Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS - GENERAL Mercury Finance Company ("Mercury") ("Company") is a consumer finance concern engaged in the business of purchasing individual installment sales finance contracts from automobile dealers and retail vendors, extending short-term installment loans directly to consumers and selling credit insurance and other related products.
Mercury was organized in 1988, as a wholly owned subsidiary of First Illinois Corporation (an Evanston, Illinois bank holding company), in order to hold 100% of the outstanding common stock of First Illinois Finance Company and First Illinois Life Insurance Company. On March 4, 1989 the Board of Directors of First Illinois Corporation approved a plan to spin-off Mercury in a stock distribution to its shareholders. On April 24, 1989, First Illinois Corporation distributed to its shareholders of record on April 10, 1989 one share of Mercury for each two shares of First Illinois Corporation stock held.
Following the stock distribution, First Illinois Finance Company was dissolved and Mercury became the sole shareholder of each of the state consumer finance subsidiaries. First Illinois Life Insurance Company was renamed Mercury Life Insurance Company ("Mercury Life").
Mercury's operating subsidiaries commenced operations in February 1984 for the purpose of penetrating the market for small dollar amount consumer loans (average of $3,000 or less). The initial focus was toward small, short term, direct installment loans made to the U.S. military servicemen. Building on this direct lending niche, Mercury has also built a substantial, diversified consumer finance portfolio by purchasing individual installment sales finance contracts from retail vendors and automobile dealers.
On April 1, 1993 Mercury acquired all the shares of Gulfco Investment Inc. for $22.3 million in cash. Gulfco Investment Inc. was the parent company which owned all of the stock of Gulfco Finance Company and Gulfco Life Insurance Company. Gulfco Finance Company conducted its consumer finance business through a branch network of 62 offices located in Louisiana, Mississippi and Texas. The acquisition was accounted for under the purchase method of accounting. Accordingly their results of operations have been included in the consolidated financial statements since the date of acquisition. The excess of cost over fair value of net assets acquired (goodwill) relating to the acquisition is being amortized over twenty years on the straight line method.
On September 30, 1994 Mercury acquired all the shares of Midland Finance Co. for $15.1 million in cash and the assumption of its net liabilities. Midland Finance Co. conducted its consumer finance business through a central office in Chicago, Illinois. The acquisition was accounted for under the purchase method of accounting. Accordingly their results of operations have been included in the consolidated financial statements of income and statements of cash flow since the date of acquisition. The excess of cost over fair value of net assets acquired (goodwill) relating to the acquisition is being amortized over twenty years on the straight line method.
Mercury's loans range for periods from 3 months to 48 months at annual interest rates ranging, with minor exception, from 18% to 40%. Generally all loans are repayable in monthly installments. Generally late payment fees are assessed to accounts which fail to make their schedule payments within 10 days of the schedule due date.
Direct finance receivables on which no payment is received within 149 days, on a recency basis, are charged off. Sales finance receivables which are contractually delinquent 150 days are charged off in the month before they become 180 days delinquent. Accounts which are deemed uncollectible prior to the maximum charge off period are charged off immediately. Management may authorize an extension if collection appears imminent during the next calendar month.
Accounts which become 60 or more days contractually delinquent and no full contractual payment is received in the month the account attains such delinquency status cease earning interest.
Mercury has certain legal remedies in the event of defaulted loans. Remedies include the repossession of secured collateral. Repossession of such collateral is determined and executed on individual contract basis at various stages of delinquency. In addition, Mercury may also pursue legal remedies toward any deficiency balances created by the repossession.
Mercury believes its growth is due to its targeted marketing strategy and its experienced consumer finance professionals who are able to assess, structure and initiate or purchase high margin consumer loans. Growth has come from an increase in existing office volume as well as new office openings and the acquisition of Gulfco Investment Inc. and Midland Finance Co..
BRANCH OFFICE NETWORK/OPERATIONS
Mercury's branch office network consists of 247 offices in 25 states located primarily in the southeastern, central and western United States. An office typically starts with 2 employees and is expanded based on receivables generated. The largest office has approximately 20 people with a network average approximately 6 people per office. Mercury is divided into 27 geographically organized districts, with each district headed by a district supervisor. A district supervisor is responsible for 7 to 11 offices (depending on size and geographical dispersion). District supervisors report directly to five group Vice Presidents of Operations.
