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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended SEPTEMBER 30, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period __________________
Commission File No. 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 (IRS Employer
of incorporation or organization) Identification No.)
700 NORTH PEARL, SUITE 400
PLAZA OF THE AMERICAS
NORTH TOWER, LOCK BOX 401
DALLAS, TEXAS 75201-7490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 965-6000
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or Section 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. [ ]
AS OF JANUARY 8, 1996, THERE WERE 8,696,141 OUTSTANDING SHARES (WITH AN
AGGREGATE MARKET VALUE OF $9,783,159) OF REGISTRANT'S $.01 PAR VALUE COMMON
STOCK, AND THE AGGREGATE MARKET VALUE OF SHARES HELD BY NON-AFFILIATES OF THE
REGISTRANT WAS $6,686,593 (BASED ON THE AVERAGE OF THE HIGH AND LOW SALE PRICE
AND 5,943,638 SHARES HELD BY NON- AFFILIATES).
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PART I
ITEM 1. BUSINESS
GENERAL
Search Capital Group, Inc. (herein called "Search" and together with
its consolidated subsidiaries called 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. See "Principal Business."
Prior to November 1994, the Company financed its receivables
purchasing business primarily through the private and public sale of
securitized, interest-bearing notes (the "Notes") issued by wholly owned
subsidiaries organized specifically for this purpose (the "Fund Subsidiaries")
and through reinvestment of operating cash flow. Each offering of Notes was
issued by a newly organized subsidiary without recourse to Search or its other
subsidiaries. See "Financing." The Notes offered by each of the Fund
Subsidiaries were not rated by a national credit agency.
After November 1994, due primarily to higher than expected losses in
the collection of its receivables, the Company temporarily abandoned its
securitization activities. In the first half of 1995, the Company developed a
reorganization strategy. In August 1995, pursuant to that strategy, Search's
existing Fund Subsidiaries filed for protection and reorganization under
Chapter 11 of the Bankruptcy Code. See "Subsidiary Bankruptcy Filings." These
Fund Subsidiaries and Search, as a co-proponent are attempting to complete a
plan of reorganization in these bankruptcy proceedings. See "Joint Plan of
Reorganization." On November 30, 1995, Search obtained $3,000,000 of interim
funding commitments from Hall Financial Group, Inc. ("HFG") that were necessary
to continue Search's operations pending completion of the plan of
reorganization. Search intends to expand and re-focus its receivables
purchasing activities upon completion of the plan of reorganization. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEVELOPMENT OF PROBLEM AND REORGANIZATION STRATEGY
In July 1994, management of the Company initially announced
unanticipated adverse trends in the collection and repossession rates for its
motor vehicle receivables. Search's stock price sharply declined, and Search
was sued in a class action suit asserting securities fraud. See "Item 3.
Legal Proceedings." In November 1994, Search's President and Chief Executive
and its independent auditing firm resigned. See "Item 9. Changes in and
Disagreements With Accountants on Accounting and Financial Disclosure." At
that time, new interim management determined to sharply reduce all receivables
purchasing activities for the Company while attempting to evaluate and, if
necessary, modify or remedy purchasing and collection procedures. In December
1994, the Company's interim management and new independent auditing firm
determined that the Company should change its basic accounting principle by
adopting SFAS 114 effective for the fourth quarter of its fiscal year ended
September 30, 1994. This change caused the Company to recognize substantial
losses for fiscal year 1994 resulting in a capital deficit for the Company. As
a consequence, in March 1995, Search's Common Stock was delisted from trading
on the NASDAQ Stock Exchange.
Under the Company's new President, who was appointed in January 1995,
the Company resumed normal levels of receivables purchasing activities but at
the same time tightened certain purchasing procedures where permitted.
Management was constrained from any substantial changes in purchasing criteria
for receivables purchased for its public Fund Subsidiaries due to restrictions
set forth in the trust indentures governing the indebtedness of those
subsidiaries. While collection and repossession rates on newly purchased
receivables have improved in 1995, the Company has been unable to recover
sufficiently to earn a profit in any quarter of 1995.
During the first calendar quarter of 1995, it became apparent to the
Company's management that the Company's Fund Subsidiaries would be unable to
satisfy in full their respective Notes upon maturity. Rather than abandon the
holders of the Notes (the "Noteholders") to recover whatever might eventually
be recovered through
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collection of receivables, management determined to attempt to reorganize
Search and its Fund Subsidiaries by converting the Notes into Search equity,
re-focusing the reorganized Company's purchasing activities toward higher
quality receivables and using the new equity of the reorganized Company to
obtain new debt financing for future growth. In May 1995, the Company
announced a preliminary outline of a plan to convert the approximately $68
million debt owed by its Fund Subsidiaries into equity in Search. To this end,
the Company engaged the investment banking firm of Alex. Brown & Sons to
develop a formal detailed plan of debt-to-equity conversion. To facilitate the
development of this plan, the Company also formed an ad hoc committee of
Noteholders (the "Ad Hoc Committee") in all eight of its Fund Subsidiaries to
review the proposals of Alex. Brown & Sons and provide input and
recommendations for the plan.
SUBSIDIARY BANKRUPTCY FILINGS
History of Bankruptcy Proceedings. In order to effect the
debt-to-equity conversion plan proposed by Alex. Brown & Sons and supported by
the Ad Hoc Committee, the Company caused each of the Fund Subsidiaries to file
for protection and reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Accordingly, on August 14, 1995, Automobile Credit Finance, Inc., Automobile
Credit Fund 1991-III, Inc., Automobile Credit Finance 1992-II, Inc., Automobile
Credit Finance III, Inc., Automobile Credit Finance IV, Inc., Automobile Credit
Finance V, Inc., Automobile Credit Finance VI, Inc. and Automobile Credit
Partners, Inc. (collectively the "Bankrupt Subsidiaries"), which are
wholly-owned subsidiaries of Search, each filed a petition in the U.S.
Bankruptcy Court in the Northern District of Texas, Dallas Division ("Court"),
seeking protection under Chapter 11 of the U.S. Bankruptcy Code ("Code").
These cases have been consolidated as one case for administrative purposes
(Case No. 395-34981-RCM-11). Search has not sought protection under the Code
but is a proponent, together with the Bankrupt Subsidiaries, of a joint plan of
reorganization of the Bankrupt Subsidiaries (the "Joint Plan"). On August 25,
1995, an organizational meeting was held by the U.S. Bankruptcy Trustee to
select a committee to represent the Noteholders during the bankruptcy
proceedings. This committee, as chosen by the U.S. Bankruptcy Trustee, is
known as the official Creditors Committee (the "Committee") and is comprised of
eleven individuals who hold Notes issued by the Bankrupt Subsidiaries or who
represent Noteholders. The Committee has retained a law firm to represent
them.
To date, through a series of cash collateral hearings through which
the Court monitors the use of funds during the bankruptcy proceedings, the
Court has allowed the Bankrupt Subsidiaries to continue operating in the
ordinary course of business. Subsequent to the formation of the Committee, the
Committee, as well as some Noteholders not on the Committee, filed with the
Court formal objections to the Joint Plan as originally proposed in August 1995
by the Company and the Bankrupt Subsidiaries. Search commenced negotiations
with the Committee to attempt to obtain the Committee's approval of the terms
of the Joint Plan. In October 1995, Search reached a preliminary agreement of
understanding with the Committee. This preliminary agreement was subject to
the completion of detailed documentation and required that significant
amendments be made to the terms of the Joint Plan as originally filed with the
Court. In December 1995, Search and the Committee filed an agreed form of the
Joint Plan with the Court. Search and the Committee also reached agreement on
the form of the related disclosure statement (the "Disclosure Statement"),
which describes the terms of the Joint Plan, Search, the Bankrupt Subsidiaries
and the rights of the Noteholders and other claimholders in the bankruptcy
proceedings. The Disclosure Statement was approved by the Court in December
1995. The Disclosure Statement, together with a copy of the consensual Joint
Plan and ballots for registering votes for acceptance or rejection of the Joint
Plan, were mailed in late December 1995 to the Noteholders and other
claimholders in the Bankrupt Subsidiaries. The final date for voting on
confirmation of the Joint Plan is expected to occur in late January 1996.
Confirmation and Effectiveness of Joint Plan. Final effectiveness of
the Joint Plan as to each Bankrupt Subsidiary is dependent on its confirmation
by the Court, which will occur, if at all, after a vote of the Noteholders, who
hold essentially all of the indebtedness of the Bankrupt Subsidiaries. The
Noteholders of each Bankrupt Subsidiary will be entitled to vote for or against
the Joint Plan, with respect to claims represented by their Notes, as a
separate creditor class. A class of Noteholders (i.e. the Noteholders of a
particular Bankrupt Subsidiary) will be deemed to have accepted the Joint Plan
if votes for acceptance are received from Noteholders in that class (i) holding
Notes representing at least two-thirds in amount of the Notes of such class
voting on the Joint Plan and (ii) comprising more than one-half in number of
Noteholders in the class voting on the Joint Plan. The final terms of the
Joint Plan, if they differ in any material fashion from the proposed terms,
will be contingent on, among other things, approval by Search's Board of
Directors. Confirmation of the Joint Plan is also conditioned on the approval
by Search's shareholders of an increase in the authorized number of shares of
Search's Common Stock and Preferred Stock to levels adequate to meet the
requirements of the proposed Joint Plan.
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JOINT PLAN OF REORGANIZATION
There can be no assurance that the Joint Plan as to each Bankrupt
Subsidiary will become effective or that the Joint Plan as to each Bankrupt
Subsidiary will be confirmed on essentially the same terms as described below.
Consequently, the following summary should not be relied upon as an accurate
description of the final, confirmed Joint Plan for each of the Bankrupt
Subsidiaries. Upon final confirmation, the Company will file a Form 8-K
Current Report with the Securities and Exchange Commission in which the final
terms will be described.
Plan Options for Secured Claims of Noteholders. If confirmed with
respect to a particular Bankrupt Subsidiary, the Joint Plan, as currently
proposed, provides that Noteholders voting to accept the Joint Plan may choose
one of two options (the "Plan Options"). Under one of the Plan Options (the
"Search Equity Option"), the Noteholders would receive with respect to the
secured portion of their claims the issuance by Search of a combination of
shares of Common Stock and shares of a new series of Convertible Preferred
Stock ("New Preferred Stock") and cash dividends accrued on their New Preferred
Stock from July 1, 1995 to the effective date of the Joint Plan. Under the
other Plan Option (the "Collateral Option"), the Noteholders would receive with
respect to the secured portion of their claims distributions of the proceeds of
the continued collection or the sale of the motor vehicle receivables securing
their Notes. As to any one Bankrupt Subsidiary, the selection by the
Noteholders of either Plan Option would be implemented on a Noteholder-by-
Noteholder basis. If the Joint Plan is confirmed as to a Bankrupt Subsidiary,
those Noteholders of that Bankrupt Subsidiary who vote against the Joint Plan
will not be entitled to select between the Search Equity Option and the
Collateral Option but will receive treatment under the Search Equity Option.
If the Joint Plan is not confirmed as to a Bankrupt Subsidiary, that Bankrupt
Subsidiary will continue to conduct its business in the ordinary course,
although the exclusivity period with respect to proposal of a reorganization
plan in its bankruptcy proceedings will terminate.
Search Equity Option. Under the Search Equity Option, as currently
proposed, the pro rata portion of the assets of the Bankrupt Subsidiaries
attributable to Noteholders electing the Search Equity Option will be
transferred to Search. Search would ultimately issue, subject to adjustment to
prevent dilution, to the former Noteholders electing the Search Equity Option
0.2823 shares of New Preferred Stock and 0.3109 shares of Common Stock for each
$1.00 of a Noteholder's secured claim. The number of shares to be issued will
be adjusted on a fully diluted basis to be determined by agreement of the
financial advisors of the Company and the official Creditors Committee of the
Bankrupt Subsidiaries as of effectiveness of the Joint Plan or, if no
agreement can be reached, by the Court. Such adjustment will be made to the
extent necessary so that the Noteholders would receive New Preferred Stock and
Common Stock equal to 75% of the value of all shares of New Preferred Stock,
Common Stock, 12% Preferred Stock, other warrants, stock options and rights
then outstanding, or agreed to be issued by the Company, as if all of the
Noteholders had elected the Search Equity Option. No adjustment would be made
as a result of any securities of the Company obtained by HFG under the Funding
Agreement, or any Warrants to be issued for unsecured claims. See "HFG
Funding Agreement."
Collateral Option. Under the Collateral Option, a pro rata share of
the assets of the Bankrupt Subsidiaries attributable to Noteholders electing
the Collateral Option will be transferred to a newly established trust (the
"Noteholders Trust") to be held for the benefit of such Noteholders. These
assets consist primarily of cash, motor vehicle receivables and repossessed
motor vehicles. The transferred cash net of a pro rata share of administrative
expenses will be immediately distributed to the Noteholders. The trustee will
collect the motor vehicle receivables held by the Noteholders Trust and make
regular distributions to the Noteholders. In the alternative, the motor
vehicle receivables will be sold by the trustee to the highest bidder if the
trustee estimates that their sale proceeds would be greater than the present
value of the collection proceeds from the Notes. The net proceeds from the
sale will be distributed to the Noteholders.
Determination of Secured Claims of Noteholders. With respect to each
Bankrupt Subsidiary, the total amount of the allowed secured claims for the
Noteholders of that Bankrupt Subsidiary will equal 120% of the present value
(the "Present Value") of the Bankrupt Subsidiary's "Net Cash Flow," using a 15%
discount rate. The "Net Cash Flow" for each Bankrupt Subsidiary is the
estimated periodic cash distributions that would be made by the Bankrupt
Subsidiary to its Noteholders assuming it continued to collect its receivables
at the historical average collection rate experienced by Search and the
Bankrupt Subsidiaries in the collection of their receivables. The Present
Value has been determined as of August 1, 1995. The total Present Values for
all Bankrupt Subsidiaries is $44,367,048.
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Unsecured Claims of Noteholders. The unsecured portion of the claims
of the Noteholders consists of the difference, (i.e. $16,077,204) between
total principal and interest due the Noteholders of $69,317,661, and the amount
of the secured claims of $53,240,457. All Noteholders of Bankrupt Subsidiaries
for which the Joint Plan is confirmed, with respect to the unsecured portion of
such Noteholders' claims, and any other holders of unsecured claims against
such Bankrupt Subsidiaries, will receive from Search a pro rata share of five
year warrants to purchase an aggregate of 5,000,000 shares of Common Stock (the
"Warrants"). The exercise price of the Warrants will be $2.00 during the first
year and increase by $0.25 per year over the term of the Warrants. All
Warrants not exercised prior to expiration will be redeemed by Search at a
price of $0.25 per Warrant.
The Joint Plan also requires the establishment of a trust (the
"Litigation Trust") for the benefit of the holders of unsecured claims of
Bankrupt Subsidiaries for which the Joint Plan is approved. The trust will be
established with a total funding of $350,000 to be supplied pro rata from the
confirming Bankrupt Subsidiaries. The Litigation Trust will be authorized to
pursue any claims and causes of action of each Bankrupt Subsidiary for which
the Joint Plan is approved. Any proceeds will be distributed pro rata to
unsecured claim holders. The Litigation Trust will automatically terminate if
the Common Stock trades at an average price of $2.50 per share for 30
consecutive trading days during the first year following effectiveness of the
Joint Plan.
Terms of New Preferred Stock. As a condition to confirmation of the
Joint Plan, the Board of Directors must establish a new series of Preferred
Stock to be designated as the "9%/7% Senior Convertible Preferred Stock" (the
"New Preferred Stock"). The New Preferred Stock would rank on a parity with
the 12% Preferred Stock as to rights to dividends and liquidation preferences.
The Joint Plan, as currently proposed, specifies certain of the basic
preferences, rights and powers of the New Preferred Stock. The final terms of
the New Preferred Stock will be established by Search's Board of Directors in
the Certificate of Designations to be filed with the Delaware Secretary of
State. Any material changes in the Joint Plan may result in changes in the
terms of the New Preferred Stock.
Dividends. Holders of the New Preferred Stock would be entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available therefor, dividends at a per annum rate of (i) $0.315 per share until
the end of the twelfth (12th) full calendar quarter following payment of the
first dividend on the New Preferred Stock ("9% End Date"), and (ii) $0.245 per
share after the 9% End Date. Dividends on the New Preferred Stock would accrue
from July 1, 1995, which was the date through which the Bankrupt Subsidiaries
have paid accrued interest to the Noteholders. The dividends would be payable
quarterly, with the first payment being due 20 days following the date that the
Court's confirmation of the Joint Plan becomes final. The Company may pay
dividends through distributions of Common Stock under certain circumstances.
Conversions. Holders of outstanding shares of the New Preferred Stock
would be able to elect at any time to convert their shares into Common Stock.
The conversion ratio would be 2.0 shares of Common Stock for each share of New
Preferred Stock. In addition, up to 50% of the outstanding shares of New
Preferred Stock could be mandatorily converted into shares of Common Stock at
the option of Search if its Common Stock trades (i) at a price of $4.25 per
share or higher on any 20 trading days in a period of 30 consecutive trading
days between the second and third anniversaries of the effective date of the
Joint Plan, or (ii) at a price of $3.50 or higher on any 20 trading days in a
period of 30 consecutive trading days after the third anniversary of the
effective date of the Joint Plan. Finally, on the seventh anniversary of the
effective date of the Joint Plan, all of the outstanding shares of New
Preferred Stock would be mandatorily converted into shares of Common Stock.
Liquidation Rights. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of Search, the holders of the New
Preferred Stock would be entitled to be paid $3.50 per share plus all accrued
and unpaid dividends thereon before any distribution or payment is made to the
holders of Common Stock.
Voting Rights. Each share of New Preferred Stock will be entitled to
exercise the same voting rights as holders of Common Stock and will have one
vote per share. Upon effectiveness of the Joint Plan, subject to any lenders'
negotiated rights to appoint new board members, the initial board of directors
of Search will consist of eight members, which will include the six current
members of Search's Board of Directors and two additional directors selected by
Search from qualified director nominees submitted by the Committee. The
duration of the terms of the two new directors will be three years for one
director and two years for the other director. These two new members will be
appointed to membership on the Compensation Committee of the Board for a one
year period after the effective date of the Joint Plan, and approval of the
Compensation Committee will be required for the issuance, granting terms and
conditions of all warrants, stock options, bonuses and forms of compensation
for certain of Search's officers and
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directors for the same period. If Search is in default in the payment of the
first two quarterly dividends following the effective date of the Joint Plan or
any four consecutive quarterly dividends on the outstanding New Preferred
Stock, the holders of outstanding New Preferred Stock would be automatically
entitled to an additional vote per share and given the right to elect
two-thirds of Search's Board of Directors. The affirmative vote or consent of
the holders of more than 66-2/3% of all outstanding shares of New Preferred
Stock, voting as a separate class, would be required (i) to amend, alter or
repeal any provision of the Certificate of Designations establishing the New
Preferred Stock to adversely affect the relative rights, preferences,
qualifications, limitations or restrictions of the New Preferred Stock or (ii)
to effect any reclassification of the New Preferred Stock. The affirmative
vote or consent of the holders of more than 50% of all outstanding shares of
New Preferred Stock, voting as a separate class, would be required to approve
any merger of Search with another company when Search is not the surviving
entity or any sale of more than 50% of Search's assets.
