessful in that the party making the application does not obtain a
modification or the vacation of the award of the Arbitrator, that party shall
bear all expenses of the application, including the reasonable fees and expenses
incurred in connection therewith by the Arbitrator.
Distribution. The Trustees shall distribute the Trust Assets then held in
------------
the Class 7B Liquidating Trust, net of costs and expenses properly chargeable to
the Trust Assets under the Plan or the Class 7B Liquidating Trust Agreement, as
soon as practicable after either the award of the Arbitrator or order of the
Court approving a consensual allocation of Trust Assets has become final and not
subject to modification, reversal or appeal, and shall make such distribution in
accordance with such arbitration award or such order of the Court. If,
subsequent to such distribution, the Class 7B Liquidating Trust shall acquire
additional Trust Assets, then as soon as practicable after receipt by the Class
7B Liquidating Trust, the Trustees shall distribute those additional Trust
Assets, net of costs and expenses properly chargeable to the Trust Assets under
the Plan or the Class 7B Liquidating Trust Agreement (including net of
attorneys' fees and costs incurred in connection with such additional assets)
according to the same allocation determined previously by consensus or
arbitration, as the case may be. With respect to any distribution of Trust
Assets to Allowed Class 7B Claims which are included within a class action
against the Debtor which was pending on the Petition Date, the Trustees shall
make such distribution by delivering it to an escrow account
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designated by lead counsel for that class in such class action and such
distribution shall remain in that escrow account until such time as (i) such
lead counsel has been able to apply to the court in which the respective class
action is pending as to the matter of a method of final distribution and an
award of attorneys' fees and costs, and (ii) any order on such application has
become final.
Termination. Following (i) a final determination of the Company KPMG
-----------
Claims and other claims constituting Trust Assets, whether by virtue of
prosecution or settlement thereof, or (ii) a decision by the Trustees not to
take any action with respect to the Company KPMG Claims and other claims
constituting Trust Assets, at such time as all Trust Assets, including any and
all sums resulting from prosecution or settlement of the Company KPMG Claims, or
other claims constituting Trust Assets, have been fully and finally distributed,
the Trustees shall apply to the Court for an order of the Court terminating the
Class 7B Liquidating Trust, upon such notice as the Court shall order. Upon the
Court's order terminating the Class 7B Liquidating Trust becoming final, the
Class 7B Liquidating Trust shall be terminated, and the Trustees shall be
discharged of all responsibilities with respect to the Trust.
ARTICLE IX
ACCEPTANCE OR REJECTION OF THE PLAN
9.01 PRESUMED ACCEPTANCE OF PLAN. Classes 1, 2 and 3 are unimpaired under
the Plan, and, therefore, conclusively are presumed to have accepted the Plan in
accordance with Section 1126(f) of the Bankruptcy Code.
9.02 DEEMED NON-ACCEPTANCE OF PLAN. Class 8 is deemed to have rejected
the Plan and will not be solicited for acceptances or rejections of the Plan.
9.03 VOTING CLASSES. Each holder of an Allowed Claim or an Allowed
Interest in Classes 4, 5, 6, 7A and 7B shall be entitled to vote to accept or
reject the Plan.
9.04 ACCEPTANCE BY IMPAIRED CLASSES. An Impaired Class of Claims shall
have accepted the Plan if (i) the holders (other than those designated under
section 1126(e) of the Bankruptcy Code) of at least two-thirds in amount of the
Allowed Claims actually voting in such Class have voted to accept the Plan and
(ii) the holders (other than those designated under section 1126(e) of the
Bankruptcy Code) of more than one-half in number of the Allowed Claims actually
voting in such Class have voted to accept the Plan. An Impaired Class of
Interests shall have accepted the Plan if the holders (other than those
designated under section 1126(e) of the Bankruptcy Code) of at least two-thirds
in amount of the Allowed Interests actually voting in such Class have voted to
accept the Plan.
9.05 NON-CONSENSUAL CONFIRMATION. The Debtor will seek confirmation of
the Plan under section 1129(b) of the Bankruptcy Code in view of the deemed non-
acceptance by Class 8. In the event that any other Impaired Class of Claims or
Interests does not accept the Plan in accordance with section 1126 of the
Bankruptcy Code, the Debtor hereby requests that the Court confirm the Plan in
accordance with section 1129(b) of the Bankruptcy Code. Subject to Section 1127
of the Bankruptcy Code, the Debtor reserves the right to modify the Plan to the
extent that confirmation pursuant to section 1129(b) of the Bankruptcy Code
requires modification.
ARTICLE X
CONDITIONS PRECEDENT
10.01 Conditions to Confirmation. It is a condition to confirmation of
the Plan that:
(i) the Confirmation Order include provisions:
(a) authorizing the Reorganized Debtor to adopt and file the
Amended and Restated Certificate of Incorporation and By-
laws;
(b) authorizing the issuance of the New Common Stock and New
Warrants;
(c) approving the compromise and settlement as set forth in
Section 8.05 and authorizing all transactions contemplated
therein;
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(d) authorizing the issuance of the New Senior Secured Notes
and the New Junior Subordinated Notes;
(e) authorizing all of the other transactions contemplated by
the Plan in order to effectuate the Plan;
(f) exempting the New Senior Secured Notes, the New Junior
Subordinated Notes, the New Common Stock and the New
Warrants from registration under the Securities Act and
state or local laws, pursuant to Section 1145;
(g) making the provisions of the Confirmation Order non-
severable and mutually dependent;
(ii) the Debtor shall have filed (a) an objection to the allowance of
claims asserted by John N. Brincat and the estate of James A.
Doyle and (b) an adversary proceeding which seeks to subordinate
any Equity Interests held by John N. Brincat and the estate of
James A. Doyle; and
(iii) in the event KPMG shall have filed any claim against the Debtor
prior to the Confirmation Date, the Debtor shall file an
objection to the allowance of such Claims and such Claims shall
have been disallowed by Final Order.
10.02 CONDITIONS TO THE EFFECTIVE DATE. The Confirmation Order shall
contain the provisions set forth in Section 10.01 of the Plan (unless waived in
accordance with the provisions of Section 10.03) and the Confirmation Order
shall be in full force and effect and shall not have been reversed, stayed,
modified or amended. The Debtor shall provide written notice to the Creditors'
Committee, Securities Claimants' Committee and Equity Holders' Committee of the
occurrence of the Effective Date.
10.03 WAIVER OF CONDITIONS. The Debtor, with the consent of the
Creditors' Committee (and the consent of the Equity Holders' Committee if such
waiver relates to the conditions set forth in Article X(i)(a), (b), (f) or
(ii)(b)), may waive any condition set forth in this Article X at any time,
without notice, without leave of the Court, and without any formal action other
than proceeding to consummate the Plan.
ARTICLE XI
EFFECTS OF PLAN CONFIRMATION
11.01 DISCHARGE. Except as otherwise expressly provided in the Plan or
Confirmation Order, as of the Effective Date, the Debtor shall be discharged
forthwith from, and the Confirmation Order shall operate as an injunction
against, the commencement or continuation of an action, the employment of
process, or an act to collect, recover or offset, any Claim (including any
Securities Fraud Claim (or any claim for contribution or indemnity relating
thereto)) and any "debt" (as that term is defined in section 101(12) of the
Bankruptcy Code) and any Interest (or Claims or debt related thereto) from or
against the Debtor or the Reorganized Debtor, and the Debtor's and the
Reorganized Debtor's liability in respect thereof shall be extinguished
completely, whether reduced to judgment or not, liquidated or unliquidated,
contingent or noncontingent, asserted or unasserted, fixed or not, matured or
unmatured, disputed or undisputed, legal or equitable, known or unknown, or
arising from any agreement of the Debtor entered into or obligation of any kind
of the Debtor incurred before the Confirmation Date, or from any conduct of the
Debtor occurring prior to the Confirmation Date or that otherwise arose before
the Confirmation Date (including, without limitation, all interest, if any, on
any such debts, whether such interest accrued before or after the date of
commencement of the applicable Reorganization Case), and the Debtor and the
Reorganized Debtor shall be released and discharged from any liability of a kind
specified in section 502(g), 502(h) and 502(i) of the Bankruptcy Code, whether
or not a proof of claim is filed or deemed filed under section 501 of the
Bankruptcy Code, such Claim is allowed under section 502 of the Bankruptcy Code,
or the holder of such Claim has accepted the Plan.
11.02 RELEASE. On the Effective Date, in consideration for, or as part
of, the treatment accorded to the holders of Impaired Claims and Interests under
the Plan, each holder of such Claims or Interests against or in the Debtor
shall be deemed to have released the Debtor from any and all causes of action
and claims, in law or in equity, whether based on tort, fraud, contract or
otherwise, which arose prior to the date of the filing of the Petition Date.
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11.03 RELEASE BY THE DEBTOR OF DIRECTORS, OFFICERS AND EMPLOYEES. Except
for the estate of James A. Doyle and John N. Brincat, as of the Effective Date
and subject to the settlement and compromise set forth in Section 8.05, the
Debtor shall be deemed to have waived and released its present and former
directors, officers and employees from any and all claims of the Debtor
(including claims which the Debtor or Debtor in Possession otherwise has legal
power to assert, compromise or settle in connection with its Reorganization
Case) against such present and former directors, officers and employees arising
on or prior to the Effective Date.
11.04 TERM OF INJUNCTIONS OR STAYS. Unless otherwise provided, all
injunctions or stays provided for in the Reorganization Case pursuant to Section
105 or 362 of the Bankruptcy Code or otherwise in effect on the Confirmation
Date shall remain in full force and effective until the Effective Date.
11.05 EXCULPATION. Except with respect to KPMG Peat Marwick, neither the
Debtor, the Reorganized Debtor, any of their respective officers, directors,
employees, advisors, agents, professionals or representatives, benefit plan
administrators or trustees, nor the members of the Steering Committee or the
parties to the Consent Agreement and their principals, advisors, professionals
and agents, nor the Creditors' Committee, Equity Holders' Committee, Securities
Claimants' Committee and their members, advisors, professionals and agents shall
have or incur any liability to any holder of a Claim or Interest for any act or
omission in connection with or arising out actions taken or omitted to be taken
in good faith in connection with the Debtor's restructuring, the Plan, the
Reorganization Case, including all prepetition activities leading to the
promulgation and confirmation of the Plan, and administration of the Plan or the
property to be distributed under the Plan; provided, however, such exculpation
shall not relate to post confirmation conduct deemed to be willful misconduct or
gross negligence. Upon the Confirmation Date, the Securities Claimants'
Committee shall dismiss or shall be deemed to have dismissed with prejudice
adversary proceeding No. 98-A-01580 against the non-director defendants therein.
11.06 REVESTING. Except as otherwise expressly provided in the Plan or in
the New Collateral Documents, on the Effective Date, the Debtor will be vested
with all of the property of its Estate free and clear of all Claims, liens,
encumbrances, charges and other interests of creditors and equity security
holders, and may operate its business free of any restrictions imposed by the
Bankruptcy Code or by the Court. The Debtor shall continue as debtor in
possession under the Bankruptcy Code until the Effective Date and, thereafter,
the Reorganized Debtor may operate its business free of any restrictions imposed
by the Bankruptcy Code or the Court except as specifically authorized by the
Plan.
11.07 RETENTION OF CAUSES OF ACTION/RESERVATION OF RIGHTS.
(a) Except as provided in Sections 11.03 or 11.05 and subsection (c) below,
nothing contained in the Plan or the Confirmation Order shall be deemed to be a
waiver or relinquishment of any rights or causes of action that the Debtor or
the Reorganized Debtor may have or which the Reorganized Debtor may choose to
assert on behalf of the Estate under any provision of the Bankruptcy Code or any
similar applicable non-bankruptcy law, including, without limitation, (i) any
and all Claims against any entity, including but not limited to KPMG Peat
Marwick, to the extent such entity asserts a crossclaim, counterclaim and/or
claim for setoff which seeks affirmative relief against the Debtor, the
Reorganized Debtor, their officers, directors or representatives; (ii) the
avoidance of any transfer by or obligation of the Debtor, or (iii) the turnover
of any property to the Estate, all of which are expressly reserved by the Plan,
or (iv) derivative actions currently pending on behalf of the Debtor which shall
be dismissed by the Reorganized Debtor immediately following the Effective Date.
(b) Nothing contained in the Plan or the Confirmation Order shall be deemed
to be a waiver or relinquishment of any claim, cause of action, right or setoff,
or other legal or equitable defense which the Debtor had immediately prior to
the Petition Date, against or with respect to any claim left unaltered or
unimpaired by the Plan. The Reorganized Debtor shall have, retain, reserve and
be entitled to assert all such claims, causes of action, rights of setoff and
other legal or equitable defenses which it had immediately prior to the Petition
Date fully as if the Reorganization Case had not been commenced; and all of the
Reorganized Debtor's legal and equitable rights respecting any claim left
unaltered or unimpaired by the Plan may be asserted after the Confirmation Date
to the same extent as if the Reorganization Case had not been commenced.
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(c) Except for the estate of James A. Doyle, John N. Brincat and KPMG Peat
Marwick, the Debtor waives and releases any rights or causes of action for the
recovery of preferential payments or fraudulent conveyances against any party.
11.08 POST-CONSUMMATION EFFECT OF EVIDENCES OF CLAIMS OR INTERESTS.
Outstanding notes, stock certificates and other evidences of Claims against or
Interests in the Debtor in Classes 4, 5, 6, 7A, 7B and 8 shall, effective upon
the Effective Date, represent only the right to participate in the distributions
contemplated by the Plan, if any.
ARTICLE XII
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
12.01 ASSUMPTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES. On the
Effective Date, and to the extent permitted by applicable law, all executory
contracts and unexpired leases of the Debtor set forth on Exhibit 3 attached to
the Plan shall be assumed in accordance with the provisions of sections 365 and
1123 of the Bankruptcy Code and, in the case of contracts evidencing Corporate
Indemnities, subject to the provisions of Section 12.03, unless such executory
contracts or unexpired leases are rejected by the Debtor's motion prior to
confirmation or in connection with the confirmation hearing.
Contracts or leases entered into after the Petition Date will be performed
by the Reorganized Debtor in the ordinary course of business.
12.02 CLAIMS BASED ON REJECTION OF EXECUTORY CONTRACTS OR UNEXPIRED
LEASES. Any Claims arising out of the rejection of contracts or leases must be
filed with the Court within the time set by any Final Order rejecting an
executory contract or unexpired lease or 30 days after the Effective Date. Any
Claims not filed within such time will be forever barred from assertion against
the Debtor or Reorganized Debtor, its estate and property. Unless otherwise
ordered by the Court or provided in this Plan, all such Claims for which proofs
of Claim are required to be filed will be treated as Class 3 Claims.
12.03 LIMITED SURVIVAL OF THE DEBTOR'S CORPORATE INDEMNITIES. Except as
provided in Section 5.03 and this Section 12.03, the Corporate Indemnities shall
not be discharged or impaired by Confirmation of this Plan. Such obligations
shall be deemed and treated as executory contracts to be assumed by the Debtor
and the Reorganized Debtor pursuant to the Plan, and shall continue as
obligations of the Reorganized Debtor, subsequent to the Effective Date,
provided that the Debtor's or Reorganized Debtor's obligations on such Corporate
Indemnities shall be limited as follows:
(i) the claims of officers, agents and employees who remain
employed by the Reorganized Debtor as of the first day
immediately following the Effective Date (excluding any claims
covered by the Indemnification Settlement Fund) shall be fully
assumed;
(ii) the claims of officers, agents, and employees (other than the
claims of the estate of James A. Doyle and John N. Brincat in
respect of which no obligations shall be assumed), who are no
longer Employed by the Reorganized Debtor as of the first day
immediately following the Effective Date, shall be assumed
only to the extent that they relate to costs and expenses
incurred after the Effective Date in connection with their
participation in an agency or government investigation and
shall be limited to $250,000 in the aggregate, such claims to
be submitted to the Reorganized Debtor and paid upon adequate
verification;
(iii) the Beneficiaries shall be entitled to assert Allowed
Indemnification Claims, but shall be entitled to compensation
on account of such claims only (x) out of the Indemnification
Settlement Fund, and (y) to the extent of insurance coverage
available under the Reliance Policies; and
(iv) the claims of persons who are outside directors as of the day
preceding the Effective Date shall be assumed and limited to
the sum of (x) any remaining fee retainer in possession of
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the professionals retained by such directors and (y) the
available balance from time to time of the Outside Directors
Reserve. Nothing in this subsection shall limit any rights of
such persons provided under Section 12.03(iii) of this Plan.
ARTICLE XIII
RETENTION OF JURISDICTION
13.01 RETENTION OF JURISDICTION. Notwithstanding the entry of the
Confirmation Order or the Effective Date having occurred, the Court shall retain
original and exclusive jurisdiction to (a) determine any disputed Claims, (b)
determine requests for payment of Claims entitled to priority under section
507(a)(1) of the Bankruptcy Code, including compensation of and reimbursement of
expenses of professionals and other parties entitled thereto, (c) resolve
controversies and disputes regarding interpretation and implementation of the
Plan, (d) enter orders in aid of the Plan, including, without limitation,
appropriate orders (which may include contempt or other sanctions) to protect
the Debtor and the Reorganized Debtor in accordance with sections 524 and 1141
of the Bankruptcy Code and the terms and conditions of the Confirmation Order,
(e) modify the Plan pursuant to Section 14.02 of the Plan, (f) determine any and
all applications, adversary proceedings and contested or litigated matters
pending on the Effective Date, (g) allow, disallow, estimate, liquidate or
determine any Claim or Interest and to enter or enforce any order requiring the
filing of any such Claim before a particular date, (h) determine any and all
pending applications for the rejection of executory contracts or unexpired
leases, or for the assignment of assumed executory contracts and unexpired
leases, and to hear and determine, and if need to be liquidate, any and all
Claims arising from any such rejection, assumption and/or assignment, (i)
determine any actions or controversies arising under or in connection with the
Plan, the Confirmation Order, the Class 7B Liquidating Trust or any contract,
instrument, release, or other agreement created in connection with the Plan, (j)
enter and implement orders as are necessary or appropriate if the Confirmation
Order is for any reason modified, stayed, reversed, revoked or vacated, (k)
enter a final decree closing the Reorganization Case, (l) determine any actions
or controversies related to or asserted against the Exchange Agent and (m) enter
and implement orders as are necessary to the transactions set forth in Section
8.05 of the Plan.
13.02 FAILURE OF COURT TO EXERCISE JURISDICTION. If the Court abstains
from exercising or declines to exercise jurisdiction, or determines that it is
otherwise without jurisdiction over any matter or proceeding arising out of,
related to or otherwise connected with the Reorganization Case, including the
matters set forth in this Article XIII , this Article shall not prohibit, or
limit or otherwise affect the exercise of jurisdiction by any other court having
competent jurisdiction with respect to such matter or proceeding.
ARTICLE XIV
MISCELLANEOUS PROVISIONS
14.01 RETIREE BENEFITS. On and after the Effective Date, pursuant to
section 1129(a)(13) of the Bankruptcy Code and applicable nonbankruptcy law, the
Reorganized Debtor shall continue to be obligated to pay all retiree benefits,
as that term is defined in section 1114 of the Bankruptcy Code, and shall
continue to pay such retiree benefits as they become due at the level
established at any time prior to confirmation of the Plan pursuant to subsection
(e)(1)(B) or (g) of section 1114, for the duration of the period the Debtor has
obligated itself to provide such benefits; provided, however, that nothing
herein shall extend or otherwise modify the duration of such period or prohibit
the Debtor's ability or the Reorganized Debtor's ability to modify the terms and
conditions of the retiree benefits as otherwise permitted by such plans and
otherwise applicable nonbankruptcy law.
14.02 MODIFICATION OF PLAN. The Debtor reserves the sole right, in
accordance with the Bankruptcy Code and Bankruptcy Rules, to amend or modify the
Plan prior to the entry of the Confirmation Order. After the entry of the
Confirmation Order, the Reorganized Debtor may, upon order of the Court, amend
or modify the Plan in accordance with section 1127(b) of the Bankruptcy Code and
the Bankruptcy Rules or remedy any defect or omission or reconcile any
inconsistency in the Plan in such manner as may be necessary to carry out the
purpose and intent of the Plan.
14.03 WITHDRAWAL OF PLAN. The Debtor reserves the right, at any time
prior to the entry of the Confirmation Order, to revoke and withdraw the Plan.
If the Debtor revokes or withdraws the Plan under this
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section, or if entry of the Confirmation Order does not occur, then the Plan
shall be deemed null and void. In that event, nothing contained in the Plan
shall be deemed to constitute a waiver or release of any Claims by or against or
any Interests in the Debtor, to prejudice in any manner the rights of the Debtor
in any further proceedings involving the Debtor, or constitute an admission
against interest by the Debtor or any other party in interest.