Management has developed its workforce by attracting and training experienced consumer lending professionals. The training program includes classroom simulation of branch operations, actual training at branch offices and personal interviews by senior operating management of the Company. The training program which is called "Pride Program" is administered by the branch managers and district supervisors and is a requirement for all branch personnel. In addition the Company also conducts a Manager's Qualification Program (MQP) for prospective managers.
The Company instituted an Accelerated Training Program (ATP) in July, 1991. The program is designed for either college graduates or individuals with comparable work experience who, in the opinion of the management of the Company, possess an above average ability to learn and succeed in the consumer finance business. The ATP supplements the Company's supply of promotable employees from the regular training program. ATP is a highly structured training program that is designed to be completed within a maximum of 12 months. Currently, there are 38 Branch Managers from this program with another 27 individuals participating at different training phases. All ATP trainees must be willing to relocate. The Company has specific training offices with experience training managers who are responsible for an ATP employee's development. In addition, to ensure broad based development of the trainees, the program is structured so as to include all levels of Operating Management in the training process.
Mercury locates and opens new offices based on availability of branch managers and the conclusions reached from market research. The market research conducted includes population and income demographics, regulatory issues, on- site visitations and introductory sales calls. The conclusion reached from the market research enables the Company to estimate growth and earnings potential for a possible branch location. On the average Mercury's offices are generally profitable within 9 to 12 months of commencing operations.
Mercury's 247 offices are strategically located in areas of high traffic density for potential customers. Such sites are determined during the market research process. The traffic patterns are periodically reviewed. This process of site selection and review allows Mercury to maximize market potential and availability of potential borrowers. Since inception, Mercury has closed five branch offices because of traffic patterns and market potential changed from the original site selection.
Mercury's borrowers represent a broad cross section of the military and non- military population. Approximately 25% of Mercury's branch offices are located in the general vicinity of major U.S. military installations. These offices generally lend to both military and non-military personnel. The remaining offices are located in urban areas and primarily provide services to civilians. Recently proposed military base closings will have, in management's opinion, no material effect on the operations of the Company.
The business mix of Mercury's branch office network between sales finance receivables which constitutes 89% of total receivables, and direct consumer loans constituting 11% of total receivables is generally consistent with the 27 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.
The geographic distribution of Mercury's offices are as follows:
LOAN ORIGINATION AND MARKETING Mercury originates loans and purchases individual sale finance contracts through its office network based on a decentralized approval process tailored to the market in which the specific offices operates. All credit extentions are reviewed and approved at the branch level. Each branch office has specific credit limit authorization and any extension of credit above the branch limit must be approved by the district supervisor. Although Mercury's branch offices maintain local credit authority, all credit extensions must conform to the objective credit worthiness policies of Mercury. These policies require completed applications, background credit investigations, employment verification and evaluation and decision guidelines. While the ability and intent of the consumer to repay are essential prerequisites to any loan, collateral provides additional security for the lender. All of Mercury's sales finance contracts are secured with collateral while the majority of its direct consumer loans are also secured with collateral. The amount of collateral required depends upon the purpose of the loan, the size of the loan and the risk factors associated with the loan.
Applications for installment sales finance receivables originate from local dealers (household goods, appliance and automobile) and are subjected to the same credit review and credit worthiness policies as direct consumer loans. A specific installment sales finance contract is purchased only after objective investigations of the credit worthiness of the borrower and a determination of the underlying value of the asset through use of industry publications, combined with the subjective assessment by an office's loan personnel. Every sales finance contract is reviewed individually and extensions of credit are made based upon the credit worthiness of each contract.