Subsequent Issuances of Securities. Search will be prohibited from
issuing Preferred Stock in the future that is pari passu with the New Preferred
Stock unless at the time of such issuance all dividends due and payable on the
New Preferred Stock have been paid in full. Search would also be prohibited
from issuing preferred or common stock or warrants or any other form of
security to any of its affiliates for consideration that does not equal or
exceed the fair market value of such security, as determined by an independent
third party. Search could, nevertheless, issue options or warrants to new or
existing directors or management if such options or warrants are approved by
the Compensation Committee. Search could also issue Common Stock upon the
exercise of outstanding warrants or options but may not amend or modify such
warrants or options without the approval of the Compensation Committee. If
Search issues any security for consideration less than its fair market value,
the number of shares of Common Stock, New Preferred Stock and Warrants issued
under the Joint Plan will be immediately and appropriately adjusted, and the
conversion price of the New Preferred Stock and the exercise price of the
Warrants shall be adjusted to take into account the dilution in value of the
security holdings of Noteholders caused by such below fair market issuance of
Search's securities.
HFG FUNDING AGREEMENT
HFG Loan. On November 30, 1995, Search entered into a Funding
Agreement with Hall Financial Group, Inc. ("HFG"). Pursuant to the Funding
Agreement, HFG agreed to make three loans totaling $3,000,000 to Search, which
are represented by three promissory notes payable by Search to HFG (the "HFG
Notes"). "HFG Note I" is in the original principal amount of $1,284,487. "HFG
Note II" is in the original principal amount of $715,513. "HFG Note III" is in
the original principal amount of $1,000,000. HFG Notes I and II bear interest
at the rate of 12% and mature on the earlier of the effective date of the Joint
Plan or 90 days after their execution unless extended for 60 days by Search, in
which case the interest rate increases to 14%. HFG Note III bears interest at
the rate of 6% and matures in one year. HFG Notes I and III have been fully
funded. HFG Note II will only be funded if necessary to payoff the Company's
loan from General Electric Credit Corp. ("GECC") and if certain conditions are
met. See "Financing--Line of Credit." Search paid HFG commitment fees of
$20,000 in connection with the HFG Loan.
The HFG Notes are secured by approximately $5,900,000 in motor
vehicle receivables owned by Search and its subsidiary, Search Funding Corp.,
2,250,000 shares of Common Stock held as treasury stock by one of Search's
subsidiaries, and 100% of the stock of Search's non-bankrupt subsidiaries,
Search Funding Corp., Automobile Credit Acceptance Corp., Automobile Credit
Holdings, Inc., and Newsearch, Inc. (collectively, the "Non-Bankrupt
Subsidiaries").
Conversion of HFG Notes. HFG Notes I and III are convertible at the
option of HFG into shares of Search's Common Stock after confirmation of the
Joint Plan or after a specified period following the execution of the HFG Notes
if confirmation has not occurred during that period. During the first 30
trading days after confirmation of the Joint Plan, the conversion price for
these HFG Notes will be the lesser of $.93 per share or 65% of the price
determined using the same formula used to determine the number of shares issued
to Noteholders under the Joint Plan. If the Joint Plan is not confirmed or
following the first 30 trading days after the Joint Plan's confirmation, the
conversion price will be a price per share equal to 60% of the average bid
price for the previous 30 trading days. HFG Note III may be prepaid by Search
on the 31st trading day after the Joint Plan's confirmation by issuing to HFG
shares of Search's Common Stock in number equal to the HFG Note III balance
divided by 60% of the average bid price for the Common Stock during the prior
30 trading days. The shares issued with respect to HFG Note III will be
restricted from resale for a period of 12 months except that 25,000 shares may
be resold per month on a cumulative basis during such 12 month period. The
conversion option with respect to HFG Note I is limited to 2,500,000 shares of
Search's Common Stock less the shares required to satisfy the conversion option
or the stock prepayment feature of the HFG Note III.
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HFG Warrants. Pursuant to the Funding Agreement, Search has issued to
HFG a warrant (the "HFG Warrant") to purchase 3,000,000 shares of Common Stock
at an exercise price of $2.00 per share. The HFG Warrant expires on November
30, 2000. Under the HFG Warrant, HFG has the right to require the Company to
effect the registration under the Securities Act of 1933 (the "1933 Act") of
the shares purchasable by HFG under the HFG Warrant as well as the shares that
HFG may obtain upon conversion of the HFG Notes. HFG will also have the right
to require Search to register such shares if Search proposes to register any of
its securities under the 1933 Act. In the event of the registration of HFG's
shares under the 1933 Act, Search will be obligated to indemnify HFG and its
affiliates from losses or liabilities arising out of untrue statements of
material fact contained in the registration statement or related prospectus.
Covenants. Pursuant to the Funding Agreement, Search is obligated to
amend its Certificate of Incorporation and bylaws as necessary to assure that
HFG has the right to elect one director to Search's Board if HFG converts HFG
Note III into Common Stock. Search is also obligated to maintain a collateral
coverage ratio of pledged motor vehicle receivables (excluding receivables with
delinquencies exceeding 60 days) to debts evidenced by the HFG Notes of not
less than 1.5 to 1. Without HFG's prior express written consent, the Funding
Agreement prohibits Search from issuing additional shares of Common Stock
(except to comply with the Joint Plan and for certain other planned share
issuances), issue additional warrants or rights to acquire shares of Common
Stock, amend its Certificate of Incorporation, modify its current loan
agreement with GECC, transfer any property among Search or its Non-Bankrupt
Subsidiaries for less than fair value, transfer any of the collateral securing
the HFG Notes, grant any junior security interest in such collateral or file
any voluntary petition under the Bankruptcy Code.
Amendment to Funding Agreement. The Funding Agreement originally
required HFG to make certain loans to the Bankrupt Subsidiaries upon completion
of the Joint Plan. Search and the Committee have determined not to include any
funding of the Bankrupt Subsidiaries in the latest version of the Joint Plan.
Search and HFG have agreed to an amendment to the Funding Agreement that
provides HFG the option to purchase, in its sole discretion, Common Stock, New
Preferred Stock, and Warrants for a purchase price equal to 80% of the Present
Value attributable to such securities for purpose of their issuance to
Noteholders under the Joint Plan, less an amount equal to the accrued dividends
attributable to the New Preferred Stock that is received by HFG. HFG would be
entitled to purchase securities in an amount up to a maximum of $6,000,000 in
Present Value, which the Company estimates would represent a purchase price
payable by HFG of approximately $4,426,000. The proceeds of any shares so
purchased will be paid to Search. Under the Funding Agreement, as amended,
Search will give HFG the right to elect another director if HFG purchases
$1,000,000 Present Value of such securities, it converts HFG Note I into at
least 1,000,000 shares of Common Stock or HFG exercises the HFG Warrants. HFG
will also have registration rights for such securities similar to those
provided by the HFG Warrants.
EFFECTS OF COMPLETION OF JOINT PLAN ON COMPANY
If the Joint Plan is confirmed, as currently proposed, with respect to
each of the Bankrupt Subsidiaries, an aggregate of approximately $69,320,000 of
indebtedness of the Bankrupt Subsidiaries represented by the Notes would be
canceled. Following effectiveness of the Joint Plan, the Company's
indebtedness is expected to be limited to the indebtedness owed to GECC and to
HFG.
The Bankrupt Subsidiaries for which the Joint Plan is confirmed will
be dissolved following effectiveness of the Joint Plan. The assets of such
Bankrupt Subsidiaries will be transferred either to Search or to the
Noteholders Trust, with $350,000 to be deposited in the Litigation Trust. The
total assets to be transferred to Search or the Noteholders Trust,
respectively, will depend on the relative amounts of indebtedness of
Noteholders electing the Search Equity Option or the Collateral Option. The
assets transferred to the Noteholders Trust would be removed from the
consolidated financial statements of the Company. The Company may also lose
any servicing rights and fee revenue with respect to the motor vehicle
receivables transferred to the Noteholders Trust. The Noteholders Trust may
engage the Company or another servicing entity to service and collect its motor
vehicle receivables. The assets transferred to the Company would be received
free and clear of any liens or restrictions. The current restrictions in the
trust indentures governing the indebtedness represented by the Notes would be
eliminated through cancellation of the indentures upon effectiveness of the
Joint Plan.
6
<PAGE> 8
If the Joint Plan is not confirmed as to any Bankrupt Subsidiary, the
assets and indebtedness of that Bankrupt Subsidiary would remain on the
consolidated financial statements of the Company.
EFFECTS OF COMPLETION OF JOINT PLAN ON EXISTING COMMON SHAREHOLDERS
As of August 14, 1995, the Bankrupt Subsidiaries owed to the
Noteholders an aggregate of approximately $69,320,000 in principal and accrued
interest represented by the Notes. The Company estimates that the aggregate
secured claims and unsecured claims of Noteholders of all Bankrupt Subsidiaries
are approximately $53,240,457 and $16,077,204, respectively. Consequently, the
Company estimates that confirmation of the Joint Plan, as proposed, may require
the issuance by Search to the Noteholders of (i) up to an aggregate of
16,551,850 shares of Common Stock and 15,031,648 shares of New Preferred Stock,
and (ii) Warrants to purchase up to an aggregate of 5,000,000 shares of Common
Stock. Assuming the confirmation of the Joint Plan, as currently proposed, for
all of the Bankrupt Subsidiaries and assuming that Noteholders holding 25%, 50%
or 75% of the secured claims of all Noteholders receive the treatment provided
in the Search Equity Option, the following table illustrates the estimated
number of shares of Common Stock and New Preferred Stock and Warrants that
would be issued by Search to Noteholders.
<TABLE>
<CAPTION>
Estimated Amounts to be Issued Percentage of Secured Claims of Noteholders
Under Joint Plan Receiving Search Equity Option Treatment
- ---------------------------------------------- -----------------------------------------------
25% 50% 75%
--------- --------- ----------
<S> <C> <C> <C>
Common Stock (1) 4,138,000 8,276,000 12,414,000
New Preferred Stock 3,758,000 7,516,000 11,274,000
Warrants 5,000,000 5,000,000 5,000,000
</TABLE>
(1) Assumes no adjustments to prevent dilution
The primary adverse effect of the effectuation of the Joint Plan and the
HFG transactions on existing shareholders would be the dilution of their voting
power from the issuance of shares of New Preferred Stock and Common Stock.
Assuming all Noteholders elected the Search Equity Option and HFG purchased all
of the Common Stock and New Preferred Stock that it has the right to purchase
under the amendment to the Funding Agreement, those shareholders owning Common
Stock outstanding prior to the issuance of such shares to HFG and under the
Joint Plan would own approximately 32% of the outstanding shares of Common
Stock and 20% of the total outstanding shares of Common Stock and New Preferred
Stock following such issuance. Holders of the New Preferred Stock would be
able to vote their shares ( one vote per share) on all matters submitted to the
vote of holders of Common Stock. If the dividend obligations on the New
Preferred Stock were in arrears, holders of New Preferred Stock would be
entitled to two votes per share. Search's existing shareholders would own none
of the newly issued shares of New Preferred Stock.
Effectiveness of the Joint Plan and the HFG transactions would benefit
Search's existing shareholders primarily by causing an increase in the
Company's net worth as a result of HFG's investment and cancellation of the
Notes, by eliminating any interest expenses attributable to the Notes issued by
the Bankrupt Subsidiaries and by removing the existing restrictions on the
Company's use of the cash flow from assets transferred to it. The Company's
net loss per share may ultimately become a profit and book value per share
should also have a corresponding increase. In addition, the annual dividend
requirements on the shares of New Preferred Stock would be substantially less
than the aggregate debt service requirements of the Notes and would disappear
upon any mandatory conversion of the New Preferred Stock. While the Notes have
stated maturities ranging from December 31, 1994 to June 30, 1998, Search would
have no obligation to redeem the shares of New Preferred Stock. Any dividends
on outstanding shares of Common Stock would be restricted if the dividend
obligations on the New Preferred Stock were in arrears. However, the Board may
not now legally declare any dividends on the Common Stock and does not
currently contemplate declaring any dividends on Search's Common Stock in the
foreseeable future after completion of the Joint Plan. If a liquidation of
Search were to occur, the liquidation preferences resulting from contributed
assets of any outstanding shares of New Preferred Stock and 12% Preferred Stock
(as well as any other series of Preferred Stock that the Board elects to issue
with a liquidation preference) would have to be satisfied in full prior to any
liquidating distributions to the holders of Common Stock.
7
<PAGE> 9
PRINCIPAL BUSINESS
The Dealer Network. The Company established the Dealer Network for
the purpose of originating motor vehicle receivables through the sale of used
automobiles and light trucks. All dealers are unaffiliated with the Company,
and each dealer enters into a membership agreement with the Company and uses
Company-approved contract forms. Under the terms of the membership agreement,
a dealer is not obligated to offer to sell any minimum number of receivables to
the Company, and the Company is under no obligation to purchase any receivables
from the dealer. Before inclusion of any dealer in the Dealer Network, the
dealer is initially visited and inspected by Company personnel and follow-up
visits are also performed on an ongoing basis, generally every 60 days, by the
Company's marketing representatives.
The Dealer Network is comprised of dealers franchised by vehicle
manufacturers and independent dealers. To qualify for membership in the Dealer
Network, each independent dealer must have been in business at least two years,
be in good standing with regulatory and auto-association authorities (as
verified by the Company), and meet certain credit standards. The Company
verifies that an independent dealer meets these standards through a credit
bureau or Dun & Bradstreet report. Franchise dealers automatically qualify for
membership in the Dealer Network.
Membership in the Dealer Network can be terminated at the Company's
discretion. Monthly, each dealer is reviewed by the Company's personnel to
determine the quality and performance of receivables the Company purchased from
the dealer. Additionally, the number of receivables submitted by each Dealer
to and purchased by the Company are reviewed. The decision to terminate a
dealer from the Dealer Network is made on a case-by-case basis depending on the
past performance of the dealer. The majority of dealers terminated from the
Dealer Network are terminated for failure to submit a receivable to the Company
within a 90 day period. The Company terminated approximately 500 dealers in
fiscal year 1995 for this reason. Other factors considered in making the
decision to terminate a dealer include: high delinquency or repossession rates
for the dealer's receivables, a low acceptance rate by the Company of
receivables submitted by the dealer and any breaches by the dealer of its
membership agreement with the Company. The Company terminated the membership
of approximately 295 dealers in fiscal year 1995 based upon these other
factors.
Dealers communicate and negotiate receivable sales transactions
directly with the Company's centralized purchasing personnel via facsimile
shortly after the receivable's origination. The receivable purchase decision
is typically communicated to the dealer in approximately one hour, and if the
receivable is purchased, documentation of such purchase is completed generally
in one week. The Company pays the dealer for the sale of the receivable after
receipt and review of the original receivable contract and other required
documents and after verification procedures are completed
The Company believes that the services it provides to used car dealers
improve their financial efficiency by enabling them to turn their working
capital more frequently. The dealers forego some future profits on each
transaction in exchange for an immediate return of their invested capital,
avoidance of collection expenses and elimination of any collection risks.
Currently, the Company is purchasing receivables from dealers located
primarily in metropolitan areas in Arizona, Florida, South Carolina, Texas,
Oklahoma, Georgia, and Tennessee. The Company's principal market focus has
been in the southern and southwestern states such as those listed above, where
"self-help" repossession laws promote efficient collection efforts with respect
to defaulted receivables, and where milder climates generate higher collateral
values for used vehicles. See "Regulation."
Receivables Purchasing Procedures and Criteria. Since September 1994,
the Company has purchased receivables only for the Fund Subsidiaries. In
November 1995, the Company's new interim management determined to sharply
reduce all receivables purchasing activities for the Company while attempting
to evaluate and, if necessary, modify or remedy purchasing and collection
procedures. In January 1995, the Company's new President caused the Company to
resume normal levels of receivables purchasing activities but at the same time
tightened certain purchasing procedures where permitted. Management was
constrained from any substantial changes in purchasing criteria for receivables
purchased for its public Fund Subsidiaries due to restrictions set forth in the
trust indentures governing the indebtedness of those subsidiaries.
8
<PAGE> 10
The indentures established specific criteria with respect to the
price, purchase discount, term, downpayment, installments and interest rate for
the receivables it purchases and also with respect to price, cost to the
dealer, average wholesale value, age, mileage and make of the motor vehicles
securing such receivables. The Company believes that the most significant of
these criteria are as follows:
o The average purchase price of a receivable may not exceed 53% of
the total remaining unpaid installments of the receivables;
o The average purchase price for a receivable may not significantly
exceed the approximate average wholesale value and/or the dealer's
actual cost for the underlying financed vehicle;
o The receivable generally must have an original term of 36 months
or less;
o The age of each financed vehicle may not generally exceed eight
years for automobiles or nine years for trucks;
o The obligor on the receivable is required to make a down payment
in cash plus a net trade-in allowance of at least 25% of the
dealer's cost in the financed vehicle;
o The interest rate on the receivable must not violate any
applicable usury laws; and
o The dealer's actual cost for a financed vehicle generally must be
greater than $2,000 and less than $6,200.
Generally, to satisfy these credit criteria, an obligor must provide
verifiable personal references, must have a valid driver's license, must have
been a resident of the local area of receivable origination for a minimum of
one year, must have verifiable current employment and credit history and must
be at least 18 years of age.
During 1995, the Company has attempted to tighten its purchasing
procedures and the application of the criteria beyond that required by the
indentures. For example, the Company has commenced to adjust the purchase
prices offered to dealers for receivables based on the perceived credit risk of
the obligor and the wholesale vehicle value, to verify directly with obligors
customer purchase satisfaction, downpayment amounts and credit information, to
monitor through the ANMS receivable transactions from dealers whose receivables
have historically lower collection rates and to reject receivables from known
credit abusers. In addition, the Company commenced more strictly to apply the
foregoing credit criteria.
The Company's receivables purchasing personnel review each receivable
for compliance with the foregoing criteria, utilizing standard and supporting
documentation provided via facsimile by the selling dealer and national
computerized databases that automatically interact with the Company's
proprietary Auto Note Management System Software ("ANMS"). The Company
verifies, by reference to published wholesale vehicle value guides, the average
wholesale prices of the underlying vehicles. In most instances, the Company
performs this pre-purchase due diligence and processes purchases within one
hour, thereby assisting the dealer in the timely sale of the underlying
vehicle. This one hour turnaround time is considered by the Company to be an
important competitive factor, and the Company constantly monitors its
turnaround time through its ANMS. The Company acquires less than half of the
receivables offered by dealers in the Dealer Network. In a typical receivable
purchase by the Company, a dealer will make a profit of approximately $900 on a
vehicle which cost the dealer $4,000 and was held in its inventory less than 30
days.
