<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For the quarter ended: Commission File Number:
June 30, 1995 0-9539
----------------------- -----------------------
S E A R C H C A P I T A L G R O U P, I N C.
---------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 41-1356819
-------------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
700 North Pearl, Suite 400, Plaza of the Americas, North Tower, Lock Box 401,
--------------------------------------------------------------------------------
Dallas, Texas 75201
--------------------
(Address and zip code of principal executive offices)
(214) 965-6000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's common stock,
as of the latest practicable date:
Number of Shares Outstanding
Class at July 31, 1995
----- ----------------------------
Common Stock, $.01 par value 8,671,141
<PAGE> 2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1995 (unaudited) September 30, 1994
------------------------------------------- ------------------------------------------
(all numbers in thousands) Search & Securitized Search & Securitized
Unrestricted Subsidiaries Unrestricted Subsidiaries
Subsidiaries & Eliminations Consolidated Subsidiaries & Eliminations Consolidated
------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Gross contract receivables $ 12,337 $ 67,307 $ 79,644 $ 35,255 $ 98,848 $ 134,103
Unearned interest (1,727) (12,134) (13,861) (6,785) (20,862) (27,647)
------------------------------------------- ------------------------------------------
Net contract receivables 10,610 55,173 65,783 28,470 77,986 106,456
Allowance for credit losses (5,691) (20,848) (26,539) (12,803) (31,830) (44,633)
Loan origination costs 591 2,971 3,562 518 2,221 2,739
Amortization of loan origination costs (382) (2,156) (2,538) (331) (1,559) (1,890)
------------------------------------------- ------------------------------------------
Net contract receivables after
allowance for credit losses & loan
origination costs 5,128 35,140 40,268 15,854 46,818 62,672
------------------------------------------- ------------------------------------------
Cash and equivalents 864 - 864 939 - 939
Restricted cash - 5,698 5,698 - 3,586 3,586
Vehicles held for resale 281 895 1,176 185 506 691
Deferred note offering costs 42 9,011 9,053 42 8,813 8,855
Accumulated amortization (40) (5,241) (5,281) (39) (3,112) (3,151)
------------------------------------------- ------------------------------------------
Deferred note offering cost, net 2 3,770 3,772 3 5,701 5,704
------------------------------------------- ------------------------------------------
Property and equipment 2,041 - 2,041 1,459 - 1,459
Accumulated depreciation (625) - (625) (397) - (397)
------------------------------------------- ------------------------------------------
Property and equipment, net 1,416 - 1,416 1,062 - 1,062
------------------------------------------- ------------------------------------------
Inter-company balance 762 (762) - 752 (752) -
Other assets, net 966 (31) 935 472 - 472
------------------------------------------- ------------------------------------------
Total assets $ 9,419 $ 44,710 $ 54,129 $ 19,267 $ 55,859 $ 75,126
=========================================== ==========================================
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIT)
--------------------------------------------------------
LIABILITIES
-----------
Line of credit $ 1,572 $ - $ 1,572 $ 3,487 $ - $ 3,487
Notes Payable - 68,328 68,328 - 70,768 70,768
Cash overdraft 439 - 439 1,218 - 1,218
Accounts payable and other liabilities 1,808 290 2,098 2,424 122 2,546
Accrued interest 2 734 736 5 1,478 1,483
------------------------------------------- ------------------------------------------
Total liabilities 3,821 69,352 73,173 7,134 72,368 79,502
------------------------------------------- ------------------------------------------
SHAREHOLDERS' EQUITY (CAPITAL DEFICIT)
--------------------------------------
Preferred stock - 12% senior convertible
$.01 par value, cumulative, 400,000
shares issued and outstanding,
liquidation preference of $2,000,000
plus accrued dividends 4 - 4 4 - 4
Common stock, $.01 par value,
20,000,000 shares authorized,
11,697,530 shares issued 117 - 117 117 - 117
Additional paid-in capital 27,006 - 27,006 27,006 - 27,006
Accumulated deficit (20,379) (24,642) (45,021) (14,969) (16,509) (31,478)
Treasury stock at cost 3,026,389 shares (1,150) - (1,150) (25) - (25)
------------------------------------------- ------------------------------------------
Total shareholders' equity
(capital deficit) 5,598 (24,642) (19,044) 12,133 (16,509) (4,376)
------------------------------------------- ------------------------------------------
Total Liabilities and Shareholders'
Equity (Capital Deficit) $ 9,419 $ 44,710 $ 54,129 $ 19,267 $ 55,859 $ 75,126
=========================================== ==========================================
</TABLE>
See notes to condensed financial statement
2
<PAGE> 3
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
June 30, 1995 June 30, 1994 (Restated - Note 5)
------------------------------------------- -------------------------------------------
Search & Securitized Search & Securitized
(all dollars in thousands, except Unrestricted Subsidiaries Unrestricted Subsidiaries