Individual sales finance recievables are purchased pursuant to formal agreements with local merchants negotiated at the branch office level and subsequently approved by supervision. Mercury purchases sales finance contracts from local dealers with which Mercury has established ongoing relationships. A relationship with a dealer begins only after the soundness of their business is determined. Mercury conducts credit investigations, independent interviews with state regulatory agencies and inquiries to local civic and community organizations to aid in this determination. Relationships with dealer and volume of contracts purchased are conducted and developed on an ongoing basis. Mercury branch offices have conducted business with many dealers since the inception of a branch.
As part of certain dealer arrangements, dealers reserve and recourse agreements are entered into to protect Mercury from credit losses and early prepayments on installment sales finance receivables. These nonrefundable reserves are negotiated on a dealer by dealer basis and are subject to change based upon the performance of the sales finance contracts purchased.
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 upon its 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, as agents for Gulfco Life and unaffiliated insurers, offer credit life, accident and health and property insurance to borrowers who obtain finance receivables directly from the consumer finance subsidiaries, and to borrowers under sales finance contracts and financing contracts purchased from merchants and automobile dealers.
Mercury Life and Gulfco Life are engaged primarily in the business of reinsuring and direct writing respectively, of credit life and accident and health insurance policies issued to borrowers of finance receivables and sales finance contracts originated by Mercury. The policies insure the holder of a sales finance contract or other debt instrument for the outstanding balance payable in the event of death or disability of the debtor. Premiums are earned over the life of the contracts using pro rata and sum-of-the-months digits methods.
Mercury Life and Gulfco Life have established policy liabilities and claim reserves. The claim reserves are based upon accumulated estimates of claims reported, plus estimates of incurred but unreported claims.
SOURCE OF FUNDS
Mercury funds its operations through payments of principal and interest from finance receivables, capital funds and the sale of debt securities. At December 31, 1994, Mercury had total debt of $750.8 million. Of this total, 60% was in commercial paper and notes, 35% was in fixed rate senior term notes, 5% in fixed rate subordinate term notes.
In addition to its outstanding debt Mercury has unused bank lines of credit and maintains bank revolving credit facilities which totalled $420 million at December 31, 1994. These funds were totally available to Mercury at Decmeber 31, 1994.
In the past, Mercury had entered into interest exchange agreements ranging in maturity from one to five years. These agreements called for Mercury to pay interest at a fixed rate and receive interest at a floating rate on notional amounts. At December 31, 1994 Mercury was not a party to open interest exchange agreements.
Related to its placement of commercial paper Mercury maintains an investment grade rating of (upgraded in May 1990) with Fitch Investors Service Inc., D-1-, with Duff and Phelps, Inc. (upgraded in May 1992) a A2 with Standard & Poors, a P2 with Moody's Investors Services Inc., and Thomson BankWatch 1.
COMPETITION
The consumer finance business is intensely competitive. Mercury competes with other consumer finance companies, personal loan departments and 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.
All lending institutions compete in the area of customer service, response time and interest rate charges. Although in some instances Mercury's interest rate charges may be greater than some of its competitors Mercury believes that its decentralized approval process provides Mercury with excellent customer service in the form of quicker response time to potential customers.
EMPLOYEES
As of December 31, 1994 Mercury had approximately 1,500 employees. Mercury expects the total number of employees to increase as it continues to expand and believes that it has excellent relationships with its 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 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 office is subject to periodic examination by state regulatory authorities. The state licenses are revocable for cause. Mercury believes it complies in all aspect 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 to insurers to the originators of such insurance are also subject to state laws and regulations. Mercury Life is subject to regulation and supervision by the Arizona Department of Insurance. Gulfco Life is subject to regulation and supervision by the Louisiana Department of Insurance.
ITEM 2.



ITEM 2. PROPERTIES
The executive offices of Mercury are located at 40 Skokie Boulevard, Northbrook, Illinois 60062, telephone number (708)564-3720. Mercury occupies approximately 7,000 square feet of a modern office building and is under a lease having a ten year initial term expiring on April 1, 1996 with an option to extend for an additional five years. 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 $3,169,000, $2,619,000, $1,905,000 in 1994, 1993 and 1992 respectively.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS In the normal course of its business, the Company and its subsidiaries are named as defendants in legal proceedings. A number of such actions are pending in various states in which subsidiaries of the Company do business. It is the policy of the Company and its subsidiaries to vigorously defend litigation, but the Company and (or) its subsidiaries have and may in the future enter into settlements of claims where management deems appropriate.