14.04 HEADINGS. The headings used in this Plan are inserted for
convenience only and neither constitute a portion of the Plan nor in any manner
affect the provisions of the Plan.
14.05 SUCCESSORS AND ASSIGNS. The rights, benefits and obligations of any
person or entity named or referred to in the Plan shall be binding upon, and
shall inure to the benefit of, the heir, executor, administrator, successor or
assign of such person or entity.
14.06 PAYMENT OF STATUTORY FEES. All fees payable pursuant to section
1930 of Title 28 of the United States Code, as determined by the Bankruptcy
Court at the hearing pursuant to section 1128 of the Bankruptcy Code, shall be
paid on or before the Effective Date.
14.07 NOTICES. Any notice, request or demand given or made under this
Plan or under the Bankruptcy Code or the Bankruptcy Rules shall be in writing
and shall be hand delivered or sent by a reputable overnight courier service,
and shall be deemed given when received at the following addresses whether hand
delivered or sent by overnight courier service:
Mark E. Dapier
General Counsel
Mercury Finance Company
100 Field Drive
Suite 340
Lake Forest, Illinois 60045
with a copy to:
Lewis S. Rosenbloom
David D. Cleary
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606-5096
Notwithstanding anything to the contrary provided herein, all notices concerning
this Plan shall be served upon the entities prescribed and in the manner
prescribed under the Bankruptcy Code and the Bankruptcy Rules.
14.08 SEVERABILITY OF PLAN PROVISIONS. If prior to confirmation, any term
or provision of the Plan which does not govern the treatment of Claims or
Interests or the conditions to confirmation or the Effective Date is held by the
Court to be invalid, void or unenforceable, the Court shall have the power to
alter and interpret such term or provision to make it valid or enforceable to
the maximum extent practicable, consistent with the original purpose of the term
or provision held to be invalid, void or unenforceable, and such term or
provision shall then be applicable as altered or interpreted. Notwithstanding
any such holding, alteration or interpretation, the remainder of the terms and
provision of the Plan will remain in full force and effect and will in no way be
affected, impaired or invalidated by such holdings, alteration or
interpretation. The Confirmation Order shall constitute a final judicial
determination and shall provide that each term and provision of the Plan as it
may have been altered or interpreted in accordance with the foregoing, is valid
and enforceable pursuant to its terms.
14.09 EXHIBITS. Exhibits to the Plan or Disclosure Statement that are not
filed simultaneously with the Plan shall be filed with the Court not less than
ten days prior to the hearing on the Disclosure Statement to be conducted
pursuant to the Bankruptcy Rule 3017 and shall be mailed to the Creditors'
Committee, the Securities and Exchange Commission, the Commissioner of
Securities for the State of Illinois and any party in interest that makes a
written request for such Exhibit to the Debtor.
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14.10 NO ADMISSIONS. Notwithstanding anything herein to the contrary,
nothing contained in the Plan shall be deemed as an admission by the Debtor with
respect to any matter set forth herein including, without limitation, liability
on any Claim or the propriety of any Claims classification.
ARTICLE XIII
CONFIRMATION REQUEST
The Debtor requests confirmation of the Plan under Section 1129(b) of the
Bankruptcy Code.
Dated: December 29, 1998
MERCURY FINANCE COMPANY
By: /s/ WILLIAM A. BRANDT, JR.
---------------------------------------
William A. Brandt, Jr.
President and Chief Executive Officer
Prepared by:
Lewis S. Rosenbloom
David D. Cleary
McDERMOTT, WILL & EMERY
227 West Monroe Street
Chicago, Illinois 60606-5096
(312) 372-2000
Counsel for Mercury Finance
Company
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EXHIBIT 1 TO PLAN
-----------------
CONSUMER LITIGATION
<TABLE>
<CAPTION>
NO. CASE NAME AND NUMBER VENUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. TAWANA BLAND v. MFC d/b/a MFC of GA and Bill Heard Muscogee County State Court
Chevrolet Co. Georgia
SC95-CV331
- -----------------------------------------------------------------------------------------------------------------------
2. BRENDA BOOHER v. Fain Lunsford, Sr., Raymond Sullian County Circuit Court
Hilliard d/b/a/ A&B Used Cars, a/k/a Raymond's Bus & Tennessee
Car Garage; Lynn Anders d/b/a Factory Outlet
Furniture; and MFC C10405(L)
- -----------------------------------------------------------------------------------------------------------------------
3. MACK CALHOUN, JR. v. MFC d/b/a MFC of GA and GT Muscogee State Court
Motors, Inc., f/k/a Players Auto Sales Georgia
SC95-CV333
- -----------------------------------------------------------------------------------------------------------------------
4. COLUMBUS FINANCE CO. v. MFC, Gayrius Mickels, Roy Muscogee State Court
Ray Automotive Georgia
97-CV-2426
- -----------------------------------------------------------------------------------------------------------------------
5. RUFUS CULLEN v. MFC Seminole County Court
98-1-SP-19-Z Florida
- -----------------------------------------------------------------------------------------------------------------------
6. WILLIAM DEARMON v. MFC, Individually and d/b/a MFC Williamson County Chancery Court
of Tennessee, Individually and American Bankers Florida
Insurance Company of Florida
24583
- -----------------------------------------------------------------------------------------------------------------------
7. SHIRLEY DEWHART v. Brooks & Thomas Motor Co., Inc., Muscogee County Superior Court
d/b/a Mike Collins Nissan and MFC Georgia
97CV-3326
- -----------------------------------------------------------------------------------------------------------------------
8. RAYMOND E. EWING v. Midland Finance Company; Gerald U.S. District Court, N.Dist., E. Div.
Mizel and MFC 96C0222 Illinois
- -----------------------------------------------------------------------------------------------------------------------
9. BOBBY & FRANCES LUCILLE GUALTNEY v. MFC Muscogee County Magistrate Court
97-301 Georgia
- -----------------------------------------------------------------------------------------------------------------------
10. TODD GORDON v. State of Florida et al. 97-3053 Miami District Court
Florida
- -----------------------------------------------------------------------------------------------------------------------
11. DAVID GROPPI v. MFC Cuyahoga City Common Pleas Court
348448 Ohio
- -----------------------------------------------------------------------------------------------------------------------
12. KATHY HOLLIDAY v. MFC d/b/a MFC of GA and Bill Heard Muscogee County State Court
Chevrolet Company Georgia
SC95-CV-330
- -----------------------------------------------------------------------------------------------------------------------
13. ANGELA K. HUMPHRIES v. MFC Jefferson County Circuit Court
CV97-676 Alabama
- -----------------------------------------------------------------------------------------------------------------------
14. EULA M. JACKSON v. Motor Cars, Inc., d/b/a Cars Muscogee County State Court
Unlimited and MFC d/b/a MFC of GA Georgia
SC-95-CV-332
- -----------------------------------------------------------------------------------------------------------------------
15. MICHAEL JOHNSON & CAROLE J. JOHNSON v. MFC d/b/a MFC Muscogee County State Court
of GA and Maloof Motor Company, Inc. Georgia
SC95-CV-326
- -----------------------------------------------------------------------------------------------------------------------
16. TERESA JOHNSTON v. James Luce MFC of Florida and MFC Pinellas County Circuit Court
97-003786-C1008 Florida
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. CASE NAME AND NUMBER VENUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
17. DAWN-FUNDERBERG-KALINOWSKI on behalf of herself and US BK Court, N. Dist., IL
those similarly situated, v MFC and MFC of Illinois Illinois
98A00854
"New Case Filed 4/29/98
- -------------------------------------------------------------------------------------------------------------------
18. DEBRA H. PORTER v. MFC d/b/a MFC of GA and Maloof Muscogee County State Court
Motor Company, Inc. Georgia
SC95-CV-325
- -------------------------------------------------------------------------------------------------------------------
19. MILTON D. PORTER AND ANGELA N. BROWN v. MFC d/b/a Muscogee County State Court
MFC of GA and Mark Levy Auto Center, Inc. Georgia
- -------------------------------------------------------------------------------------------------------------------
20. WAYMON PRIOR, ET AL. v. MFC of Alabama and American Coffee County, Elba Division,
Bankers Insurance Alabama
- -------------------------------------------------------------------------------------------------------------------
21. ANGELA D. SCARVER v. Edwards Chevrolet Co, Inc., (Not listed)
American Bankers, Roadguard, MFC of Alabama and MFC
Corporation
- -------------------------------------------------------------------------------------------------------------------
22. JOSEPH P. & MARIE SIOFELE v. Martha Cornejo; MFC and Riverside County Municipal Court
MFC d/b/a/ MERC Finance Company; California Coastal California
Recovery; and Does 1 to 10
8068
- -------------------------------------------------------------------------------------------------------------------
23. MARION SIMS & MARY EPTING v. MFC and A.B., jointly Smith County Court
and severally Mississippi
- -------------------------------------------------------------------------------------------------------------------
24. MYRON B. STAPLES V, MFC and John Hall Milwaukee County Circuit Court
96-CV-5065 Wisconsin
- -------------------------------------------------------------------------------------------------------------------
25. RANDALL SCOTT STARKS, d/b/a Starks & Associates v. Harris County District Court
MFC a/k/a MFC Finance Company Texas
H-97-1379
- -------------------------------------------------------------------------------------------------------------------
26. RALPH G. STEWART v. B&M Motors, James D. Davis d/b/a Walker County Circuit Court
B&M Motors, MFC and A,B,C,D Alabama
- -------------------------------------------------------------------------------------------------------------------
27. DION TAYLOR & Claudia Anderson v. Celozzi Ettelson DuPage County Circuit Court
Chevrolet, Inc. and MFC Illinois
97L-00264
- -------------------------------------------------------------------------------------------------------------------
28. JAMES E. THOMAS & DOROTHY L. DIXON V. Bill Heard Russell County Circuit Court
Chevrolet, Bill Bratton, John Does 1-10, and MFC, Alabama
Inc.
CV95-47
- -------------------------------------------------------------------------------------------------------------------
29. LLOYD WAINWRIGHT & MITCH BUCHOLZ v. MFC of Wisconsin Racine County Circuit Court
and MFC Wisconsin
97CV-0922
- -------------------------------------------------------------------------------------------------------------------
30. VNESSA WALLACE V. MFC d/b/a MFC of GA and Gateway Muscogee County State Court
Lincoln-Mercury Georgia
SC95-CV327
- -------------------------------------------------------------------------------------------------------------------
31. DOUGLAS & LINDA WALTERS v. MFC and American Bankers Fayette County Circuit Court
Life Assurance Company Alabama
CV94-054
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 2 TO PLAN
-----------------
SECURITIES LITIGATION
1. Each of the civil actions pending in the United States District Court for
the Northern District of Illinois in the Consolidated Pretrial Proceeding
captioned In the Matter of Mercury Finance Company of Illinois, Case No. 97
----------------------------------------------------
C 3035 (N.D.Ill.) Ill. filed March 20, 1997);
2. The case captioned Ferree v. Mercury Finance Company, et al., No. 97 C 5245
-----------------------------------------
(N.D. Ill. filed July 24, 1997);
3. The case captioned Realtech Software, Inc. et al. v. Mercury Finance Co.
-----------------------------------------------------
et. al., No. 97 CH 1277 (Cir. Ct. Cook Co. Ill. filed January 31, 1997);
-------
4. The case captioned Crandon Capital Partners v. John N. Brincat et al., No.
--------------------------------------------------
97 CH 1491 (Cir. Ct. Cook Co. Ill. filed February 5, 1997);
5. The case captioned Malone v. John N. Brincat et al., No. 15510-NC (Del. Ch.
--------------------------------
filed February 4, 1997);
6. The cases captioned Thorp et al. v. Mercury Finance Co. et al., No. 97 CH
------------------------------------------
1440 (Cir. Ct. Cook Co. Ill. filed February 4, 1997); State Board of
--------------
Administration of Florida et al. v. Brincat et. al., No. 97 CH 1440 (Cir.
---------------------------------------------------
Ct. Cook Co. Ill., Application for intervention filed November 22, 1997);
7. The case captioned Kittle et al. v. Mercury Finance Co. et al., No. 97 CH
-------------------------------------------
3639 (Cir. Ct. Cook Co. Ill. filed March 25, 1997);
8. The case captioned Pontikes et al. v. John N. Brincat et al., No. 97 CH
-----------------------------------------
3039 (Cir. Ct. Cook Co. Ill. filed March 12, 1997);
9. The case captioned Dloogatch et al. v. John N. Brincat et al., No. 97 CH
------------------------------------------
8790 (Cir. Ct. Cook Co. Ill. filed July 16, 1997);
10. The case captioned Wexler v. John N. Brincat et al., No. 15512-NC (Del. Ch.
--------------------------------
filed February 5, 1997);
11. The case captioned Krasnow v. John Brincat et al., No. 15525-NC (Del. Ch.
------------------------------
filed February 7, 1997);
12. The case captioned Trauscht v. John N. Brincat et al., No. 15524-NC (Del.
----------------------------------
Ch. filed February 6, 1997);
13. The case captioned Damaskus v. John N. Brincat et al., No. 15546-NC (Del.
----------------------------------
Ch. filed February 14, 1997);
14. The case captioned Schwartz v. John N. Brincat et al., No. 15567-NC (Del.
----------------------------------
Ch. filed February 24, 1997;
15. The case captioned Grinnell v. John N. Brincat et al., No. 15568-NC (Del.
----------------------------------
Ch. filed February 24, 1997);
16. The case captioned Cumming v. John N. Brincat et al., No. 15569-NC (Del.
---------------------------------
Ch. filed February 24, 1997);
17. The case captioned Sutherland v. John N. Brincat et al., No. 15582-NC (Del.
------------------------------------
Ch. filed February 27, 1997);
<PAGE>
18. The case captioned Gulf Trust v. John N. Brincat et al., No. 15581-NC (Del.
------------------------------------
Ch. filed February 27, 1997);
19. The case captioned Jackson v. Brincat et al., No. 97 C 1941 (N.D. Ill.
-------------------------
filed March 20, 1997);
20. T. Rowe Price Financial Services Fund, Inc., et al. v. Mercury Finance Co.,
--------------------------------------------------------------------------
et al. Case No. 97 C 4782 N.D. Ill. filed July 3, 1997. (Motion for
finding of relatedness denied.)
21. Robert F. Wells, et al. v. John N. Brincat, et al., No. 98 L 013108 (Cir.
--------------------------------------------------
Ct. Cook Co. Ill. filed November 13, 1998).
22. Shriners Hospital for Children v. Mercury Finance Co, et al., No. 98 C 1480
-----------------------------------------------------------
(N.D. Ill. Filed March 15, 1998).
Ex 2 - 2
<PAGE>
EXHIBIT 3 TO PLAN
-----------------
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
TO BE ASSUMED/1/
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPIRED LEASE OF CONTRACT OR UNEXPIRED LEASE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. ADT AUTOMOTIVE SERVICES, INC. Contract to provide collateral recovery services
ATTN: GENERAL COUNSEL
435 METROPLEX DRIVE
NASHVILLE, TN 37211
- ------------------------------------------------------------------------------------------------------------------------------------
2. ALTERNATIVE COMMUNICATIONS AND TELECONSULTING Contract to provide long-distance communication services
585 CHEROKEE ROAD
HIGHLAND PARK, IL 60035
- ------------------------------------------------------------------------------------------------------------------------------------
3. ARCUS DATA SECURITY Contract to provide data storage services
222 W LAS COLINAS BLVD
SUITE 850
IRVING, TX 75039
- ------------------------------------------------------------------------------------------------------------------------------------
4. ARNFED GENERAL AGENCY, INC. Contract to provide workman's compensation insurance
805 SOUTH WHEATLEY
SUITE 600
RIDGELAND, MS 39158
- ------------------------------------------------------------------------------------------------------------------------------------
5. BANK ONE, ILLINOIS, NA Contract to provide trustee and investment management services
ATTN: BOB ZEIGLER in connection with the Mercury Finance Company Savings Plan (401K)
800 DAVID STREET plan
EVANSTON, IL 60201
Contract to provide trustee services in connection with the
Mercury Finance Company Retirement Plan
Various contracts relating to the cash management system (i.e.