per share amounts) Subsidiaries & Eliminations Consolidated Subsidiaries & Eliminations Consolidated
------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue $ 3,205 $ 9,976 $ 13,181 $ 1,843 $ 7,435 $ 9,278
Interest expense 215 9,177 9,392 117 6,675 6,792
------------------------------------------- -------------------------------------------
Net interest income 2,990 799 3,789 1,726 760 2,486
Provision for credit losses 2,017 4,062 6,079 3,355 9,967 13,322
------------------------------------------- -------------------------------------------
Net interest income (loss) after
provision for credit losses
General and administrative expense 6,203 4,870 11,073 2,796 2,666 5,462
------------------------------------------- -------------------------------------------
Net loss (5,230) (8,133) (13,363) (4,425) (11,873) (16,298)
------------------------------------------- -------------------------------------------
Preferred stock dividends (180) - (180) (180) - (180)
------------------------------------------- -------------------------------------------
Net loss attributable to
common stockholders $ (5,410) $ (8,133) $ (13,543) $ (4,605) $(11,873) $ (16,478)
=========================================== ===========================================
Net loss per share
attributable to common shareholders $ (1.49) $ (1.35)
============= ==============
Weighted average number of
common shares outstanding 9,067,000 12,182,000
============= ==============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1995 June 30, 1994 (Restated - Note 5)
------------------------------------------- -------------------------------------------
Search & Securitized Search & Securitized
(all dollars in thousands, except Unrestricted Subsidiaries Unrestricted Subsidiaries
per share amounts) Subsidiaries & Eliminations Consolidated Subsidiaries & Eliminations Consolidated
------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue $ 1,153 $ 3,334 $ 4,487 $ 1,123 $ 2,898 $ 4,021
Interest expense 53 2,902 2,955 1 2,638 2,639
------------------------------------------- -------------------------------------------
Net interest income 1,100 432 1,532 1,122 260 1,382
Provision for credit losses 343 399 742 1,717 4,056 5,773
------------------------------------------- -------------------------------------------
Net interest income (loss) after
provision for credit losses 757 33 790 (595) (3,796) (4,391)
------------------------------------------- -------------------------------------------
General and administrative expense 2,067 1,785 3,852 1,485 655 2,140
------------------------------------------- -------------------------------------------
Net loss (1,310) (1,752) (3,062) (2,080) (4,451) (6,531)
------------------------------------------- -------------------------------------------
Preferred stock dividends (60) - (60) (60) - (60)
------------------------------------------- -------------------------------------------
Net loss attributable to
common stockholders $ (1,370) $ (1,752) $ (3,122) $ (2,140) $ (4,451) $ (6,591)
=========================================== ===========================================
Net loss per share
attributable to common shareholders $ (0.35) $ (0.53)
============= ==============
Weighted average number of
common shares outstanding 8,858,000 12,399,000
============= ==============
</TABLE>
See notes to condensed financial statements
3
<PAGE> 4
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1995
---------------------------------------
(all numbers in thousands) Search & Securitized
Unrestricted Subsidiaries
Subsidiaries & Eliminations Consolidated
------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,230) $ (8,133) $ (13,363)
Adjustments to reconcile net loss to cash
used in operations:
Provision for credit losses 2,017 4,062 6,079
Amoritization of deferred offering costs 1 2,129 2,130
Amortization of loan origination costs 51 597 648
Depreciation 228 - 228
Changes is assets and liabilities:
Decreases (increases) in other assets, net (494) 31 (463)
Increases (decreases) in accounts payable
and accrued expense (1,398) 207 (1,191)
Decrease in fixed assets 141 - 141
Decreases (increases) in related party (10) 10 -
------------------------------------------
Cash used in operations (4,694) (1,097) (5,791)
------------------------------------------
INVESTING ACTIVITIES:
Purchases (sales) of contract receivables,
net of LOF 1,079 (18,401) (17,322)
Principal payments on contract receivables
including proceeds from sales of vehicles 7,483 25,031 32,514
Purchases of property and equipment (723) - (723)
Decrease in notes receivable, related party - - -
------------------------------------------
Cash provided by (used in) investing 7,839 6,630 14,469
------------------------------------------
FINANCING ACTIVITIES:
Borrowings under line of credit 2,850 - 2,850
Repayments under line of credit (4,765) - (4,765)
Notes payable proceeds - 1,779 1,779
Notes payable repayments - (5,002) (5,002)
Notes payable offering costs - (198) (198)
Proceeds from sale of stock, net of expense - - -
Change in treasury stock (1,125) - (1,125)
Change in ESOP Note Receivable - - -
Payment of dividends on preferred stock (180) - (180)
------------------------------------------
Cash provided by (used in) financing activities (3,220) (3,421) (6,641)
------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents (75) 2,112 2,037