While the Company purchases groups of receivables, it typically
purchases individually selected receivables. Purchasing receivables from
dealers on an individual basis in accordance with the Company's purchasing
criteria enables the Company to more readily control conformity to collateral
and credit requirements and compliance with applicable laws and regulations.
The Company's underwriting strategy differs markedly from many of its
competitors. Many of the Company's competitors usually make only bulk
purchases of receivables and/or retain recourse against the selling dealer for
mere non-payment of the receivable through quasi-loan arrangements, dealer
holdbacks or reserve accounts or other collection collateral or guaranties. As
a result of the assumption from the dealer of more collection risk and its
purchase of individual receivables, the Company is able to purchase receivables
at greater discounts than these competitors. The purchase and credit criteria
and verification procedures also differ from competitor to competitor, although
the variations are smaller for those competitors directly competing with the
Company in its market niche. Unlike the Company, certain other competitors
will only purchase "seasoned" receivables, i.e. receivables that have existed
and performed in an acceptable manner for a period of time.
9
<PAGE> 11
Receivables Servicing and Collections. Upon purchase of each
receivable, the Company instructs each obligor to remit payments directly to
the Company's post office box, utilizing preprinted payment coupon booklets.
Payments may also be made in person at the Company's offices or via Western
Union Quick Collect service or through Ace Cash Express. Though the Company's
collections operations are based at the Company's home office in Dallas, Texas,
the Company operates branch collections offices in the following cities:
Garland, Texas; Arlington, Texas; Houston, Texas; Memphis, Tennessee.
The Company has a staff of collection personnel that monitor payments
of the receivables and contacts obligors via telephone when payments are
delinquent. Collections personnel generally have (i) a minimum of one year
collection experience, (ii) the ability to obtain corrective action on
delinquent accounts and (iii) knowledge and ability to comply with state and
federal debt collection laws. Generally, if at least three semi-monthly
payments are past due and the obligor fails to make any payments, including
partial payments, for a period of 30 days, the receivable is subject to
enhanced collection efforts, including intensified telephone and written
contacts aimed at identifying the likelihood and expected amount of payment on
the receivable. At any time thereafter, the Company may (i) contract with an
independent third party repossession company to locate and peacefully repossess
the motor vehicle securing the receivable or (ii) seek and obtain an order of a
court of competent jurisdiction for turnover of the motor vehicle. The
decision to repossess a motor vehicle is made on a case-by-case basis by a
collections unit manager. Factors considered by these unit managers include
recent payments and willingness on the part of the obligor to commit to payment
upon a date certain. Any delays in repossession expose the Company to the risk
of reduced resale value for the vehicle due to additional mileage and the
possibility of damage or lack of necessary maintenance or repairs to the
vehicle.
The Company's collection and repossession activities are administered
through its ANMS. The Company's ability through the ANMS to relationally
cross-reference receivable collection statistics against vehicle, dealer,
customer and geographic data enables the Company to monitor receivables and
adjust purchase procedures and prices.
Following repossession, the Company sells each repossessed vehicle on
a wholesale basis to dealers at an unaffiliated motor vehicle auction at the
highest available bid. During the period from October 1994 until December
1995, the Company sold many of its repossessed vehicles directly to consumers
at used car lots operated by the Company. The sale of the vehicles in this
manner, rather than on a wholesale basis, created another receivable with
associated risks of default and payment delays. Because the profits generated
by these lots was not sufficient to justify their existence, the Company had
closed all three of its retail lots as of December 31, 1995, which will result
in reduction of direct costs and general and administrative expenses in future
periods. The Company currently holds approximately 726 receivables originated
through these retail lots.
The Company, in the past, subcontracted with LSI Financial Group
("LSI") to provide collection and repossession services with respect to
approximately 5% of the Company's motor vehicle receivables. In September
1995, the Company transferred all collection and repossession services
previously performed by LSI to its own collections department and now services
all receivables itself.
Expansion into Other Credit Markets. Following completion of the
Joint Plan, the Company anticipates implementation of a program that would
expand its operations into higher credit-rated receivables. This expansion
would continue to target borrowers with sub-standard credit histories; however,
it would focus on borrowers with increased job and residence stability, higher
income, and re-established positive credit. If implemented, receivables
purchased under the new program would carry interest rates ranging from
approximately 18% to 25%. The receivables purchased would be secured primarily
by automobiles up to 6 years in age, having been driven no more than (i) an
average of 25,000 miles per year and (ii) having 80,000 total miles.
Participating dealers would be primarily franchised dealers and some
independent dealers.
The Auto Note Management System (ANMS). Since its inception, the
Company has pursued a strategy of developing in-house, receivable purchase and
collection operating systems utilizing personal computer-based software and
hardware. The Company's current ANMS and related systems are connected with
outside databases, such as national credit bureaus, wholesale vehicle valuation
guides, and major dealers. These systems contribute to the Company's ability
to satisfy the Dealer Network's needs by enhancing the Company's ability to
meet its targeted one-hour receivable processing commitment. In addition, the
Company's ability to relationally cross-reference
10
<PAGE> 12
receivable collection statistics against vehicle, dealer, customer and
geographic data enables the Company to monitor receivables and adjust
purchasing activities and criteria according to such comparative statistics.
The Company maintains a full-time staff of personnel who develop and maintain
the ANMS.
RECEIVABLES CHARACTERISTICS
General. Set forth below is a summary of pertinent statistics
regarding the average active receivable in the Company's portfolio of motor
vehicle receivables, as of September 30, 1995 and September 30, 1994. The
contracts are segregated into individually purchased receivables and bulk
receivable purchases. Bulk receivable purchases are evaluated and purchased as
a group under different purchasing criteria, including customer payment
history.
AVERAGE RECEIVABLE CHARACTERISTICS FOR INDIVIDUAL RECEIVABLE PURCHASES
<TABLE>
<CAPTION>
As of As of
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Dealer's vehicle cost $3,609 $4,411
Purchase price to customer of underlying vehicle $8,026 $7,859
Dealer's profit on receivable sale $959 $931
Age of vehicle 5.9 Years 4.8 Years
Wholesale value of vehicle $4,640 $4,409
Down payment (including net trade-in credit) $1,588 $1,577
Receivable term 31.6 Months 30.5 Months
APR 24.2% 24.3%
Semi-monthly payment $150 $145
Receivable balance (principal and unearned interest) $9,549 $9,242
Purchase price for receivable $4,969 $4,699
Receivable cost as % of receivable balance 51.67% 50.8%
Receivable discount as % of receivable balance 48.33% 49.2%
</TABLE>
AVERAGE RECEIVABLE CHARACTERISTICS FOR BULK PURCHASES
<TABLE>
<CAPTION>
As of As of
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Purchase price to customer of underlying vehicle $5,716 $4,718
Age of vehicle 8.5 Years 8.42 Years
Down payment (including net trade-in credit) $1,292 $1,140
Receivable term 22.05 Months 22.3 Months
Semi-monthly payment $121 $110
Receivable balance (principal and unearned interest) $5,274 $3,441
Purchase price for receivable $2,955 $2,066
Receivable cost as % of receivable balance 55.01% 60.0%
Receivable discount as % of receivable balance 44.99% 40.0%
</TABLE>
At September 30, 1995, the Company had an aggregate of 12,128 motor
vehicle receivables in its portfolio with an aggregate total unpaid balance of
$66,677,000, including $13,106,000 in unearned interest and $18,623,000 in
credit loss allowance. In vehicles held for resale, the Company had a total of
599 vehicles having an estimated value of approximately $601,000. As of
September 30, 1995, 586 of the total 12,128 receivables were bulk receivables
and $1,712,000 of the total $66,677,000 represented unpaid installments on bulk
receivables. The Company's average recorded investment in impaired loans was
$14,737,000 and $10,724,000 for the fiscal years ended September 30, 1995 and
1994 respectively.
Seasonality. The Company's operations are seasonably impacted by
higher delinquency rates during certain holiday periods.
Delinquency, Repossession and Collections. The following tables set
forth certain information regarding the Company's motor vehicle receivables,
from inception (April 1, 1991) through September 30, 1995. There can be no
assurance that the future performance of the receivables purchased by the
Company, including future delinquency and loss experience, will be similar to
that set forth in the following tables.
11
<PAGE> 13
MOTOR VEHICLE RECEIVABLES - AGING AND DELINQUENCIES
<TABLE>
<CAPTION>
(Dollars in thousands) As of September 30 1995 As of September 30,1994
----------------------- -----------------------
Number of Total (1) % of Number of Total (1) % of
Active Unpaid Total Unpaid Active Unpaid Total Unpaid
Contractual Delinquency Receivables Installments Installments Receivables Installments Installments
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current to 60 days past due 9,805 $53,758 80.6% 14,726 $104,117 77.7%
61-180 days past due(2) 1,696 9,182 13.8% 3,069 21,240 15.8%
181+ days past due(2) 627 3,737 5.6% 1,200 8,746 6.5%
-----------------------------------------------------------------------------------------------
All Active Receivables 12,128 $66,677 100.0% 18,995 $134,103 100.0%
===============================================================================================
</TABLE>
(1) Includes unearned income.
(2) Active receivables exclude 599 and 821 accounts that have been
reclassified to vehicles held for resale at September 30, 1995, and
September 30, 1994, respectively.
PERFORMANCE OF MOTOR VEHICLE RECEIVABLES
<TABLE>
<CAPTION>
(Dollars in thousands) From Inception From Inception From Inception
Through Through Through
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C> <C>
Collections (1) $102,766 $55,781 $16,300
Net Repossession Proceeds (2) $27,377 $16,427 $4,295
Net Losses on Repossessions (3) $21,377 $ 8,628 $ 1,348
Ratio of Net Losses to Original Receivables Cost 31.1% 26.8% 18.9%
Number of Repossessions 15,543 8,270 1,821
Ratio of Repossessions to Total Receivables (Units) 45.9% 29.0% 18.7%
Average Age of Receivables (4) 13.51 Months 10.5 months 7.9 months
</TABLE>
(1) Total receivable collections include installments received on receivables
prior to repossession but exclude net repossession proceeds.
(2) Represents net proceeds from sales of 1,798, 6,449 and 7,273 repossessed
vehicles through September 30, 1993, 1994 and 1995, respectively.
(3) The term "Net Losses" represents total collections (including repossession
proceeds) less the initial cost of receivables related to the repossessed
vehicles.
(4) Based on period from purchase of contract receivable up to contract term,
excluding bulk purchases.
The percentage of contractually delinquent accounts has decreased from
September 30, 1994 to September 30, 1995. At the end of September 30, 1995,
19.4% of the Company's active contracts were at least 61 days contractually
delinquent compared to 22.3% at September 30, 1994. The decrease in accounts
at least 61 days contractually delinquent is due to increased collection
efforts, tightened credit criteria and the Company's charge-off policy
implemented in June of 1995. Since implementation of the policy, the Company
has charged-off 1,321 accounts with remaining contractual balances of
$8,235,000.
The net cumulative losses on repossessions were $1,396, $1,043 and
$740 per repossession for the years ending September 30, 1995, 1994 and 1993,
respectively. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation--Results of Operations".
FINANCING
See the discussion of the financing provided by HFG under "HFG Funding
Agreement" above.
12
<PAGE> 14
Until November 1994, the Company financed its receivables purchasing
activities through public and private sales of unrated, asset-backed debt
securities by its Bankrupt Subsidiaries. Unlike more common securitizations,
the Company did not seek a rating of these asset-backed securities by any
rating agencies.
Each Bankruptcy Subsidiary filed, on August 14, 1995, a petition in
the U.S. Bankruptcy Court in the Northern District of Texas, Dallas Division
seeking relief under Chapter 11 of the U.S. Bankruptcy Code ("Code") See
discussion under "Subsidiary Bankruptcy Filings." The following table sets
forth certain information regarding the Note indebtedness of each Bankrupt
Subsidiary; these notes and related interest are prepetition and subject t o
compromise under the Plan of Reorganization.
DESCRIPTION OF NOTES OF BANKRUPT SUBSIDIARIES
<TABLE>
<CAPTION>
Original Interest Interest Sinking Fund Private
Offering Principal Accrual Payment Commencement or
Entity Name Completion Amount ($) Rate Rate Maturity Date Public
----------- ---------- ---------- ---- ---- -------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Automobile Credit Fund 91- Jan. 1992 1,000,000 21% 15% (4) 3/31/95 (3) 3/31/94 (1) Private
III, Inc. ("ACF 91-III")
Automobile Credit Finance, May 1992 5,000,000 18% 15% (4) 12/31/94(3) 12/31/93 (1) Public
Inc. ("ACF")
Automobile Credit Partners, May 1992 1,000,000 21% 15% (4) 4/30/95 (3) 4/30/94 (1) Private
Inc. ("ACP")
Automobile Credit Finance Dec. 1992 10,000,000 15% 15% (4) 12/31/95 12/31/94 (1) Public
1992-II, Inc. ("ACF 92-II")
Automobile Credit Finance July 1993 15,000,000 15% 15% (4) 4/30/96 4/30/95 (1) Public
III, Inc. ("ACF III")
Automobile Credit Finance Dec. 1993 10,000,000 14% 14% (4) 12/31/96 9/30/95 (1)(2) Public
IV, Inc. ("ACF IV")
Automobile Credit Finance Oct. 1994 19,872,000 12% 12% (4) 12/31/97 9/30/96 (1)(2) Public
V, Inc. ("ACF V")
Automobile Credit Finance Dec. 1994 10,675,000 12% 12% (4) 6/30/98 6/30/97 (1)(2) Public
VI, Inc. ("ACF VI")
</TABLE>
(1) See Note 5 to consolidated financial statements.
(2) Quarterly principal payments are required after sinking fund commencement.
(3) 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. ACF's
insufficient cash balance constituted a default under its indenture
agreement between the Company and Texas Commerce Bank National Association
("Trustee"). As of September 30, 1995, ACF had $359,000 in remaining
principal and interest on its receivables and owed $1,506,000 on its
Notes. 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. ACF 91-III's
insufficient cash balance constituted a default. As of September 30,
1995, ACF 91-III had $216,000 in remaining principal and interest on its
receivables and owed $590,000 on its Notes. On the April 30, 1995
maturity date for ACP, there was $525,000 in cash to be applied to
obligations of $1,180,000. ACP's insufficient cash balance constituted a
default. At September 30, 1995, ACP had $180,000 in remaining principal
and interest on its receivables and owed $610,000 on its Notes.
(4) Effective on the earlier of August 14, 1995, which was the date of filing
the bankruptcy petition for the Bankrupt Subsidiaries, or the date of
default, the Company ceased accruing interest on the Notes. See Note 2 to
the Consolidated Financial Statements.
Each of the Bankrupt Subsidiaries originally contracted with the
Company for receivables purchasing and collecting services through its maturity
date. The Notes of the respective Bankrupt Subsidiaries are secured by the
receivables that were purchased using the net proceeds of the offering and the
subsidiary's excess cash flow after payment of interest and allowed expenses.
Each public Bankrupt Subsidiary's excess cash flow must be deposited after the
sinking fund commencement date into a sinking fund held by an independent
trustee for repayment of its Notes at maturity. The Notes issued by each of ACF
92-II, ACF III, ACF IV, ACF V and ACF VI may be redeemed in full by each such
Bankrupt Subsidiary at any time after the commencement of the sinking fund.
Before investing in the purchase of receivables, each Bankrupt
Subsidiary paid its offering and organizational fees and costs out of the gross
sales proceeds from its Notes. These fees and costs were limited to a
percentage of the gross sales proceeds, as follows:
13
<PAGE> 15
<TABLE>
<CAPTION>
Bankrupt Subsidiary Maximum Organizational %
- ------------------- ------------------------
<S> <C>
ACF 90-I, ACF 91-II, ACF 91-III, ACP, ACF , ACF 92-II 15.0%
ACF III 12.5%
ACF IV 13.5%
ACF V 10.7%
ACF VI 8.0%
</TABLE>
Fees to the Company; Bankrupt Subsidiary Operations. Under the terms
of the indentures, the Company may collect servicing fees, purchasing fees and
investor relations fees from the Bankrupt Subsidiaries. Under the existing
cash collateral orders of the Court in the bankruptcy proceedings of the
Bankrupt Subsidiaries, the Bankrupt Subsidiaries are allowed to pay these fees.
Each Bankrupt Subsidiary pays servicing fees to a Search subsidiary for each
receivable that has not been assigned for repossession. Servicing fees were
$21.80 per receivable that has not been assigned for repossession in calendar
year 1994 and were $22.30 in calendar year 1995. In addition, ACF III, ACF IV,
ACF V, and ACF VI pay to a Search subsidiary a purchasing fee of $125 per
receivable purchased by the subsidiary and a monthly investor relations fee of
1/12 of 0.5% of the outstanding principal amount of its Notes.
Under the terms of the indenture agreements (that have not to date
been rejected in the bankruptcy proceedings), the net cash flow generated from
the collection of the receivables held by each Bankrupt Subsidiary, after
payment of interest and allowed expenses, must either be reinvested in the
purchase of additional receivables or retained in a sinking fund account for
payment of the respective Notes. For information regarding the results of
operations and financial condition of each of the Bankrupt Subsidiaries, see
the discussion under "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Line of Credit. On June 17, 1994, Search and its 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 of SFC's assets and is guaranteed by Search. Search and SFC
were to comply with various restrictive covenants that required the maintenance
of certain financial ratios and other financial conditions. Search has not
been in compliance with interest or equity coverage ratios since fiscal year
1994.
In January 1995, SFC signed an agreement with GECC to revise the
restrictive covenants and to eliminate any future advances under the line of
credit. SFC is required to remit cash receipts of all pledged contracts to
GECC until the line of credit is repaid. Interest is accrued daily at the
average of the one month London Interbank Offered Rates ("LIBOR") for the
preceding month plus 5.1%. As of September 30, 1995 and September 30, 1994,
LIBOR was 5.89% and 4.70% and the interest rate on the line of credit was
10.99% and 9.80%, respectively. SFC recorded $250,000 and $85,000 in interest
expense to GECC during 1995 and 1994, respectively.
On March 22, 1995, GECC advised Search that Search and SFC were in
default of various provisions of the original loan agreement and the January
1995 agreement. As a result of these defaults, GECC declared that the
outstanding balance as of that date of $2,600,074 was due and payable in full
on or before April 28, 1995. Search and GECC established a pay-out plan which
requires a minimum payment of $500,000 per quarter. SFC is required to remit
cash receipts of all pledged contracts until the line of credit is repaid. As
of December 19, 1995, the line had a balance due of $615,000. Subject to
certain conditions, HFG has committed to lend sufficient funds to payoff
amounts owed to GECC if necessary. See "HFG Funding Agreement".
