It couldn’t have been easy finding a silver lining in Wednesday’s announcement by Lake Forest-based Mercury Finance Co.: Rather than earning millions of dollars in profits for 1996, the company suffered a loss of about $50 million.
But William A. Brandt, the hired gun brought in to rescue the company after revelations that management had cooked Mercury’s books, said the big loss was, in a way, good news.
“The statement represents the past and is not the future,” Brandt said. He contended that the restated loss is so large because of Mercury’s decision to adopt the most conservative accounting methods in the industry.
“Under a different accounting method, it’s likely we wouldn’t have lost as much,” he said, predicting that the subprime lending industry as a whole probably will be forced to adopt Mercury’s new stringent standards.
In the statement issued before the stock market opened Wednesday, Mercury announced it will report a net loss for 1996 “in the range of $48 million to $55 million, or 28 cents to 32 cents a share.” It’s more than a $175 million swing from the net profit the company reported in early January.
The company attributed the change primarily to additional loan loss provisions of $125 million and the establishment of a $25 million reserve for the loss on the pending sale of Lyndon Insurance Co.
And the company warned that Arthur Andersen LLP probably will question the company’s ability to continue because of the default on more than $100 million in debt.
Many of its competitors in the subprime auto lending business already have reported large losses for either the fourth quarter or the year, and Wall Street barely reacted to the news.
The value of Mercury’s stock closed down 12 percent, or 25 cents a share, to $1.75, a ripple compared with the 88 percent plunge the stock suffered when trading resumed on Jan. 31 after the company reported its earnings had been misstated for four years.
Brandt insisted that Mercury will survive, and that’s welcome news for the company’s individual stockholders, most of whom were unable to sell their stock before its value collapsed.
Mercury’s problems erupted at the end of January when it unexpectedly announced its financial records had been misstated for four years.
The FBI and U.S. Attorney’s office launched an investigation after James A. Doyle, the company’s senior vice president, controller and secretary, was accused by the company of cooking the books. Doyle then began to cooperate with the FBI.
A criminal inquiry that has already resulted in company records being subpoenaed by a federal grand jury is moving ahead. But sources cautioned Wednesday that no official results or criminal charges are likely anytime soon.
“What the situation boils down to at this point,” said one government source, “is that it appears some (unnamed Mercury officials) were less than forthright in their financial reports. Specifically, their delinquent (loan) rate is questionable. It looks like bad loans were carried as good ones and their accounts receivable were inflated substantially.”
Mercury is part of a long list of companies–including First Merchants Acceptance Corp. in Deerfield, which fired four top executives last week, Dallas-based Jayhawk Acceptance Corp., which was forced to file for bankruptcy after it defaulted, and Reliance Acceptance Corp. of San Antonio, which reported a $8.6 million fourth-quarter loss–that have run into financial trouble this year.
Despite the litany of problems, however, Brandt, a workout specialist who’s saved other troubled lenders, said the subprime loan industry, which lends money to people with little or no credit, is viable.
“This is an industry where you can make money,” said Brandt. “Maybe you just can’t make as much as the Wall Street blue-sky forecast suggests.”