Cash and cash equivalents - beginning 939 3,586 4,525
------------------------------------------
Cash and cash equivalents - ending $ 864 $ 5,698 $ 6,562
==========================================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 8,008
=============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1994 (Restated - Note 5)
------------------------------------------
(all numbers in thousands) Search & Securitized
Unrestricted Subsidiaries
Subsidiaries & Eliminations Consolidated
------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,425) $ (11,873) $ (16,298)
Adjustments to reconcile net loss to cash
used in operations:
Provision for credit losses 3,355 9,967 13,322
Amoritization of deferred offering costs 52 1,416 1,468
Amortization of loan origination costs 84 354 438
Depreciation 143 - 143
Changes is assets and liabilities:
Decreases (increases) in other assets, net (200) 2 (198)
Increases (decreases) in accounts payable
and accrued expense 755 461 1,216
Decrease in fixed assets - - -
Decreases (increases) in related party (1,907) 1,907 -
------------------------------------------
Cash used in operations (2,143) 2,234 91
------------------------------------------
INVESTING ACTIVITIES:
Purchases (sales) of contract receivables,
net of LOF (21,971) (47,384) (69,355)
Principal payments on contract receivables
including proceeds from sales of vehicles 3,968 20,881 24,849
Purchases of property and equipment (510) - (510)
Decrease in notes receivable, related party 167 - 167
------------------------------------------
Cash provided by (used in) investing (18,346) (26,503) (44,849)
------------------------------------------
FINANCING ACTIVITIES:
Borrowings under line of credit 5,000 - 5,000
Repayments under line of credit - - -
Notes payable proceeds - 23,509 23,509
Notes payable repayments (1,000) - (1,000)
Notes payable offering costs - (2,615) (2,615)
Proceeds from sale of stock, net of expense 19,407 - 19,407
Change in treasury stock - - -
Change in ESOP Note Receivable (106) - (106)
Payment of dividends on preferred stock (180) - (180)
------------------------------------------
Cash provided by (used in) financing activities 23,121 20,894 44,015
------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents 2,632 (3,375) (743)
Cash and cash equivalents - beginning 735 7,002 7,737
------------------------------------------
Cash and cash equivalents - ending $ 3,367 $ 3,627 $ 6,994
==========================================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 4,968
==========
</TABLE>
See notes to condensed financial statements
4
<PAGE> 5
SEARCH CAPITAL GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL INFORMATION
The information presented herein includes adjustments that the Company believes
are necessary for fair presentation of its financial position and results of
operations. Substantially all of the disclosures required for annual financial
reports have been omitted. These interim financial statements and related
notes are unaudited, and should be read in conjunction with the Company's
annual report on Form 10-K for the year ended September 30, 1994.
Search Capital Group, Inc. ("Search") and its consolidated subsidiaries are
engaged primarily in the motor vehicle receivables purchasing and servicing
business. Search and its consolidated subsidiaries are referred to herein as
the "Company."
The Company purchases, at a significant discount, receivables created by the
sale of used automobiles and light trucks. The Company has formed a network of
third party, new and used vehicle dealers, who generate the receivables and
sell them to Search or its subsidiaries.
The Company has financed its purchasing and servicing business primarily
through the securitization of receivables. The receivables are transferred to
securitization subsidiaries (the "Funds") which sell notes to investors
secured by the receivables pool. There are eight securitized subsidiaries with
outstanding note payable balances consisting of Automobile Credit Fund 91-III
("ACF 91-III"), Automobile Credit Finance, Inc. ("ACF"), Automobile Credit
Partners, Inc. ("ACP"), Automobile Credit Finance 1992-II, Inc. ("ACF 92-II"),
Automobile Credit Finance III, Inc. ("ACF III"), Automobile Credit Finance IV,
Inc. ("ACF IV"), Automobile Credit Finance V, Inc. ("ACF V"), Automobile Credit
Finance VI, Inc. ("ACF VI"). The Company retains servicing rights and the
residual interest in the pool after repayment of the notes.
2. INTEREST INCOME, CONTRACT RECEIVABLES
AND ALLOWANCE FOR CREDIT LOSSES
The Company records contract purchases at cost. An initial reserve is recorded
for the difference between the remaining contractual finance amount at the time
of acquisition and the acquisition cost. Contractual finance charges are
initially recorded to unearned interest and recorded to interest income using
the interest method. The Company evaluates the impairment of loans based on
contract delinquency and other factors. Reserves are established for impaired
loans to reduce the net receivable to the lower of cost or estimated net
realizable value. Interest income is not recognized on loans where concern
exists about the collectibility of the account. Reserve requirements in excess
of the initial reserve are provided, as needed, through a charge to provision
for credit losses.