Future Financings. After completion of the Joint Plan, the Company
presently intends to pursue future financings through lower-cost debt
financings from traditional financial sources such as banks. Since the
Company's inception, the effective interest rate, inclusive of front-end
offering costs, incurred by the Company from its securitization activities, has
fallen from a high of 29.7% to 16.2% at September 30, 1995. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Bankrupt Subsidiary Activities."
COMPETITION
The Company has numerous competitors engaged in the business of buying
new and used motor vehicle receivables at a discount. The Company in the past
had few competitors that purchased receivables from high credit
14
<PAGE> 16
risk individuals that purchased medium-priced, used motor vehicles in the
Company's current primary geographic markets consisting of the metropolitan
areas of Arizona, Georgia, Florida, South Carolina, Oklahoma, Tennessee and
Texas. Assuming confirmation of the Joint Plan, the Company intends to
purchase receivables whose obligors have somewhat lower credit risk than
obligors of receivables previously purchased by the Company. The Company
expects to encounter more competition in the purchase of such lower risk
receivables. See "Principal Business - Expansion Into Other Credit Markets."
The Company competes to some extent with providers of alternative financing
services, such as floor plan lines of credit from financial institutions, lease
financing and dealer self-financing, and certain purchasers of receivables for
higher-priced, used motor vehicles. National or regional rental car companies,
finance companies, used car companies, auction houses, dealer groups or other
firms with equal or greater financial resources than the Company could elect to
compete with the Company in its market. These competitive factors could have
a material adverse effect upon the operations of the Company.
REGULATION
Numerous federal and state consumer protection laws impose
requirements upon the origination and collection of consumer receivables.
State laws impose finance charge ceilings and other restrictions on consumer
transactions and may require certain contract disclosures in addition to those
required under federal law. These requirements impose specific statutory
liabilities upon creditors who fail to comply with their provisions. In
addition, certain of these laws make an assignee of such contract liable to the
obligor thereon for any violations by the assignor. The Company's ANMS
verifies the accuracy of disclosure for each receivable that it purchases;
however, the Company, as an assignee of such receivables, may be unable to
enforce some of its receivables or may be subject to liability to the obligors
under some of its receivables if such receivables do not comply with such laws.
In the event of default by an obligor on a receivable, the Company has
all the remedies of a secured party under the Uniform Commercial Code ("UCC").
The UCC remedies of a secured party include the right to repossession by
self-help means, unless such means would constitute a breach of the peace.
Unless the obligor voluntarily surrenders a vehicle, self-help repossession, by
an individual independent repossession specialist engaged by the Company, is
the method usually employed by the Company when an obligor defaults. Self-help
repossession is accomplished by retaking possession of the motor vehicle. If a
breach of the peace is likely to occur, or if applicable state law so requires,
the Company must obtain a court order from the appropriate state court and
repossess the vehicle in accordance with that order. None of the states in
which the Company presently does or intends to do business has state laws that
would require the Company, in the absence of a probable breach of peace, to
obtain a court order before it attempts to repossess a motor vehicle.
In most jurisdictions, including those states in which the Company
presently does or intends to do business, the UCC and other state laws require
the secured party to provide the obligor with reasonable notice of the date,
time, and place of any public sale or the date after which any private sale of
the collateral may be held. Unless the obligor waives his rights after
default, the obligor has the right to redeem the collateral prior to actual
sale by paying the secured party the unpaid installments (less any required
discount for prepayment) of the receivable plus reasonable expenses for
repossessing, holding, and preparing the collateral for disposition and
arranging for its sale, plus in some jurisdictions, reasonable attorneys' fees,
or, in some states, by payment of delinquent installments.
HISTORY AND DISCONTINUANCE OF OIL AND GAS BUSINESS
The Company's predecessor was initially incorporated as Search Natural
Resources, Inc., a Minnesota corporation, on June 20, 1979, and, in order to
change its state of incorporation, was merged with and into the Company, a
Delaware corporation, in August 1988. From its inception until 1991, when it
disposed of most of its properties, the Company's primary business was the
acquisition, exploration, development and sale of oil and gas properties.
EMPLOYEES
As of November 30, 1995, the Company had 136 employees, of which 55
were engaged in receivables purchasing and collections, 44 in the repossession
and resale of repossessed vehicles, 31 in administration and 6 in
15
<PAGE> 17
senior management. The Fund Subsidiaries do not have any employees. None of
the Company's employees is represented by a labor union.
ITEM 2. PROPERTIES
On October 28, 1992, ACAC entered into a sixty month lease for office
facilities with a basic monthly rental obligation of $13,450. This lease was
modified in 1994 to expand the office facilities from approximately 16,000
square feet to approximately 23,000 square feet at a revised monthly rental
obligation of $22,057. With six months notice ACAC may cancel the lease at the
end of the thirty-sixth month with the payment of the unamortized up-front
costs associated with the premises, as defined in the lease agreement,
otherwise the lease is non-cancelable. Rental expense for 1995, 1994, and 1993
was approximately $284,000, $212,000 and $117,000, respectively.
During the year, the Company opened four remote collection facilities,
these leases expire through 1999. The lease expense for fiscal 1995 total
approximately $20,000.
Search signed three car lot leases at the beginning of fiscal 1995.
The leases were in Dallas, TX and a suburb of Atlanta, GA and had terms of 12
to 24 months. These lots were used to process and sell repossessed vehicles
directly to consumers. During the fiscal year ended September 30, 1995, Search
closed the Georgia lot and one of the lots in Dallas. Subsequent to year-end,
Search adopted a formal plan to close the remaining car lot and related
make-ready facility by January 1, 1996. See related discussion in Item 1
Principal Business.
ITEM 3. LEGAL PROCEEDINGS
BANKRUPTCY OF FUND SUBSIDIARIES
On August 14, 1995, Automobile Credit Finance, Inc., Automobile Credit
Fund 1991-III, Inc., Automobile Credit Finance 1992-II, Inc., Automobile Credit
Finance III, Inc., Automobile Credit Finance IV, Inc., Automobile Credit
Finance V, Inc., Automobile Credit Finance VI, Inc. and Automobile Credit
Partners, Inc., which are wholly-owned subsidiaries of the Company, each filed
a petition in the U.S. Bankruptcy Court in the Northern District of Texas,
Dallas Division ("Court"), seeking protection under Chapter 11 of the U.S.
Bankruptcy Code ("Code"). These cases have been consolidated as one case for
administration (Case No. 395-34981-RCM-11). See the discussion under the
caption "Fund Subsidiary Bankruptcy Filings" in "Item 1 Business" for a more
detailed description of the bankruptcy proceedings.
SHAREHOLDER CLASS ACTION LAWSUIT
On July 7, 1994, a class action civil lawsuit was filed against
Search, certain of its officers and directors, one of its former accounting
firms and 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 (the "Class Action Suit").
The Class Action Suit was filed on behalf of all purchasers of
Search's Common Stock during the period beginning December 10, 1993 and ending
through July 5, 1994, which was the date that Search made a public announcement
regarding lower earnings. The Class Action Suit contends that Search made
misstatements in its registration statements concerning Search's computerized
system, accounting methodologies used by Search, collectibility of its
receivables and repossession rates of autos that secured its receivables. The
plaintiffs also complained of allegedly false public filings, press releases
and reports issued during 1994. The plaintiffs sought damages, rescission ,
punitive damages, pre-judgment interest, fees, costs, equitable relief and/or
injunctive relief and such other relief as the court may deem just and proper.
16
<PAGE> 18
Search's management and counsel for the plaintiffs have entered into a
stipulation of settlement (the "Settlement") of the Class Action Suit. This
Settlement was initially filed with the court on August 4, 1995, and an amended
version of the Settlement was filed on November 13, 1995. No objections to the
Settlement have been received to date. The Settlement provides for the payment
by Search of $287,500 upon approval of the Settlement ($100,000 has already
been deposited in an escrow account maintained by the plaintiff's lawyers), and
the issuance by Search of its Common Stock with a value of $2,612,500 or cash.
The settlement provides that the number of shares of Common Stock 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.
Final effectiveness of the Settlement is conditioned upon court
certification of the class of plaintiffs for the Settlement and court approval
of the fairness of the Settlement. On January 5, 1996, the Court concluded
hearings on the issue of Settlement. The Company believes the Court will rule
quickly and in favor of the Settlement and certification of class as proposed.
Search believes that the Settlement is fair and equitable to the class of
plaintiffs and will ultimately be approved. A final, non-appealable order
approving the Settlement is a condition precedent to the implementation of the
Search Equity Option under the Joint Plan.
OTHER LITIGATION
In December 1993, Automobile Credit Acceptance Corp. ("ACAC"), a
subsidiary of Search, was joined as a defendant in a pending civil action filed
in the 153rd Judicial District Court, Tarrant County, Texas, styled Autostar
Solutions, Inc. v. Tim Clothier and Automobile Credit Acceptance Corporation,
Cause No. 153-144940. The plaintiff in this action alleges the existence of a
partnership between the plaintiff and another defendant and seeks damages,
actual and exemplary, and an injunction for alleged conversion and
misappropriation of certain property, including computer programs, allegedly
owned by Autostar. In the petition, the plaintiff alleges that ACAC wrongfully
assisted its co- defendant and tortiously interfered with the plaintiff's
contracts and business and has claimed, as damages, $250,000. ACAC believes
that these allegations are without merit. ACAC has filed a general denial and
has pending a motion for partial summary judgment. Discovery in this case is
ongoing and no opinion can be given as to the final outcome of the lawsuit.
On January 6, 1995, in a civil action filed in the 134th Judicial
District Court, Dallas County, Texas, styled Innovative Office Systems, Inc. v.
Automobile Credit Acceptance Corp., Cause No. 95-00180-C, plaintiff filed suit
against ACAC alleging damages of approximately $60,000.00 for breach of two
lease agreements and for attorneys' fees. In the petition, the plaintiff
alleges that ACAC breached two office equipment leases. Search believes that
these allegations are without merit and is vigorously contesting this lawsuit.
ACAC has filed a general denial and discovery in this case is ongoing.
Currently, no opinion can be given as to the final outcome of the lawsuit.
On January 9, 1996, Search received notice from plaintiffs that a suit
had been filed on December 21, 1995 against Search, certain of its former
officers and directors, and certain underwriters of three of the Fund
Subsidiaries. The case is styled Janice and Warren Bowe, et. al. vs. Search
Capital Group, Inc., et. al., Cause No. 1:95CV 649GR and was filed in the
Federal District Court for the Southern District of Mississippi. The
plaintiffs allege violations of the securities laws by the defendants and
seeks unspecified damages, rescission, punitive damages and other relief. The
plaintiffs also seek establishment of a class of plaintiffs consisting of all
persons who have purchased Notes issued by three of the Fund Subsidiaries. The
Company believes the suit is without merit and intends to vigorously defend
itself and may seek equitable remedies, including injunctive relief, in the
Bankruptcy Court that has jurisdiction over the Bankrupt Subsidiaries.
There are presently no other material pending legal proceedings, other
than ordinary routine litigation incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Effective December 10, 1993, the Company listed its Common Stock on
the NASDAQ National Market System under the symbol "SRCG." Effective March 23,
1995, the Company's Common Stock was delisted by NASDAQ for failure to file its
Form 10-K Annual Report for the fiscal year ended September 30, 1994 and its
Form 10-Q Quarterly Report for the quarter ended December 30, 1994 and for
failure to meet its continued listing criteria for consolidated net tangible
assets.
The following table sets forth for each quarter after fiscal 1993 the
high and low bid and ask prices for the Common Stock prior to December 10,
1993, and after March 22, 1995, as reported by the National Quotations Bureau,
and the high and low sales prices for the Common Stock after December 9, 1993,
and prior to March 23, 1995, as reported by the National Market System of
NASDAQ. Prior to December 10, 1993, and after March 22, 1995, trading of the
Company's Common Stock in the over-the-counter market has been sporadic and
limited. Prior to December 10, 1993, the quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and do not represent
actual transactions.
<TABLE>
<CAPTION>
Bid Prices Ask Prices NASDAQ
---------- ---------- ------
Fiscal Years High Low High Low High Low
------------ ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
1994
----
Oct. 1-Dec. 9, 1993 8.750 6.000 11.000 8.000
Dec. 10-31, 1993 9.500 8.500
Second Quarter 15.250 8.750
Third Quarter 14.000 8.750
Fourth Quarter 9.750 3.375
1995
----
First Quarter 3.625 1.000
Second Quarter 2.125 1.125 2.375 1.375
Third Quarter 1.875 0.813 2.250 1.063
Fourth Quarter 2.000 1.000 2.250 1.188
1996
----
First Quarter 1.938 1.000 2.125 1.219
</TABLE>
As of December 31, 1995, there were 8,696,141 shares of Common Stock
outstanding and approximately 1,599 holders of record of the Common Stock.
Dividends on the Common Stock may be paid if, as and when declared by
the directors of the Company out of funds legally available therefor. The
Company has never paid dividends on the outstanding Common Stock and the
current policy of the Company's Board of Directors is to retain any available
earnings for use in the operation and expansion of the Company's business.
Therefore, the payment of cash dividends on the Common Stock is unlikely in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition and any other factors
deemed relevant by the Board of Directors.
18
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is a table of selected consolidated financial data for
the fiscal years ended December 31, 1991, and 1992 and the nine month period
ending September 30, 1993 and the fiscal year ended September 30, 1994 and
1995:
<TABLE>
<CAPTION>
Year Ended Year Ended 9 Months Year Ended Year Ended
($ in thousands, except per share data) 9/30/95 9/30/94 9/30/93 12/31/92 12/31/91
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Interest revenue $13,472 $14,054 $7,096 $2,739 $328
Interest expense (1) 11,205 9,968 4,173 1,909 137
Provision for credit losses (2) 3,128 20,180 - - -
--------- --------- -------- -------- --------
Net interest income (loss) after provision (861) (16,094) 2,923 830 191
Operating and Other expenses 15,881 9,320 3,075 1,504 542
Settlement expense 2,837 560 - - -
Reorganization expense 315 - - - -
Other income - 24 24 34 13
--------- --------- -------- -------- --------
(Loss) from continuing operations (19,894) (25,950) (128) (640) (338)
Discontinued oil and gas segment - - - - (594)
--------- --------- -------- -------- --------
Net (loss) (19,894) (25,950) (128) (640) (932)
Preferred stock dividends 240 240 263 206 128
--------- ---------- -------- -------- --------
(Loss) available to common stockholders $(20,134) $(26,190) $(391) $(846) $(1,060)
========= ========== ======== ======== ========
Loss per share of common stock from $(2.25) $(2.33) $(0.06) $(0.22) $(0.15)
Net (loss) per share of common stock $(2.25) $(2.33) $(0.06) $(0.22) $(0.34)
Weighted average number of common shares 8,967 11,258 6,131 3,851 3,146
Operating Data:
Number of active dealers at period end (4) 125 206 126 68 14
Number of receivables at period end 12,128 18,995 6,991 2,962 366
Number of receivables purchased during period 5,328 18,377 6,331 3,452 399
(In thousands) 9/30/95 9/30/94 9/30/93 12/31/92 12/31/91
--------- --------- -------- -------- --------
Balance Sheet Data (3):
Contract receivables, net $34,948 $61,823 $29,396 $11,009 $1,280
Total assets 49,922 75,126 44,223 19,912 2,826
Notes payable (prepetition subject to compromise) 69,320 - - - -
Notes payable - 70,768 40,562 18,000 1,923
Total liabilities 75,557 79,502 42,013 18,838 2,286
Shareholders' equity (deficit) (25,635) (4,376) 2,210 1,074 540
</TABLE>
______________________
(1) Includes amortization of offering expenses incurred in connection with Note
offerings of $2,840,0000, $2,158,000, $762,000, $306,000, and $30,000
respectively.
(2) The provision for credit losses is first recorded in 1994 because of the
adoption of SFAS 114. See the discussion in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
under the caption "Interest Income and Provision for Credit Losses."
(3) The Company sold substantially all of its oil and gas assets in exchange
for the assumption by the purchaser of the related liabilities in December
1991. These assets and liabilities were therefore not included in the 1991
balance sheet.
(4) Active dealers are those dealers in the Dealer Network who sold receivables
to the Company during the last 30 days of the period, 60 day for 1995.
The Fund Subsidiaries, which are non-recourse to Search and are
debtors-in-possession, have accounted for all transactions related to the
reorganization proceedings in accordance with SOP 90-7. Accordingly, all
prepetition liabilities of the Fund Subsidiaries that are expected to be
impaired under the Joint Plan of Reorganization ultimately approved by the
Bankruptcy Court are reported separately in the consolidating balance sheet as
liabilities subject to compromise (see Note 5 for a description of such
liabilities). Expenses, primarily professional fees resulting from the
reorganization proceedings, are reported separately in the consolidating
statement of operations as reorganization items. Contractual interest
obligations which are relieved from payment as a result of the Chapter 11
proceedings or are not warranted when a Fund Subsidiary is in default are not
accrued.
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Except where otherwise indicated, the following discussion relates to
the operations of the Company on a consolidated basis, including its principal
operating subsidiary, ACAC.
Interest Income and Provision for Credit Losses
Through the third quarter of fiscal 1994, the Company recorded
interest revenue and allowance for credit losses based on AICPA Practice
Bulletin 6, Amortization of Discounts on Certain Acquired Loans ("PB6"). Under
PB6, the Company recorded an allowance for credit losses upon acquisition of
the installment loans in an amount equal to the difference between the
contractual payments due and the estimated undiscounted future cash
collections. The difference between the undiscounted future cash collections
and the acquisition amount of the installment contracts was amortized to
interest revenue over the period in which payments on the installment contracts
were expected to be collected. Under PB6, if the estimate of the total
probable collections was increased or decreased but still greater than the sum
of the acquisition amount less collections plus the discount amortized to date,
the remaining amount of the discount to be amortized to interest income was
adjusted and amortized over the remaining life of the loans. Accordingly,
changes in estimates of future cash collections were recognized through
prospective yield adjustments.
In the fourth quarter of fiscal 1994, Search elected early adoption of
Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114"),
which address the accounting by creditors for impairment of a loan and related
income recognition and disclosures. In accordance with SFAS 114, contracts
receivable are analyzed on a loan-by-loan basis. Search evaluates the
impairment of loans based on contractual delinquency, as well as other factors
specific to the notes receivable. When a concern exists as to the
collectibility of an account, interest income ceases to be recognized. The
notes receivable, once impaired, are collateral dependent; that is once a note
receivable is in default Search looks to the underlying collateral for
repayment of the note receivable. Therefore at impairment Search records an
allowance for credit losses to record the note receivable at the fair value of
the collateral. If the measure of the impaired note receivable is less than the
net recorded investment in the note receivable, Search recognizes an impairment
by creating an additional allowance for credit losses in excess of the initial
allowance provided, with a corresponding charge to provision for credit losses.
The provision for credit losses is adjusted for any differences between the
final net proceeds of an impaired note receivable and its net carrying value.