wire transfer agreement, ACH collection, Allotment agreement,
control disbursement agreement)
- ------------------------------------------------------------------------------------------------------------------------------------
6. BERKOW, DAVID Non-compete and Termination Benefits Contract
1310 KINGSLEY DRIVE
ARLINGTON HEIGHTS, IL 60004
- ------------------------------------------------------------------------------------------------------------------------------------
7. CAREY, GEORGE Non-Compete And Termination Benefits Contract
794 N OAKWOOD AVENUE
LAKE FOREST, IL 60045
- ------------------------------------------------------------------------------------------------------------------------------------
8. CAUL, MICHAEL H Non-Compete And Termination Benefits Contract
10791 N. 101ST PLACE
SCOTTSDALE, AZ 85260
- ------------------------------------------------------------------------------------------------------------------------------------
9. CIMCO COMMUNICATIONS Contract to Provide Data Communication Services
18W100 22ND STREET
SUITE 109
OAKBROOK TERRACE, IL 60181
- ------------------------------------------------------------------------------------------------------------------------------------
10. COLLINS, JAMES R Non-Compete And Termination Benefits Contract
9829 S HOYNE
CHICAGO, IL 60643
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________________
/1/ Unless such contract or unexpired lease is rejected by motion on or prior
to the Confirmation Date.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPIRED LEASE OF CONTRACT OR UNEXPIRED LEASE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
11. DAPIER, MARK E. Non-Compete And Termination Benefits Contract
445 E. DEERPATH
LAKE FOREST, IL 60045
- ------------------------------------------------------------------------------------------------------------------------------------
12. DATA CLEAN CORP Contract to provide computer equipment cleaning services
1033 GRACELAND AVENUE
DES PLAINES, IL 60016
- ------------------------------------------------------------------------------------------------------------------------------------
13. EQUIFAX CREDIT INFORMATION SERVICES, INC. Contract to provide consumer credit reporting
1600 PEACHTREE STREET
ATLANTA, GA 30309
- ------------------------------------------------------------------------------------------------------------------------------------
14. EXPERIAN INFORMATION SOLUTIONS, INC. Contract to provide consumer credit reporting
425 NORTH MARTINGALE ROAD
SUITE 600
SCHAUMBURG, IL 60173
- ------------------------------------------------------------------------------------------------------------------------------------
15. FIDELITY INVESTMENTS Contract to provide trustee, record management, plan
120 N LASALLE administration and investment services in connection with the
SUITE 2700 IN4 Mercury Finance Company Savings Plan (401K Plan)
CHICAGO, IL 60602
- ------------------------------------------------------------------------------------------------------------------------------------
16. FIRST ALLAMERICA FINANCIAL Contract to provide administration services and excess employee
LIFE INSURANCE COMPANY benefit loss insurance in connection with employee health
440 LINCOLN benefit plan
WORCESTER, MA 01605
- ------------------------------------------------------------------------------------------------------------------------------------
17. GEOCAPITAL CORPORATION Contract to provide investment management services in
767 FIFTH AVENUE connection with the Mercury Finance Company Retirement Plan
NEW YORK, NY 10153
- ------------------------------------------------------------------------------------------------------------------------------------
18. GOULD, STEVEN G Agreement to reimburse employee relocation expenses; and
14365 W BRAEMORE Non-Compete and Termination Benefits Contract
GREEN OAKS, IL 60048
- ------------------------------------------------------------------------------------------------------------------------------------
19. AL GREEN Agreement to Reimburse Employee Relocation Expenses; and
2480 OTTER CREEK LN Non-Compete and Termination Benefits Contract
ELGIN, IL 60123-5608
- ------------------------------------------------------------------------------------------------------------------------------------
20. HARRIS TRUST COMPANY OF NEW YORK Contract to act as Registrar and Stock Transfer Agent in
77 WATER STREET connection with Common Stock
NEW YORK, NY 10005
- ------------------------------------------------------------------------------------------------------------------------------------
21. HARTFORD FIRE INSURANCE COMPANY Contract to provide commercial automobile liability insurance
HARTFORD PLAZA
HARTFORD, CT 06115
- ------------------------------------------------------------------------------------------------------------------------------------
22. HEWITT ASSOCIATES, LLC Contract to provide actuarial and consulting services in
100 HALF DAY ROAD connection with the Mercury Finance Company Retirement Plan
LINCOLNSHIRE, IL 60069
- ------------------------------------------------------------------------------------------------------------------------------------
23. INFINITI FINANCIAL SERVICES Automobile lease
990 WEST 190TH STREET
TORRANCE, CA 90502
- ------------------------------------------------------------------------------------------------------------------------------------
24. ITT HARTFORD INSURANCE GROUP Contract to provide employer's liability insurance
HARTFORD PLAZA
HARTFORD, CT 08115
- ------------------------------------------------------------------------------------------------------------------------------------
25. LAM, CHARLES Agreement to reimburse employee relocation expenses; and
14360 W BRAEMORE CLOSE Non-Compete and Termination Benefits Contract
GREEN OAKS, IL 60048
- ------------------------------------------------------------------------------------------------------------------------------------
26. LARRY FRYKMAN OFFICE MACHINES Contract to provide office equipment maintenance
281 E MESSNER DRIVE
WHEELING, IL 60090
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ex.3-2
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPIRED LEASE OF CONTRACT OR UNEXPIRED LEASE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
27. LLOYD'S OF LONDON Contract to provide accidental death & dismemberment insurance
CORPORATE RISK INTERNATIONAL
11250 WAPLES MILL RD
FAIRFAX, VA 22030
- ------------------------------------------------------------------------------------------------------------------------------------
28. LUTGEN, ROBERT M. Agreement to Provide Employee Relocation Expenses; and
14881 RIVER OAKS DR. Non-Compete and Termination Benefits Contract
LINCOLNSHIRE, IL 60069
- ------------------------------------------------------------------------------------------------------------------------------------
29. MARTIN PARTNERS LLC Executive Placement Agreement
224 S. MICHIGAN AVENUE
SUITE 620
CHICAGO, IL 60604
- ------------------------------------------------------------------------------------------------------------------------------------
30. WILLIAM M. MERCER Contract to provide consulting services with respect to
10 S WACKER DRIVE employee benefit plans
SUITE 1700
CHICAGO, IL 60606
- ------------------------------------------------------------------------------------------------------------------------------------
31. MERCURY FINANCE COMPANY Mercury Finance Company Amended and Restated 1989 Stock Option
100 FIELD DRIVE, SUITE 340 and Incentive Compensation Plan
LAKE FOREST, IL 60045
- ------------------------------------------------------------------------------------------------------------------------------------
32. NATIONAL LOAN EXCHANGE CORPORATION Contract to provide exclusive asset-marketing services for
11475 OLDE CABIN ROAD written-off loan receivables
SUITE 2200
ST LOUIS, MO 63141
- ------------------------------------------------------------------------------------------------------------------------------------
33. NATIONSBANK, N.A. Contract for Indemnification of NationsBank for Payment of
ATTN: LOUISA A. COMBS Certain Drafts
101 SOUTH TRYON STREET, 28TH FLOOR
CHARLOTTE, NC 28255-0074
- ------------------------------------------------------------------------------------------------------------------------------------
34. PARADATA FINANCIAL SYSTEMS Contract to Provide Computer Consulting Services
18102 CHESTERFIELD AIRPORT ROAD
SUITE J
CHESTERFIELD, MO 63005
- ------------------------------------------------------------------------------------------------------------------------------------
35. PETERS, DAVE Non-Compete and Termination Benefits Contract
2337 TIFFANY CIRCLE
FLORENCE, MS 39073
- ---------------------------------------------------------------------------------------------------------------------------------
36. PROGRESSIVE CASUALTY INSURANCE CO Contracts to provide collateral protection insurance and
PROGRESSIVE NORTHERN INSURANCE CO. related services
6300 WILSON MILLS ROAD
MAYFIELD VILLAGE, OH 44143
- ------------------------------------------------------------------------------------------------------------------------------------
37. RELIANCE INSURANCE COMPANY Two contracts providing officer and director insurance
77 WATER STREET
NEW YORK, NY 10005
- ------------------------------------------------------------------------------------------------------------------------------------
38. STATE MUTUAL/FIRST ALLAMERICA Contract to service employee welfare benefits
440 LINDOLN STREET
WORCHESTER, MA 01605
- ------------------------------------------------------------------------------------------------------------------------------------
39. STAUTZENBACH, EDWARD G. Non-Compete and Termination Benefits Contract
610 E. FAIRVIEW
ARLINGTON HGTS, IL 60005
- ------------------------------------------------------------------------------------------------------------------------------------
40. SUNGARD RECOVERY SERVICES Contract to provide computer services
3100 ARNOLD LANE
NORTHBROOK, IL 60062
- ------------------------------------------------------------------------------------------------------------------------------------
41. TWIN CITY FIRE INSURANCE COMPANY Contract to provide commercial general liability insurance
HARTFORD PLAZA
HARTFORD, CT 06115
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-3
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPIRED LEASE OF CONTRACT OR UNEXPIRED LEASE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
42. UNITED FINANCIAL CASUALTY COMPANY Collateral protection insurance and related services
747 ALPHA DRIVE
HIGHLAN HEIGHTS, OH 44143
- ----------------------------------------------------------------------------------------------------------------------------------
43. US STORAGE Contract to provide storage space
177 DEER LAKE ROAD
DEERFIELD, IL 60015
- ----------------------------------------------------------------------------------------------------------------------------------
44. VISION SERVICES Contract to provide administrative services and vision care
3333 QUALITY DRIVE benefits
RANCHO CORDOVA, CA 95670
- ----------------------------------------------------------------------------------------------------------------------------------
45. WORLDCOM Contract to provide long-distance communication services
ATTN: RONALD STUART - LEGAL DEPT
6929 N LAKEWOOD AVENUE
TULSA, OK 74117
- ----------------------------------------------------------------------------------------------------------------------------------
46. XEROX Contract to provide office equipment maintenance and service
350 S NORTHWEST HIGHWAY
PARK RIDGE, IL 60068
- ----------------------------------------------------------------------------------------------------------------------------------
47. XYPLEX Contract to provide computer network services
295 FOSTER STREET
LITTLETON, MA 01460
- ----------------------------------------------------------------------------------------------------------------------------------
48. FOLMAR & ASSOC. Real Property Lease
P.O. BOX 16765 Store # 280: Meridian, MS
MOBILE, AL 36616
- ----------------------------------------------------------------------------------------------------------------------------------
49. ATLANTIC STRUCTURES, L.P. Real Property Lease
C/O THE RUBENSTEIN CO. Store #189: Marietta, GA
SUITE 201
TWO LOGAN SQUARE
PHILADELPHIA, PA 19103
- ----------------------------------------------------------------------------------------------------------------------------------
50. CLAUDE DEBOTTON AS AGENT FOR THE DEBOTTON TRUST Real Property Lease
1001 BALTIMORE PIKE Store # 325 (Philadelphia West): Broomall, PA
SPRINGFIELD, PA 19064
- ----------------------------------------------------------------------------------------------------------------------------------
51. BANK ONE OF CHICAGO, Real Property Lease
AS TRUSTEE FOR TRUST NO. R3772 Midland: 7541 Northwestern Avenue, Chicago, IL
LAND TRUST DEPARTMENT
ATTN: CATHY MARTIN
14 SOUTH LAGRANGE
LAGRANGE, IL 60525
- ----------------------------------------------------------------------------------------------------------------------------------
52. BENNETT & GRIGG ASSOCIATES, INC. Real Property Lease
806-M HIGHWAY 66 S Store # 193: Kernersville, NC
KERNERSVILLE, NC 27284
- ----------------------------------------------------------------------------------------------------------------------------------
53. BRISCOE INVESTMENTS LIMITED PARTNER Real Property Lease
250 S. EXEUCTIVE DRIVE Store # 215: Hales Corner, WI
SUITE 301
BROOKFIELD, WI 53005
- ----------------------------------------------------------------------------------------------------------------------------------
54. BYRAM PROPERTIES Real Property Lease
510 S. CONGRESS, SUITE 400 Store # 137: Austin, TX
AUSTIN, TX 78704
- ----------------------------------------------------------------------------------------------------------------------------------
55. ATLANTA SOUTHERN BUSINESS PARK LTD. Real Property Lease
3000 CORPORATE CENTER DR., SUITE 300 Store # 212 (Atlanta South): Morrow, GA
P.O. BOX 870485
MORROW, GA. 30287
- ----------------------------------------------------------------------------------------------------------------------------------
56. PIERCE PROPERTIES LTD. Real Property Lease
4041 E. THOMAS ROAD, SUITE 200 Store # 162: Phoenix, AZ
PHOENIX, AZ 85108
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPIRED LEASE OF CONTRACT OR UNEXPIRED LEASE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
57. ALLEN DEVELOPMENT GROUP, INC. Real Property Lease
5210 ARMOUR ROAD, SUITE 300 Store # 113: Columbus Auto, Columbus, GA
COLUMBUS, GA 31904
- ------------------------------------------------------------------------------------------------------------------------------------
58. DELTA BUILDING INC. Real Property Lease
C/O MR. FILO COATS Store # 820: Grenada, MS
P.O. BOX 1443
GRENADA, MS 38904
- ------------------------------------------------------------------------------------------------------------------------------------
59. DELTA PLAZA ASSOCIATES Real Property Lease
10132 US HIGHWAY 19 Store # 223: Port Richey, FL
PORT RICHEY, FL 34668
- ------------------------------------------------------------------------------------------------------------------------------------
60. DESERT INN OFFICE CENTER II Real Property Lease
2785 E. DESERT INN RD., SUITE 130 Store # 142: Las Vegas, NV
LAS VEGAS, NV 89121
- ------------------------------------------------------------------------------------------------------------------------------------
61. DUKE REALTY INVESTMENTS, INC. Real Property Lease
4225 NAPERVILLE ROAD, SUITE 1500 Location: 100 Field Drive, Suite 340, Lake Forest, IL 6045
LISLE, IL 60532
- ------------------------------------------------------------------------------------------------------------------------------------
62. HAWTHORN ASSOCIATES Real Property Lease
C/O EATON & LAUTH REAL ESTATE SERVICES Store # 188: Indianapolis North, IN
12220 N. MERIDIAN ST., SUITE 175
CARMEL, IN 46032
- ------------------------------------------------------------------------------------------------------------------------------------
63. FIRST CAPITAL LANSING PROPERTIES Real Property Lease
6810 S. CEDAR STREET, SUITE 3C Store # 304: Lansing, MI
LANSING, MI 48911
- ------------------------------------------------------------------------------------------------------------------------------------
64. HARDING DAHM & CO., INC. Real Property Lease
P.O. BOX 1448 Store # 306: Fort Wayne, IN
FT. WAYNE, IN. 46858-1448
- ------------------------------------------------------------------------------------------------------------------------------------
65. GALAXY DEVELOPMENT LTD. Real Property Lease
2511 MILES ROAD, NORTH F Store # 246: Cleveland, OH
CLEVELAND, OH 44125-5499
- ------------------------------------------------------------------------------------------------------------------------------------
66. GLENWOOD SQUARE SHOPPING CENTER Real Property Lease
1000 NATIONSBANK CENTER Store # 139: Norfolk, VA
ONE COMMERCIAL
NORFOLK, VA 23510
- ------------------------------------------------------------------------------------------------------------------------------------
67. RIVERAIN LIMITED PARTNERSHIP Real Property Lease
C/O LARRY STEIN REALTY Store # 311 (Dayton): Centerville, OH
2 RIVERPLACE, SUITE 300
P.O. BOX 544
DAYTON, OH 45401
- ------------------------------------------------------------------------------------------------------------------------------------
68. HALL BROTHERS INVESTMENTS Real Property Lease
P.O. BOX 55686 Store # 224: Lexington, KY
LEXINGTON, KY 40555-5686
- ------------------------------------------------------------------------------------------------------------------------------------
69. HOUMA BUILDING PARTNERSHIP Real Property Lease
1340 W. TUNNEL BOULEVARD Store # 290: Houma, LA
SUITE 600
HOUMA, LA 70360
- ------------------------------------------------------------------------------------------------------------------------------------
70. HUBBARD REALTY OF WINSTON-SALEM Real Property Lease
285 S. STRATFORD ROAD Store # 265: Winston-Salem, NC
WINSTON-SALEM, NC 27013
- ------------------------------------------------------------------------------------------------------------------------------------
71. AXIS COMMERCIAL REALTY, INC. Real Property Lease
1660 S. ALBION STREET Store # 254: Northglenn, CO
SUTIE 806
DENVER, CO 80222
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-5
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPIRED LEASE OF CONTRACT OR UNEXPIRED LEASE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
72. JEFFERSON PARK PROPERTIES Real Property Lease
C/O SIMON PROPERTIES Store # 606: Middleburg Heights, OH
4635 RICHMOND RD., SUITE 105
WARRENSVILLE HEIGHTS, OH 44125
- ------------------------------------------------------------------------------------------------------------------------------------
73. KK PARTNERSHIP Real Property Lease
28901 CLEMENS ROAD, UNIT 105 Store # 289 (Cleveland West): Westlake, OH
WESTLAKE, OH 44145
- ------------------------------------------------------------------------------------------------------------------------------------
74. BELL WEST SHOPPING CENTER Real Property Lease
C/O MPB REALTY SERVICES Store # 192: Phoenix, AZ
200 E. MONTEREY WAY
PHOENIX, AZ 85012
- ------------------------------------------------------------------------------------------------------------------------------------
75. LAKESIDE DEVELOPMENT CO. Real Property Lease
955 EXECUTIVE PARKWAY, SUITE 210 Store # 217 (Roanoke): Salem, VA
ST. LOUIS, MO 63141
- ------------------------------------------------------------------------------------------------------------------------------------
76. LANDMARK COMMERCIAL INC. Real Property Lease
5022 WRIGHTSVILLE AVENUE Store # 307: Wilmington, NC
WILMINGTON, NC 28403
- ------------------------------------------------------------------------------------------------------------------------------------
77. PACESETTER ENTERPRISES Real Property Lease
C/O A.C. GOLD AND COMPANY Store # 208: South Holland, IL
2711 W. 183RD ST., SUITE 211
HOMEWOOD, IL 60430
- ------------------------------------------------------------------------------------------------------------------------------------
78. MCGINNIS PARTNERS Real Property Lease
555 E. LOOCKERMAN STREET Store # 303: Dover, DE
DOVER, DE 19901
- ------------------------------------------------------------------------------------------------------------------------------------
79. MEGA PROPERTIES Real Property Lease
4849 N. MILWAUKEE AVENUE Store # 152 (Lawrence): Chicago, IL
SUITE 302
CHICAGO, IL 60630
- ------------------------------------------------------------------------------------------------------------------------------------
80. MITCHELL & NANCY NANCE Real Property Lease
5301 BRAGG BOULEVARD Store # 109: Fayette Auto, Fayetteville, NC
FAYETTEVILLE, NC 28303
- ------------------------------------------------------------------------------------------------------------------------------------
81. CANYON CREEK NATIONAL BANK Real Property Lease
333 W. CAMPBELL ROAD Store # 226: Richardson, TX
RICHARDSON, TX 75080
- ------------------------------------------------------------------------------------------------------------------------------------
82. NORTHBROOK LTD Real Property Lease
C/O SLR MANAGEMENT CORP. Store # 133: No. Charleston, NC
P.O. BOX 1524
FAIRFIELD, NJ 07007
- ------------------------------------------------------------------------------------------------------------------------------------
83. O'REILLY INVESTMENT COMPANY Real Property Lease
P.O. BOX 1897 Store # 333: Springfield, MO
SPRINGFILED, MO 65801
- ------------------------------------------------------------------------------------------------------------------------------------
84. ORANGE TREE PROPERTIES Real Property Lease
2000 WELLS ROAD, SUITE B Store # 136: Jacksonville Auto, Orange Park, FL
ORANGE PARK, FL 32073
- ------------------------------------------------------------------------------------------------------------------------------------
85. BRENNER LAND TRUST Real Property Lease
C/O WILLIAM F. BRENNER Store # 187: Joliet, IL
2110 S. WABASH
CHICAGO, IL 60616
- ------------------------------------------------------------------------------------------------------------------------------------
86. PATTON JR., JOSEPH D. Real Property Lease
32 VICK PARK "B" Store # 335: Rochester, NY
ROCHESTER, NY 14607
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPIRED LEASE OF CONTRACT OR UNEXPIRED LEASE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