5
<PAGE> 6
The recorded investment and related allowance for credit losses is summarized
below:
<TABLE>
<CAPTION>
As of June 30, 1995
--------------------------------------------------------
Number of Total Net
Active Unpaid Unearned Contract
Receivables Installments Interest Receivables
----------- ------------- -------- -----------
<S> <C> <C> <C> <C>
Impaired contracts 2,844 $ 17,806,000 $ 2,380,000 $ 15,426,000
Unimpaired contracts 10,952 61,838,000 11,481,000 50,357,000
------------------------------------------------------------
13,796 $ 79,644,000 $ 13,861,000 65,783,000
=========================================
Allowance for credit losses 26,539,000
--------------
Contract receivables, net of
allowance for credit losses $ 39,244,000
==============
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1994
------------------------------------------------------------
Number of Total Net
Active Unpaid Unearned Contract
Receivables Installments Interest Receivables
----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Impaired contracts 4,269 $ 29,986,000 $ 4,968,000 $ 25,018,000
Unimpaired contracts 14,726 104,117,000 22,679,000 81,438,000
------------------------------------------------------------
Allowance for credit losses 18,995 $ 134,103,000 $27,647,000 106,456,000
===========================================
44,633,000
-------------
Contract receivables, net of
allowance for credit losses $ 61,823,000
============
</TABLE>
The change in the allowance for credit losses is summarized as follows:
<TABLE>
<S> <C>
Balance, at September 30, 1994 $ 44,633,000
Allowance recorded upon acquisition of loans 7,417,000
Increase in allowance for credit losses 6,079,000
Loans charged off aga,nnetaoforecovery (31,591,000)
-------------
Balance, at June 30, 1995 $ 26,539,000
=============
</TABLE>
In the fourth quarter 1994, the Company adopted SFAS 114 and SFAS 118 and has
accordingly restated the earlier 1994 quarters (see Note 5).
Most of the Company's contracts receivable are due from individuals in large
metropolitan areas of Texas and other southern and western states. To some
extent, realization of the receivables will be dependent on local economic
conditions. The Company and the Trustee for the Securitized Subsidiaries hold
vehicle titles as collateral for all contracts receivable until such contracts
are paid in full.
6
<PAGE> 7
3. LINE OF CREDIT
On June 17, 1994, Search's wholly-owned subsidiary, Search Funding Corp.
("SFC"), entered into an agreement for a line of credit with General Electric
Capital Corporation ("GECC"). The line of credit initially had a maximum
borrowing commitment of $20,000,000 and was limited to a percentage of eligible
contracts held by SFC. The line of credit is secured by all SFC assets and is
guaranteed by the Company. The Company and SFC must comply with various
restrictive covenants that require the maintenance of certain financial ratios
and other financial conditions.
Interest is accrued daily at the average of the one month London Interbank
Offered Rates ("LIBOR") for the preceding month plus 5.1%. At June 30, 1995,
LIBOR was 6.06% and the interest rate on the line of credit was 11.16%. SFC
recorded $214,000 in interest expense to GECC during the nine months ended June
30, 1995.
On March 22, 1995, GECC advised the Company that the Company and SFC were in
default of various provisions of the original loan agreement. As a result of
these defaults, the Company has signed an agreement with GECC to make minimum
payments of $500,000 per quarter against the outstanding balance of the line of
credit. During the quarter ended June 30, 1995, the Company paid GECC $703,000
in principal payments against the line of credit. As of July 31, 1995, the GECC
line of credit had a balance of $1,398,000.
4. CONTRACT RECEIVABLES MATURITIES
At June 30, 1995, contractual maturities of contracts receivable were as
follows:
<TABLE>
<CAPTION>
12 Months Ended June 30,
---------------------------------------------------
1996 1997 1998 Total
---- ---- ---- -----
<S> <C> <C> <C> <C>
Future Payments Receivable $49,678,000 $26,507,000 $3,459,000 $79,644,000
Less: Unearned Interest 10,637,000 3,067,000 157,000 13,861,000
---------------------------------------------------
$39,041,000 $23,440,000 $3,302,000 $65,783,000
===================================================
</TABLE>
In the opinion of management, a portion of the contracts receivable will be
repaid or extended either before or past the contractual maturity date. The
above tabulation, therefore, is not to be regarded as a forecast of future cash
collections.
7
<PAGE> 8
5. ADJUSTMENT TO THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1994
In the fourth quarter of 1994, the Company elected early adoption of SFAS 114
and SFAS 118. This adoption results in the restatement of all prior interim
periods of fiscal 1994 and effects this interest income and loss provision
amounts on the three month and nine month periods ended June 30, 1994. The
accompanying financial statements have been restated to reflect these items.
The effect of the restatement on the results of operations for the three
months and nine months ended June 30, 1994 is as follows:
<TABLE>
<CAPTION>
9 months 3 months 9 months 3 months
ended ended ended ended
6/30/94 6/30/94 6/30/94 6/30/94
(amount) (amount) (per share) (per share)
----------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) before dividends:
-------------------------------
As previously reported $ 239,000 $ (728,000) $ 0.02 $ (0.06)
Effect on interest revenue of adopting
SFAS 114 (no tax effect) (3,215,000) (30,000) (0.26) (0.00)
Effect on net loss provision of adopting
SFAS 114 (no tax effect) (13,322,000) (5,773,000) (1.09) (0.47)
----------------------------------------------------------
As restated $ (16,298,000) $ (6,531,000) $ (1.33) $ (0.53)
==========================================================
Income (loss) attributable to common shareholders:
--------------------------------------------------
As previously reported $ 59,000 $ (788,000) $ 0.00 $ (0.06)
Effect on interest revenue of adopting
SFAS 114 (3,215,000) (30,000) (0.26) (0.00)
Effect on net loss provision of adopting
SFAS 114 (13,322,000) (5,773,000) (1.09) (0.47)
----------------------------------------------------------
Loss as restated $ (16,478,000) $ (6,591,000) $ (1.35) $ (0.53)
==========================================================
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is an industry specific financial services company specializing in
the purchase, management, and securitization of used motor vehicle receivables.