Search continues to record contract purchases at cost. Contractual
finance charges are initially recorded as unearned interest and amortized to
interest income using the interest method. As noted above amortization of
interest income ceases upon impairment. An initial allowance for credit losses
is recorded at the acquisition of a note receivable equal to the unearned
discount, the difference between the amount financed and the acquisition cost.
The recognition of this initial allowance is recorded as an adjustment to the
provision for credit losses.
Effective Interest Rates
Interest expense consists of Notes issued by the Fund Subsidiaries and
combines 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>
9 Months Ended Year Ended Year Ended
9/30/93 9/30/94 9/30/95
------- ------- -------
<S> <C> <C> <C>
Weighted average stated interest rate 15.6% 14.7% 11.7%
Weighted average effective cost of
borrowing 21.5% 20.2% 16.1%
</TABLE>
The stated and effective rates do not reflect anticipated, bankruptcy
and current defaults by the Fund Subsidiaries as discussed in Note 5 of the
accompanying consolidated financial statements.
20
<PAGE> 22
RESULTS OF OPERATIONS
The first payment default chart suggests that when contract purchasing
volume increased in 1994, the quality of the contracts being purchased may have
deteriorated. After analysis of these contracts, the Company realized that the
high number of first payment defaults were due, in part, to (i) Dealers
overstating to the Company the amount of the downpayment made by obligors on
the receivable and (ii) Dealers overstating the value of the automobile
securing the receivable. Obligors, because they had little downpayment
invested in the automobile or because they felt they had paid too high a price
for the automobile, were willing to allow the automobile to be repossessed
rather begin making payments. After year end September 1994, the Company was
able to reduce first payment defaults by being more selective in the contracts
purchased and initiating personal interviews in order to verify amount of
downpayments.
FIRST PAYMENT DEFAULTS AS PERCENTAGE OF TOTAL CONTACTS BOOKED
BY QUARTER CONTRACTS WERE BOOKED:
<TABLE>
<CAPTION>
DEFAULT PERCENT TOTAL NUMBER OF
PERIOD CONTRACTS BOOKED CONTRACTS BOOKED
------ ---------------- ----------------
<S> <C> <C>
First Quarter of Fiscal Year 1991 0.00% 1
Second Quarter of Fiscal Year 1991 0.00% 47
Third Quarter of Fiscal Year 1991 2.67% 75
Fourth Quarter of Fiscal Year 1991 2.90% 207
First Quarter of Fiscal Year 1992 3.46% 405
Second Quarter of Fiscal Year 1992 6.73% 594
Third Quarter of Fiscal Year 1992 7.19% 918
Fourth Quarter of Fiscal Year 1992 8.29% 1,254
First Quarter of Fiscal Year 1993 6.79% 1,930
Second Quarter of Fiscal Year 1993 5.83% 1,731
Third Quarter of Fiscal Year 1993 8.96% 2,432
First Quarter of Fiscal Year 1994 11.67% 3,360
Second Quarter of Fiscal Year 1994 9.09% 4,810
Third Quarter of Fiscal Year 1994 11.14% 4,749
Fourth Quarter of Fiscal Year 1994 12.31% 4,160
First Quarter of Fiscal Year 1995 9.15% 1,355
Second Quarter of Fiscal Year 1995 3.74% 1,122
Third Quarter of Fiscal Year 1995 3.30% 1,484
Fourth Quarter of Fiscal Year 1995 N/A 789
</TABLE>
Contract purchases increased rapidly during the nine months ended
September 1993 and the year ending September 1994. Due to the inadequate
collections on contract receivables, the Company tightened purchasing
21
<PAGE> 23
procedures in January 1995. Total contract collections 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. 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.
Comparison of Twelve Month Periods Ended September 30, 1995 and the Twelve
Month Period ending September 30, 1994
The Company purchased 5,328 ($24,830,000, net) contracts during the
twelve months ending September 30, 1995 compared to 18,377 ($88,124,000, net)
contracts purchased during the twelve months ended September 30, 1994. The
decrease in contract purchases of 13,049 or 71% was due to tightened purchasing
procedures, reductions in new funds raised, and a smaller dealer network.
Interest revenue decreased 4% from $14,054,000 to $13,472,000 for the
year ended September 30, 1995 due to decreased contracts receivables. Interest
expense increased 12% from $9,968,000 to $11,205,000 due to increased offering
cost amortization and the fact that the ACF VI debt of $10,675,000 was
outstanding for all of 1995 as compared to a portion of 1994. The increase in
interest expense was somewhat mitigated by ceasing the interest expense accrual
of the Fund Subsidiaries on the Bankruptcy Date or maturity date (whichever
event occurred first). See Note 5 to the consolidated financial statements.
The provision for credit losses decreased 85% from $20,180,000 to
$3,128,000 due to generally adequate allowance established in prior years and
the adequacy of the initial allowance on current year purchases to cover losses
during the twelve months ended September 30, 1995. In addition, purchase
activity was down substantially in 1995 compared to 1994. As most additional
allowances are recorded in the first six months of a contract's life, this
decrease in purchasing activity also had an impact on the decreased provision
for credit losses.
General and administrative expenses increased from $9,320,000 to
$15,881,000. The increase in general and administrative expense is primarily
due to increased repossession, remarketing, and collection costs. During the
years ended September 30, 1995, the Company incurred $1,270,000 of additional
cost in the repossession and remarketing of its as compared to such costs in
1994. The largest increases were in repossession and repair fees which
increased from $1,432,000 to $2,332,000. During the year ended September 30,
1995, the Company repossessed a total of 7,273 accounts compared to 6,449
during the year ended September 30, 1994.
The net loss decreased $6,056,000 from $25,950,000 in fiscal 1994 to
$19,894,000 in fiscal 1995. The decrease in net loss was primarily due to a
decrease in the provision for credit losses of $17,052,000 partially offset by
increases in interest expense of $1,237,000 and general and administrative
expenses of $6,561,000 and increases in settlement and reorganization charges
of $2,592,000.
Comparison of the Nine Month Period Ended September 30, 1993 and the Twelve
Month Period Ended September 30, 1994
Interest revenue, interest margins, net income and operating and
investing cash flows are not comparable between the nine months ending
September 30, 1993, and the year ending September 30, 1994, due to the
Company's early adoption of SFAS 114 as well as the difference in periods (nine
months versus twelve months.) See Note 2 to the consolidated financial
statements.
The Company purchased 18,377 contract receivables during the fiscal
year ending September 30, 1994, and 6,331 contract receivables during the nine
months ended September 30, 1993.
Interest revenue grew 98% from $7,096,000 for the nine months ended
September 30, 1993, to $14,054,000 for the year ended September 30, 1994, due
to an increase in net contract receivables. Net interest income increased 40%
from $2,923,000 for the nine months ended September 30, 1993, to $4,086,000 for
the year ended September
22
<PAGE> 24
30, 1994. As a percentage of interest revenue, net interest margin decreased
from 41% to 29% due to higher repossession frequency, fewer payments being made
prior to repossession and lower auction proceeds in 1994.
General and administrative expenses increased from $3,075,000 during
the nine months ended September 30, 1993, to $9,880,000 during the year ended
September 30, 1994. This increase was due to continued expansion of the
Company's business (primarily payroll and related expenses) and is
proportionate with increases in contract purchases that grew by 190% between
1993 and 1994.
Net loss for the nine months ended September 30, 1993 was $128,000
compared to a net loss of $25,950,000 for the year ended September 30, 1994.
The increase was due to deterioration in contract performance and due to the
early adoption of SFAS 114. This loss included $20,180,000 for a provision for
credit losses. See Note 2 to the accompanying consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
General
Neither Search nor any subsidiary or affiliate of Search has
guaranteed repayment of the Fund Subsidiaries' Notes. Proceeds from the
receivables are restricted to repayment of that Fund Subsidiary's Notes, the
payment of certain allowed expenses, including servicing fees, and the purchase
of additional receivables. Accrued interest will not be paid if the Fund
Subsidiaries' Plan of Reorganization is confirmed.
During the Bankruptcy Proceedings the Bankrupt Subsidiaries have
continued to operate under an order from the Bankruptcy Court authorizing the
use of cash-collateral for normal expenditures including servicing fees payable
to ACAC.
With respect to each Bankrupt Subsidiary, the Joint Plan of
Reorganization of the Bankrupt Subsidiaries provides that if the Joint Plan is
approved, the Noteholders that vote for the Plan may elect one of two methods
that provide for the disposition of the collateral securing their Notes. The
Search Equity Option generally allows the Noteholder to receive Search
securities in exchange for the release of liens on collateral and transfer to
Search a proportionate share of the assets of the Bankrupt Subsidiaries'. The
Collateral Option allows the Noteholder to have his or her proportionate share
of collateral transferred to a trust that will collect the remaining
receivables and distribute the resulting cash to the Noteholders. Under this
option, a servicer will collect the receivables. If ACAC is not selected as
servicer, it will not receive servicing fees for the collection of the
remaining receivables.
If a large portion of the Noteholders elect the Collateral Option, the
amount of equity available to Search would be decreased. This decreased equity
and the potential loss of servicing fees may result in little or no future
financing being available to Search. Insufficient equity or financing will
result in lower interest revenues to support Search's current level of
operations. Consequently, operations would have to be reduced or in the
extreme, would jeopardize Search's ability to continue as a going concern.
Search obtained liquidity financing from HFG in November 1995.
Further sources of liquidity financing may be available pending confirmation of
the Joint Plan. Confirmation of the Joint Plan is not certain. Substantial
delays in confirmation of Joint Plan or discontinuance or reduction of
servicing and management fees currently allowed under collateral orders granted
by the Bankruptcy Court may have severe liquidity effects for Search.
The consolidated financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 proceedings, and the reliance by Search
on the cash flows derived from the Fund Subsidiaries, such realization of
assets and liquidation of liabilities are subject to significant uncertainty.
Recent Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") has recently issued
Statement of Financial Accounting Standard ("SFAS") No. 123 - "Accounting for
Stock-Based Compensation" which is required for transactions entered into in
fiscal years that begin after December 15, 1995. An entity may elect to
continue to
23
<PAGE> 25
measure compensation cost using APB Opinion No. 25 "Accounting for Stock Issued
to Employees", however, pro forma disclosures in accordance with SFAS No. 123
must be included, beginning with all awards after December 15, 1994. The
statement requires a fair value based method of accounting for an employee
stock option or similar equity instrument as compared to the intrinsic value
based method of accounting prescribed by APB Opinion No. 25. Search has not
fully evaluated the effects of implementing this statement but expects that
they will not be material. In addition no decision has been made with regard
to applying SFAS No. 123 to transactions prior to December 15, 1995, or
continuing to apply APB Opinion No. 25 for those transactions.
Fund Subsidiary Activities
Pertinent information regarding each Fund Subsidiary, as of and for
the year ended September 30, 1995, is summarized below:
<TABLE>
<CAPTION>
Private Public (5)
------------------ -------------------------------------------------------
(All $ in thousands) ACF 91-III ACP ACF ACF 92-II ACF-III ACF-IV ACF-V ACF-VI
---------- --- --- --------- ------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stated interest rate of debt:
Due monthly 15% 15% 15% 15% 15% 3%/14%(4) 12% 12%
Deferred until maturity 6% 6% 3% - - - - -
------------------ -----------------------------------------------------------
Total stated interest 21% 21% 18% 15% 15% 3%/14%(4) 12% 12%
================== ===========================================================
Effective interest rate on debt 28.5% 28.4% 25.7% 21.6% 20.4% 19.2% 16.0% 15.4%
================== ===========================================================
Balance Sheet as of September 30,
- ---------------------------------
Unpaid installments $213 $177 $346 $4,033 $9,338 $9,790 $22,748 $12,667
Less allowanceiforrcredit losses (95) (79) (158) (1,891) (3,310) (2,206) (4,980) (3,042)
Loan origination costs, net of - - - - 94 87 206 138
------------------ -----------------------------------------------------------
Net receivable $47 $39 $70 $725 $3,643 $6,018 $14,243 $7,485
================== ===========================================================
Sinking fund cash $67 $72 $142 $3,826 - - - -
================== ===========================================================
Total assets (3) $99 $95 $189 $4,698 $7,678 $6,518 $15,253 $8,449
================== ===========================================================
Notes payable, subject to compromise $590 $610 $1,506 $10,000 $15,000 $10,000 $19,872 $10,675
================== ===========================================================
Maturity date 3/31/95 4/30/95 12/31/94 12/31/95 4/30/96 12/31/96 12/31/97 6/30/98
Average contract age in months
For the year ended September 30,
- --------------------------------
Interest income $63 $53 $200 $1,263 $2,210 $1,473 $3,262 $1,999
Interest expense (1) (138) (162) (318) (1,846) (2,606) (1,685) (2,652) (1,344)
Othersexpensescredit losses (63) (59) (209) (982) (1,422) (993) (2,388) (1,504)
------------------ -----------------------------------------------------------
Net (loss) $(149) $(177) $(360) $(1,777) $(2,188) $(1,452) $(2,324) $(1184)
================== ===========================================================
Stockholders' equity (capital
September 30, 1995 $(544) $(575) $(1,810) $(4,751) $(7,135) $(4,543) $(5,887) $(1,472)
</TABLE>
(1) Stated interest rate of Notes plus amortization of Notes offering
costs.
(2) Includes unamortized costs of Notes offerings, cash, and other assets.
(3) Interest was 3% until October 15, 1993 and 14% thereafter.
24
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Pursuant to Instruction 1 of Regulation S-K, Item 304, no disclosure
is required under this item because of prior reports filed with the Securities
and Exchange Commission on Forms 8-K.
25
<PAGE> 27
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidating Balance Sheets as of September 30, 1995 and 1994 F-4
Consolidating Statements of Operations for the years ended
September 30, 1995, 1994 and the nine months ended
September 30, 1993 F-5
Consolidated Statement of Changes in Stockholders' Equity
(Capital Deficit) for the period from January 1, 1993 through
September 30, 1995 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 1995, 1994 and the nine months ended September 30,
1993 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
All financial statement schedules are omitted because they are not applicable,
not required, or the information required to be set forth therein is included in
the financial statements of the notes thereto.
F-1
<PAGE> 28
[BDO LETTERHEAD]
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
Search Captial Group, Inc.
Dallas, Texas
We have audited the accompanying consolidating balance sheets of Search Capital
Group, Inc. and Subsidiaries as of September 30, 1995 and 1994, and the related
consolidating statements of operations and consolidated statements of changes
in stockholders' equity (captial deficit), and cash flows for the years then
ended. The 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Search Capital
Group, Inc. and Subsidiaries as of September 30, 1995 and 1994, and the results
of operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Notes 2 and 13 to the consolidated financial statements, the
Fund Subsidiaries filed on August 14, 1995, a petition in the United States
Bankruptcy Court for the Northern District of Texas seeking protection under
Chapter 11 of Title 11 of the United States Bankruptcy Code. Search, the parent
company of the Fund Subsidiaries, did not seek protection of the Bankruptcy
Court; and contemporaneously filed with the Fund Subsidiaries, as
co-proponents, the Joint Plan of Reorganization ("The Plan"). The Plan and
related disclosure statement was approved by the United States Bankruptcy Court
December 22, 1995. The Plan will now be submitted to the creditors for final
acceptance and selection of available options. The final outcome of the
creditors' decision and confirmation of The Plan cannot presently be
determined. The consolidated financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 proceedings, and the reliance by Search
on the cash flows derived from the Fund Subsidiaries, such realization of
assets and liquidation of liabilities are subject to significant uncertainty.
Accordingly, no adjustment that may result from The Plan has been made to the
accompanying financial statements.
As discussed in Note 4 to the consoidated financial statements in 1994, the
Company elected early adoption of Statements of Financial Accounting Standards
Nos. 114 and 118, thus changing its method of accounting for loan impairments.
As discussed in Note 14 to the consolidated financial statements, the Company
is a defendant in a class action complaint alleging federal securities law
violations. The ultimate outcome of the litigation cannot be presently
determined. Accordingly, no provision for any liability that may result from
litigation or settlement has been made in the accompanying financial
statements.
/s/ BDO SEIDMAN, LLP
Certified Public Accountants
Dallas, Texas
November 15, 1995, except for Notes 2, 6 and 14
which are as of December 30, 1995
F-2
<PAGE> 29
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Search Capital Group, Inc.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Search Capital Group, Inc. and
Subsidiaries for the nine months ended September 30, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express our 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 results of operations and cash flows of Search
Capital Group, Inc. and Subsidiaries for the nine months ended September 30,
1993 in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information is presented for purposes of additional analysis of the
consolidated financial statements rather than to present the financial
position, results of operations, and cash flows of the individual companies.