87. ROCKWELL BUILDING PARTNERSHIP Real Property Lease
C/O MR. ELDON L. HOYLE Store # 111: Junction City, KS
HOYLE REALTORS
419 N. WASHINGTON ST.
P.O. BOX 845
JUNCTION CITY, KS. 66441-0845
- ------------------------------------------------------------------------------------------------------------------------------------
88. PEMBROKE VIRGINIA ASSOCIATES Real Property Lease
281 INDEPENDENCE BOULEVARD Store # 107: Virginia Beach, VA
VIRGINIA BEACH, VA 23462-2979
- ------------------------------------------------------------------------------------------------------------------------------------
89. PORTEN, MICHAEL L. Real Property Lease
P.O. BOX 941 Store # 108: Hinesville, GA
HINESVILLE, GA 31313
- ------------------------------------------------------------------------------------------------------------------------------------
90. PRINCIPLE DEVELOPMENT LTD. Real Property Lease
1001 EISENHOWER BOULEVARD Store # 326: Johnstown, PA
SUITE A
JOHNSTOWN, PA 15904
- ------------------------------------------------------------------------------------------------------------------------------------
91. OAK CREEK OFFICE PARK L.L.C. Real Property Lease
C/O ASSET MANAGEMENT ASSOCIATES Store # 332: Flint, MI
1309 S. LINDEN AVE., SUITE A
FLINT, MI 48532
- ------------------------------------------------------------------------------------------------------------------------------------
92. BENDERSON, RANDALL 1993-1 Real Property Lease
570 DELAWARE AVENUE Store # 334: Buffalo, NY
BUFFALO, NY 14202
- ------------------------------------------------------------------------------------------------------------------------------------
93. RBR&ST Real Property Lease
P.O. BOX 1636 Store # 310: Asheville, NC
ASHEVILLE, NC 28802-1636
- ------------------------------------------------------------------------------------------------------------------------------------
94. REALTY ASSOCIATES, INC. Real Property Lease
2904 B TAZEWELL PIKE Store # 207: Knoxville, TN
KNOXVILLE, TN 37918
- ------------------------------------------------------------------------------------------------------------------------------------
95. GILBERT CUBBAGE CPM Real Property Lease
CASE POMEROY PROPERTIES Store # 203 (Orlando West): Orlando, FL
10407 CENTURION PARKWAY, N., SUITE 108
JACKSONVILLE, FL 32256
- ------------------------------------------------------------------------------------------------------------------------------------
96. SMETANA 8876 ASSOCIATES Real Property Lease
8876 GULF FREEWAY, SUITE 240 Store # 138: Houston, TX
HOUSTON, TX 77017
Store # 5008: Houston Recovery, Houston, TX
- ------------------------------------------------------------------------------------------------------------------------------------
97. SPIEGEL, SAM AND SIMONE Real Property Lease
10 FAIRWAY DRIVE, SUITE 114 Store # 144: West Palm Beach, FL
DEERFIELD BEACH, FL 33441
- ------------------------------------------------------------------------------------------------------------------------------------
98. STATE STREET INVESTORS OF ROCKFORD Real Property Lease
5301 E. STATE STREET, SUITE 205 Store # 196: Rockford, IL
ROCKFORD, IL 61108
- ------------------------------------------------------------------------------------------------------------------------------------
99. STUART HOFFMAN & RICHARD ROGGE Real Property Lease
7925 N. 76TH STREET Store # 194: Milwaukee, WI
MILWAUKEE, WI 52223
- ------------------------------------------------------------------------------------------------------------------------------------
100. TOWNE BROTHERS REALTY Real Property Lease
7206 HILLSIDE Store # 140: Hillside, IL
SPRING GROVE, IL 60081
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPIRED LEASE OF CONTRACT OR UNEXPIRED LEASE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
101. PARAMOUNT DEVELOPMENT CORP. Real Property Lease
4710 OLEANDER DR. Store # 339: Myrtle Beach, SC
MYRTLE BEACH, SC 29477
- ------------------------------------------------------------------------------------------------------------------------------------
102. TURN-KEY PARTNERSHIP Real Property Lease
2310 VILLAGE PARK COURT, NORTH Store # 341: Mansfield, OH
MANSFILED, OH 44906
- ------------------------------------------------------------------------------------------------------------------------------------
103. TWO ORACLE LIMITED COMPANY Real Property Lease
C/O ROMANO REAL ESTATE CORPORATION Store # 274: Tucson, AZ
3900 E. VIA PALOMITA
TUCSON, AZ 85718
- ------------------------------------------------------------------------------------------------------------------------------------
104. VIRGINIA BEACH ASSOCIATES Real Property Lease
281 INDEPENDENCE BOULEVARD Store # 5002 (Virginia Beach Recovery): Virginia Beach, VA
VIRGINIA BEACH, VA 23462-2979
- ------------------------------------------------------------------------------------------------------------------------------------
105. WRUBEL DEVELOPMENT Real Property Lease
#7 EXECUTIVE ESTATES DRIVE Store # 123: Belleville Auto Lot, Belleville, IL
MILLSTADT, IL 62260
- ------------------------------------------------------------------------------------------------------------------------------------
106. YOUNG HO KIM Real Property Lease
3054-A BERKMAR DRIVE Store # 222: Charlottesville, VA
CHARLOTTESVILLE, VA 22011
- ------------------------------------------------------------------------------------------------------------------------------------
107. 3701 COMMERCIAL LLC Real Property Lease
333 SKOKIE BOULEVARD, SUITE 111 Northbrook Computer Center, Northbrook, Illinois
NORTHBROOK, IL 60062
- ------------------------------------------------------------------------------------------------------------------------------------
108. 4905 TILGHMAN, L.P. Real Property Lease
C/O SOMERSET PROPERTIES, INC. Store # 328: Allentown, PA
768 N. BETHLEHEM PIKE, SUITE 203
LOWER GWYNEDD, PA 19002
- ------------------------------------------------------------------------------------------------------------------------------------
109. 7272 CORPORATION Real Property Lease
7887 SAN FELIPE, SUITE 237 Store # 197: Houston North, TX
HOUSTON, TX 77063
- ------------------------------------------------------------------------------------------------------------------------------------
110. ASSED, JED Undertaking Letter Agreement dated 1/13/98
11411 BLACKHAWK
HOUSTON, TX 77089
- ------------------------------------------------------------------------------------------------------------------------------------
111. BIGGERS, SABRINA K. Undertaking Letter Agreement dated 1/16/98
1580 CANTER DRIVE
FLORISSANT, MO 63033
- ------------------------------------------------------------------------------------------------------------------------------------
112. BOKSA, BONNIE Undertaking Letter Agreement dated 9/22/97
1701 W. BELMONT
LIBERTYVILLE, IL 60048
- ------------------------------------------------------------------------------------------------------------------------------------
113. BOROWIAK, LARRY Undertaking Letter Agreement dated 3/31/97
1600 SURRIDGE COURT
MUNDELEIN, IL 60060
- ------------------------------------------------------------------------------------------------------------------------------------
114. BOSSON, RICHARD Undertaking Letter Agreement dated 4/23/97
3300 COVE CAY DRIVE
APT 1-G
CLEARWATER, FL 34620
- ------------------------------------------------------------------------------------------------------------------------------------
115. BRINCAT, JEFFREY Undertaking Letter Agreement dated 6/2/97
16 CAMBRIDGE DRIVE
HAWTHORNE WOODS, IL 60047
- ------------------------------------------------------------------------------------------------------------------------------------
116. BRINCANT, JOHN JR. Undertaking Letter Agreement dated 6/16/97
21357 W. BOSCHOME
KILDEER, IL 60047
- ------------------------------------------------------------------------------------------------------------------------------------
117. CAREY, GEORGE Undertaking Letter Agreement dated 4/15/97
794 N. OAKWOOD AVENUE
LAKE FOREST, IL 60045
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-8
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPECTED LEASE OF CONTRACT OR UNEXPIRED LEASE
- -------------------------------------------------------------------------------------------------------
<S> <C>
118. CHOOKASZIAN, DENNHIS H. Indemnification Agreement dated 3/20/97
C/O KIRKLAND AND ELLIS
200 EAST RANDOLPH
CHICAGO, IL 60601
- ---------------------------------------------------------------------------------------------------------
119. CROFT, WILLIAM C. Indemnification Agreement dated 3/20/97
C/O KIRKLAND AND ELLIS
200 EST RANDOLPH
CHICAGO, IL 60601
- ---------------------------------------------------------------------------------------------------------
120. FRANCIS, MIKE Undertaking Letter Agreement dated 1/19/98
319 SOUTH 2ND STREET
VIVIAN, LA 71082
- ---------------------------------------------------------------------------------------------------------
121. GORDON, EDWARD Undertaking Letter Agreement dated 7/2/97
C/O LEVIN MIDDLEBROOKS THOMAS ET AL
ATTN: JAMES R. GREEN
P.O. BOX 12308
316 S. BAYLEN STREET
PENSACOLA, FL 32581
- ---------------------------------------------------------------------------------------------------------
122. GOULD, STEVEN Indemnification Agreement dated 4/6/89
14365 W. BRAEMORE CLOSE
GREEN OAKS, IL 60048
- ---------------------------------------------------------------------------------------------------------
123. GREEN, AL Undertaking Letter Agreement dated 1/12/98
2480 OTTER CREEK LANE
ELGIN, IL 60123-5608
- ---------------------------------------------------------------------------------------------------------
124. GUNTHER, JOHN Undertaking Letter Agreement dated 6/17/98
3456 ASHMORE LANE
PACE, FL 32571
- ---------------------------------------------------------------------------------------------------------
125. GUTHRIE, JIM Undertaking Letter Agreement dated 1/30/98
18352 DALLAS PARKWAY
BOX 136-337
DALLAS, TX 75287
- ---------------------------------------------------------------------------------------------------------
126. HAILEY, STEVEN A. Undertaking Letter Agreement dated 3/24/98
1252 HWY 1194
MARKSVILLE, LA 71351
- -------------------------------------------------------------------------------------------------------
127. HOLMES, JOHN Undertaking Letter Agreement dated 3/12/98
133 WHITELOCK DRIVE
MARIETTA, GA 30064
- -------------------------------------------------------------------------------------------------------
128. IKERD, GAY Undertaking Letter Agreement dated 2/2/98
3772 HIGHWAY 452
MARKSVILLE, LA 71351
- -------------------------------------------------------------------------------------------------------
129. JOHNSON, CLIFFORD R. Indemnification Agreement dated 3/20/97
C/O KIRKLAND AND ELLIS
200 EAST RANDOLPH
CHICAGO, IL 60601
- -------------------------------------------------------------------------------------------------------
130. JOHNSON, THELMA Undertaking Letter Agreement dated 1/30/98
1310 HAMBLEH ROAD
HUMBLE, TX 77339
- -------------------------------------------------------------------------------------------------------
131. JOYNER, BUD Undertaking Letter Agreement dated 1/13/98
1725 HOLMAN ROAD
HOSCHTON, GA 30548
- -------------------------------------------------------------------------------------------------------
132. KAPLAN, DAVE Undertaking Letter Agreement dated 1/13/98
1877 NW 99TH AVENUE
PLANTATION, FL 33324
- -------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-9
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPECTED LEASE OF CONTRACT OR UNEXPIRED LEASE
- -------------------------------------------------------------------------------------------------------
<S> <C>
133. KURCZYNSKI, GREG Undertaking Letter Agreement dated 1/30/98
62 WINDSOR DRIVE
ENGLEWOOD, FL 34226-0008
- -------------------------------------------------------------------------------------------------------
134. LABEACH, MARJORIE Undertaking Letter Agreement dated 1/2/98
1275 RIVER VISTA ROW, #137
SAN DIEGO, CA 92111
- -------------------------------------------------------------------------------------------------------
135. LAIBLIN, WALTER A. Undertaking Letter Agreement Dated 6/17/98
1736 S. HIAWASSEE ROAD
APT. 36
ORLANDO, FL 32835-6406
- -------------------------------------------------------------------------------------------------------
136. LAM, CHARLES Undertaking Letter Agreement dated 1/5/98
9050 PARK BLVD. #8
LARGO, FL 33777
- -------------------------------------------------------------------------------------------------------
137. LAWSON, RICHARD Undertaking Letter Agreement dated 3/13/98
511-6 BAYMEADOWS ROAD, #106
JACKSONVILLE, FL 32217
- -------------------------------------------------------------------------------------------------------
138. LOEF, JAMES Undertaking Letter Agreement dated 9/17/97
273 SHADOW BEND
WHEELING, IL 60090
- -------------------------------------------------------------------------------------------------------
139. LUCE, JAMES D. Undertaking Letter Agreement dated 1/12/98
7514 NEBRASKA AVE.
NEW PORT RICHEY, FL 34653
- -------------------------------------------------------------------------------------------------------
140. MCDONALD, JANETH Undertaking Letter Agreement dated 1/2/98
429 SHERIDAN ROAD, #10
HIGHWOOD, IL 60040
- -------------------------------------------------------------------------------------------------------
141. MCNALLY, ANDREW IV Indemnification Agreement dated 3/20/97
C/O KIRKLAND AND ELLIS
200 EAST RANDOLPH
CHICAGO, IL 60601
- -------------------------------------------------------------------------------------------------------
142. MCPHEE, BRUCE I. Indemnification Agreement dated 3/20/97
C/O KIRKLAND AND ELLIS
200 EAST RANDOLPH
CHICAGO, IL 60601
- -------------------------------------------------------------------------------------------------------
143. METZ, DENISE Undertaking Letter Agreement dated 2/3/98
1445 CHURCHHILL CT
APT #106 K
MUNDELEIN, IL 60060
- -------------------------------------------------------------------------------------------------------
144. MIZEL, GERALD Undertaking Letter Agreement
15 COUNTRY LANE
NORTHFIELD, IL 60093
- -------------------------------------------------------------------------------------------------------
145. OWEN, BRAD Undertaking Letter Agreement dated 9/25/97
1752 NORTH SHORE AVENUE
CHICAGO, IL 60626
- -------------------------------------------------------------------------------------------------------
146. PARKS, KENNETH Undertaking Letter Agreement dated 6/18/98
373 WINDERMERE BLVD.
ALEXANDRIA, LA 71303
- -------------------------------------------------------------------------------------------------------
147. PERNA, REGINA Undertaking Letter Agreement dated 5/28/97
6871 W. MT VERON COURT
GURNEE, IL 60031
- -------------------------------------------------------------------------------------------------------
148. PETERS, DAVE Undertaking Letter Agreement dated 1/98
2337 TIFFANY CIRCLE
FLORENCE, MS 39073
- -------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-10
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPECTED LEASE OF CONTRACT OR UNEXPIRED LEASE
- -------------------------------------------------------------------------------------------------------
<S> <C>
149. PIATKIEWIC, BOB Undertaking Letter Agreement dated 1/21/98
1521 ARLINGTON AVENUE
BATON ROUGE, LA 70808
- -------------------------------------------------------------------------------------------------------
150. POND, CHARLEY Undertaking Letter Agreement dated 4/1/97
25985 N. OAK HILL ROAD
LAKE BARRINGTON, IL 60010
- -------------------------------------------------------------------------------------------------------
151. PORTER, DON Undertaking Letter Agreement dated 1/16/98
2500 CHAPELWOOD DRIVE
PITTSBURGH, PA 15241
- -------------------------------------------------------------------------------------------------------
152. PRATT, JOHN Indemnification Agreement dated 4/6/89
15210 LAUREL LANE S.
PEMBROKE PINES, FL 33207
- -------------------------------------------------------------------------------------------------------
153. SCHUBLE, GARY Undertaking Letter Agreement dated 1/12/98
2657 LOTA COURT
ORANGE PARK, FL 32073
- -------------------------------------------------------------------------------------------------------
154. SHANER, CAROLYN Undertaking Letter Agreement dated 10/6/97
401 LONGOASTLE DRIVE, #4
GREEN CASTLE, IN 46135
- -------------------------------------------------------------------------------------------------------
155. SMITH, DAN G. Undertaking Letter Agreement dated 1/9/98
3114 PEBBLE HILL CT.
SELLERSBURG, IN 47172
- -------------------------------------------------------------------------------------------------------
156. SMITH, ROBERT L. Undertaking Letter Agreement dated 1/27/98
122 FAIRBURY DR.
GOOSE CREEK, SC 29445
- -------------------------------------------------------------------------------------------------------
157. SNYDER, LOREN Undertaking Letter Agreement dated 6/17/98
2308 BRIAR LANE
LINDENHURST, IL 60046
- -------------------------------------------------------------------------------------------------------
158. STAUTZENBACH, EDWARD G. Undertaking Letter Agreement dated 10/20/97
610 E. FAIRVIEW
ARLINGTON HGTS, IL 60005
- -------------------------------------------------------------------------------------------------------
159. STEINGRABER, FRED G. Indemnification Agreement dated 3/20/97
C/O KIRKLAND AND ELLIS
200 EAST RANDOLPH
CHICGO, IL 60601
- -------------------------------------------------------------------------------------------------------
160. STEPHENS, JOHN Undertaking Letter Agreement dated 1/15/98
8154 HWY 107
MANSURA, LA 71350-0000
- -------------------------------------------------------------------------------------------------------
161. TAYLOR, DAVE Undertaking Letter Agreement dated 1/98
1720 ARABIAN LANE
PALM HARBOR, FL 34685
- -------------------------------------------------------------------------------------------------------
162. TERRA, ESTATE OF DANIEL J. Undertaking Letter Agreement dated 9/15/97
528 ROSLYN
KENILWORTH, IL 60043
- -------------------------------------------------------------------------------------------------------
163. TILSON, SHEILA Undertaking Letter Agreement dated 5/27/97
1023 SHADY TREE LANE
WHEELING, IL 60090
- -------------------------------------------------------------------------------------------------------
164. VALLEM, BRADLEY Undertaking Letter Agreement dated 4/9/97
206 LONSDALE
PROSPECT HEIGHTS, IL 60070
- -------------------------------------------------------------------------------------------------------
165. WALKER, CLIFF Undertaking Letter Agreement dated 1/14/98
1439 MARKEL DRIVE
WINTERGARDEN, FL 34787
- -------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-11
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NO. NAME/ADDRESS OF PARTY DESCRIPTION
TO CONTRACT OR UNEXPECTED LEASE OF CONTRACT OR UNEXPIRED LEASE
- -------------------------------------------------------------------------------------------------------
<S> <C>
166. WATSON, CHARLES Undertaking Letter Agreement dated 1/19/98
9014 MARVA DRIVE
SHREVEPORT, LA 71118
- -------------------------------------------------------------------------------------------------------
167. WICKLANDER, PHILIP Indemnification Agreement dated 3/20/97
C/O KIRKLAND AND ELLIS
200 EAST RANDOLPH
CHICAGO, IL 60601
- -------------------------------------------------------------------------------------------------------
168. WILT, BILL Undertaking Letter Agreement dated 12/20/97
6421 W. CORONA DRIVE
CHANDLER, AZ 85226
- -------------------------------------------------------------------------------------------------------
169. WOODALL, RALPH Undertaking Letter Agreement dated 1/98
186 BLANCO PEAK
KERNERSVILLE, NC 27284
- -------------------------------------------------------------------------------------------------------
170. ZLATOS, FRANK Undertaking Letter Agreement dated 1/23/98
770 THOMASZEWSKI
LEMONT, IL 60439
- -------------------------------------------------------------------------------------------------------
</TABLE>
Ex. 3-12
<PAGE>
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In re: )
) Case No. 98 B 20763
MERCURY FINANCE COMPANY, ) Honorable Erwin I. Katz
a Delaware Corporation, ) Chapter 11
)
Debtor. )
_________________________ )
SUPPLEMENTAL MODIFICATION TO THE
SECOND AMENDED PLAN OF REORGANIZATION
OF MERCURY FINANCE COMPANY
--------------------------
Mercury Finance Company, Debtor and Debtor-In-Possession, hereby
submits the following supplemental modification to the Second Amended Plan of
Reorganization of Mercury Finance Company Under Chapter 11 of the Bankruptcy
Code (the "Plan") dated as of December 29, 1998:
1. Exhibit 3 to the Plan is hereby modified to read in its entirety
as attached hereto as Exhibit A and incorporated herein.
Ex. 3-28
<PAGE>
EXHIBIT A
---------
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In re: )
) Case No. 98 B 20763
MERCURY FINANCE COMPANY, ) Honorable Erwin I. Katz
a Delaware Corporation, ) Chapter 11
)
Debtor. )
________________________________ )
MODIFICATIONS TO THE SECOND AMENDED PLAN OF
-------------------------------------------
REORGANIZATION OF MERCURY FINANCE COMPANY
-----------------------------------------
Mercury Finance Company, Debtor and Debtor-In-Possession, hereby
submits the following modifications (the "Plan Modifications") to the Second
Amended Plan of Reorganization of Mercury Finance Company Under Chapter 11 of
the Bankruptcy Code (the "Plan")/2/ dated as of December 29, 1998:
1. Certain terms, the definitions for which are set forth in Article
1 of the Plan, are hereby redefined as follows:
a. The term "DISTRIBUTION RECORD DATE" is hereby modified to
read in its entirety as follows :
"DISTRIBUTION RECORD DATE means the Business Day immediately
preceding the Effective Date."
b. The term "EXCESS CASH" is hereby modified to read in its
entirety as follows:
____________________
/2/ Capitalized terms as used in this Plan Modification shall have
the meanings ascribed to them in the Plan, unless otherwise defined herein. In
addition, in accordance with Article 1 of the Plan, any term used in the Plan or
this Plan Modification that is not defined in this Plan or this Plan
Modification, but that is used in the Bankruptcy Code or the Bankruptcy Rules,
shall have the meaning ascribed to such term in the Bankruptcy Code or the
Bankruptcy Rules.
Ex. 3-13
<PAGE>
"EXCESS CASH means, as of the day immediately preceding the Effective
Date, the ending book cash balance of the Debtor on a fully
consolidated basis, which cash shall include overnight investments,
cash, corporate accounts, credit card cash, and branch cash including
cash of Midland (but only to the extent such branch cash in the
aggregate exceeds $3,000,000) and proceeds from the sale of the credit
card portfolio when received, minus the sum of (a) $55,100,000 or such
-----
greater amount to be agreed to by the Debtor and the Creditors'
Committee, (b) the Interest Reserve, (c) the Professional Fee Reserve,
(d) the Signing Bonus, (e) ordinary course payments accrued but not
paid on the Effective Date, including but not limited to, D&O
insurance premiums for the Reorganized Debtor's board of directors,
and (f) the aggregate amount of cash to be distributed under the Plan
other than to Class 4."
c. The term "NEW COMMON STOCK" is hereby modified to read in its
entirety as follows:
"NEW COMMON STOCK means the 50,000,000 shares of Common Stock par
value $0.01 per share of the Reorganized Debtor authorized pursuant to
the Amended and Restated Certificate of Incorporation, 10,000,000
shares of which are to be issued and distributed in accordance with
the Plan constituting 100% of the total number of shares of such
Common Stock to be issued and outstanding immediately after the
Effective Date."
d. The term "OUTSIDE DIRECTORS RESERVE" is hereby modified to read in
its entirety as follows:
"OUTSIDE DIRECTORS RESERVE means a fund of $350,000 deposited into a
segregated account by the Debtor to be used for purposes of
reimbursement of continuing indemnification costs of current outside
directors."
e. The term "REORGANIZED DEBTOR" is hereby modified to read in its
entirety as follows:
"REORGANIZED DEBTOR means the Debtor on and after the Effective Date
and shall thereafter be known as Mercury Finance Company or any other
name designated by the board of directors for the Reorganized Debtor."
f. The term "TRADE CLAIMS" is hereby modified to read in its entirety
as follows:
"TRADE CLAIM means any Unsecured Claim against the Debtor arising from
or with respect to the sale of goods or services to the Debtor,
including Allowed Claims based on rejection of executory contracts or
unexpired leases, prior to the Petition Date, in the ordinary course
of the Debtor's business, including but not limited to, any Claim of
an employee and/or director that is not a Priority Claim or an
Indemnification Claim and any Claim of a Nondebtor Subsidiary against
the Debtor, but excluding any claim by KPMG Peat Marwick, whether
arising by contract or for contribution or indemnity."
Ex. 3-14
<PAGE>
Section 2.03 of the Plan is hereby modified to read in its entirety as
follows:
"2.03 TAX CLAIMS. The Debtor waives jurisdiction of the Court
pursuant to section 5.05 of the Code. Notwithstanding the limited
waiver of section 5.05 of the Code, and unless otherwise agreed to by
the parties, each holder of a Tax Claim will receive Cash equal to the
unpaid portion of such Tax Claim on or as soon as practical after the
later of (i) the Effective Date, and (ii) the date on which such Claim
becomes an Allowed Claim; provided, however, that at the option of the
Reorganized Debtor, the Reorganized Debtor may pay Tax Claims over a
period not exceeding six (6) years after the date of assessment of the
Tax Claim as provided in subsection 1129(a)(9)(C) of the Bankruptcy
Code. If the Reorganized Debtor elects this option as to any Tax
Claim, then the payment of such Tax Claim shall be made in equal
semiannual installments with the first installment due on the latest
of: (i) the Effective Date, (ii) 30 calendar days after the date on
which an order allowing such Tax Claim becomes a Final Order, and
(iii) such other time as may be agreed to by the holder of such Tax
Claim and the Reorganized Debtor. Each installment shall include
simple interest on the unpaid portion of such Tax Claim, without
penalty of any kind, at the statutory rate of interest provided for
such taxes under applicable nonbankruptcy law; provided, however, that
the Reorganized Debtor shall reserve the right to pay any Tax Claim,
or any remaining balance of such Tax Claim, in full, at any time on or
after the Effective Date, without premium or penalty."