On August 4, 1994, a verdict of $90,000 in compensatory damages and $50,000,000 in punitive damages was rendered against Mercury Finance Corporation of Alabama ("Mercury Alabama"), a subsidiary of the Company, in the Circuit Court of Barbour County, Alabama. On January 26, 1995, the Circuit Court of Barbour County, Alabama, entered an order requiring a new trial unless the plaintiff accepted a reduction of the punitive damage award from $50,000,000 to $2,000,000. Following the entry of the January 26, 1995 order, parties entered into a joint motion to vacate the verdict and judgment and dismiss the case pursuant to a settlement of plaintiff's claim for an amount less than the reduced punitive damage award. Mercury Alabama has accrued the cost of the settlement as of December 31, 1994, and the consolidated statement of income for the year ended December 31, 1994 reflects this accrual.
As of December 31, 1994, Mercury Alabama was a defendant or counterclaim defendant in approximately 40 other lawsuits pending in state and federal courts in Alabama, the majority of which had been filed since the entry of the August 4, 1994 Barbour County jury verdict. The cases (some of which also name the Company as a defendant) include claims for alleged truth-in-lending violations, nondisclosures, misrepresentations, wrongful repossessions of vehicles and deceptive trade practices, among other things. The relief requested by the plaintiffs varies but includes requests for compensatory, statutory and punitive damages, as well as declaratory and equitable relief.
As of February 20, 1995, several of the cases pending on December 31, 1994 (including the Circuit Court of Barbour County, Alabama, case discussed above, which had resulted in a judgment against Mercury Alabama) have been settled. In addition, approximately ten cases have been filed against Mercury Alabama since December 31, 1994, and the Company has been joined as a defendant in a number of cases in which it previously had not been named as a party.
A number of the pending Alabama cases are brought as putative class actions. On October 14, 1994, the Circuit Court of Barbour County, Alabama, certified a plaintiff class in a case alleging breach of contract and fraud claims against Mercury Alabama and the Company in connection with Alabama financing transactions. The court has not yet ordered the transmittal of notice to the class.
Although management is of the opinion that the resolution of these proceedings will not have a material effect on the financial position of the Company, it is not possible at this time to estimate (except for the Circuit Court of Barbour County case discussed previously) the amount of damages or settlement expenses that may be incurred. Accordingly, no provisions has been made in the consolidated financial statements for any of the pending proceedings except for the Circuit Court of Barbour County, Alabama case.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
PART II ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information is presented on page 24 of the Registrant's Annual Report and is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA Information is presented on page 11 of the Registrant's Annual Report and is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information is presented on pages 25 to 28 of the Registrant's Annual Report and is incorporated herein by reference.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Information is presented on pages 12 to 24 of the Registrant's Annual Report and is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. None.
PART III ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is contained in Mercury's 1994 Proxy and information regarding executive officers is set forth in Item 1 herein.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION Information is contained in Mercury's 1994 Proxy and is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNER'S AND MANAGEMENT Information is contained in Mercury's 1994 Proxy and is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information is contained in Mercury's 1994 Proxy and is incorporated herein by reference.
PART IV ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS FILED IN MERCURY'S 1994 ANNUAL REPORT Consolidated Balance Sheets as of December 31, 1994 and 1993. Consolidated Statements of Income for the Three Year Period Ended December 31, 1994, 1993 and 1992. Consolidated Statements of Changes in Shareholders' Equity for the Three Year Period Ended December 31, 1994, 1993 and 1992. Consolidated Statements of Cash Flows for the Three Year Period Ended December 31, 1994, 1993 and 1992. Notes to Consolidated Financial Statements for the Three Year Period Ended December 31, 1994, 1993 and 1992. Independent Auditors' Report.
FINANCIAL STATEMENT SCHEDULE None. All schedules ommitted are inappropriate or the information required is shown in the consolidated financial statements or notes hereto.