These receivables are secured by medium-priced, used automobiles and light
trucks which typically have been purchased by consumers with substandard credit
histories at retail prices ranging from $5,000 to $10,000. The Company
purchases these receivables from a network of unaffiliated new and used
automobile dealers (the "Dealer Network") at discounts ranging generally from
40% to 55% of total unpaid installments, which installments include both
principal and interest. The members of the Dealer Network generate the
receivables and offer them for sale on a non-exclusive basis to the Company.
Members forego some future profit on each receivable sold to the Company in
exchange for an immediate return of their invested capital. The Company
administers its receivables purchasing, servicing and management activities
utilizing its proprietary Auto Note Management System software, developed and
maintained by full-time Company systems personnel. The Company commenced its
used motor vehicle receivables purchasing and servicing business in 1991.
RESULTS OF OPERATIONS
Contract purchases increased rapidly during the nine months ended September 30,
1993 and the year ending September 1994. Due to inadequate collections on
contract receivables, the Company tightened purchasing criteria in the fourth
quarter of 1994, and first quarter of 1995. Total contract collection over the
life of a group of loans is primarily dependent on repossession rates, number
of payments received prior to repossession and repossession proceeds. While
eventual repossession rates can only be forecasted during the life of a group
of contracts, the percentage of contracts that have not made their first
payment ("first payment defaults"), is a good indication of the quality of
receivable purchased within a specific period. The individual contracts
purchased and related first payment default rates are shown below:
<TABLE>
<CAPTION>
Contract First Payment
Period Quantity Default Rate
------ -------- -------------
<S> <C> <C>
Year Ended Dec. 31, 1991 331 2.4%
Year Ended Dec. 31, 1992 3,170 7.0%
Quarter Ended Mar. 31, 1993 1,945 6.8%
Quarter Ended June 30, 1993 1,728 5.9%
Quarter Ended Sept. 30, 1993 2,474 9.0%
Quarter Ended Dec. 31, 1993 3,361 11.7%
Quarter Ended Mar. 31, 1994 4,884 9.1%
Quarter Ended June 30, 1994 4,604 11.3%
Quarter Ended Sept. 30, 1994 4,122 12.5%
Quarter Ended Dec. 31, 1994 1,334 9.3%
Quarter Ended Mar. 31, 1995 1,081 3.7%
Quarter Ended June 30, 1995 1,035 4.1%
</TABLE>
The first payment default rates shows that when contract purchasing volume
increased in 1994, the quality of the contracts being purchased deteriorated.
First payment defaults are more serious than other repossessions because the
differences between repossession proceeds and the cost of the receivable are
not reduced by customer payments prior to repossession. After September 30,
1994, the Company was able to reduce first payment defaults by being more
selective in the contracts purchased.
9
<PAGE> 10
Comparison of Nine Month Periods Ended June 30, 1995, and 1994
The Company purchased 3,906 individual contracts and no bulk contracts during
the nine months ended June 30, 1995, as compared to 12,849 individual and 1,451
bulk contracts during the nine months ended June 30, 1994. The cost of the
contracts including loan origination costs was $17,322,000 ($4,435 per
contract) for the nine months ended June 30, 1995, compared to a cost of
$69,355,000 ($4,850 per contract) for the nine months ended June 30, 1994.
Interest revenue grew 42% from $9,278,000 (as restated) in the nine months
ended June 30, 1994, to $13,181,000 for the nine months ended June 30,1995, due
to an increase in average net contract receivables. Additionally, during the
nine months ended June 30, 1995, the Company experienced a significant increase
in payoffs compared to prior years. The increase in payoffs is reflected in
discount earned and is included with interest revenue.
The provision for credit losses decreased 54% from $13,322,000 (as restated)
for the nine months ended June 30, 1994, to $6,079,000 for the nine months
ended June 30, 1995, due to improvement in contract performance, and adequate
reserves being established at acquisition and in prior periods through a charge
to provision for credit losses.
General and administrative expenses increased 168% from $5,462,000 for the nine
months ended June 30, 1994, to $11,073,000 for the nine months ended June 30,
1995. The increase in general and administrative expenses was due to continued
expansion of the Company's business, the addition of three car lots for the
sale of repossessed vehicles, significant legal, accounting, and other
professional fees related to the Company's year end audit of September 30, 1994
and senior management changes that occurred during the first quarter of
calendar 1995, and professional fees related to the Company's proposed
restructuring.
Net loss for the nine months ended June 30, 1995, was $13,363,000 as compared
to a loss of $16,298,000 (as restated) for the same period in 1994.