3. Section 3.08 of the Plan is hereby modified to read in its entirety as
follows:
"3.08 CLASS 7B SECURITIES FRAUD CLAIMS AND DIVIDEND CLAIMS. Class 7B
consists of all holders of Securities Fraud Claims and Dividend
Claims, other than Beneficiaries."
4. Section 6.04 of the Plan is hereby modified to read in its entirety as
follows:
6.04 SURRENDER OF INSTRUMENTS AND RECEIPT OF DISTRIBUTIONS--SENIOR
DEBT CLAIMS AND SUBORDINATED NOTEHOLDER CLAIMS. As a condition to
participation under the Plan, each holder of a Senior Debt Claim or a
Subordinated Noteholder Claim is required to provide evidence of the
securities evidencing the Senior Debt Claims and Subordinated
Noteholders Claims ("Old Securities") by (i) completing and returning
a Letter of Transmittal to the Exchange Agent, together with
certificates (to the extent such exist) representing their Old
Securities (the "Tendered Certificates"), or (ii) completing the book-
entry confirmation procedure, promptly after the Confirmation Date.
Holders of Senior Debt Claims relating to commercial paper need not
tender any certificates, as no such certificates exist evidencing the
commercial paper. Promptly following the Effective Date, the Exchange
Agent will mail to those persons who have properly completed and
returned Letters of Transmittal and Tendered Certificates or completed
the book-entry confirmation procedure, certificates representing the
New Senior Secured Notes, the New Junior Subordinated Notes and/or the
New Common Stock to be issued in accordance with the Plan. HOLDERS
OF OLD SECURITIES WHO HAVE NOT PROPERLY COMPLETED AND RETURNED TO THE
EXCHANGE AGENT LETTERS OF TRANSMITTAL OR COMPLETED THE BOOK-ENTRY
CONFIRMATION PROCEDURE WITHIN TWO YEARS OF THE EFFECTIVE DATE,
TOGETHER WITH THE TENDERED CERTIFICATES, WILL NOT RECEIVE THE
CERTIFICATES OR CASH TO WHICH THEY ARE OTHERWISE ENTITLED PURSUANT TO
THE PLAN NOR WILL THEY BE ENTITLED TO ANY OTHER DISTRIBUTION UNDER THE
PLAN. The Debtor selected two years as opposed to the five year
period permitted (but not required) under section 1143 of the
Bankruptcy Code because the securities mature in less than five years
and the Debtor believes that the cost and expense of establishing an
escrow fund for delinquent tenders outweighs the risk that substantial
holders of Old Securities will fail to surrender their certificates
within two years.
Book-Entry Transfer. The Exchange Agent will establish an account
with respect to the Old Securities at DTC. Any tendering financial
institution that is a participant in DTC's book-entry transfer
facility system must make a book-entry delivery of the Old Securities
by causing DTC to
Ex. 3-15
<PAGE>
transfer such Old Securities into the Exchange Agent's account at DTC
in accordance with DTC's procedures for transfers. Such holder of Old
Securities should transmit its acceptance to DTC on or prior to the
two years from the Effective Date (or comply with the guaranteed
delivery procedures set forth below), DTC will verify such acceptance,
execute a book-entry transfer of the tendered Old Securities Notes
into the Exchange Agent's account at DTC and then send to the Exchange
Agent confirmation of such book-entry transfer, including an agent's
message confirming that DTC has received an express acknowledgment
from such holder that such holder has received and agrees to be bound
by the Letter of Transmittal and that the company may enforce the
Letter of Transmittal against such holder (a "book-entry
confirmation").
A beneficial owner of Old Securities that are held by or
registered in the name of a broker, dealer, commercial bank, trust
company or other nominee or custodian is urged to contact such entity
promptly if such beneficial owner wishes to participate.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Letters of Transmittal. Signatures on a Letter of Transmittal
must be guaranteed by an Eligible Institution (as defined below),
unless the Old Securities tendered pursuant thereto are tendered for
the account of an Eligible Institution. If signatures on a Letter of
Transmittal are required to be guaranteed, such guarantees must be by
a member firm of a registered national securities exchange in the
United States, a member of the National Association of Securities
Dealers, Inc., or by a commercial bank or trust company having an
office or a correspondent in the United States (each of which is an
"Eligible Institution"). If Old Securities are registered in the name
of a person other than the person signing the Letter of Transmittal,
in order to be validly tendered, the Old Securities must be endorsed
or accompanied by properly completed power of authority, with
signature guaranteed by an Eligible Institution.
Holders of Old Securities who are not holders of record on the
Distribution Record Date should:
(i) obtain a properly completed Letter of Transmittal (or
facsimile thereof) from the record holder on the Distribution
Record Date,
(ii) obtain and include with the Letter of Transmittal a
properly competed stock or bond power, as the case may be, from
the record holder, or
(iii) effect a record transfer of their Old Securities prior to
delivery of the Letter of Transmittal.
If a holder desires to tender Old Securities pursuant to the
Letter of Transmittal but is unable to locate the Tendered
Certificates, such holder should write to or telephone the Exchange
Agent about procedures for obtaining replacement certificates for Old
Securities or arranging for indemnification.
ALL QUESTIONS AS TO THE VALIDITY, FORM, ELIGIBILITY (INCLUDING
TIME OF RECEIPT), AND ACCEPTANCE OF BALLOTS, LETTERS OF TRANSMITTAL
AND TENDERED CERTIFICATES WILL BE RESOLVED BY THE DEBTOR, WHOSE
DETERMINATION WILL BE FINAL AND BINDING, SUBJECT ONLY TO REVIEW BY THE
COURT UPON APPLICATION WITH DUE NOTICE TO ANY AFFECTED PARTIES IN
INTEREST. THE DEBTOR RESERVES THE RIGHT TO REJECT ANY AND ALL BALLOTS,
LETTERS OF TRANSMITTAL AND TENDERED CERTIFICATES NOT IN PROPER FORM,
OR LETTERS OF TRANSMITTAL AND TENDERED CERTIFICATES, THE DEBTOR'S
ACCEPTANCE OF WHICH WOULD, IN THE OPINION OF THE DEBTOR OR ITS
COUNSEL, BE UNLAWFUL.
5. Section 6.05 of the Plan is hereby modified to read in its entirety as
follows:
Ex. 3-16
<PAGE>
"6.05 DISTRIBUTION RECORD DATE--OLD COMMON STOCK. At the close of
business on the Distribution Record Date, the transfer ledgers for the
Old Common Stock shall be closed, and there shall be no further
changes in the record holders of the Old Common Stock. The Debtor
shall have no obligation to recognize any transfer of the Old Common
Stock occurring on or after the Distribution Record Date. The Debtor
shall be entitled instead to recognize and deal for all purposes
hereunder with only those record holders stated on the transfer
ledgers as of the close of business on the Distribution Record Date.
As a condition to participation under the Plan, each holder of a
Equity Interest is required to provide evidence of the securities
evidencing the Equity Interest ("Old Securities") by (i) completing
and returning a Letter of Transmittal to the Exchange Agent, together
with certificates (to the extent such exist) representing their Old
Securities (the "Tendered Certificates"). Promptly following the
Effective Date, the Exchange Agent will mail to those persons who have
properly completed and returned Letters of Transmittal and Tendered
Certificates, certificates representing the New Common Stock and New
Warrants to be issued in accordance with the Plan. HOLDERS OF OLD
SECURITIES WHO HAVE NOT PROPERLY COMPLETED AND RETURNED TO THE
EXCHANGE AGENT LETTERS OF TRANSMITTAL WITHIN TWO YEARS OF THE
EFFECTIVE DATE, TOGETHER WITH THE TENDERED CERTIFICATES, WILL NOT
RECEIVE THE CERTIFICATES TO WHICH THEY ARE OTHERWISE ENTITLED PURSUANT
TO THE PLAN NOR WILL THEY BE ENTITLED TO ANY OTHER DISTRIBUTION UNDER
THE PLAN. The Debtor selected two years as opposed to the five year
period permitted (but not required) under section 1143 of the
Bankruptcy Code because the securities mature in less than five years
and the Debtor believes that the cost and expense of establishing an
escrow fund for delinquent tenders outweighs the risk that substantial
holders of Old Securities will fail to surrender their certificates
within two years.
Letters of Transmittal. Signatures on a Letter of Transmittal must be
guaranteed by an Eligible Institution (as defined below), unless the
Old Securities tendered pursuant thereto are tendered for the account
of an Eligible Institution or such signature guarantee if not
otherwise required by applicable law. If signatures on a Letter of
Transmittal are required to be guaranteed, such guarantees must be by
a member firm of a registered national securities exchange in the
United States, a member of the National Association of Securities
Dealers, Inc., or by a commercial bank or trust company having an
office or a correspondent in the United States (each of which is an
"Eligible Institution"). If Old Securities are registered in the name
of a person other than the person signing the Letter of Transmittal,
in order to be validly tendered, the Old Securities must be endorsed
or accompanied by properly completed power of authority, with
signature guaranteed by an Eligible Institution.
Holders of Old Securities who are not holders of record on the
Distribution Record Date should:
(i) obtain a properly completed Letter of Transmittal (or
facsimile thereof) from the record holder on the
Distribution Record Date, or
(ii) obtain and include with the Letter of Transmittal a
properly competed stock or bond power, as the case may be,
from the record holder.
If a holder desires to tender Old Securities pursuant to the
Letter of Transmittal but is unable to locate the Tendered
Certificates, such holder should write to or telephone the Exchange
Agent about procedures for obtaining replacement certificates for Old
Securities or arranging for indemnification.
ALL QUESTIONS AS TO THE VALIDITY, FORM, ELIGIBILITY (INCLUDING TIME OF
RECEIPT), AND ACCEPTANCE OF BALLOTS, LETTERS OF TRANSMITTAL AND
TENDERED CERTIFICATES WILL BE RESOLVED BY THE DEBTOR, WHOSE
DETERMINATION WILL BE FINAL AND BINDING, SUBJECT ONLY TO REVIEW BY THE
COURT UPON APPLICATION WITH DUE NOTICE TO ANY AFFECTED PARTIES IN
INTEREST. THE DEBTOR RESERVES THE RIGHT TO REJECT ANY AND ALL
BALLOTS, LETTERS OF
Ex. 3-17
<PAGE>
TRANSMITTAL AND TENDERED CERTIFICATES NOT IN PROPER FORM, OR LETTERS
OF TRANSMITTAL AND TENDERED CERTIFICATES, THE DEBTORS ACCEPTANCE OF
WHICH WOULD, IN THE OPINION OF THE DEBTOR OR ITS COUNSEL, BE
UNLAWFUL."
6. Section 6.07 of the Plan is hereby modified to read in its entirety as
follows:
"6.07 UNCLAIMED DISTRIBUTIONS. If any holder of a Claim or Interest
entitled to a distribution directly from the Exchange Agent under the
Plan cannot be located on the Effective Date, such distributions shall
be set aside and maintained by the Exchange Agent. If such person is
located within two years of the Effective Date, such distributions
shall be distributed to such person. If such person cannot be located
within two years of the Effective Date, any such securities shall
become the property of and shall be released to the Reorganized
Debtor; provided, however, that nothing contained in this Plan shall
require the Reorganized Debtor or the Exchange Agent to attempt to
locate such person."
7. Section 8.02 of the Plan is hereby modified to read in its entirety as
follows:
"8.02 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION. On the
Effective Date, the Reorganized Debtor shall file its Amended and
Restated Certificate of Incorporation with the Secretary of State of
the State of Delaware in accordance with Section 103 of the Delaware
General Corporation Law. The Amended and Restated Certificate of
Incorporation will, among other things, provide (to the extent
necessary to effectuate the terms of the Plan) for (i) the prohibition
of the issuance of non-voting equity securities, and (ii) the
authorization of 50,000,000 shares of the New Common Stock, and which
encompasses the shares to be issued upon exercise of the New Warrants;
and the shares to be issued upon the exercise of stock options granted
for management of the Reorganized Debtor pursuant to the amended stock
option plan. Confirmation of the Plan shall constitute an election by
the Reorganized Debtor not to be governed by Section 203 of the
Delaware General Corporation Law."
Ex. 3-18
<PAGE>
8. Section 8.06 of the Plan is hereby modified to read in its entirety as
follows:
"8.06 CANCELLATION OF SECURITIES AND AGREEMENTS. Except as expressly
provided in the Plan or in the Confirmation Order, on the Effective
Date, the Debtor's commercial paper, short-term notes, senior notes,
the Gulfco notes, Subordinated Notes, Old Common Stock, options,
shareholder's rights plans and all the documentation relating thereto,
shall be cancelled and all obligations of the Debtor under or in
respect of any of the foregoing shall be terminated. Notwithstanding
the foregoing, although all stock options of the Debtor shall be
cancelled, the Debtor's existing option plan shall be amended as set
forth in Exhibit 4 to the Plan to permit the grant of new options in
accordance with the Plan, as amended."
9. Section 8.07 of the Plan is hereby modified to read in its entirety as
follows:
"8.07 MANAGEMENT OF THE REORGANIZED DEBTOR. Upon the Effective Date,
the operation of the Reorganized Debtor shall become the general
responsibility of the board of directors who shall, thereafter, have
the responsibility for the management, control and operation of the
Reorganized Debtor. The board of directors of the Reorganized Debtor
shall be comprised of seven (7) persons, 4 of whom will be designated
by the Creditors' Committee, one of whom shall be the new CEO, 1 of
whom shall be nominated by the new CEO and shall be reasonably
acceptable to the Creditors' Committee, and one of whom will be
nominated by the Equity Holders' Committee and shall be reasonably
acceptable to the Creditors' Committee and the new CEO. The identity
of each of the nominees shall be announced prior to or at the hearing
on the confirmation of the Plan. Such persons shall be deemed elected
pursuant to the Confirmation Order, and such elections shall be
effective on and after the Effective Date, without any requirement of
further action by stockholders of the Reorganized Debtor. The initial
chairman of the board of directors of the Reorganized Debtor shall be
chosen by the board of directors of the Reorganized Debtor after the
Effective Date. Upon the Effective Date, the Employment Agreement
shall be executed and delivered by the Reorganized Debtor and the new
CEO and shall then become effective."
10. Section 8.11 of the Plan is hereby modified to read in its entirety as
follows:
"8.11 CORPORATE ACTIONS. The issuance of the New Common Stock and
the New Warrants, the amendment of the Debtor's existing option plan,
the adoption of the Amended and Restated Certificate of Incorporation
and By-laws by the Reorganized Debtor, the selection of certain
directors and officers of the Reorganized Debtor, the execution and
delivery of any documents to be executed and delivered under the Plan
(including the Employment Agreement, including the stock option
agreement attached thereto), and other matters under the Plan
involving the corporate structure of the Debtor or corporate action by
the Debtor shall be deemed to have occurred and be effective on and
after the Effective Date without any requirement of further action by
stockholders or directors of the Debtor pursuant to and in accordance
with Section 303 of the Delaware General Corporation Law. Without
limiting the foregoing, upon entry of the Confirmation Order by the
Clerk of the Court, the Filing by the Debtor or the Reorganized Debtor
of the Amended and Restated Certificate of Incorporation and By-laws
shall be authorized and approved in all respects. On the Effective
Date, or as soon thereafter as is practicable, pursuant to applicable
state law, the Reorganized Debtor shall file with the applicable state
governmental agencies or offices the respective Certificates of
Incorporation and By-laws."
11. Section 8.15 of the Plan is hereby modified to read in its entirety as
follows:
Ex. 3-19
<PAGE>
"8.15 ADMINISTRATION OF THE CLASS 7B LIQUIDATING TRUST. On the
Effective Date: (i) the Debtor shall duly execute two originals of the
Class 7B Liquidating Trust Agreement, a copy of which is attached to
the Disclosure Statement as Exhibit U, (ii) deliver one signed
original thereof to the Trustees identified below, thereby
establishing a trust which shall be known as the Class 7B Liquidating
Trust, and (iii) file one fully executed original of the Class 7B
Liquidating Trust Agreement with the clerk of the Court.
The provisions of the Class 7B Liquidating Trust Agreement are
incorporated into the Plan, as if the same were fully set forth
herein. The operation of the Class 7B Liquidating Trust shall be
governed by the provisions of the Class 7B Liquidating Trust Agreement
and this Section 8.15 of the Plan. Reference should be made to the
Class 7B Liquidating Trust Agreement for a complete statement of the
terms and conditions governing the operation of the Class 7B
Liquidating Trust and the administration of the assets of the Class 7B
Liquidating Trust since not all of such terms and conditions are set
forth in this Section 8.15. It is the intent of the Plan that the
provisions of the Class 7B Liquidating Trust Agreement shall be
consistent with the provisions of this Section 8.15 of the Plan. To
the extent, if any, that the provisions of the Class 7B Liquidating
Trust Agreement and the provisions of this Section 8.15 of the Plan
may be inconsistent, the provisions of this Section 8.15 of the Plan
shall govern.
The Trustees. Initially the current members of the Securities
------------
Claimants' Committee shall serve as Trustees. The Trustees shall serve
for the duration of the Class 7B Liquidating Trust, subject to earlier
death, resignation, mandatory disqualification, or removal. If at any
time subsequent to the Effective Date there are less than three (3)
Trustees, within ten (10) days thereof the remaining Trustees shall
elect a successor Trustee or Trustees, subject to the Court's
approval. For purposes of the Class 7B Liquidating Trust Agreement,
"mandatory disqualification" of a Trustee will occur in the event that
the Class 7B Claim asserted by such Trustee is disallowed in its
entirety or is allocated a distribution in an amount less than Fifteen
Thousand Dollars ($15,000), whether by virtue of a consensual
allowance/allocation approved by the Court or a decision by the
Arbitrator.
Initial Trust Assets. On the Effective Date, the Reorganized Debtor
--------------------
shall transfer and assign to the Class 7B Liquidating Trust, to be
held in trust, for the holders of Allowed Class 7B Claims all of the
Debtor's, the Reorganized Debtor's, and the Estate's rights, title,
and interest in and to all of the following (collectively, the
"INITIAL TRUST ASSETS"): (a) the sum of Five Million Dollars
($5,000,000) in cash which sum shall be transferred pursuant to the
wire transfer instructions provided by the Securities Claimants'
Committee; and (b) the Company KPMG Claims, as that term is defined
above in Article I.A. of the Plan, together with complete and
exclusive control of the prosecution and/or settlement of the Company
KPMG Claims and (c) $250,000 in cash, which sum shall be transferred
pursuant to wire transfer instructions provided by the Securities
Claimants' Committee, for fees and costs to be incurred in connection
with the administration of the Class 7B Liquidating Trust. The Company
KPMG Claims and attendant prosecution rights shall be deemed to be
assets of the Class 7B Liquidating Trust as of the Effective Date.
Upon delivery of the distributions to the Class 7B Liquidating Trust
required to be made by the Debtor pursuant to Section 5.05 and this
paragraph, the Debtor and the Reorganized Debtor shall have no
obligation or liability to the Trust or any of the beneficiaries of
the Trust, other than to cause the claims administrator to forward
Requests for Allowance to the Class 7B Claims Administrator and to
cooperate with the Trustees, as set forth in Section 2.04 of the Class
7B Liquidating Trust Agreement, in the prosecution of the Company KPMG
Claims.
Subsequent Trust Assets. In addition to the Initial Trust Assets,
-----------------------
other assets may be transferred to the Class 7B Liquidating Trust.
These assets may and shall include any proceeds received by the Class
7B Liquidating Trust as a result of the Company KPMG Claims as well as
any proceeds or claims received by the Class 7B Liquidating Trust
pursuant to the settlement agreement which is attached as Exhibit T to
the Disclosure Statement ("Class Settlement Agreement") or otherwise
pursuant to the Plan or agreements
Ex. 3-20
<PAGE>
implementing the Plan. All assets transferred to the Class 7B Liquidating Trust
which are not included within the definition of the Initial Trust Assets are
referred to herein as the "Subsequent Trust Assets." The Initial Trust Assets
and the Subsequent Trust Assets are collectively referred to herein as the
"Trust Assets."