REPORTS ON FORM 8-K No report on the Form 8-K has been filed with the Securities and Exchange Commission during the quarter ended December 31, 1994.
EXHIBITS A list of all exhibitis included as part of this report is set forth in the Exhibit Index accompanying this report, which is included herein.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to signed on its behalf by the undersigned, thereunto duly authorized.
MERCURY FINANCE COMPANY Registrant
March 30, 1995 John N. Brincat Date John N. Brincat 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 registrants and in the capacities and on the dates indicated.
John N. Brincat March 30, 1995 John N. Brincat Date Chief Executive Officer
James A. Doyle March 30, 1995 James A. Doyle Date Principal Accounting Officer
Charley A. Pond March 30, 1995 Charley A. Pond Date Principal Financial Officer
The Board of Directors of the registrant has given the following persons its power of attorney for signing this report on its behalf and on behalf of the individual directors of the registrant.
John N. Brincat March 30, 1995 John N. Brincat Date Chief Executive Officer
James A. Doyle March 30, 1995 James A. Doyle Date Principal Accounting Officer
Charley A. Pond March 30, 1995 Charley A. Pond Date Principal Financial Officer
As attorneys in fact pursuant to power of attorney granted to said parties.
The following exhibits required by Item 601 of Regulation S-K are not contained herein (except exhibits 11, 12, 13, 22 and 24) but are filed separately with this Form 10-K filing:
EXHIBIT 11 MERCURY FINANCE COMPANY
EXHIBIT 12 MERCURY FINANCE COMPANY
EXHIBIT 22 MERCURY FINANCE COMPANY SUBSIDIARIES
Mercury Life Insurance Company (Ariz) 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 Florida (Del) Mercury Finance Company of Georgia (Del) Mercury Finance Company of Illinois (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 (Del) Mercury Finance Company of Nevada (Nev) Mercury Finance Company of New Mexico (Del) Mercury Finance Company of North Carolina (Del) Mercury Finance Company of Ohio (Del) Mercury Finance Company of Oklahoma (Del) Mercury Finance Company of South Carolina (Del) Mercury Finance Company of Tennessee (Tenn) MFC Finance Company of Texas (Del) Mercury Finance Company of Virginia (Del) Mercury Finance Company of Washington (Del) Mercury Finance Company of Wisconsin (Del) MFC Financial Services, Inc. (Fla) Gulfco Investment Inc. (La) Gulfco Finance Company (La) Gulfco Life Insurance Company (La) Midland Finance Co.
EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Mercury Finance Company: RE: REGISTRATION STATEMENTS ON FORM S-8 * Employee Stock Purchase Plan * 1989 Stock Option and Incentive Compensation Plan * 401(k) Plan
We consent to incorporation by reference in the subject Registration Statements (filed with the Securities and Exchange Commission on May 3, 1989, May 11, 1989 and June 26, 1989) of Mercury Finance Company of our report dated January 31, 1995, except as to note 9, which is as of February 20, 1995, relating to the consolidated balance sheets of Mercury Finance Company and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 1994, which report appears in the December 31, 1994 annual report on Form 10-K of Mercury Finance Company.
As discussed in the notes to consolidated financial statements, Mercury Finance Company changed its method of accounting for income taxes in 1993 to adopt the provision of Financial Accounting Standards Board's SFAS No. 109, Accounting for Income Taxes.
As discussed in note 9 to the consolidated financial statements, Mercury Finance Company and its subsidiary Mercury Finance Company of Alabama are named as defendants in a number of lawsuits pending in state and Federal courts in Alabama. The cases include claims for alleged truth-in-lending violations, nondisclosures, misrepresentations, wrongful repossessions of vehicles, and deceptive trade practices, among other things. Mercury Finance Company is vigorously defending this litigation, however, the outcome of this litigation and the amount of damages, if any, that may ultimately be incurred cannot presently be determined. Accordingly, no provision for any liability that may result from such litigation has been recognized in the accompanying consolidated financial statements except for the Circuit Court of Barbour County, Alabama case as discussed in the note.
KPMG Peat Marwick LLP
Chicago, Illinois March 29, 1995