Comparison of Three Month Periods Ended June 30, 1995, and 1994
The Company purchased 1,491 contracts during the three months ended June 30,
1995, as compared to 4,687 individual and 767 bulk contracts during the three
months ended June 30, 1994. The cost of the contracts including loan
origination costs was $6,414,000 ($4,162 per contract) for the three months
ended June 30, 1995, compared to a cost of $26,149,000 ($4,693 per contract)
for the three months ended June 30, 1994.
Interest revenue increased 12% from $4,021,000 (as restated) in the three
months ended June 30, 1994, to $4,487,000 for the three months ended June 30,
1995 due to an increase in average net contract receivables and a larger number
of payoffs during the three months ended June 30, 1995.
General and administrative expenses increased 80% from $2,140,000 for the three
months ended June 30, 1994, to $3,851,000 for the three months ended June 30,
1995. This increase in general and administrative expenses was due to
increased volume of loans being serviced, the closure of two car lots
for the sale of repossessed vehicles, and professional dues related to the
Company's proposed restructuring.
10
<PAGE> 11
The provision for credit losses decreased from $5,773,000 for the three months
ended June 30, 1994, to $742,000 for the three months ending June 30, 1995.
The decrease in provision for credit losses was due to improvement in contract
performance.
Net loss for the three months ended June 30, 1995, was $3,121,000 as compared
to a loss of $6,591,000 (as restated) for the same period in 1994.
LIQUIDITY AND CAPITAL RESOURCES
On the December 31, 1994 maturity date for ACF, there was $3,175,000 in the ACF
sinking fund to be applied to obligations of $5,406,000 ($5,000,000 principal
and 3% interest deferred until maturity). ACF's insufficient cash balance
constituted a default under its indenture agreement with the Company and Texas
Commerce Bank National Association ("Trustee"). With the occurrence of the
default the Trustee has the option to sell ACF assets, to institute judicial
proceedings to force complete or partial foreclosure of ACF, and to take any
other appropriate actions to protect and enforce the rights and remedies of the
Trustee and ACF note holders.
As of June 30, 1995, ACF has $725,000 in remaining principal and interest on
receivables, $3,000 in repossessed vehicles. As these assets are sold or
collected the proceeds are applied to the remaining balance to the note holders
after Trustee fees and expenses. Trustee expenses can include servicing,
banking, legal, accounting, repossession, repair, liquidation and taxation
expenditures.
A noteholder committee was formed for ACF and worked with the Trustee and the
Company on how to dispose of the remaining receivables and vehicles. The
Trustee and the Noteholder committee has decided to continue to use the Company
to service ACF receivables and has agreed to reimburse the Company for normal
expenses incurred in collecting ACF receivables. The Company's servicing fees
for the six months ended June 30, 1995 from ACF totaled $47,000 and will
decrease as the number of contracts serviced declines over time.
On the March 31, 1995 maturity date for ACF 91-III, there was $538,000 in cash
to be applied to obligations of $1,195,000 ($1,000,000 principal and 6%
interest deferred until maturity). As of June 30, 1995, ACF 91-III has
$306,000 in remaining principal and interest on contract receivables and $1,000
in repossessed vehicles. As these assets are sold or collected the proceeds
after expenses will be applied to reduce the remaining balance due noteholders.
On the April 30, 1995 maturity date for ACP, there was $525,000 in cash to be
applied to obligations of $1,180,000 (1,000,000 principal and 6% interest
deferred until maturity). ACP has $335,000 in remaining principal and interest
on contract receivables and $3,000 in repossessed vehicles. As these assets
are sold or collected the proceeds after expenses will be applied to reduce the
remaining balance due noteholders. Based on the collection performance of
contracts owned by the Securitization Subsidiaries, it is currently estimated
that all remaining Securitization Subsidiaries will have insufficient sinking
fund cash to pay the noteholders in full at maturity. While the sale or
collection of remaining receivables after maturity may reduce the shortfall
there can be no assurance that the Company will be able to obtain a buyer for
the receivables and it is not likely that the proceeds from sale or collections
will be sufficient to pay the noteholders in full.
11
<PAGE> 12
With the occurrence of a default in the Company's public Securitized
Subsidiaries, the Trustee determines whether the Securitized Subsidiary will
continue to pay Search's servicing and management fees. Servicing and
management fee revenue for Search was $2,316,000 in the first nine months of
1995. An occurrence of default in one Securitized Subsidiary does not affect
the payment of servicing, management and loan origination fees from the other
Securitized Subsidiaries.
Management is currently pursuing a plan to convert the existing notes payable
into common and preferred shares of Search. It is anticipated that both the
common and the preferred shares will be fully tradable securities and that the
preferred shares will pay quarterly dividends at 9% per annum. The plan would
necessitate that the Securitization Subsidiaries file under Chapter 11 of the
United States Bankruptcy Code. An ad hoc noteholder committee has been formed
to determine the terms of the conversion plan with the Search and the
Securitization Subsidiaries. During the period from the filing of the Chapter
11 petition until the plan is approved by the noteholders and the Bankruptcy
Court has issued a final order of confirmation of a reorganization plan, the
Securitization Subsidiaries intend to continue to use Search to service their
receivables and will reimburse Search for normal expenses incurred in
collecting their receivables until either all of the remaining receivables are
collected and any repossessed vehicles are sold or until the conversion plan is
consummated. If the plan of reorganization is not approved by the Bankruptcy
Court, the Securitization Subsidiaries may have to seek another company to
service their receivables since Search has indicated that, in the absence of
the conversion of the notes payable into Search common and preferred shares, it
may not have sufficient resources to continue servicing the subsidiaries'
receivables.