Powers of Trustees. Pursuant to the Class 7B Liquidating Trust Agreement,
------------------
the Trustees will have the power and authority to do, among other actions, the
following:
A. Receive and hold the Trust Assets and invest the same, from time to time, in
accordance with the parameters set forth in the Class 7B Liquidating Trust
Agreement;
B. Take such actions on behalf of the Class 7B Liquidating Trust as may be
required in connection with the Class Settlement Agreement;
C. Devise, implement, supervise, modify, and administer procedures for the
allowance of Class 7B Claims and the allocation of the assets of the Class 7B
Liquidating Trust among the holders of Allowed Class 7B Claims, subject to the
limitations imposed by Class 7B Liquidating Trust Agreement or the Plan;
D. Utilize and distribute the Trust Assets to satisfy Allowed Class 7B Claims
in accordance with procedures set forth in the Class 7B Liquidating Trust
Agreement and the Plan;
E. Hire such employees, administrative personnel or claims administrators and
engage such legal, financial, accounting, investment, and other advisors,
custodians of assets, including without limitation the Arbitrator and a
Mediator, if any, as those terms are defined in the Class 7B Liquidating Trust
Agreement, and agents as the business of the Class 7B Liquidating Trust
requires, and to delegate to such Persons such powers, authority, and discretion
as the Trustees in their discretion deem advisable or necessary to carry out the
terms of the Class 7B Liquidating Trust (this provision E. is not intended to,
and shall not, include the hiring of any legal, financial, accounting, or any
other type of advisors or experts, by any Class 7B claimant or group of Class 7B
claimants for purposes of proving a Claim, defending objections thereto, or
asserting objections thereto);
F. Compensate, utilizing the Trust Assets, such employees, legal, financial,
accounting, investment, and other advisors, and agents, described in E. above,
provided, however, that accountants, lawyers, and investment advisors engaged by
the Trustees on behalf of the Class 7B Liquidating Trust to represent interests
of the Class 7B Liquidating Trust shall be compensated only with the approval of
the Court after such notice and hearing as the Court may require (this provision
F is not intended to, and shall not, include the utilization of any Trust Assets
to compensate any legal, financial, accounting, or any other type of advisors or
experts, retained by any Class 7B claimant, any group of Class 7B claimants, any
individual members of the Securities Claimants' Committee, or individual
Trustees for the purpose(s) of representing their own respective interests);
G. Make such decisions as they may deem appropriate, and in accordance with the
voting procedures set forth in Section 4.03 of the Class 7B Liquidating Trust
Agreement, in connection with the prosecution, non-prosecution, or resolution of
the Company KPMG Claims or claims constituting Trust Assets; and
H. Apply to the Court for instructions to the Trustees as they may deem proper
or necessary in connection with the administration of the Class 7B Liquidating
Trust or the performance of their duties.
Except as otherwise provided by applicable law: (i) no Trustee shall be liable
to the Class 7B Liquidating Trust or to any Person holding a Class 7B Claim,
except for his, her, or its own willful misconduct; and (ii) except to the
extent any act or failure to act on the part of a
Ex. 3-21
<PAGE>
Trustee shall constitute willful misconduct; (a) no Trustee shall be liable for
any act or omission of any Co-Trustee or any officer, agent, or employee of the
Class 7B Liquidating Trust; (b) the Trustees shall be entitled to rely upon the
advice of counsel or other advisors to the Class 7B Liquidating Trust or the
Trustees, reports prepared by the Class 7B Claims Administrator, and information
provided by any other Person employed by the Class 7B Liquidating Trust; and (c)
all actions taken and determinations made by the Trustees, unless otherwise
expressly provided in the Class 7B Liquidating Agreement, the Plan, or an order
of the Court, shall be final and binding upon all Persons having any interest in
the Class 7B Liquidating Trust.
Each Trustee shall be reimbursed by the Class 7B Liquidating Trust for his,
her, or its reasonable expenses incurred in the performance of his, her, or its
duties ad Trustee under the Class 7B Liquidating Trust Agreement, provided that
any request for such reimbursement is approved by the Court after such notice
and hearing as the Court may require, and provided, further, that any legal fees
and costs incurred by an individual Trustee, or any other Class 7B claimant, on
its own account and not on behalf of the Class 7B Liquidating Trust shall not be
paid from Trust Assets but shall be paid from the allocation such Trustee or
Class 7B claimant receives pursuant to the allowance/allocation procedures set
forth in the Class 7B Liquidating Trust Agreement.
Company KPMG Claims-Other Claims Constituting Subsequent Trust Assets. The
---------------------------------------------------------------------
Debtor will use its best efforts to obtain a tolling of the statute of
limitations for the Company KPMG Claims until sixty (60) days after the
allowance and allocation process set forth below and in the Class 7B Liquidating
Trust Agreement has become final. Thereafter, control and all decisions
regarding the Company KPMG Claims or other claims constituting Subsequent Trust
Assets, including without limitation the filing (or non-filing), prosecution,
and settlement thereof, shall be made by the vote of the representative(s) of
the holders of Allowed Class 7B Claims holding at least a majority in dollar
amount of all Allowed Class 7B Claims (singly a "REPRESENTATIVE" or collectively
"REPRESENTATIVES") which Representative(s) may be, but is/are not required to
be, a Trustee or Trustees of the Class 7B Liquidating Trust, provided, however,
that any decision (i) to release, or (ii) to settle the Company KPMG Claims or
claim constituting a Subsequent Trust Asset, in whole or in part, or (iii) to
dismiss such claims, if suit has been filed, shall be submitted to the Court for
approval after notice and hearing as the Court may require, and provided,
further, that all proceeds recovered, if any, as a result of the resolution of
the Company KPMG Claims or claims constituting Subsequent Trust Assets shall
remain Trust Assets and be distributed in accordance with Section 6.04 of the
Class 7B Liquidating Trust Agreement, all of which remains subject to the
judgment reduction provisions contained within the Class Settlement Agreement.
The Representative(s) shall provide status reports to the Trustees no less
frequently than semi-annually regarding actions taken and decisions made with
respect to the Company KPMG Claims and claims constituting Subsequent Trust
Assets.
Procedures for Claims' Allowance and Allocation.
-----------------------------------------------
Request for Allowance/Allocation. In connection with confirmation of the
--------------------------------
Plan, the Debtor shall seek approval of the Court for the form of notice to be
sent to parties who may hold Claims in Class 7B ("Notice"), as well as the form,
the timing, and the place for publication of such notice, and shall cause such
notice to be sent and published as ordered by the Court. Prior to seeking such
approval from the Court, the Debtor shall obtain the review and approval from
the Securities Claimants' Committee of the forms of notice and the place for
publication hereof. The forms of notice, among other things, shall advise Class
7B claimants that to be eligible to participate in the consensual allowance
process described below or obtain any allocation or distribution from the Class
7B Liquidating Trust, they, or their representatives (if they are a member of a
class described in a class action pending against the Debtor on the Petition
Date or are individual holders of Class 7B claims whose claims arise from their
purchase of Old Common Stock before January 29, 1997 and who continue to hold
such Old Common Stock as of the Distribution Record Date (the "Old and Cold
Holders")) must submit a Request for Allowance/Allocation prior to the date set
forth below
Ex. 3-22
<PAGE>
and in accordance with procedures set forth below. In addition, the Notice shall
advise Class 7B Claimants that if they are members of a group included within
the Class set forth in the Notice: (1) there is no need to take any affirmative
steps or submit any information at this time to participate in the partial
settlement, (2) their rights are already being represented in the allowance
process by the designated counsel for the group in which the class member's
claim falls, (3) a representative of that group will be permitted to file a
Request for Allowance on behalf of that entire group, (4) counsel for the
designated class representative of each group within the class receiving an
allocation from the settlement fund will, subject to approval of the court in
which the claims asserted by that group were initiated, issue a supplemental
Notice to members of the group which will provide information regarding the
outcome of the allocation procedure, the estimate of the average per share
recovery that will be achieved by members of the group as a result of the
settlement, and (5) the plan of allocation approved by the court pursuant in
which the proceeds of the settlement will be ultimately distributed to members
of the group.
Date before which Request for Allowance/Allocation must be Filed. In
----------------------------------------------------------------
addition to the provisions which the Court may require, the notice shall notify
such parties that in order to be eligible for any allocation or distribution
from the Class 7B Liquidating Trust, (i) they (or their representatives if they
are either a member of a class described in a class action pending against the
Debtor on the Petition Date or an Old and Cold Holder) must file a Request for
Allowance/Allocation in the form approved by the Court (a "REQUEST FOR
ALLOWANCE") with the Claims Center on or before April 9, 1999. For purposes of
the filing of a Request for Allowance, a representative of a class may include
the class representative, or if the class has not been certified or no such
representative has been appointed, lead counsel for plaintiffs in such class
action. For purposes of the filing of a Request for Allowance except to the
extent that the Court determines at the time of the confirmation of the Plan
that the interests of the Old and Cold Holders are represented in pending class
actions, a representative of the Old and Cold Holders shall be approved by the
Court at the time of confirmation of the Plan and may file a Request for
Allowance on behalf of the class of Old and Cold Holders.
Evidence to Accompany Request for Allowance. Any Request for Allowance
-------------------------------------------
filed on behalf of an individual holder of a Class 7B Claim shall be accompanied
by true and correct copies of confirmations, brokerage account statements, or
other sufficient evidence of: (i) the date(s) of purchase(s), (ii) the purchase
price(s), (iii) the date(s) of sale(s), (iv) the sale price(s), and (v) the
number of shares of stock purchased or sold on such date(s) and at such
price(s). Any Request for Allowance filed on behalf of a class of holders of
Class 7B Claims or by the representative of the Old and Cold Holders shall be
accompanied by evidence sufficient to allow the Arbitrator described below to
determine the basis for an award with respect to allowance and/or allocation of
the Class 7B Claims contained in such class.
No Priority; No Automatic Allowance. The filing of a Request for Allowance
-----------------------------------
will not automatically result in the allowance of the Class 7B Claim described
therein. No Allowed Class 7B Claim shall be afforded any priority over any
other Allowed Class 7B claim in distribution. All Claims for which a Request
for Allowance is filed shall be subject to objection and the claims allowance
and allocation process in accordance with the procedures established by the
Trustees.
Forwarding Requests for Allowance. As soon as practicable after April 9,
---------------------------------
1999, the Reorganized Debtor shall cause the Claims Center to forward copies of
all Requests for Allowance filed on behalf of claimants asserting a right to be
included in Class 7B to the Trustees, c/o the Class 7B claims administrator
selected by the Securities Claimants' Committee (the "CLASS 7B CLAIMS
ADMINISTRATOR"). Prior to or on the Confirmation Date, the Securities
Claimants' Committee will select the Class 7B Claims Administrator and provide
notice of the selection to the Debtor, the United States Trustee, counsel for
the Creditors' Committee, and counsel for the Equity Committee.
Ex. 3-23
<PAGE>
Selection of Arbitrator. The Securities Claimants' Committee (i) has
-----------------------
selected Nicholas J. Bua (the "ARBITRATOR") to serve in connection
with allowance of Class 7B Claims and the allocation of the Trust
Assets among the various classes of claimants represented in class
actions which were pending against the Debtor on the Petition Date and
other holders of Allowed Claims in Class 7B, and (ii) will provide
notice of the selection to the Debtor, the United States trustee,
counsel for the Unsecured Creditors' Committee, and counsel for the
Equity Committee. At confirmation of the Plan, the selection of the
Arbitrator will be presented to the Court for approval. The reasonable
expenses of the Arbitrator as well as such fees as may be agreed upon
between the Arbitrator and the Trustees in writing shall be paid first
from the funds provided by this Section 8.15 of the Plan and, if such
funds have been exhausted, then from the remaining Trust Assets. The
arrangements relating to the compensation and reimbursement of the
Arbitrator will be presented to the Court for approval at the hearing
on confirmation of the Plan.
Allowance/Allocation/Arbitration Procedures. Within fifteen (15) days
-------------------------------------------
of the Confirmation Date, the Trustees shall establish: (i) a
procedure for resolving, on a consensual basis, the allowance of Class
7B Claims and allocation of Trust Assets among holders of the Allowed
Class 7B Claims, and (ii) a process for the arbitration of allowance
of Class 7B Claims and allocation of Trust Assets among holders of the
Allowed Class 7B Claims in the event that there is no resolution on a
consensual basis. If the Trustees determine that the services of a
mediator (a "MEDIATOR") would be of assistance in the efforts to
attain a consensual allowance ad allocation, they may engage a
Mediator for that purpose.
Consensual Allowance and Allocation. If, as a result of the efforts of
-----------------------------------
the Trustees, a Mediator if any, and any claimants who indicated on
their Request for Allowance a desire to provide input regarding a
consensual allowance, a proposal with respect to a consensual
allowance of Class 7B Claims and allocation of Trust Assets on account
of such Claims is accepted by a unanimous vote of the Trustee then in
office, in accordance with procedures adopted by the Trustees, then
the agreement shall be submitted by the Trustees to the Court for
approval, upon such notice as the Court shall order.
No Consensus; Arbitration. If, on or before May 14, 1999, or such
-------------------------
later date as the Trustees shall establish, no motion is filed with
the Court seeking approval of a consensual allowance of Class 7B
Claims and allocation of Trust Assets on account of such Claims, then
an arbitration of any unresolved issues relating to the allowance of
Claims in Class 7B and the allocation of Trust Assets shall be
conducted by the Arbitrator as soon as practicable, in accordance with
such rules as the Arbitrator shall establish to the extent that the
Trustees have not done so. The arbitration shall be completed on or
before July 31, 1999 or such later date as the Trustees shall
establish.
Binding Arbitration. The arbitration shall be binding in nature, and
-------------------
the only grounds of any application to vacate or modify any decision
or award of the Arbitrator shall be that the Arbitrator was other than
a neutral party, that the award was obtained by fraud, or that the
award constituted an abuse of discretion or violated public policy.
Post-Award Proceedings. Any application to vacate or modify an award
----------------------
of the Arbitrator shall be only to the Court, and any notice of appeal
from such an award must be filed within fourteen (14) days after the
Arbitrator shall have provided a copy of his award to the Trustees and
any party to the arbitration, via facsimile to each of the Trustees
and via overnight delivery service in a method requiring a receipt
therefor or via certified mail return receipt requested to any other
party to the arbitration. In the event such an application is filed,
with respect thereto the Arbitrator may, utilizing Trust Assets,
engage counsel to defend the award in connection with any such
application.
Expenses of Post-Award Proceedings. A party filing an application to
----------------------------------
vacate or modify the award of the Arbitrator shall be responsible for
his, her, or its own costs, expenses and attorneys' fees. In addition,
if an application is unsuccessful in that the party making the
Ex. 3-24
<PAGE>
application does not obtain a modification or the vacation of the
award of the Arbitrator, that party shall bear all expenses of the
application, including the reasonable fees and expenses incurred in
connection therewith by the Arbitrator.
Distribution. The Trustees shall distribute the Trust Assets then held
------------
in the Class 7B Liquidating Trust, net of costs and expenses properly
chargeable to the Trust Assets under the Plan or the Class 7B
Liquidating Trust Agreement, as soon as practicable after either the
award of the Arbitrator or order of the Court approving a consensual
allocation of Trust Assets has become final and not subject to
modification, reversal or appeal, and shall make such distribution in
accordance with such arbitration award or such order of the Court. If,
subsequent to such distribution, the Class 7B Liquidating Trust shall
acquire additional Trust Assets, then as soon as practicable after
receipt by the Class 7B Liquidating Trust, the Trustees shall
distribute those additional Trust Assets, net of costs and expenses
properly chargeable to the Trust Assets under the Plan or the Class 7B
Liquidating Trust Agreement (including net of attorneys' fees and
costs incurred in connection with such additional assets) according to
the same allocation determined previously by consensus or arbitration,
as the case may be. With respect to any distribution of Trust Assets
to Allowed Class 7B Claims which are included within a class action
against the Debtor which was pending on the Petition Date, the
Trustees shall make such distribution by delivering it to an escrow
account designated by lead counsel for that class in such class action
and such distribution shall remain in that escrow account until such
time as (i) such lead counsel has been able to apply to the court in
which the respective class action is pending as to the matter of a
method of final distribution and an award of attorneys' fees and
costs, and (ii) any order on such application has become final.
Termination. Following (i) a final determination of the Company KPMG
Claims and other claims constituting Trust Assets, whether by virtue
of prosecution or settlement thereof, or (ii) a decision by the
Trustees not to take any action with respect to the Company KPMG
Claims and other claims constituting Trust Assets, at such time as all
Trust Assets, including any and all sums resulting from prosecution or
settlement of the Company KPMG Claims, or other claims constituting
Trust Assets, have been fully and finally distributed, the Trustees
shall apply to the Court for an order of the Court terminating the
Class 7B Liquidating Trust, upon such notice as the Court shall order.
Upon the Court's order terminating the Class 7B Liquidating Trust
becoming final, the Class 7B Liquidating Trust shall be terminated,
and the Trustees shall be discharged of all responsibilities with
respect to the Trust."
12. Section 11.05 of the Plan is hereby modified to read in its entirety as
follows:
"11.05 EXCULPATION. Except with respect to KPMG Peat Marwick, neither the
Debtor, the Reorganized Debtor, any of their respective officers,
directors, employees, advisors, agents, professionals or representatives,
benefit plan administrators or trustees, nor the members of the Steering
Committee or the parties to the Consent Agreement and their principals,
advisors, professionals and agents, nor the Creditors' Committee, Equity
Holders' Committee, Securities Claimants' Committee and their members,
advisors, professionals and agents shall have or incur any liability to any
holder of a Claim or Interest for any act or omission in connection with or
arising out actions taken or omitted to be taken in good faith in
connection with the Debtor's restructuring, the Plan, the Reorganization
Case, including all prepetition activities leading to the promulgation and
confirmation of the Plan, and administration of the Plan, including the
execution of corporate governance, debt and securities regulation documents
and filings, or the property to be distributed under the Plan; provided,
however, such exculpation shall not relate to post confirmation conduct
deemed to be willful misconduct or gross negligence. Upon the Confirmation
Date, the Securities Claimants' Committee shall dismiss or shall be deemed
to have dismissed, with prejudice, adversary proceeding No. 98-A-01580
against the non-director defendants therein."
Ex. 3-25
<PAGE>
13. Section 12.03 of the Plan is hereby modified to read in its entirety as
follows:
"12.03 LIMITED SURVIVAL OF THE DEBTOR'S CORPORATE INDEMNITIES. Except as
provided in Section 5.03 and this Section 12.03, the Corporate Indemnities
shall not be discharged or impaired by Confirmation of this Plan. Such
obligations shall be deemed and treated as executory contracts to be
assumed by the Debtor and the Reorganized Debtor pursuant to the Plan, and
shall continue as obligations of the Reorganized Debtor, subsequent to the
Effective Date, provided that the Debtor's or Reorganized Debtor's
obligations on such Corporate Indemnities shall be limited as follows:
(i) the claims of officers, agents and employees who remain employed
by the Reorganized Debtor as of the first day immediately
following the Effective Date (excluding any claims covered by the
Indemnification Settlement Fund) shall be fully assumed;
(ii) the claims of officers, agents, and employees (other than the
claims of the estate of James A. Doyle and John N. Brincat in
respect of which no obligations shall be assumed), who are no
longer employed by the Reorganized Debtor as of the first day
immediately following the Effective Date, shall be assumed only
to the extent that they relate to reasonable costs and expenses
incurred after the Effective Date in connection with their
participation in an agency or government investigation and shall
be limited to $250,000 in the aggregate, such claims to be
submitted to the Reorganized Debtor and paid upon adequate
verification or, to the extent such claims exceed $250,000, paid
on a pro rata basis;
(iii) the Beneficiaries shall be entitled to assert Allowed
Indemnification Claims, but shall be entitled to compensation on
account of such claims only (x) out of the Indemnification
Settlement Fund, and (y) to the extent of insurance coverage
available under the Reliance Policies; and
(iv) the claims of persons who are outside directors as of the day
preceding the Effective Date shall be assumed and limited to the
sum of (x) any remaining fee retainer in possession of the
professionals retained by such directors and (y) the available
balance from time to time of the Outside Directors Reserve.
Nothing in this subsection shall limit any rights of such persons
provided under Section 12.03(iii) of this Plan."
14. Section 13.01 of the Plan is hereby modified to read in its entirety as
follows:
"13.01 RETENTION OF JURISDICTION. Notwithstanding the entry of the
Confirmation Order or the Effective Date having occurred, the Court shall
retain original and exclusive jurisdiction to (a) determine any disputed
Claims, (b) determine requests for payment of Claims entitled to priority
under section 507(a)(1) of the Bankruptcy Code, including compensation of
and reimbursement of expenses of professionals and other parties entitled
thereto, (c) resolve controversies and disputes regarding interpretation
and implementation of the Plan, (d) enter orders in aid of the Plan,
including, without limitation, appropriate orders (which may include
contempt or other sanctions) to protect the Debtor and the Reorganized
Debtor in accordance with sections 524 and 1141 of the Bankruptcy Code and
the terms and conditions of the Confirmation Order, (e) modify the Plan
pursuant to Section 14.02 of the Plan, (f) determine any and all
applications, adversary proceedings and contested or litigated matters
pending on the Effective Date, (g) allow, disallow, estimate, liquidate or
determine any Claim or Interest and to enter or enforce any order requiring
the filing of any such Claim before a particular date, (h) determine any
and all pending applications for the rejection of executory contracts or
unexpired leases, or for the assignment of assumed executory contracts and
unexpired leases, and to hear and determine, and if need be to liquidate,
any and all Claims arising from any such rejection, assumption and/or
assignment, (i) determine any actions or controversies arising under or in
connection with the Plan, the Confirmation Order, the Class 7B Liquidating
Trust or any contract,
Ex. 3-26
<PAGE>
instrument, release, or other agreement created in connection with the
Plan, (j) enter and implement orders as are necessary or appropriate if the
Confirmation Order is for any reason modified, stayed, reversed, revoked or
vacated, (k) enter a final decree closing the Reorganization Case, (l)
determine any actions or controversies related to or asserted against the
Exchange Agent, (m) enter and implement orders as are necessary to the
transactions set forth in Section 8.05 of the Plan and (n) determine any
and all claims and controversies of the Debtor against Lyndon Insurance
Group and Aon Automotive Group, Inc."
