High-flying Mercury Finance Co. has had its wings clipped, at least temporarily.

Investors are fretting about a $50 million jury award recently handed down against the company and increased competition in the used car financing industry.

Mercury's defenders say the concerns are overblown, but the damage has been done. A stock that began August trading at just over $16 a share has since slipped, causing the company to lose nearly 6% of its market capitalization.

On Wednesday, the stock closed down 25 cents at $15.125.

"We consider this probably the most serious issue that has happened to us," said James A. Doyle, Mercury's senior vice president and treasurer. "The frustration is really driving us nuts right now."

The source of all the angst is the decision by an Alabama jury to slap Mercury with $90,000 in actual damages and $50 million in punitive damages in a case involving a $4,000 car loan.

Mercury, the nation's largest independent used car lender with $1.1 billion in receivables, had purchased the loan several years ago at a discount for $2,700 from a dealer in Dothan, Ala.

The customer subsequently defaulted on the loan and ended up owing Mercury $6,500, including interest.

This practice of buying discounted loans from dealers is routine for Mercury, which does it to keep its loan-loss ratios down.

Mercury contends the practice is allowed under Alabama law a contention challenged by plaintiff's lawyers.

The company intends to appeal the award to the Alabama Supreme Court, a process Mr. Doyle admits could take "up to a year" unless Mercury settles the case.

"You never say never. But for right now, our strategy is to win this case and not be looking to settle." Mr. Doyle said.

On Aug. 8, the day Mercury announced the jury award its stock dropped 62 cents, from $16.125 a share. Further bad news came a week later when Barron's mentioned the legal problems in a lengthy profile.

The article cited other concerns that seem to have spooked investors, including increased competition from other used car finance companies and Mercury's potential vulnerability to higher interest rates.

Mercury officials have scrambled to reassure institutional investors through personal visits and conference calls. President and CEO John N. Brincat wrote stockholders promising that "1994 will be another record earnings year."

"I don't think there are any serious issues for Mercury," said Katrina Blecher, an analyst with Gruntal & Co. in New York. "The fears in the marketplace are totally unfounded."

She believes Mercury will ultimately prevail in court and dismisses competitive concerns.

Noting the depressed stock price, Ms. Blecher added: "I think it's a wonderful buying opportunity."

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