The consolidating information has been subjected to the auditing procedures
applied in the audit of the consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
January 6, 1994
Dallas, Texas
F-3
<PAGE> 30
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidating Balance Sheets
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
-------------------------------------------- ------------------------------------------
(All numbers in thousands) Fund Subsidiaries
Search & & Eliminations Search & Fund
ASSETS Unrestricted (Debtors-in- Unrestricted Subsidiaries
- ------ Subsidiaries possession) Consolidated Subsidiaries & Eliminations Consolidated
------------ ----------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gross Contracts receivable $7,365 $59,312 $66,677 $35,255 $98,848 $134,103
Unearned interest (1,300) (11,806) (13,106) (6,785) (20,862) (27,647)
--------------------------------------------- -------------------------------------------
Net Contracts Receivable 6,065 47,506 53,571 28,470 77,986 106,456
Allowance for credit losses (2,862) (15,761) (18,623) (12,803) (31,830) (44,633)
Loan origination costs 591 3,163 3,754 518 2,221 2,739
Amortization of loan
origination costs (506) (2,431) (2,937) (331) (1,559) (1,890)
--------------------------------------------- -------------------------------------------
Net contract receivables - after
allowance for credit losses &
other costs 3,288 32,477 35,765 15,854 46,818 62,672
--------------------------------------------- -------------------------------------------
Cash and cash equivalents 442 - 442 939 - 939
Restricted cash - 8,105 8,105 - 3,586 3,586
Vehicles held for resale 93 508 601 185 506 691
Deferred note offering costs 42 9,011 9,053 42 8,813 8,855
Accumulated amortization (41) (5,950) (5,991) (39) (3,112) (3,151)
--------------------------------------------- -------------------------------------------
Deferred note offering cost,
net 1 3,061 3,062 3 5,701 5,704
--------------------------------------------- -------------------------------------------
Property and equipment 2,126 - 2,126 1,459 - 1,459
Accumulated depreciation (820) - (820) (397) - (397)
--------------------------------------------- -------------------------------------------
Property and equipment, net 1,306 - 1,306 1,062 - 1,062
--------------------------------------------- -------------------------------------------
Inter-company balance 646 (646) - 752 (752) -
Other assets, net 650 (9) 641 472 - 472
--------------------------------------------- -------------------------------------------
Total assets $6,426 $43,496 $49,922 $19,267 $55,859 $75,126
============================================= ===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Lines of Credit $1,058 $ - $ 1,058 $3,487 $ - $ 3,487
Notes Payable - - - - 70,768 70,768
Cash overdraft - - - 1,218 - 1,218
Accrued settlement 2,912 - 2,912 560 - 560
Accrued restructuring 214 - 214 - - -
Accounts payable and other 1,804 247 2,051 1,864 122 1,986
liabilities
Accrued interest 2 - 2 5 1,478 1,483
------------------------------------------- ----------------------------------------
5,990 247 6,237 7,134 72,368 79,502
------------------------------------------- ----------------------------------------
Prepetition notes payable and
accrued interest subject to
compromise - 69,320 69,320 - - -
STOCKHOLDERS' 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 26,766 - 26,766 27,006 - 27,006
Accumulated deficit (25,301) (26,071) (51,372) (14,969) (16,509) (31,478)
Treasury stock at cost,
3,026,389 and 2,526,389 shares,
respectively (1,150) - (1,150) (25) - (25)
------------------------------------------- ----------------------------------------
Total stockholders' equity
(capital deficit) 436 (26,071) (25,635) 12,133 (16,509) (4,376)
------------------------------------------- ----------------------------------------
Total liabilities and
stockholders' equity (capital
deficit) $6,426 $43,496 $49,922 $19,267 $55,859 $75,126
=========================================== ========================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 31
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidating Statements of Operations
<TABLE>
<CAPTION>
Year Ended September 30, 1995 Year Ended September 30, 1994
----------------------------------------- ----------------------------------------
Search & Fund Search & Fund
(All dollars, except per share, Unrestricted Subsidiaries Unrestricted Subsidiaries
in thousands) Subsidiaries & Eliminations Consolidated Subsidiaries & Eliminations Consolidated
(Debtors-in-
possession)
----------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue $2,949 $10,523 $13,472 $2,921 $11,133 $14,054
Interest expense 252 10,953 11,205 237 9,731 9,968
----------------------------------------- ----------------------------------------
Net interest income (loss) 2,697 (430) 2,267 2,684 1,402 4,086
Provision for credit losses 1,365 1,763 3,128 4,757 15,423 20,180
----------------------------------------- ----------------------------------------
Net interest income (loss) after
provision for credit losses 1,332 (2,193) (861) (2,073) (14,021) (16,094)
----------------------------------------- ----------------------------------------
General and administrative
expense 8,513 7,368 15,881 5,996 3,324 9,320
Settlement expense 2,837 - 2,837 560 - 560
Reorganization expense 315 - 315 - - -
----------------------------------------- ----------------------------------------
Operating and other expense 11,665 7,368 19,033 6,556 3,324 9,880
Other Income - - - 24 - 24
----------------------------------------- ----------------------------------------
Net income (loss) (10,333) (9,561) (19,894) (8,605) (17,345) (25,950)
----------------------------------------- ----------------------------------------
Preferred stock dividends (240) - (240) (240) - (240)
Net loss attributable to common
stockholders $(10,573) $(9,561) $(20,134) $(8,845) $(17,345) $(26,190)
========================================= ========================================
Net loss per share attributable
to common shareholders $(2.25) $(2.33)
============== ==============
Weighted average number of
common shares outstanding 8,967,000 11,258,000
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1993
(See Note 1)
Search & Fund
(All dollars, except per share, Unrestricted Subsidiaries
in thousands) Subsidiaries & Eliminations Consolidated
----------------------------------------------
<S> <C> <C> <C>
Interest revenue $433 $6,663 $7,096
Interest expense 196 3,977 4,173
----------------------------------------------
Net interest income (loss) 237 2,686 2,923
Provision for credit losses - - -
----------------------------------------------
Net interest income (loss) after
provision for credit losses 237 2,686 2,923
----------------------------------------------
General and administrative
expense 1,362 1,713 3,075
Settlement expense - - -
Reorganization expense - - -
----------------------------------------------
Operating and other expense 1,362 1,713 3,075
Other Income 24 - 24
----------------------------------------------
Net income (loss) (1,101) 973 (128)
----------------------------------------------
Preferred stock dividends (263) - (263)
----------------------------------------------
Net loss attributable to common
stockholders $(1,364) $973 $(391)
==============================================
Net loss per share attributable
to common shareholders $(0.06)
===============
Weighted average number of
common shares outstanding 6,131,000
===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 32
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
For the period from January 1, 1993 through September 30, 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
--------------- ------------ -------------- Additional
Paid-In
Shares Amount Shares Amount Shares Amount Capital
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 (See Note 1) 302,000 $3,000 6,983,664 $69,000 2,526,389 $(25,000) $6,312,000
Issuance of preferred shares for cash 98,000 1,000 - - - - 407,000
Issuance of Common shares for cash - - 300,000 4,000 - - 1,121,000
Issuance of common shares for minority
interest in subsidiary - - 4,397,006 44,000 - - (44,000)
Class B preferred stock dividends
($0.22/share) - - - - - - (87,000)
Senior preferred stock dividends
($0.60/share) - - - - - - (176,000)
Net loss - - - - - - -
------------------------------------------------------------------------------------
Balance, September 30, 1993 400,000 4,000 11,680,670 117,000 2,526,389 (25,000) 7,533,000
Conversion of ESOP to Equity - - 485,000 5,000 - - 1,178,000
------------------------------------------------------------------------------------
Balance, September 30, 1993 with ESOP 400,000 4,000 12,165,670 122,000 2,526,389 (25,000) 8,711,000
Issuance of common shares for cash - - 2,785,000 28,000 - - 19,379,000
ESOP Termination, net of expenses - - (306,152) (3,000) - - (874,000)
Stock Cancellation - - (2,946,988) (30,000) - - 30,000
Senior preferred stock dividends
($.60/share) - - - - - - (240,000)
Net loss - - - - - - -
------------------------------------------------------------------------------------
Balance, September 30, 1994 400,000 4,000 11,697,530 117,000 2,526,389 (25,000) 27,006,000
Stock Purchase at May 5, 1995 - - - - 500,000 (1,125,000) -
Senior preferred stock dividends
($.60/share) - - - - - - (240,000)
Net loss - - - - - - -
------------------------------------------------------------------------------------
Balance, September 30, 1995 400,000 $4,000 11,697,530 $117,000 3,026,389$(1,150,000) $26,766,000
============================================================================================================================
<CAPTION>
Total Equity/
ESOP Notes Accumulated (Capital
Receivable Deficit Deficit)
--------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1993 (See Note 1) $ - $(5,400,000) $959,000
Issuance of preferred shares for cash - - 408,000
Issuance of Common shares for cash - - 1,125,000
Issuance of common shares for minority - - -
interest in subsidiary
Class B preferred stock dividends - - (87,000)
($0.22/share)
Senior preferred stock dividends - - (176,000)
($0.60/share)
Net loss - (128,000) (128,000)
--------------------------------------------
Balance, September 30, 1993 (5,528,000) 2,101,000
Conversion of ESOP to Equity (1,073,000) - 110,000
--------------------------------------------
Balance, September 30, 1993 with ESOP (1,073,000) (5,528,000) 2,211,000
Issuance of common shares for cash - - 19,407,000
ESOP Termination, net of expenses 1,073,000 - 196,000
Stock Cancellation - - -
Senior preferred stock dividends - - (240,000)
($.60/share)
Net loss - (25,950,000) (25,950,000)
--------------------------------------------
Balance, September 30, 1994 - (31,478,000) (4,376,000)
Stock Purchase at May 5, 1995 - - (1,125,000)
Senior preferred stock dividends - - (240,000)
($.60/share)
Net loss - (19,894,000) (19,894,000)
--------------------------------------------
Balance, September 30, 1995 $ - $(51,372,000) ($25,635,000)
====================================================================================================
</TABLE>
Note - certain subsidiaries, as discussed in Note 2, are
debtors-in-possession.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 33
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(All numbers in thousands) Nine Months Ended
Twelve Months Ended Twelve Months Ended September 30, 1993
September 30, 1995 September 30, 1994 (See Note 1)
------------------- ------------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(19,894) $(25,950) $(128)
Adjustments to reconcile net loss to cash used
in operations:
Provision for credit losses 3,128 20,180 -
Amortization of deferred offering costs 2,840 2,158 762
Amortization of loan origination costs 1,047 1,728 162
Depreciation and amortization 384 217 76
Changes in assets and liabilities:
Decreases (increases) in other assets, net (86) 60 (85)
Increases in accounts payable and accrued
expense 1,840 3,488 640
-------------------- -------------------- -------------------
Cash provided (used in) operations (10,741) 1,881 1,427
-------------------- -------------------- -------------------
INVESTING ACTIVITIES:
Purchase of contract receivables, including
origination fees (24,830) (88,124) (29,002)
Principal payments on contract receivables
including proceeds from sales of vehicles 47,652 33,912 9,598
Purchases of property and equipment (711) (957) (75)
(Increases) decreases in restricted cash (4,519) 3,416 (2,665)
Increase in notes receivables - - (2)
Decrease in notes receivable, related party - 167 -
-------------------- -------------------- -------------------
Cash provided by (used in) investing 17,592 (51,586) (22,146)
-------------------- -------------------- -------------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line
of credit (2,429) 3,487 -
Notes payable proceeds 1,779 31,206 22,562
Notes payable repayments - prepetition (5,077) (1,000) -
Capital lease (repayments) financing (58) 308 -
Notes payable offering costs (198) (3,455) (2,861)
Proceeds from sale of preferred stock, net of
expenses - - 408
Proceeds from sale of stock, net of expense - 19,407 1,125
Purchase of treasury stock (1,125) - -
Change in ESOP Note Receivable - 196 (4)
Payment of dividends (240) (240) (263)
-------------------- -------------------- -------------------
Cash provided by (used in) financing
activities (7,348) 49,909 20,967
-------------------- -------------------- -------------------
CHANGE IN CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents (497) 204 248
Cash and cash equivalents - beginning 939 735 487
-------------------- -------------------- -------------------
Cash and cash equivalents - ending $442 $939 $735
==================== ==================== ===================
=====================================================================================================================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $9,272 $7,426 $2,931
==================== ==================== ===================
</TABLE>
Note - certain subsidiaries, as discussed in Note 2, are debtors-in-possession.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 34
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
(CERTAIN SUBSIDIARIES, AS DISCUSSED IN NOTE 2, ARE DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying consolidated financial statements include the accounts of
Search Capital Group, Inc. and its subsidiaries ("Search") as follows:
<TABLE>
<CAPTION>
Ownership
Subsidiary Percentage
---------- ----------
<S> <C>
Automobile Credit Holdings, Inc. ("ACHI") 100% (a, c)
Automobile Credit Acceptance Corp. ("ACAC") (100% owned by ACHI) 100% (a, c)
Consumer Dealer Autocredit Corporation ("CDAC") (100% owned by ACHI) 100% (a, b, c)
Eight Fund Subsidiaries and two previous Fund Subsidiaries
- debtors-in-possession 100%
Newsearch, Inc. 100% (b, c)
Search Funding Corp. ("SFC") 100% (c)
Automobile Wholesaling, Inc. 100% (b, c)
Search Automobile Leasing Corporation 100% (b, c)
</TABLE>
(a) Search had a 52% voting interest in these entities, resulting from
ownership of 50% of the common stock and 100% of the voting preferred stock of
ACHI, until June 30, 1993, at which time Search acquired the minority interest
in ACHI.
(b) Currently inactive.
(c) Unrestricted subsidiaries, which are not debtors-in-possession.
The consolidating statements separate Search and its unrestricted
subsidiaries from the Fund Subsidiaries which are non-recourse. The Fund
Subsidiaries are special purpose corporations which raised money through the
issuance of interest bearing notes for the purchase of contract receivables.
The Fund Subsidiaries, which are debtors-in-possession (see Note 2 for full
discussion of bankruptcy proceedings), have accounted for all transactions
related to the reorganization proceedings in accordance with Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," (SOP 90-7) issued by the American Institute of Certified
Public Accountants in November 1990.
Search and its subsidiaries are collectively referred to as Search. ACAC
is in business to raise capital to be used by the Fund Subsidiaries to
purchase, at a significant discount, retail installment sale contracts
generated by the sale of used automobiles and light trucks. ACAC also services
the contracts on behalf of the Fund Subsidiaries. All significant intercompany
transactions have been eliminated.
Certain reclassifications have been made to prior financial statements in
order to conform with the 1995 presentation. In 1993, Search changed its
fiscal year end to September 30.
Interest Income and Allowance for Credit Losses
Search's recognition of interest income and allowance for credit losses is
discussed in Note 2.
F-8
<PAGE> 35
Loan Origination Costs
Search performs substantially all of the functions associated with
origination of the contracts and capitalizes the related costs. The costs are
amortized by the interest method against income as an adjustment of yield.
Deferred Notes Payable Offering Costs
Costs directly related to notes payable offerings are capitalized and
amortized to expense by the interest method over the contractual terms of the
notes. Deferred offering costs are the commissions, printing, legal,
accounting and other expenditures incurred in issuing the notes to the
investors.
Vehicles Held for Resale
Vehicles held for resale represent estimated collateral value for cars in
Search's possession and are carried at the lower of cost or estimated net
realizable value.
Property and Equipment
Property and Equipment includes assets which are depreciated over 3 year
and 5 year lives and leasehold improvements which are amortized over the
remaining term of the lease.
Net Loss Per Share Attributable to Common Stockholders
The net loss per share attributable to common stockholders has been
computed based on the weighted average number of common shares outstanding
during each period. Common stock equivalents, Class B Convertible and Senior
Convertible Preferred Stock are included in the calculations except when their
effect would be antidilutive.
On July 20, 1994, certain stockholders voluntarily canceled 2,946,988
shares of common stock and warrants to purchase 390,654 shares of common
stock. Had these shares and warrants been canceled at the beginning of the
fiscal year ended September 30, 1994, the common shares outstanding and net
loss per share would have been $(2.95) on a weighted average number of common
shares and equivalents outstanding of 8,893,000.
Income Taxes
Statement of Financial Accounting Standards (SFAS) No. 109, issued by the
Financial Accounting Standards Board in February 1992, required a change in
accounting for income taxes. Search adopted SFAS No. 109 in 1993, and it did
not have a material effect on Search's financial statements.
Statement of Cash Flows
For purposes of reporting cash flows, Search considers short term cash
investments with original maturities of three months or less to be cash
equivalents. Cash held in a Fund Subsidiary is restricted to payment of
allowable expenses and investment in contract receivables until the note
balance of the Fund Subsidiary is paid.
F-9
<PAGE> 36
2. CHAPTER 11 BANKRUPTCY FILING OF THE FUND SUBSIDIARIES AND CONTRACTS
RECEIVABLE
As of September 30, 1995, the Fund Subsidiaries consist of six public and
two private corporations as follows:
Automobile Credit Fund 91-III, Inc. (ACF 91-III) - Private
Automobile Credit Finance, Inc. (ACF) - Public
Automobile Credit Partners, Inc. (ACP) - Private
Automobile Credit Finance 92-II, Inc. (ACF 92-II) - Public
Automobile Credit Finance III, Inc. (ACF III) - Public
Automobile Credit Finance IV, Inc. (ACF IV) - Public
Automobile Credit Finance V, Inc. (ACF V) - Public
Automobile Credit Finance VI, Inc. (ACF VI) - Public
Fund Subsidiaries' restricted cash balance of $8,105,000 at September 30,
1995, is held for reinvestment or in sinking funds to be applied to the
repayment of the Fund Subsidiaries' notes. Use of proceeds from the contracts
receivable is restricted to payment of certain allowed expenses and the
purchase of additional contracts.
At September 30, 1995, contractual maturities of contracts receivables for
Search and unrestricted subsidiaries were as follows:
<TABLE>
<CAPTION>
1996 1997 1998 Total
<S> <C> <C> <C> <C>
Future Payments Receivable $5,763,000 $1,591,000 $11,000 $7,365,000
Less Unearned Interest 1,115,000 184,000 1,000 1,300,000
---------- ---------- ------- ----------
$4,648,000 $1,407,000 $10,000 $6,065,000
========== ========== ======= ==========
</TABLE>
At September 30, 1995, contractual maturities of contracts receivable
for Fund Subsidiaries were as follows:
<TABLE>
<CAPTION>
1996 1997 1998 Total
<S> <C> <C> <C> <C>
Future Payments Receivable $36,905,000 $19,056,000 $3,351,000 $59,312,000
Less Unearned Interest 8,950,000 2,681,000 175,000 11,806,000
----------- ----------- ---------- -----------
$27,955,000 $16,375,000 $3,176,000 $47,506,000
=========== =========== ========== ===========
</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. In
addition, some contracts will default before maturity. The above tabulation,
therefore, is not to be regarded as a forecast of future cash collections.
Management has determined that the net cash flow from the Fund Subsidiaries
will not be sufficient to fully retire the related Fund Subsidiaries notes
payable as discussed in Note 5, and as part of the Plan of Reorganization
discussed below, the Fund Subsidiaries filed for protection under Chapter 11.
SUBSIDIARY BANKRUPTCY FILINGS
At Search's annual shareholders' meeting, held May 10, 1995, Search
announced a preliminary outline of a plan to convert the approximately $68
million debt owed by the Fund Subsidiaries into equity in the Parent Company
(Search). Search engaged the investment banking firm of Alex. Brown & Sons to
develop a formal detailed plan of debt-to-equity conversion. To facilitate the
development of this plan Search also formed an ad hoc
F-10
<PAGE> 37
committee of noteholders in all eight of its Fund Subsidiaries to review the
proposals of Alex. Brown & Sons and provide input and recommendations for the
plan.
In order to consummate the debt-to-equity conversion plan proposed by Alex.
Brown & Sons, it was necessary for each of the Fund Subsidiaries to file for
reorganization under Chapter 11 of the U. S. Bankruptcy Code. These cases have
been consolidated as one case for administration. Search and its unrestricted
subsidiaries have not sought protection under the Code but Search is a
proponent of a joint plan of reorganization of the Fund Subsidiaries ("Joint
Plan"). On August 25, 1995 an organizational meeting was held by the U. S.
Bankruptcy Trustee to select a committee (the "Committee") to represent the
noteholders ("Creditors") during the bankruptcy proceedings. On December 19,
1995, Search, the Fund Subsidiaries and the Committee agreed to a consensual
plan of reorganization (Joint Plan) which was approved by the Court on December
22, 1995.
Final effectiveness of the Joint Plan as to each Fund Subsidiary is
dependent on its confirmation by the Court, which will occur, if at all, after
a vote of the holders ("Noteholders") of outstanding notes issued by the Fund
Subsidiaries ("Notes"). There can be no assurance that the Joint Plan as to
each Fund Subsidiary will become effective or that the Joint Plan as to each
Fund Subsidiary will be confirmed on essentially the same terms as fully
described in the Disclosure Statement. The final terms of the Joint Plan, if
they differ in any material fashion from the proposed terms, will be contingent
on, among other things, approval by Search's Board of Directors and a vote of
Search's shareholders to approve the increase in the authorized number of
shares of Common Stock and Preferred Stock to levels adequate to meet the
requirements of the proposed Joint Plan.