15. The following definition shall be inserted after the existing definition of
INTEREST RESERVE:
"KPMG OR KPMG PEAT MARWICK MEANS KPMG Peat Marwick LLP and any of its
related entities or partners.
Ex. 3-27
<PAGE>
MERCURY FINANCE COMPANY
AMENDMENT
TO
AMENDED AND RESTATED 1989 STOCK OPTION AND INCENTIVE COMPENSATION PLAN
(As approved by the United States Bankruptcy Court for the Northern District of
Illinois pursuant to Section 303 of the General Corporation Law of the State of
Delaware)
1. Amendment
---------
By order of the United States Bankruptcy Court for the Northern District of
Illinois, Mercury Finance Company (the "Company") hereby further amends the
Mercury Finance Company Amended and Restated 1989 Stock Option and
Incentive Compensation Plan (the "Plan") by unanimous action of the
Directors and Stockholders of the Company pursuant to Section 303 of the
General Corporation Law of the State of Delaware as follows:
a. Sections 1(2), 2.05, 2.06, 2.08, 2.09, 5.01(a), 5.02 and 6.02 are
hereby deleted in their entirety.
b. Section 2.03 is hereby amended by changing the reference to "par value
$1.00 per share" to "par value $0.01 per share."
c. Section 2.12 is hereby amended by deleting the portion of the sentence
after the word "Participant."
d. Section 2.13 is hereby amended by deleting the portion of the sentence
after the term "Option Date."
e. Section 3 is hereby amended to reserve for issuance under the Plan
950,000 shares of Common Stock and by adding the following sentence at
the end of the paragraph :
No "covered employee" (as such term is defined in Section 162(m)
of the Internal Revenue Code of 1986, as amended) shall be
granted more than 500,000 shares of Common Stock in any calendar
year with respect to a stock option.
f. The first sentence of Section 4.01 is hereby amended to read as
follows:
The Committee that administers the Plan shall consist of not
fewer than two (2) members of the Board of Directors who are non-
employee directors within the meaning of Securities and Exchange
Commission Rule 16b-3(b)(3)(i). Such persons may be appointed
from time to time by the Board.
g. Section 4.02 (c) is hereby amended by deleting the phrase:
"and except for the grants to directors provided for in paragraph
5.02,"
Ex. 3-28
<PAGE>
h. Section 5.01(b) is hereby renumbered 5.01(a) and amended to add directors
as a class of eligible participants.
i. Section 5.03 is hereby amended by deleting the phrase "Options and each
award under Section 5.01(b) of this Plan will consist of."
j. Section 6.01 is hereby amended by adding the following clause at the
end of the paragraph:
; provided that such Common Stock has been held by the
Participant for at least six months.
k. Section 6.03 is amended by adding the following phrase at the beginning
of the first sentence:
Except as otherwise provided in the form of option agreement
or
l. Section 9 is hereby amended to delete all references to Daniel Terra.
m. Section 10 is hereby amended to permit in the discretion of the Committee
limited transferability of stock options to members of the holder's
immediate family and trusts or family limited partnership for their
benefit.
n. Section 16 is hereby amended to permit the use of share withholding to
pay income taxes associated with the exercise of nonqualified stock
options.
o. Section 17 is amended by deleting the present language and substituting the
following:
The Board of Directors may from time to time amend or revise the
terms of this Plan in whole or in part, but no amendment shall
disqualify the Plan from the exemption provided by Securities and
Exchange Commission Rule 16b-3. In addition no such amendment
shall be made without the approval of the Company's stockholders
to the extent such approval is required by law or regulatory
authority.
p. Section 18.02 is hereby amended by deleting the present language and
substituting the following:
The Board of Directors may terminate the Plan at any time with
respect to any shares not yet subject to Options. Unless
terminated earlier by the Board of Directors, the Plan will
terminate ten years from the effective date of this Amendment.
2. Effect and Effective Date.
-------------------------
This Amendment and all provisions of the Plan implementing this
Amendment shall be effective as if approved by unanimous consent of the
Directors and Stockholders on February __, 1999.
Ex. 3-29
<PAGE>
3. Authority and Restatement
-------------------------
The proper officers of this Corporation are hereby authorized to take all
actions they deem necessary and appropriate to carry out the purposes and intent
of the foregoing Amendment and to prepare a Restatement of the Plan containing
all of the changes set forth in the foregoing Amendment.
Ex. 3-30
<PAGE>
Exhibit 10AZ
CONSULTING AGREEMENT
THIS AGREEMENT is made and entered into on this 5th day of November, 1998
by and between Mercury Finance Company, a Delaware corporation, (hereinafter
referred to as "Company") and Edward G. Harshfield (hereinafter referred to as
"Consultant").
WHEREAS, Company intends to pursue a plan of reorganization in the United
States Bankruptcy Court; and
WHEREAS, Company wishes to obtain the benefit of Consultant's participation
in the preparations for that reorganization and in the overall supervision and
direction of the business of Company prior to any confirmation by the Bankruptcy
Court of a plan of reorganization; and
WHEREAS, Consultant wishes to provide his services for those purposes;
NOW, THEREFORE, Company and Consultant, each intending to be legally bound,
hereby mutually covenant and agree as follows:
1. Engagement and Term.
-------------------
(a) Engagement. Company engages Consultant to assist in the
----------
preparations for the reorganization of Company. Neither the Company nor
Consultant shall, without prior review and approval by the other party, issue
any press release or other public statement about Consultant's engagement by the
Company, but such approval shall not be withheld unreasonably.
(b) Term. The term of Consultant's engagement under this Agreement
-----
shall commence on November __, 1998 and shall continue indefinitely, subject to
termination by either party by giving at least ten (10) days written notice of
termination, and subject to Paragraph 14, below.
2. Duties. Consultant shall participate in planning and preparing for the
------
reorganization of Company. Such participation shall consist of such specific
activities as the Board of Directors of Company (the "Board") shall reasonably
request from time to time. Consultant shall devote such time as is necessary to
fulfill his responsibilities hereunder.
3. Compensation. As compensation for Consultant's services under this
------------
Agreement, Company shall pay Consultant fees at the rate of eighty-three
thousand three hundred and thirty-three dollars ($83,333) per month, payable in
advance on the first day of each calendar month. If the term of this Agreement
ends prior to the end of a calendar month, the Executive shall refund to the
Company a pro rata portion of the fee for that final month. The fees payable to
Consultant under this Agreement shall be administrative expenses of Company
having priority, in the Chapter 11 proceeding of the Company, over all pre-
petition unsecured claims of creditors.
4. Expense Reimbursement. Company shall reimburse Consultant for
---------------------
reasonable travel and all other direct, out-of-pocket expenses actually incurred
in the performance of services
1
<PAGE>
under this Agreement, including (but not by way of limitation) the cost of
commuting between California and Illinois and the cost of suitable temporary
housing in Illinois, during Consultant's engagement under this Agreement. Such
reimbursement shall be paid within a reasonable time following Consultant's
submission of proper substantiation, in accordance with the expense
reimbursement policies then generally applicable to directors and officers of
Company.
5. Covenants of Consultant. In order to induce Company to enter into this
-----------------------
Agreement, Consultant hereby agrees as follows:
(a) Confidentiality. Except for and on behalf of Company with the
---------------
consent of or as directed by the Board, Consultant shall keep confidential and
shall not divulge to any other person or entity, during the term of engagement
hereunder or thereafter, any business secrets or other confidential information
regarding Company and its affiliates which has not otherwise become public
knowledge; provided, however, that nothing in this Agreement shall preclude
Consultant from disclosing information (i) to an appropriate extent to parties
retained to perform services for Company or its affiliates or (ii) under any
other circumstances to the extent such disclosure is, in the reasonable judgment
of Consultant, appropriate or necessary to further the best interests of Company
and its affiliates or (iii) as may be required by law.
(b) Noncompetition. During the term of Consultant's engagement under
--------------
this Agreement and during the one (1)-year period immediately following (i) the
Company's termination of such engagement for "Cause" (as defined below) or (ii)
Consultant's termination of such engagement other than for "Good Reason" (as
defined below), Consultant shall not, directly or indirectly, engage in, be
employed by, act as a consultant to, or be a director, officer, owner or partner
of, any business activity or entity which competes significantly and directly
with the Company or any of its subsidiaries in lines of business conducted by
the Company or its subsidiaries during the term of Consultant's engagement under
this Agreement or, for purposes of applying this noncompetition restriction
after the end of that term, in lines of business conducted by the Company or its
subsidiaries as of the end of that term and, in either event, in any geographic
area in which the Company or its subsidiaries engage in such business; provided,
however, that it shall not be a violation of this paragraph (b) for Consultant
to continue to serve in those current directorships which are disclosed to the
Company by Consultant in writing at the time of his execution of this Agreement;
and provided further that it shall not be a violation of this Agreement for
Consultant to own an interest of less than five percent (5%) in any entity whose
ownership interests are publicly traded. For purposes of this paragraph (b), the
terms "Cause" and "Good Reason" shall have the meanings set forth in Sections
6(b) and 6(c) (excluding paragraph (i) of Section 6(c)), respectively, of the
Employment Agreement of even date herewith between Consultant and the Company.
(c) Enforcement. Consultant recognizes that the provisions of
this Paragraph 5 are vitally important to the continuing welfare of Company and
its affiliates and that money damages would constitute an inadequate remedy for
any violation thereof. Accordingly, in the event of any such violation by
Consultant, Company and its affiliates, in addition to any other remedies they
may have, shall have the right to compel
2
<PAGE>
specific performance thereof or to seek an injunction restraining any action by
Consultant in violation of this Paragraph 5.
6. Non-Employee Status. Consultant and Company acknowledge that Consultant
-------------------
will, in performing his duties under this Agreement, be acting as an independent
contractor and will not be an employee of Company. Consultant will not be
eligible to participate in any benefits plan or program now existing or
hereafter created for employees of Company or any affiliate of Company. Except
as otherwise required by law, Company will not withhold any taxes from the
compensation paid to Consultant under this Agreement. Consultant will be solely
responsible for the payment of all taxes (including, but not by way of
limitation, federal and state income taxes and Social Security taxes) imposed
upon such compensation and for fulfilling all other legal obligations associated
with rendering services as a self-employed independent contractor.
7. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of Consultant, Company, the heirs and representatives of Consultant, and
the successors and permitted assigns of Company.
8. Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be deemed to have been duty given if
delivered by hand or by reputable, commercial delivery service or if mailed
within the continental United States by First class certified mail, return
receipt requested, postage prepaid, addressed as follows:
(a) If to Company, to:
Mercury Finance Company
100 Field Drive, Suite 340
Lake Forest, Illinois 60045
Attention: Chairman of the Board,
with a copy to:
Lewis S. Rosenbloom, Esq.
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
(b) If to Consultant, to:
Mr. Edward G. Harshfield
510 Rosemont Avenue
Pasadena, California 91103
3
<PAGE>
with a copy to:
Robert J. Stucker, Esq.
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street, Suite 2600
Chicago, Illinois 60601
Either party may change its address by written notice sent to the other party at
the last recorded address of that party.
9. No Assignment. This Agreement is not assignable by Consultant or
-------------
Company, and no payment to be made to Consultant hereunder shall be subject to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
other charge.
10. Execution in Counterparts. This Agreement may be executed by the
-------------------------
parties hereto in two (2) or more counterparts, each of which shall be deemed to
be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
11. Applicable Law. This Agreement shall be construed and interpreted in
--------------
accordance with and governed by the laws of the State of Illinois, other than
the conflict of laws provisions of such laws.
12. Severability. If any provision of this Agreement shall be adjudged by
------------
any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder of
this Agreement. Furthermore, if the scope of any restriction or requirement
contained in this Agreement is too broad to permit enforcement of such
restriction or requirement to its full extent, then such restriction or
requirement shall be enforced to the maximum extent permitted by law, and
Consultant consents and agrees that any court of competent jurisdiction may so
modify such scope in any proceeding brought to enforce such restriction or
requirement.
13. Waiver. No waiver by any party at any time of any breach by the other
------
party of, or failure to comply with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of any
other provisions or conditions at the same time or at any prior or subsequent
time.
14. Entire Agreement. This Agreement embodies the entire understanding of
----------------
the parties hereto, and supersedes all other prior oral or written agreements or
understandings between them, regarding the subject matter hereof. However,
nothing in this Agreement is intended to impair or modify, or shall be
interpreted as impairing or modifying, any part of the Employment Agreement of
even date herewith between Consultant and Company. Upon that Employment
Agreement becoming effective, it shall fully replace and supersede this
Agreement with respect to subsequent services of Consultant for Company, and the
term of this Agreement shall end. No other change, alteration or modification
hereof may be made except in a writing, signed by each of the parties hereto.
The headings in this Agreement are for convenience of reference only and
4
<PAGE>
shall not be construed as part of this Agreement or to limit or otherwise affect
the meaning hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on this 5th day of November, 1998.
Attest: MERCURY FINANCE COMPANY
By: /s/ William A. Brandt, Jr.
____________________________ ----------------------------------
Title:______________________ Title: President/C.E.O.
/s/ Edward G. Harshfield
-------------------------------------
Edward G. Harshfield
5
<PAGE>
EXHIBIT 11
MERCURY FINANCE COMPANY
COMPUTATION OF NET INCOME/(LOSS) PER SHARE
Year Ended December 31 (dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Income Data:
- --------------
1. Net loss $(53,570) $(74,193) $(28,968)
2. Weighted average common share
outstanding, adjusted for stock splits 177,901 177,892 177,129
3. Weighted average shares of treasury stock
outstanding, adjusted for stock splits 5,403 5,403 4,361
4. Weighted average shares reserved for stock
options (utilizing the treasury stock method) 0 0 0
NET INCOME PER COMMON SHARE
5. Common Shares Outstanding 172,498 172,489 172,768
(Line 2-3+4)
6. Net loss per common shares $(0.31) $ (0.43) $ (0.17)
(Line 1 / 5)
DIVIDEND DATA
1. Dividends Declared $ 0 $ 12,937 $ 51,821
2. Average common shares outstanding
on dividend record date - 172,498 172,737
3. Dividends per common share $ 0 $ 0.075 $ .30
</TABLE>
Note 1.
In February, 1997, following the announcement of the discovery of accounting
irregularities which caused the overstatement of the previously released
earnings for 1995 and 1996, the market value of the Company's common stock was
significantly reduced.
Since the announcement, the value of the common stock has not exceeded the
exercise price of the stock options granted or regranted under a revised stock
option program. As a result, the calculation of the common share equivalents
becomes not meaningful for the years ended December 31, 1998 and 1997.
The Company applies APB Opinion 25 in accounting for its Plan, and accordingly,
no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's 1998 and 1997 net losses and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C>
Net Loss As reported $(53,570) $(74,193)
Pro forma $(53,581) $(78,564)
Basic and Diluted Loss per Share As reported $ (0.31) $ (0.43)
Pro forma $ (0.31) $ (0.46)
</TABLE>
6
<PAGE>
The weighted average fair value of the options granted, using the Black-Scholes
method, was $2.60 and $2.41 per option in 1998 and 1997, respectively. The full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net loss amounts presented above because
compensation cost is reflected over the options' vesting period of eighteen
months.
Upon the announcement of the discovery of the accounting irregularities and
financial statement restatement in January, 1997, the market value of the
Company's common stock declined dramatically. Management thus believes that the
market value of the Company's common stock during 1996 is overstated. Because a
key component of the fair value calculation (and the related pro forma net
income and earnings per share disclosures) is the market value of the Company's
stock, the fair value and other disclosures required under SFAS 123 for 1996 is
not considered meaningful.
7
<PAGE>
EXHIBIT 10BA
FIRST AMENDMENT TO RETENTION AND LETTER OF ENGAGEMENT OF DEVELOPMENT
--------------------------------------------------------------------
SPECIALISTS, INC.
-----------------
This First Amendment to Retention and Letter of Engagement of
Development Specialists, Inc., dated as of July 14th , 1998 (this "Amendment")
is between Mercury Finance Company, a Delaware corporation and its subsidiaries
(collectively, the "Company") and Development Specialists, Inc. ("DSI").
PRELIMINARY STATEMENTS
----------------------
1. The Company and DSI are parties to a Retention and Letter of
Engagement dated February 5, 1997 (the "Agreement").
2. On or about May 14, 1998, Mercury Finance Company ("Mercury")
entered into an agreement with substantially all of the institutional holders of
claims, notes, and/or commercial paper issued by Mercury providing for the
financial restructuring and recapitalization of Mercury (the "Restructuring
Agreement").
3. The Company and DSI have agreed to amend the Agreement, but only
on the terms and conditions stated herein.
AGREEMENT
---------
In consideration of the promises and mutual agreements contained in
this Amendment and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties to this Amendment agree as
follows:
1. DSI shall continue to make Fred C. Caruso, Acting Chief Operating
Officer of the Company, and Patrick J. O'Malley, Chief Accounting Officer of
the Company, available to fully perform and discharge such duties and
responsibilities as are attendant to their respective offices during the term of
DSI's employment.
2. DSI agrees that the term of DSI's retention shall continue until
the earlier of (i) thirty (30) days following notice by the Company to DSI that
its retention is terminated, or (ii) one hundred eighty (180) days following
notice by DSI of its intent to terminate the Agreement as amended. DSI further
agrees that, until the "effective date" of the plan of reorganization
contemplated by the Restructuring Agreement, DSI agrees not to undertake any
assignment with or assist in any business or undertaking which engages in a
business substantially similar to or in competition with the sub-prime financing
business conducted by the Company.
3. DSI agrees that it shall continue to be bound by the terms of the
Confidentiality Agreement of DSI entered into with Mercury and its subsidiaries
prior to the date hereof (the "Confidentiality Agreement").
<PAGE>
4. DSI acknowledges that any breach of the Confidentiality Agreement
shall cause substantial harm to the Company that cannot be adequately
compensated for in money damages, and that any breach by DSI, its officers,
directors, employees or representatives of the Confidentiality Agreement will
cause irreparable harm to the Company. Therefore, if DSI, its officers,
directors, employees or representatives breach or threatens to breach the
Confidentiality Agreement, the Company shall, in addition to any other remedies
that may be available to it, have the right to obtain from any court having
jurisdiction such equitable relief as may be appropriate, including but not
limited to a decree enjoining DSI, its officers, directors, employees and
representatives from any further breach.
5. All notices or other communications hereunder shall be in writing
and shall be effectively given when mailed by Registered Mail/Return Receipt
Requested and
directed to the party at the address given herein or to such other address as
either party may hereafter designate to the other in writing. Any notice to DSI
shall be given to:
William A. Brandt, Jr.
Development Specialists, Inc.
3 First National Plaza
Suite 2300
Chicago, Illinois 60602
with a copy to:
Carl R. Klein
Holleb & Coff
55 E. Monroe Street Suite 4100
Chicago, Illinois 606033
Any notice to the Company shall be given to:
Mark Dapier
Mercury Finance Company
100 Field Drive Suite 340
Lake Forest, Illinois 60045
with a copy to:
Lewis S. Rosenbloom
McDermott, Will & Emery
227 W. Monroe Street
Chicago, Illinois 60606
6. Except as provided for in paragraph 4, any controversy relating to
the Agreement or this Amendment shall be settled exclusively by arbitration in
Chicago, Illinois
-2-
<PAGE>
in accordance with the rules of the American Arbitration Association then in
affect. Judgment may be entered on an arbitrator's award relating to this
Agreement and amendments thereto in any court having jurisdiction.
This Amendment constitutes the full and entire understanding of the
Company and DSI with respect to the subject matter of this Amendment. Except as
provided for herein, the Agreement shall remain in effect. However, to the
extent that any term of this Amendment is inconsistent with or contrary to any
term of the Agreement, this Amendment shall govern.
MERCURY FINANCE COMPANY DEVELOPMENT SPECIALISTS, INC.