In August 1995, Search executed a proposal agreement with Congress Financial
Corporation, the commercial lending arm of Core States Bank, for a $100 million
line of credit facility to be utilized for purchasing contract receivables.
The granting of the credit facility is subject to completion of the conversion
of the noteholder debt to equity (as discussed above) and subject to completion
of due diligence work by Congress. Terms of the line of credit facility are to
be finalized by closing.
For the nine months ended June 30, 1995, $5,791,000 of cash was used in
operations due to the Company's net loss. Receivables purchases of $17,332,000
were financed primarily through the principal portion of payments received on
contract receivables and sales of repossessed vehicles.
Fund Activities
Search is responsible for purchasing and servicing the Funds' receivables and
receives a fee for such services. Proceeds from the receivables are restricted
to repayment of the applicable Fund's notes payable, the payment of certain
allowed expenses, including servicing fees, and the purchase of additional
receivables. The notes require interest payments until maturity, and a portion
of the interest in three of the Funds is deferred and due at maturity.
12
<PAGE> 13
Pertinent information regarding the interest rates and maturity of each active
Fund, as of June 30, 1995, is summarized below:
<TABLE>
<CAPTION>
Notes Stated Maturity Effective
Fund Payable Rate Date (1) Rate
---- ----------- ------ ------- -----
<S> <C> <C> <C> <C>
ACF $ 1,531,000 18%(2) Dec.-94 25.7%
ACF 91-III 615,000 21%(2) Mar-95 28.5%
ACP 635,000 21%(2) Apr.-95 28.4%
ACF 92-II 10,000,000 15% Dec.-95 21.6%
ACF III 15,000,000 15% Apr.-96 20.4%
ACF IV 10,000,000 14% Dec.-96 19.2%(3)
ACF V 19,872,000 12% Dec.-97 16.0%(3)
ACF VI 10,675,000 12% Jun.-98 15.2%(3)
-----------
Total $68,328,000
===========
</TABLE>
(1) Due to projected shortfalls in cash, a portion of the note payable is
expected to extend beyond the maturity date.
(2) Interest at 15% is paid monthly and the remaining interest was deferred
until maturity.
(3) For ACF IV, V, and VI the effective interest rate includes the effect of
estimated quarterly principal reductions during the sinking fund
period.
Sinking Fund Periods
The Company is required to place the proceeds from receivables payments for
Funds 91-III, ACF, ACP, ACF 92-II, ACF III, and ACF VI into separate sinking
funds for repayment of the notes beginning one year prior to the respective
note maturity dates. The receivables proceeds for Fund ACF IV and ACF V will
be placed into their respective sinking funds beginning 15 months prior to note
maturity. Sinking funds for ACF IV, ACF V, and ACF VI will be used to make
quarterly reductions to the note principal payments on the notes and to retire
the remaining balance at maturity.
Effective Interest Rates
Interest expense is derived from the Notes issued by the Securitization
Subsidiaries and consists of both stated and effective rates. The stated rate
reflects the interest due to be paid to the note holder while the effective
rate includes the amortization of offering costs. The Company's weighted
average stated interest rates and weighted average effective cost of borrowing,
after considering the amortization of offering costs, has been:
<TABLE>
<CAPTION>
Year Ended 9 Months Ended Year Ended 9 Months Ended
12/31/92 9/30/93 9/30/94 6/30/95
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average stated interest rate 17.9% 15.6% 14.7% 13.5%
Weighted average effective cost of
</TABLE>
The stated and effective rates do not reflect anticipated and current defaults
on the Securitization Subsidiaries.
13
<PAGE> 14
Subcontracted Services
Servicing fees are an allowed expense of the Funds and are paid to Search.
Search subcontracts approximately 6.1% of the collection servicing with an
independent company with collection experience in motor vehicle receivables.
The subcontracted service provides additional servicing capacity and an
independent basis to measure collection performance, timeliness and cost.
Unrestricted Cash Flow Activity
For the nine months ended June 30, 1995, Search collected $ 3,196,000 in Fund
servicing fees, loan origination fees, and other fees. This cash flow along
with interest and principal from receivables owned by Search, is used to fund
the general and administrative expenses excluding those of the Funds.
INFLATION
Historical statistics indicate that collateral value, vehicle sales prices, and
receivable interest rates are relatively stable within the Company's market
segment. However, significantly changing prices could impact the Company's
ability to acquire receivables at favorable prices. Changes in the Company's
interest rates can affect Company interest expenses.