If confirmed with respect to a particular Fund Subsidiary, the Joint Plan,
as currently proposed, provides that Noteholders voting to accept the Joint
Plan may choose one of two options (the "Plan Options"). Under the First Plan
Option (the "Search Equity Option"), the Noteholders would essentially exchange
their Notes for the issuance by Search of a combination of shares of Common
Stock, shares of a new series of Convertible Preferred Stock ("New Preferred
Stock") and dividends accrued at 9% on the New Preferred Stock from July 1,
1995 until the effective date of the Joint Plan. Under the Second Plan Option,
the Noteholders could choose the continued collection or the sale of the
collateral securing their Notes and the distribution to the Noteholders of the
resulting cash proceeds (the "Collateral Option"). As to any one Fund
Subsidiary, the selection by the Noteholders of either Plan Option would be
implemented on a Noteholder-by-Noteholder basis. Noteholders who vote against
the Joint Plan will not be entitled to select between the Search Equity Option
and the Collateral Option but will receive treatment under the Search Equity
Option. A pro rata share of the assets of the Fund Subsidiaries attributable
to Noteholders electing the Collateral Option will be transferred to the
trustee of a newly established trust to be held for the benefit of such
Noteholders. The trustee will collect the motor vehicle receivables held by
the trust and make regular distributions to the Noteholders. In the
alternative, the motor vehicle receivables will be sold by the trustee to the
highest bidder, assuming a sale price greater than the liquidation value of the
receivables. The pro-rata portion of the assets of the Fund Subsidiaries
attributable to Noteholders electing the Search Equity Option will be
transferred to Search. In addition to the New Preferred Stock, the Common Stock
and dividends, the Noteholders will receive with respect to the unsecured
portion of their claims, a pro-rata share of five year warrants to purchase an
aggregate of 5,000,000 shares of Common Stock (the "Warrants"). The exercise
price of the Warrants will be $2.00 during the first year and increase by $.25
per year during the term of the Warrants. All Warrants not exercised prior to
the expiration will be redeemed at a price of $.25 per Warrant.
The Joint Plan also contemplates establishment of a trust ("Litigation
Trust") for the benefit of holders of unsecured claims of Fund Subsidiaries for
which the Joint Plan is approved. The trust will be established with a total
funding of $350,000 prorated among the confirming Fund Subsidiaries. The
Litigation Trust will be authorized to pursue any claims and causes of action
of each Fund Subsidiary for which the Joint Plan is approved. The Litigation
Trust will automatically terminate if the Common Stock trades at an average
price of $2.50 per share for 30 consecutive trading days during the first year
following the effective date of the Joint Plan.
As a consequence of the consummation of the Joint Plan as to any Fund
Subsidiary, the former Noteholders of that Fund Subsidiary who elect the Search
Equity Option would ultimately own shares of Search's Common Stock and New
Preferred Stock. The Notes and the Noteholders constitute essentially all of
the indebtedness and creditors, respectively, of the Fund Subsidiaries. If the
Joint Plan is confirmed, as currently proposed, with respect to each of the
Fund Subsidiaries, an aggregate of approximately $69,320,000 of indebtedness of
the Fund Subsidiaries represented by the Notes would be canceled. The total
assets to be
F-11
<PAGE> 38
transferred to Search as opposed to a transfer to the Noteholders Trust will
depend on the relative amounts of indebtedness of Noteholders electing the
Search Equity Option or the Collateral Option.
The Joint Plan and Disclosure Statement describing the terms of the Joint
Plan, Search, the Fund Subsidiaries, the terms of the New Preferred Stock and
the rights of the Noteholders and other claimholders are subject to review and
approval by the Court prior to being mailed to the Noteholders. On December
22, 1995, the Court approved the Joint Plan and Disclosure Statement for
mailing to the Noteholders and other claimholders, together with ballots for
registering their votes for acceptance or rejection of the Joint Plan. The
Noteholders of each Fund Subsidiary will be entitled to vote for or against the
Joint Plan, with respect to claims represented by their Notes, as a separate
creditor class. The Disclosure Statement was mailed to Noteholders on December
29 & 30, 1995, the final date for receipt of ballots on the Plan is January 29,
1996.
The primary adverse effect of the confirmation of the Joint Plan on
existing shareholders would be the dilution of their voting power from issuance
of the shares of the New Preferred Stock, Common Stock and Common Stock
equivalents. The shares of New Preferred Stock would be convertible into
30,063,296 shares of Common Stock. Search's existing shareholders would own
none of the newly issued shares of New Preferred Stock, and the Noteholders
would own none of the outstanding shares of the 12% Preferred Stock. In
addition, the annual dividend requirements on the shares of New Preferred Stock
would be substantially less than the aggregate debt service requirements of the
Notes and would be reduced or disappear upon any conversion of the New
Preferred Stock into Common Stock.
The accompanying financial statements include the cost associated with the
Company's Fund Subsidiaries bankruptcy proceedings and these costs have been
separately disclosed in the statement of operations as a reorganization
expense.
The Fund Subsidiaries, which are debtors in possession, have accounted for
all transactions related to the reorganization proceedings in accordance with
SOP 90-7. Accordingly, all prepetition liabilities of the Fund Subsidiaries
that are expected to be impaired under the joint plan of reorganization
ultimately approved by the Bankruptcy Court are reported separately in the
consolidating balance sheet as liabilities subject to compromise (see Note 5
for a description of such liabilities). Expenses, primarily professional fees,
resulting from the reorganization proceedings, are reported separately in the
consolidating statement of operations as reorganization expense. Contractual
interest obligations which are relieved from payment as a result of the Chapter
11 proceedings are not accrued.
3. ACQUISITIONS
On June 30, 1993, Search acquired the remaining 50% of ACHI's common stock
in exchange for 4,397,006 newly issued restricted common shares and the shares
were recorded at the book value of the minority interest acquired, which
approximated management's estimate of market value. These transactions were
accounted for as a purchase and the operations of CDAC have been consolidated
with those of Search beginning August 31, 1992.
In October 1993 Search purchased 100% of the common stock of Automobile
Credit Partners, Inc. (ACP), a company owned by an officer and director and
principal stockholder of Search. ACP is engaged in the same business and has
been funded in the same manner as the Fund Subsidiaries, and its contracts are
serviced by CDAC. The purchase price was $17,000. This transaction has been
accounted for as a reorganization of entities under common control which is
similar to the pooling of interests method. Accordingly, all assets and
liabilities are recorded at their historical cost and the results of operations
and cash flows have been included from the acquisition date, the date on which
Search had common control.
F-12
<PAGE> 39
4. CHANGE IN ACCOUNTING PRINCIPLE AND ALLOWANCE FOR CREDIT LOSSES
Through the third quarter of fiscal 1994, Search recorded interest revenue
and allowance for credit losses based on AICPA Practice Bulletin 6,
Amortization of Discounts on Certain Acquired Loans ("PB6"). Under PB6, Search
recorded an allowance for credit losses upon acquisition of the installment
loans in an amount equal to the difference between the contractual payments due
and the estimated undiscounted future cash collections. The difference between
the undiscounted future cash collections and the acquisition amount of the
installment contracts was amortized to interest revenue over the period in
which payments on the installment contracts were expected to be collected.
Under PB6, if the estimate of the total probable collections was increased or
decreased but still greater than the sum of the acquisition amount less
collections plus the discount amortized to date, the remaining amount of the
discount to be amortized to interest income was adjusted and amortized over the
remaining life of the loans. Accordingly, changes in estimates of future cash
collections were recognized through prospective yield adjustments.
In the fourth quarter of fiscal 1994, Search elected early adoption of
Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114"),
which address the accounting by creditors for impairment of a loan and related
income recognition and disclosures. In accordance with SFAS 114, contracts
receivable are analyzed on a loan-by-loan basis. Search evaluates the
impairment of loans based on contractual delinquency, as well as other factors
specific to the notes receivable. When a concern exists as to the
collectibility of an account, interest income ceases to be recognized. The
notes receivable, once impaired, are collateral dependent; that is once a note
receivable is in default Search looks to the underlying collateral for
repayment of the note receivable. Therefore at impairment Search records an
allowance for credit losses to record the note receivable at the fair value of
the collateral. If the measure of the impaired note receivable is less than the
net recorded investment in the note receivable, Search recognizes an impairment
by creating an additional allowance for credit losses in excess of the initial
allowance provided, with a corresponding charge to provision for credit losses.
The provision for credit losses is adjusted for any differences between the
final net proceeds of an impaired note receivable and its net carrying value.
Search records contract purchases at cost. Contractual finance charges are
recorded as unearned interest and amortized to interest income using the
interest method. As noted above amortization of interest income ceases upon
impairment. An initial allowance for credit losses is recorded at the
acquisition of a note receivable equal to the unearned discount, the difference
between the amount financed and the acquisition cost.
The recorded investment and related allowance for credit losses, excluding
net loan origination costs, are summarized below on a consolidated basis:
<TABLE>
<CAPTION>
As of September 30, 1995
--------------------------------------------------------------------
(Dollars in thousands) Number of Total
Active Unpaid Unearned Net
Receivables Installments Interest Receivables
----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Impaired contracts 2,323 $12,919 $ 1,644 $11,275
Unimpaired contracts 9,805 53,758 11,462 42,296
----------- ------------ --------- -----------
Total 12,128 $66,677 $13,106 $53,571
=========== ============ ========= ===========
Allowance for credit losses (18,623)
-----------
Contract receivables, net of allowance
for credit losses $34,948
===========
</TABLE>
F-13
<PAGE> 40
<TABLE>
<CAPTION>
As of September 30, 1994
----------------------------------------------------------------------
(Dollars in thousands) Number of Total
Active Unpaid Unearned Net
Receivables Installments Interest Receivables
----------- ------------- -------- -----------
<S> <C> <C> <C> <C>
Impaired contracts 4,269 $ 29,986 $ 4,968 $ 25,018
Unimpaired contracts 14,726 104,117 22,679 81,438
----------- ------------ -------- -----------
Total 18,995 $134,103 $27,647 $106,456
=========== ============ ======== ===========
Allowance for credit losses (44,633)
-----------
Contract receivables, net of allowance
for credit losses $ 61,823
===========
</TABLE>
The change in the allowance for credit losses is summarized as follows on a
consolidated basis:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Balance, beginning of period $44,633 $4,656
Allowance recorded upon acquisition of loans 9,613 37,727
Increase in allowance for credit losses 3,169 20,180
Loans charged off against allowance (38,792) (17,930)
-------- -------
Balance, end of period $18,623 $44,633
======= ======
</TABLE>
Prior to 1994, uncollectible receivables were charged against the allowance
for credit losses recorded when receivables were initially purchased. Under
PB6, reductions in the amount of estimated future cash collections on contract
receivables were charged against income only if the estimated future collection
was less than Search's net investment in the receivables plus discount
amortized to interest income to date.
In accordance with the adoption of SFAS 114, the portion of the increase in
allowance for credit losses attributable to prior years, if any, was included
in current operations of the year of adoption (fiscal 1994) and no cumulative
effect is shown on the statement of operations.
Most of Search'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. Search and the Trustee for the Fund Subsidiaries hold vehicle
titles as collateral for all contracts receivable until such contracts are paid
in full.
F-14
<PAGE> 41
5. PREPETITION NOTES PAYABLE AND ACCRUED INTEREST SUBJECT TO COMPROMISE
Notes payable of the Fund Subsidiaries are non-recourse to Search and its
affiliated non-fund subsidiaries. Related terms and interest rates for the
Fund Subsidiaries, all of which are in bankruptcy and default (See Note 4),
consisted of the following:
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Notes payable by ACF 91-III, bearing interest at 21%, require monthly
interest payments at 15% through March 31, 1995, at which time principal
and the remaining deferred interest accrued at 6% was due - in default at $590,000 $1,000,000
maturity date.
Notes payable by ACP, bearing interest at 21%, require monthly interest
payments of 15% through April 30, 1995 at which time principal and the
remaining deferred interest accrued at 6% was due - in default at 610,000 1,000,000
maturity date.
Notes payable by ACF, bearing interest at 18%, require monthly interest
payments at 15% through December 31, 1994, at which time principal and
the remaining deferred interest accrued at 3% was due - in default at 1,506,000 5,000,000
maturity date.
Notes payable by ACF 92-II, bearing interest at 15% due monthly, require
payment of principal in full on December 31, 1995. 10,000,000 10,000,000
Notes payable by ACF III, bearing interest at 15% due monthly, require
payment of principal in full on April 30, 1996. 15,000,000 15,000,000
Notes payable by ACF IV, bearing interest at 3% until October 15, 1993
and 14% thereafter due monthly, require payment of principal quarterly
from September 30, 1995 to December 31, 1996. 10,000,000 10,000,000
Notes payable by ACF V, bearing interest at 12% due monthly, require
payment of principal quarterly from October 1, 1996 to
December 31, 1997. 19,872,000 19,872,000
Notes payable by ACF VI, bearing interest at 12% due monthly, require
payment of principal quarterly from July 1, 1997 to June 30, 1998. 10,675,000 8,896,000
------------------ ------------------
68,253,000 70,768,000
Accrued Interest 1,067,000 1,478,000
------------------ ------------------
$69,320,000 $72,246,000
================== ==================
</TABLE>
Contracts receivable owned by each Fund Subsidiary are pledged as
collateral for the respective notes payable of each entity.
As of their maturity ACF, ACF 91-III and ACP stopped accruing interest on
the remaining unpaid principal. As these Fund Subsidiaries are in default, it
is currently management's position that the accrual of interest is not
warranted since each Fund Subsidiary will not have sufficient assets to fully
retire the principal portion of the notes.
The August 14, 1995 bankruptcy filing of the individual Fund Subsidiaries
was an event of default for all of the Fund Subsidiaries under the terms of
their indenture agreements. In accordance with SOP 90-7, contractual interest
obligations which are relieved from payment as a result of the Chapter 11
proceedings are not accrued. Contractual interest on the above obligations
amounts to $12,453,000 which is $1,500,000 in excess of reported interest
expense. Management has presented the noteholders a proposal for a
debt-to-equity exchange more fully described in Note 2 and in the Joint
Disclosure Statement filed with the Bankruptcy Court.
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. ACF's
insufficient cash balance constituted a default under its indenture agreement
with Search and Texas Commerce Bank National Association ("Trustee"). As of
September 30, 1995, ACF has $346,000 in remaining principal and interest on
receivables and $1,000 in repossessed vehicles.
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. ACF 91-III's insufficient
cash balance constituted a default under its indenture agreement with the
Trustee. As of September 30, 1995, ACF 91-III has $216,000 in remaining
principal and interest on contract receivables.
F-15
<PAGE> 42
On April 30, 1995 maturity date for ACP, there was $525,000 in cash to be
applied to obligations of $1,180,000. ACP's insufficient cash balance
constituted a default under its indenture agreement with the Trustee. At
September 30, 1995, ACP has $180,000 in remaining principal and interest on
contracts receivable and $2,000 in repossessed vehicles.
The filing of bankruptcy created a default in each Fund subsidiary not
currently in default at August 14, 1995. The U.S. Bankruptcy Court has granted
the continued use of cash collateral. Under the cash collateral motions, the
Fund subsidiaries continue to pay service and management fee revenue to Search.
Servicing and management fee revenue for Search was $3,064,000, $2,866,000 and
$1,010,000 for the fiscal years ended September 30, 1995 and 1994, and nine
months ended September 30, 1993, respectively, and is included as a reduction
of general administrative expenses in the accounts of Search.
As of December 22, 1995, the consensual joint plan of reorganization was
approved by the U.S. Bankruptcy Court for distribution to noteholders.
Confirmation of the joint plan will be sought from the court after tallying of
the noteholders votes. (See note 4 for further discussion of the Joint Plan of
Reorganization).
6. LINES OF CREDIT
On June 17, 1994, 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 Search.
In January 1995, SFC signed an agreement with GECC to revise the existing
restrictive covenants and to eliminate any future advances under the line of
credit. On March 22, 1995, GECC advised Search that it and SFC were in default
of various provisions of the original loan agreement and the January 1995
agreement. As a result of these defaults, GECC declared the outstanding
balance, as of that date, due and payable. Search, SFC and GECC established a
pay-out plan which requires a minimum payment of $500,000 per quarter. SFC is
required to remit cash receipts of all pledged contracts to GECC until the line
of credit is repaid. As of September 30, 1995, the line had a balance of
$1,058,000. Interest is accrued daily at the average of the one month London
Interbank Offered Rates ("LIBOR") for the preceding month plus 5.1% (10.99% at
September 30, 1995). SFC recorded $253,000 interest expense to GECC during 1995
and $85,000 in 1994.
On November 30, 1995, Search and certain of its non-fund subsidiaries and
affiliates entered into a funding agreement ("Funding Agreement") with Hall
Financial Group, Inc. ("HFG"). Under the terms of the Funding Agreement, HFG
agreed to loan to Search up to $3,000,000, obtained Warrants to purchase up to
3,000,000 shares of Search Common Stock for $2.00 per share, and agreed,
subject to certain limitations and restrictions, to a plan funding commitment
under which HFG would loan the Fund Subsidiaries funds for a cash-out option
under a plan to be proposed by Search at an amount equal to 80% of Present
Value of the Notes.
The loan is comprised of three notes. Note I is in the amount of
$1,284,487. Note II is in the amount of $715,513. Note III is in the amount
of $1,000,000. Notes I and II bear interest at the rate of 12% and mature on
the earlier of the Effective Date or 90 days after their execution unless
extended for 60 days by Search in which case the interest rate increased to
14%. Note III bears interest at the rate of 6% and matures in one year. Note
I has been fully funded, Note II will only be funded if necessary to payoff the
GECC Line of Credit, and Note III has been fully funded. Notes I and III are
convertible into Search Common Stock up to a total of 2,500,000 shares
including any shares converted in payment of Note III. Note III can be repaid
entirely with Search Common Stock.
The Notes are secured by approximately $5,900,000 in auto receivables owned
by Search and Search Funding Corp., 2,250,000 shares of Search Common Stock
currently held as Treasury Stock, and 100% of the stock of Search Funding
Corp., Automobile Credit Acceptance Corp., Automobile Credit Holdings, Inc.,
and Newsearch, Inc. HFG is entitled to elect one director to Search's board
upon conversion of Note III and one additional director upon purchase of
$1,000,000 in Net Present Value of Notes under the plan funding commitment.