By:________________________ By: ______________________________
Its:________________________ Its: ______________________________
-3-
<PAGE>
EXHIBIT 10BB
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
This First Amendment to Employment Agreement, dated as of July 14th ,
1998 (this "Amendment") is between Mercury Finance Company, a Delaware
corporation (the "Company") and William A. Brandt, Jr. ("Employee").
PRELIMINARY STATEMENTS
----------------------
1. The Company and Employee are parties to an Employment Agreement
dated February 1, 1997 (the "Employment Agreement").
2. On or about May 14, 1998, the Company entered into an agreement
with substantially all the institutional holders of claims, notes, and/or
commercial paper issued by the Company ("Senior Lenders") providing for the
financial restructuring and recapitalization of the Company ("Restructuring
Agreement").
3. The Restructuring Agreement contemplates that the restructuring
will be implemented under a prestructured plan of reorganization to be filed in
federal bankruptcy court (the "Plan").
4. The Company and Employee have agreed to amend the Employment
Agreement on the terms and conditions stated herein.
AGREEMENT
---------
In consideration of the promises and mutual agreements contained in
this Amendment and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties to this Amendment agree as
follows:
1. Subsection (b) (ii) of Section 1 of the Employment Agreement
-------------------- ---------
hereby is amended by deleting the reference to "thirty days" and replacing it
with "one hundred eighty (180) days".
2. Section 2 of the Employment Agreement hereby is amended by adding
---------
a new Subsection (c) as follows:
--------------
(c) Success Fee. Upon confirmation of the Plan, the Company shall
-----------
pay one million dollars ($1,000,000) to Employee, subject to automatic
forfeiture upon termination of Employee for any reason whatsoever.
3. Section 4 of the Employment Agreement hereby is amended by
---------
amending and restating such section in its entirety as follows:
Employer has the right to terminate Employee's employment at will
and without prior notice. Upon termination, Employee shall forfeit any right to
the payment set forth in Section 2(c).
<PAGE>
4. Section 5 of the Employment Agreement hereby is amended by
---------
amending and restating such section in its entirety as follows:
(a) Employee agrees that he shall be bound by the terms of the
Confidentiality Agreement of DSI entered into with Employer on or
prior to the date hereof (the "Confidentiality Agreement").
(b) Employee acknowledges that any breach of the Confidentiality
Agreement shall cause substantial harm to the Company that cannot be
adequately compensated for in money damages, and that any breach by
Employee of the Confidentiality Agreement will cause irreparable harm
to the Company. Therefore, if Employee breaches or threatens to
breach the Confidentiality Agreement, Employee shall forfeit any right
to the payment set forth in Section 2(c) and the Company shall, in
addition to any other remedies that may be available to it, have the
right to obtain from any court having jurisdiction such equitable
relief as may be appropriate, including but not limited to, a decree
enjoining Employee from any further breach.
5. Subsection (a) of Section 7 of the Employment Agreement hereby is
-------------- ---------
amended by amending and restating such subsection in its entirety as follows:
All notices or other communications hereunder shall be in writing and
shall be effectively given when mailed by Registered Mail/Return
Receipt Requested and directed to the party at the address given
herein or to such other address as either party may hereafter
designate to the other in writing. Any notice to Employee shall be
given to:
William A. Brandt, Jr.
Development Specialists, Inc.
3 First National Plaza
Suite 2300
Chicago, Illinois 60602
with a copy to:
Carl R. Klein
Holleb & Coff
55 E. Monroe Street Suite 4100
Chicago, Illinois 60603
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<PAGE>
Any notice to the Company shall be given to:
Mark Dapier
Mercury Finance Company
100 Field Drive Suite 340
Lake Forest, Illinois 60045
with a copy to:
Lewis S. Rosenbloom
McDermott, Will & Emery
227 W. Monroe Street
Chicago, Illinois 60606
6. Section 7 of the Employment Agreement hereby is further amended by
----------
adding a new Subsection (e) as follows:
--------------
(e) Except as provided for in Section 5(b), any controversy
relating to this Employment Agreement or amendments thereto shall be
settled exclusively by arbitration in Chicago, Illinois in accordance
with the rules of the American Arbitration Association then in affect.
Judgment may be entered on an arbitrator's award relating to this
Employment Agreement and amendments thereto in any court having
jurisdiction.
This Amendment constitutes the full and entire understanding of the
Company and the Employee with respect to the subject matter of this Amendment.
To the extent that any term of this Amendment is inconsistent with or contrary
to any term of the Employment Agreement, this Amendment shall govern.
MERCURY FINANCE COMPANY WILLIAM A. BRANDT, JR.
By: ____________________________ ______________________________
Its:____________________________
-3-
<PAGE>
EXHIBIT 10BC
RETENTION AGREEMENT OF DEVELOPMENT SPECIALISTS, INC.
----------------------------------------------------
THIS AGREEMENT is made as of the 14th day of July, 1998, by
and among Mercury Finance Company of Alabama; Mercury Finance Company of
Arizona; Mercury Finance Company of California; Mercury Finance Company of
Colorado; Mercury Finance Company of Delaware; Mercury Finance Company of
Florida; Mercury Finance Company of Georgia; Mercury Finance Company of Idaho;
Mercury Finance Company of Illinois; Mercury Finance Company of Indiana; Mercury
Finance Company of Iowa; Mercury Finance Company of Kansas; Mercury Finance
Company of Kentucky; Mercury Finance Company of Louisiana; Mercury Finance
Company of Michigan; Mercury Finance Company of Mississippi; Mercury Finance
Company of Missouri; Mercury Finance Company of Nevada; Mercury Finance Company
of New Mexico; Mercury Finance Company of New York; Mercury Finance Company of
North Carolina; Mercury Finance Company of Ohio; Mercury Finance Company of
Oklahoma; Mercury Finance Company of Oregon; Mercury Finance Company of
Pennsylvania; Mercury Finance Company of South Carolina; Mercury Finance Company
of Tennessee; Mercury Finance Company of Texas; Mercury Finance Company of Utah;
Mercury Finance Company of Virginia; Mercury Finance Company of Washington;
Mercury Finance Company of Wisconsin; Filco Marketing Company; MFC Financial
Services, Inc.; Gulfco Finance Company; Gulfco Investment Company; Midland
Finance Company; and MFN Insurance Company ("Subsidiaries" or "Employer") and
Development Specialists, Inc. ("DSI").
W I T N E S S E T H:
WHEREAS, on or about May 14, 1998, Mercury Finance Company
("Mercury") entered into an agreement with substantially all the institutional
holders of claims, notes, and/or commercial paper issued by Mercury ("Senior
Lenders") providing for the financial restructuring and recapitalization of
Mercury (the "Restructuring Agreement");
WHEREAS, the Restructuring Agreement contemplates that the
restructuring will be implemented under a prestructured plan of reorganization
to be filed in a federal bankruptcy court (the "Plan");
WHEREAS, the Subsidiaries will benefit from the financial
restructuring and recapitalization of Mercury; and
WHEREAS, DSI has requested a signing bonus/incentive payment
in recognition of the services rendered and to be rendered by DSI;
NOW, THEREFORE, in consideration of the mutual undertakings of
the parties hereto, it is agreed as follows:
<PAGE>
1. Retention of DSI
----------------
(a) DSI hereby accepts the terms of its retention by Employer as set
forth in this Agreement and agrees to provide the continued availability of Fred
C. Caruso, as Acting Chief Operating Officer of Employer, and Patrick J.
O'Malley, as Chief Accounting Officer of Employer, both as required by Employer
so that they are available to fully perform and discharge such duties and
responsibilities as are attendant to their respective offices.
(b) The term of employment shall continue until the earlier of (i)
thirty (30) days following notice by Employer to DSI that its employment is
terminated, or (ii) one hundred eighty (180) days following notice by DSI of its
intent to terminate employment.
(c) Until the "effective date" of the Plan, DSI agrees not to
undertake any assignment with or assist in any business or undertaking which
engages in a business substantially similar to or in competition with the sub-
prime financing business conducted by Employer.
2. Compensation and Success Fee
----------------------------
Upon execution of this Agreement and subsequent approval of DSI's
retention by Mercury in its chapter 11 case, Employer shall pay one million six
hundred thousand dollars ($1,600,000) to DSI (" Signing Bonus and Incentive
Fee").
3. Employee Benefits
-----------------
DSI shall not be entitled to any employee benefits and waives all
rights thereto.
4. Restrictions
------------
DSI agrees that it shall continue to be bound by the terms of the
Confidentiality Agreement of DSI entered into with Mercury and its subsidiaries
prior to the date hereof (the "Confidentiality Agreement").
5. Breach of Confidentiality Agreement
-----------------------------------
DSI acknowledges that any breach of the Confidentiality Agreement
shall cause substantial harm to the Subsidiaries that cannot be adequately
compensated for in money damages, and that any breach by DSI, its officers,
directors, employees or representatives of the Confidentiality Agreement will
cause irreparable harm to the Subsidiaries. Therefore, if DSI, its officers,
directors, employees or representatives breach or threatens to breach the
Confidentiality Agreement, the Subsidiaries shall, in addition to any other
remedies that may be available to it, have the right to obtain from
-2-
<PAGE>
any court having jurisdiction such equitable relief as may be appropriate,
including but not limited to a decree enjoining DSI, its officers, directors,
employees and/or representatives from any further breach.
6. Indemnification
---------------
Employer shall indemnify DSI to the fullest extent permitted under
applicable Delaware law.
7. Miscellaneous
-------------
(a) Any notice required or permitted to be given under this Agreement
shall be sufficient if in writing and sent by certified mail (i) to DSI at:
William A. Brandt, Jr.
Development Specialists, Inc.
Three First National Plaza
Suite 2300
Chicago, Illinois 60602
and
Carl R. Klein
Holleb & Coff
55 E. Monroe Street
Suite 4100
Chicago, Illinois 60606-5896;
and (ii) to Employer at:
Mark Dapier
Mercury Finance Company
100 Field Drive
Suite 340
Lake Forest, Illinois 60045
and
Lewis S. Rosenbloom
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606-5096
-3-
<PAGE>
(b) The captions set forth in this Agreement are for convenience only
and shall not be considered as part of this Agreement or as binding or
amplifying the terms and provisions hereof.
(c) This Agreement and all rights and benefits hereunder are personal
to DSI, and neither this Agreement nor any right or interest of DSI herein, or
arising hereunder, shall be subject to voluntary or involuntary sale, transfer
or assignment.
(d) This Agreement shall be governed by and construed in accordance
with the substantive laws of the State of Illinois.
8. Dispute Resolution
------------------
Except as provided for in Section 5, any controversy relating to this
Agreement or amendments thereto shall be settled exclusively by arbitration in
Chicago, Illinois in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on an arbitrator's award
relating to this Agreement and amendments thereto in any court having
jurisdiction.
9. Entire Agreement
----------------
This Agreement expresses the entire Agreement of the parties with respect
to the matters set forth herein. No person, other than pursuant to a resolution
of the Board of Directors of Employer, shall have any authority on behalf of
Employer to agree to modify or change this Agreement or anything in reference
thereto. Except as provided for herein, the Agreement between Mercury and the
Subsidiaries dated February 5, 1997 and the First Amendment to Retention and
Letter of Engagement of Development Specialists, Inc. dated June __, 1998, shall
remain in full force and effect.
10. Counterparts
------------
This Agreement may be executed in any number of counterparts, all of which
together constitute one instrument.
IN WITNESS WHEREOF, Employer and DSI have executed or caused this
Agreement to be duly executed, as of the day and year first above written.
EMPLOYER DEVELOPMENT SPECIALISTS, INC.
By: ___________________ By: __________________________
By: ___________________ Title:_________________________
Title: __________________
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<PAGE>
MERCURY FINANCE COMPANY
INCORPORATED IN DELAWARE, 11/22/88
36-3627010
<TABLE>
<CAPTION>
SUBSIDIARIES
------------
<S> <C> <C> <C>
NAME OF SUBSIDIARY INCORPORATED DATE FED ID#
Mercury Finance Corporation of Alabama AL 03/31/86 36-3432951
Mercury Finance Company of Arizona AZ 06/23/87 36-3522774
Mercury Finance Company of California CA 05/06/87 36-3510697
Mercury Finance Company of Colorado DEL 06/07/93 36-3894729
Mercury Finance Company of Delaware DEL 03/27/95 36-4087137
Mercury Finance Company of Florida DEL 12/06/83 36-3259211
Mercury Finance Company of Georgia DEL 12/06/83 36-3259129
Mercury Finance Company of Idaho DEL 02/22/96 36-4087171
Mercury Finance Company of Illinois DEL 01/11/84 36-3268074
Mercury Finance Company of Indiana DEL 09/17/84 36-3323938
Mercury Finance Company of Iowa DEL 12/27/96 36-4087170
Mercury Finance Company of Kansas DEL 12/06/83 36-3259133
Mercury Finance Company of Kentucky DEL 12/06/83 36-3259134
Mercury Finance Company of Louisiana DEL 12/06/83 36-3259207
Mercury Finance Company of Michigan DEL 02/22/91 36-3925937
Mercury Finance Company of Mississippi DEL 07/16/84 36-3312237
Mercury Finance Company of Missouri MO 07/13/87 36-3526398
Mercury Finance Company of Nevada NV 12/17/84 36-3333729
Mercury Finance Company of New Mexico DEL 03/28/90 36-3960816
Mercury Finance Company of New York DEL 02/16/96 36-4087168
Mercury Finance Company of North Carolina DEL 12/06/83 36-3259208
Mercury Finance Company of Ohio DEL 10/14/92 36-3853109
MFC Finance Company of Oklahoma DEL 01/11/84 36-3268073
Mercury Finance Company of Oregon DEL 06/09/95 36-4087166
Mercury Finance Company of Pennsylvania DEL 01/04/95 36-4005960
Mercury Finance Company of South Carolina DEL 07/25/84 36-3312238
Mercury Finance Company of Tennessee TN 07/02/87 36-3515680
MFC Finance Company of Texas DEL 12/06/83 36-3259209
Mercury Finance Company of Utah DEL 01/17/96 36-4087165
Mercury Finance Company of Virginia DEL 12/06/83 36-3259210
Mercury Finance Company of Washington DEL 09/20/94 36-4005959
Mercury Finance Company of Wisconsin DEL 03/28/90 36-3697121
Filco Marketing Company DEL 03/22/96 36-3263395
MFC Financial Services, Inc. FL 03/09/88 36-3571098
Gulfco Finance Company LA 07/06/56 72-0506341
Gulfco Investment Company LA 05/20/74 72-0758509
Midland Finance Co. IL 08/26/54 36-2272524
MFN Insurance Company
</TABLE>
<PAGE>
EXHIBIT 11
MERCURY FINANCE COMPANY
COMPUTATION OF NET INCOME/(LOSS) PER SHARE
Year Ended December 31 (dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Income Data:
- ------------
<S> <C> <C> <C>
1. Net loss $ (53,570) $ (74,193) $(28,968)
2. Weighted average common share
outstanding, adjusted for stock splits 177,901 177,892 177,129
3. Weighted average shares of treasury stock
outstanding, adjusted for stock splits 5,403 5,403 4,361
4. Weighted average shares reserved for stock
options (utilizing the treasury stock method) 0 0 0
NET INCOME PER COMMON SHARE
5. Common Shares Outstanding 172,498 172,489 172,768
(Line 2-3+4)
6. Net loss per common shares $ (0.31) $ (0.43) $ (0.17)
(Line 1/5)
DIVIDEND DATA
1. Dividends Declared $ 0 $ 12,937 $ 51,821
2. Average common shares outstanding
on dividend record date - 172,498 172,737
3. Dividends per common share $ 0 $ 0.075 $ 0.30
</TABLE>
Note 1.
In February, 1997, following the announcement of the discovery of accounting
irregularities which caused the overstatement of the previously released
earnings for 1995 and 1996, the market value of the Company's common stock was
significantly reduced.
Since the announcement, the value of the common stock has not exceeded the
exercise price of the stock options granted or regranted under a revised stock
option program. As a result, the calculation of the common share equivalents
becomes not meaningful for the years ended December 31, 1998 and 1997.
The Company applies APB Opinion 25 in accounting for its Plan, and accordingly,
no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's 1998 and 1997 net losses and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Loss As reported $(53,570) $(74,193)
Pro forma $(53,581) $(78,564)
Basic and Diluted Loss per Share As reported $ (0.31) $ (0.43)
Pro forma $ (0.31) $ (0.46)
</TABLE>
76
<PAGE>
EXHIBIT 12
MERCURY FINANCE COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31 (dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income/(loss) $(53,570) $(74,193) $(28,968) $ 74,129 $ 86,545
Added fixed charges:
Cost of Borrowing 38,593 86,529 64,789 57,303 39,375
One-third of rentals 1,222 1,524 1,464 1,370 1,056
-------- -------- -------- -------- --------
Total fixed charges: $ 39,815 $ 88,053 $ 66,253 $ 58,673 $ 40,431
======== ======== ======== ======== ========
Provisions/(credits) for
income taxes:
Federal $ 4,100 $(15,276) $(18,604) $ 38,895 $ 46,797
State 1,900 (974) (1,811) 7,084 7,648
-------- -------- -------- -------- --------
Total income taxes $ 6,000 $(16,250) $(20,415) $ 45,979 $ 54,445
======== ======== ======== ======== ========
Total "earnings" (net income/
(loss), fixed charges and
income taxes) $(18,110) $ (2,390) $ 16,870 $178,781 $181,421
======== ======== ======== ======== ========
Ratio of "earnings" to fixed
charges (Note 1) - - - 3.05 4.49
======== ======== ======== ======== ========
Deficiency of fixed charges
coverage (Note 1) $ 57,934 $ 90,443 $ 49,383 N/A N/A
======== ======== ======== ======== ========
</TABLE>
Note 1.
SEC Regulation S-K requires the disclosure of the ratio of earnings to fixed
charges except where the ratio falls below 1, then the deficiency shall be
disclosed in dollar terms.
<PAGE>
EXHIBIT 21
MERCURY FINANCE COMPANY
SUBSIDIARIES
Mercury Finance Corporation of Alabama (Ala)
Mercury Finance Company of Arizona (Ariz)
Merc Finance Company of California (Cal)
Mercury Finance Company of Colorado (Del)
Mercury Finance Company of Delaware (Del)
Mercury Finance Company of Florida (Del)
Mercury Finance Company of Georgia (Del)
Mercury Finance Company of Illinois (Del)
Mercury Finance Company of Idaho (Del)
Mercury Finance Company of Iowa (Del)
Mercury Finance Company of Indiana (Del)
Mercury Finance Company of Kansas (Del)
Mercury Finance Company of Kentucky (Del)
Mercury Finance Company of Louisiana (Del)
Mercury Finance Company of Michigan (Del)
Mercury Finance Company of Mississippi (Del)
Mercury Finance Company of Missouri (MO)
Mercury Finance Company of Nevada (Nev)
Mercury Finance Company of New Mexico (Del)
Mercury Finance Company of New York (Del)
Mercury Finance Company of North Carolina (Del)
Mercury Finance Company of Ohio (Del)
MFC Finance Company of Oklahoma (Del)
Mercury Finance Company of Oregon (Del)
Mercury Finance Company of Pennsylvania (Del)
Mercury Finance Company of South Carolina (Del)
Mercury Finance Company of Tennessee (Tenn)
MFC Finance Company of Texas (Del)
Mercury Finance Company of Utah (Del)
Mercury Finance Company of Virginia (Del)
Mercury Finance Company of Washington (Del)
Mercury Finance Company of Wisconsin (Del)
MFC Financial Services, Inc. (Fla)
Filco Marketing Company (Del)
Gulfco Investment Inc. (La)
Gulfco Finance Company (La)
Midland Finance Co. (IL)
MFN Insurance Company (Turks and Caicos)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 10, 1999, included in this Form 10-K, into Mercury Finance
Company's previously filed Form S-8 Registration Statement File Nos. 33-28513
and 33-28693 and Form S-8 Registration Statement dated June 26, 1989 and Form S-
8A dated July 6, 1989.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 186,350
<SECURITIES> 0
<RECEIVABLES> 643,705
<ALLOWANCES> 90,305
<INVENTORY> 0
<CURRENT-ASSETS> 782,229
<PP&E> 13,545
<DEPRECIATION> (9,836)
<TOTAL-ASSETS> 798,683
<CURRENT-LIABILITIES> 769,553
<BONDS> 0
0
0
<COMMON> 177,901
<OTHER-SE> (148,771)
<TOTAL-LIABILITY-AND-EQUITY> 798,683
<SALES> 181,093
<TOTAL-REVENUES> 194,284
<CGS> 0
<TOTAL-COSTS> 85,295
<OTHER-EXPENSES> 61,176
<LOSS-PROVISION> 56,790
<INTEREST-EXPENSE> 38,593
<INCOME-PRETAX> (47,570)
<INCOME-TAX> 6,000
<INCOME-CONTINUING> (53,570)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,570)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