14
<PAGE> 15
OTHER INFORMATION
ITEM 1. Legal Proceedings
On July 7, 1994, a class action civil lawsuit was filed against Search. and
certain of its officers and directors, against one of its former accounting
firms and against the lead underwriter and one of its principals involved in
the issuance of Search's Common Stock. This action was filed in the United
States District Court for the Northern District of Texas, Dallas Division, and
is styled Ellen O'Shea, et al. v. Search Capital Group, Inc., et al. Civil
Action No. 3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar
actions in John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al.
Civil Action No. 3:94-CV-1452-J; and Gary Odom v. Search Capital Group, Inc.,
et al. Civil Action No. 3:94-CV-1494-J, respectively, were also filed. The
above Cases were consolidated in September 1994 under Civil Action No.
3:94-CV-1428-J.
Each of the plaintiffs purchased stock of Search after its public offering
effective December 10, 1993 and contended that the registration statement filed
and prospectus issued with respect to the public offering contained
misstatements concerning Search's computerized systems; accounting
methodologies used by Search and representations as to collectibility of
receivables and repossession rates of autos that secured the loans. The
plaintiffs complained further of allegedly false public filings, press releases
and reports issued during 1994.
The plaintiffs sought all damages sustained, recision and/or treble, punitive
or exemplary damages, pre-judgment interest and attorneys' fees, expert fees,
court costs and disbursements, equitable relief and/or injunctive relief to
assure that the plaintiffs have an effective remedy and such other relief as
the court may deem just and proper.
Search's management and counsel for the Plaintiffs have entered into a
stipulation of settlement ("Settlement") of this case. This Settlement was
filed with the court on August 4, 1995. The Settlement's papers request a
hearing of the terms of the Settlement and certification of the class of
plaintiffs for this Settlement only. The court could require a separate
hearing for certification of the class of plaintiffs for all matters in this
case and then require a second hearing for approval of the Settlement. A
hearing will be held on the fairness of the Settlement. While it is
anticipated that the hearing or hearings and submission of shareholders will be
completed prior to completion of the confirmation of the Joint Plan, there is
no assurance that the Settlement will be completed prior to the confirmation of
the Joint Plans. Search believes that the Settlement is fair and equitable to
the class of plaintiffs and will ultimately be approved by the members of the
class of plaintiffs in substantially the same manner as submitted to the court.
The settlement provides that the number of shares to be issued to the Class
shall be computed using the average of the bid/ask price of the last 30 days
ending generally on the date that the settlement becomes final prior to the
date of distribution of the shares. For example, if the weighted average of
the bid/ask price as computed above is $1.75 per share, the number of shares
Search would issue to the class is 1,492,857.
15
<PAGE> 16
ITEM 5. Other Information
Changes to Board of Directors
In August 1995, Search named two additional individuals to its Board of
Directors increasing the Board size to seven members. Named to the Board were
William H.T. "Bucky" Bush, St. Louis, Missouri, and Douglas W. Powell, Dallas,
Texas.
Mr. Bush previously served as President of Boatman's National Bank of St. Louis
and was a member of its Board as well as the Board of its parent holding
company, Boatmen's Bancshares, Inc. In 1986 Mr. Bush founded the financial
advisory firm of Bush-O'Donnell & Company, specializing in investment
management and financial advisory services. Mr. Bush also serves on the boards
of directors of twelve other corporate and civic organizations and served as a
surrogate for his brother, former President, George Bush, during the 1988 and
1992 political campaigns. Mr. Bush is the uncle of George W. Bush, the current
Governor of Texas.
Mr. Powell is the Chairman and Chief Executive Officer of the Dominion
Companies, a Dallas, Texas investment firm. Mr. Powell was a graduate of the
U.S. Naval Academy and served as a Captain in the U.S. Air Force. Mr. Powell
also served as President of Direction One, Inc. from 1976 to 1981 prior to
founding the Dominion Companies in 1981.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
SEARCH CAPITAL GROUP, INC.
DATE: August 14, 1995 BY: /s/ George C. Evans
------------------------------------------------------
George C. Evans
Chairman, President, Chief Executive
Officer and Director
DATE: August 14, 1995 BY: /s/ Robert D. Idzi
------------------------------------------------------
Robert D. Idzi
Senior Vice President,
Chief Financial Officer,
and Treasurer
DATE: August 14, 1995 BY: /s/ Andrew D. Plagens
------------------------------------------------------
Andrew D. Plagens
Controller,
Chief Accounting Officer
</TABLE>
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 6,562
<SECURITIES> 0
<RECEIVABLES> 65,783
<ALLOWANCES> 26,539
<INVENTORY> 1,176
<CURRENT-ASSETS> 5,731
<PP&E> 2,041
<DEPRECIATION> 625
<TOTAL-ASSETS> 54,129
<CURRENT-LIABILITIES> 73,173
<BONDS> 0
<COMMON> 117
0
4
<OTHER-SE> (19,165)
<TOTAL-LIABILITY-AND-EQUITY> 54,129
<SALES> 0
<TOTAL-REVENUES> 13,181
<CGS> 0
<TOTAL-COSTS> 11,073
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,079
<INTEREST-EXPENSE> 9,392
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,363)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