F-16
<PAGE> 43
The Funding Agreement originally required HFG to make certain loans to the
Bankrupt Subsidiaries upon completion of the Joint Plan. Search and the
Committee have determined not to include any funding of the Bankrupt
Subsidiaries in the latest version of the Joint Plan. Search and HFG have
agreed to an amendment to the Funding Agreement that provides HFG the option to
purchase, in its sole discretion, Common Stock, New Preferred Stock, and
Warrants for a purchase price equal to 80% of the Present Value attributable to
such securities for purpose of their issuance to Noteholders under the Joint
Plan, less an amount equal to the accrued dividends attributable to the New
Preferred Stock that is received by HFG. HFG would be entitled to purchase
securities in an amount up to a maximum of $6,000,000 in Present Value, which
the Company estimates would represent a purchase price payable by HFG of
approximately $4,426,000. The proceeds of any shares so purchased will be paid
to Search. Under the Funding Agreement, as amended, Search will give HFG the
right to elect another director if HFG purchases $1,000,000 Present Value of
such securities. HFG will also have registration rights for such securities
similar to those provided by the HFG Warrants.
7. EMPLOYEE STOCK OWNERSHIP PLAN
Effective August 1, 1994, the Board of Directors terminated the employee
stock ownership plan (ESOP). As part of the termination, Search reacquired
from the ESOP 306,152 shares of stock at $3.50 per share in exchange for the
balance of the note receivable plus accrued interest, totaling $1,183,000. The
reacquired shares were canceled on September 29, 1994. The remaining 178,848
shares are allocated to participating employees.
8. STOCKHOLDERS' EQUITY
Preferred Stock
Search is authorized to issue a total of 10,000,000 shares of preferred
stock in series with rights and preferences as designated by the board of
directors. The Preferred shares have voting rights and are convertible into
one share of common stock for each share of preferred stock at the option of
the shareholders. The shares carry a cumulative annual dividend of $0.60 per
share, payable quarterly. Search may convert the shares to common stock or may
redeem the shares at $5.00 per share upon the occurrence of certain events
defined in the terms of the preferred stock designation.
In June 1993, Search designated a new series of preferred stock as 8%
Voting Convertible Preferred Stock. No shares are issued or outstanding as of
September 30, 1994 and 1995.
In January 1993, Search completed a private placement of $2,000,000 of
Senior Preferred Stock at a price of $5.00 per share. As a result of this
offering, Search obtained net proceeds of $1,755,000, after deduction of
$150,000 of brokers' commissions and $95,000 of expenses related to the
offering. In addition, Search issued warrants to purchase up to 50,000 shares
of Common Stock at $0.375 per share and 100,000 shares of Common Stock at $2.50
per share to certain broker/dealers who assisted in the sale of the Senior
Preferred Stock and certain offerings by Fund Subsidiaries.
Common Stock
During June through August 1993, Search sold 300,000 shares of Search's
restricted common stock in a private placement for $1,200,000. Offering costs
of $75,000 were recorded as a reduction of the proceeds.
In December 1993, Search sold in a public offering 2,760,000 shares of its
common stock for $22,080,000. Offering costs of $2,673,000 were incurred with
the sale. In connection with the offering, Search granted the underwriter
warrants to purchase 240,000 shares of common stock at $9.60 per share.
In February 1994, 25,000 warrants were exercised at a price of $0.375 per
share.
F-17
<PAGE> 44
Common Stock Warrants and Employee Stock Options
On August 1, 1994, the Board of Directors adopted, subject to stockholder
approval, the 1994 Employee Stock Option Plan (the "Stock Plan"). The Stock
Plan was approved by Search's stockholders at their annual meeting held in May
1995. Employees of Search or directors of subsidiaries are eligible to
participate in the Stock Plan. As of September 30, 1995, approximately 138
persons were eligible to participate. The Stock Plan expires on July 31, 2004,
although any option outstanding on such date will remain outstanding until it
either has expired or has been fully exercised. The Stock Plan is administered
by the Compensation Committee of the Board. Options granted under the Stock
Plan are not transferable otherwise than by will or by the laws of descent and
distribution. Options are forfeited immediately after an optionee's employment
is terminated for cause or 30 days after the optionee's mental or physical
disability. The options usually vest over a three year period. The Stock Plan
provides that 30 days prior to major corporate events such as, among other
things, certain changes in control, mergers or sales of substantially all the
assets of Search, each option will immediately become exercisable in full. A
total of 1,750,000 shares of Common Stock has been reserved for sale upon
exercise of options granted under the Stock Plan. As of September 30, 1995,
there were 943,500 outstanding options. Certain options issued during the year
ended September 30, 1995, were repriced to reflect the current market prices
at that time.
In October 1994, 100,000 options were issued at $1.4375 to an officer of
Search and in January 1995, 500,000 and 25,000 were issued at $1.625 and $1.875
respectively to two officers of Search. In January an additional 285,500
options at $1.4375 were issued to employees. All were issued at the market
price existing at the time.
In August and September 1994, an additional 19,000 and 10,000 options at
$4.25 and $3.75 (existing market value) respectively were issued to employees.
In August 1994, 2 officers and 5 employees agreed, subject to shareholder
approval of the Option Plan, to the cancellation of their warrants in exchange
for options under the Option Plan at the then current market price of $4.25.
The canceled warrants consisted of 220,000 at $3.00 per share issued in April
1993, 70,000 at $8.75 per share issued in December 1993, and 35,000 at $14.75
per share issued in June 1994.
In August 1993, Search issued warrants to purchase 60,000 shares of common
stock at $5.50 per share to broker/dealers who assisted in the private
placement of common stock.
9. STOCK PURCHASE AGREEMENT
On May 5, 1995, Search purchased from a director of Search 500,000 shares
of Search's $.01 par value common stock for $2.25 per share. The purchase was
recorded at cost and is reflected as treasury stock. Simultaneously to the
purchase, the director resigned from the Board and gave Search an irrevocable
proxy expiring May 5, 1997 to vote the remaining 800,000 shares of stock held
by a trust controlled by the former director.
10. RELATED PARTY TRANSACTIONS
During 1994 and 1993, Search paid or accrued approximately $156,000 and
$113,000, respectively for fees related to the notes payable offerings
described in Notes 4 and 5 to an individual who owned a minority interest in
ACAC and two of the Fund Subsidiaries until June 1992 and was a director of
Search for a period of time in 1992 and 1993.
F-18
<PAGE> 45
In November 1993, Search paid SBM Trust and an officer of Search $131,000
and $32,750, respectively, in settlement of interest and principal on profit
participation notes relating to Search's purchase of Automobile Credit
Acceptance Corporation in 1991.
During the year ended September 30, 1994, Search engaged Brean Murray,
Foster Securities Inc. ("BMFS") to serve as underwriter for Search's public
offering of Common Stock, and co-managing broker-dealer, together with another
independent broker-dealer, for the public offering of asset-backed debt
securities offered in 1994, by Search's subsidiaries, Automobile Credit Finance
V, Inc. and Automobile Credit Finance VI, Inc. The Company paid BMFS
$1,987,000 in connection with the Common Stock offering and $766,000 in
connection with the public offerings of asset-backed debt securities. Also in
connection with its services as underwriter of the Common Stock offering BMFS
was issued warrants to purchase 240,000 shares of Common Stock exercisable for
a period of 5 years at a price of $9.60 per share. BMFS, simultaneously with
its receipt of the warrants, assigned warrants to purchase 113,558 shares to
Mr. A. Brean Murray. Mr. Murray is a director of Search and Chairman of BMFS.
Upon confirmation of the Joint Plan discussed in Note 2, Brean Murray, Foster
Securities, Inc. will receive a $200,000 cash success fee from Search.
Additional related party transactions are described in Notes 3, 7 and 8.
11. INCOME TAXES
Search Capital Group, Inc. and Subsidiaries file a consolidated income tax
return.
The components of Search's net deferred tax asset as of September 30, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
------------------- -------------------
<S> <C> <C>
Deferred tax asset:
Allowance for credit losses & inventory
reserve $800,000 $1,500,000
Net operating loss carryforwards 15,400,000 8,900,000
Other tax credit carryforwards 90,000 90,000
Valuation allowance (16,290,000) (10,490,000)
------------------- -------------------
Total deferred tax asset -- --
------------------- -------------------
</TABLE>
At September 30, 1995, the Search consolidated tax return group has a net
operating loss carryforward for Federal income tax purposes of approximately
$44,000,000 which will expire, if unused, in the following years:
<TABLE>
<CAPTION>
Years of Expiration Amount
------------------- -----------
<S> <C>
1997 to 2008 $5,400,000
2009 21,000,000
2010 17,600,000
-----------
Total $44,000,000
===========
</TABLE>
Following the acquisition of the minority interest in ACHI on June 30, 1993
(see Note 3), the Search tax consolidated group had a change in ownership as
defined under Section 382 of the Internal Revenue Code, which will limit the
utilization of the net operating loss to approximately $1,000,000 per year on
those NOL losses incurred prior to 1994.
The proposed debt to equity conversion plan as outlined in the Bankruptcy
Plan of Reorganization will have significant tax consequences when the plan in
consummated. Debt Discharge Income of approximately $12,500,000 will be
recognized for income tax purposes. This debt to equity conversion will result
in an ownership change as defined under Section 382 of the Internal Revenue
Code. This ownership change will result in a further limit on the annual the
net operating loss carryforward.
F-19
<PAGE> 46
12. COMMITMENTS
On October 28, 1992, ACAC entered into a sixty month lease for office
facilities with a basic monthly rental obligation of $13,450. This lease was
modified in 1994 to expand the office facilities from approximately 16,000
square feet to approximately 23,000 square feet at a revised monthly rental
obligation of $22,057. With six months notice ACAC may cancel the lease at the
end of the thirty-sixth month with the payment of the unamortized up-front
costs associated with the premises, as defined in the lease agreement,
otherwise the lease is non-cancelable. Rental expense for 1995, 1994, and 1993
was approximately $284,000, $212,000 and $117,000, respectively.
During the year, the Company opened four remote collection facilities,
these leases expire through 1999. The lease expense for fiscal 1995 total
approximately $20,000.
Search signed three car lot leases at the beginning of fiscal 1995. The
leases were in Dallas, TX and a suburb of Atlanta, GA and had terms of 12 to 24
months. These lots were used to process and sell repossessed vehicles directly
to consumers. During the fiscal year ended September 30, 1995, Search closed
the Georgia lot and one of the lots in Dallas. Subsequent to year-end, Search
adopted a formal plan to close the remaining car lot and related make-ready
facility by January 1, 1996.
Operating lease commitments by Search are as follows:
<TABLE>
<CAPTION>
Year Ending September 30,
---------------------------------------------------------------
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Office leases $323,000 $323,000 $96,000 $18,000
Car lot leases 77,000 - - -
Office equipment leases 104,000 69,000 24,000 -
--------- --------- ---------- ---------
Total lease commitments $504,000 $392,000 $120,000 $18,000
========= ========= ========== =========
</TABLE>
In addition to the operating leases, Search has one capitalized lease with
payments of $81,000 per year through 1998 and $67,000 in 1999.
13. LIQUIDITY
Search's management is currently pursuing several options for additional
capital for expansion of Search's current dealer network and additional product
developments including automobile loans to customers with a higher credit
rating. It is anticipated, upon conversion of debt-to-equity (see Note 4),
that Search's liquidity concerns will be eased over the next 12 to 24 months.
However, should the plans of reorganization be delayed or should the Bankruptcy
Court decide to discontinue or reduce the servicing and management fees
currently allowed under collateral orders granted by the Bankruptcy Court and
paid to Search, Search could encounter significant liquidity problems that
would require obtaining an additional line of credit or infusion of equity, or
significantly reducing expenses and restructuring Search's current operation.
Management has explored the option of obtaining an additional infusion of
equity investment. The effect of such an investment currently cannot be
determined. It is anticipated, however, that such an investment would
significantly dilute current stockholders' equity.
14. LEGAL PROCEEDINGS
On August 14, 1995, Automobile Credit Finance, Inc., Automobile Credit
Finance 1991-III, Inc., Automobile Credit Finance 1992-II, Inc., Automobile
Credit Finance III, Inc., Automobile Credit Finance IV, Inc., Automobile Credit
Finance V, Inc., Automobile Credit Finance VI, Inc. and Automobile Credit
Partners, Inc., which are wholly-owned subsidiaries of Search, each filed, on
August 14, 1995, a petition in the U.S. Bankruptcy Court in the Northern
District of Texas, Dallas Division ("Court"), seeking protection under Chapter
11 of the U.S. Bankruptcy Code ("Code"). These cases have been consolidated as
one case for administration (Case No. 395-34981-RCM-11) (See Note 4 for
additional discussion).
F-20
<PAGE> 47
On July 7, 1994, a class action civil lawsuit was filed against Search,
certain of its officers and directors, one of its former accounting firms and
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 (the
"Class Action Suit").
The Class Action Suit was filed on behalf of all purchasers of Search's
Common Stock during the period beginning December 10, 1993 and ending through
July 5, 1994, which was the date that Search made a public announcement
regarding lower earnings. The Class Action Suit contends that Search made
misstatements in its registration statements concerning Search's computerized
system, accounting methodologies used by Search, collectibility of its
receivables and repossession rates of autos that secured its receivables. The
plaintiffs also complained of allegedly false public filings, press releases
and reports issued during 1994. The plaintiffs sought damages, rescission ,
punitive damages, pre-judgment interest, fees, costs, equitable relief and/or
injunctive relief 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 (the "Settlement") of the Class Action Suit. This
Settlement was initially filed with the court on August 4, 1995, and an amended
version of the Settlement was filed on November 13, 1995. No objections to the
Settlement have been received to date. The Settlement provides for the payment
by Search of $287,500 upon approval of the Settlement ($100,000 has already
been deposited in an escrow account maintained by the plaintiff's lawyers), and
the issuance by Search of its Common Stock with a value of $2,612,500 or cash.
The settlement provides that the number of shares of Common Stock 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.
Final effectiveness of the Settlement is conditioned upon court
certification of the class of plaintiffs for the Settlement and court approval
of the fairness of the Settlement. Search believes that the Settlement is fair
and equitable to the class of plaintiffs and will ultimately be approved. A
final, non-appealable order approving the Settlement is a condition precedent
to the implementation of the Search Equity Option under the Joint Plan.
In December 1993, Automobile Credit Acceptance Corp. ("ACAC"), a subsidiary
of Search, was joined as a defendant in a pending civil action filed in the
153rd Judicial District Court, Tarrant County, Texas, styled Autostar
Solutions, Inc. v. Tim Clothier and Automobile Credit Acceptance Corporation,
Cause No. 153-144940. The plaintiff in this action alleges the existence of a
partnership between the plaintiff and another defendant and seeks damages,
actual and exemplary, and an injunction for alleged conversion and
misappropriation of certain property, including computer programs, allegedly
owned by Autostar. In the petition, the plaintiff alleges that ACAC wrongfully
assisted its co- defendant and tortiously interfered with the plaintiff's
contracts and business and has claimed, as damages, $250,000. ACAC believes
that these allegations are without merit because it did not interfere with the
plaintiff's contracts and business and did not obtain in an improper manner any
property belonging, at least in part, to Autostar. ACAC has filed a general
denial and has pending a motion for partial summary judgment. Discovery in
this case is ongoing and no opinion can be given as to the final outcome of the
lawsuit.
Search received notice from plaintiffs that a suit had been filed on
December 21, 1995 against Search, certain of its former officers and
directors, and certain underwriters of three of the Fund Subsidiaries. The
case is styled Janice and Warren Bowe, et. al. vs. Search Capital Group, Inc.,
et. al., Cause No. 1:95CV 649GR and was filed in the Federal District Court for
the Southern District of Mississippi. The plaintiffs allege violations of the
securities laws by the defendants and seeks unspecified damages, rescission,
punitive damages and other relief. The plaintiffs also seek establishment of a
class of plaintiffs consisting of all persons who have purchased Notes issued
by three of the Fund Subsidiaries. The Company has been unable to evaluate the
merit of these claims.
F-21
<PAGE> 48
There are presently no other legal proceedings, threatened or pending,
relating to Search which would, in the opinion of management, have a material
impact on earnings or the financial condition of Search.
F-22
<PAGE> 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item is included in the Company's
definitive Proxy Statement pursuant to Reg. 14A in connection with the
Registrant's 1996 Annual Meeting of Stockholders and is incorporated herein by
reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's
definitive Proxy Statement pursuant to Reg. 14A in connection with the
Registrant's 1996 Annual Meeting of Stockholders and is incorporated herein by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's
definitive Proxy Statement pursuant to Reg. 14A in connection with the
Registrant's 1996 Annual Meeting of Stockholders and is incorporated herein by
reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Company's
definitive Proxy Statement pursuant to Reg. 14A in connection with the
Registrant's 1996 Annual Meeting of Stockholders and is incorporated herein by
reference thereto.
26
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Financial Statements and Schedules
The financial statements listed in the Index to Financial Statements
are filed as part of this annual report. No financial statement
schedules are required to be filed as part of this annual report
because all information otherwise included in schedules has been
incorporated into the Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Search during the quarter ended
September 30, 1995.
27
<PAGE> 51
(c) Exhibits
Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation, as amended
(incorporated by reference from Exhibit 3.1 to the Form
S-1 Registration Statement of Search Capital Group, Inc.
(File No. 33- 68524) (the "Search Registration
Statement")).
3.2 Bylaws, as amended (incorporated by reference from
Exhibit 3.2 to the Search Registration Statement).
4.1 Indenture dated as of October 1, 1991 between Automobile
Credit Finance, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the 18% Automobile Contract Notes
due December 31, 1994 of Automobile Credit Finance, Inc.
(incorporated by reference to Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance, Inc.
(File No. 33-41872)).
4.2 Indenture dated as of August 1, 1992 between Automobile
Credit Finance 1992-II, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the 15% Automobile Contract Notes
due December 31, 1995 of Automobile Credit Finance
1992-II, Inc. (incorporated by reference from Exhibit 4.1
to Form S-1 Registration Statement of Automobile Credit
Finance 1992-II, Inc. (File No. 33-48300)).
4.3 Indenture dated as of December 1, 1992 between Automobile
Credit Finance III, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the 15% Secured Notes due April
30, 1996 of Automobile Credit Finance III, Inc.
(incorporated by reference from Exhibit 4.1 to the Form
S-1 Registration Statement of Automobile Credit Finance
III, Inc. (File No. 33-55070)).
4.4 Indenture dated as of July 1, 1993 between Automobile
Credit Finance IV, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the Secured Notes due December 31,
1996 of Automobile Credit Finance IV, Inc. (incorporated
by reference from Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance IV,
Inc. (File No. 33-62980)).
4.5 Indenture dated as of February 1, 1994 between Automobile
Credit Finance V, Inc., Texas Commerce Bank National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the Secured Notes due December 31,
1997 of Automobile Credit Finance V, Inc. (incorporated
by reference from Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance V,
Inc. (File No. 33-73768)).
4.6 Indenture dated as of May 1, 1994 between Automobile
Credit Finance VI, Inc., and Texas Commerce Bank National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the Secured Notes due June 30,
1998 of Automobile Credit Finance VI, Inc. (incorporated
by reference from Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance VI,
Inc. (File No. 33-77932)).
4.7 Warrant to purchase 3,000,000 shares of common stock of
Search Capital Group, Inc. dated as of November 30, 1995
(incorporated herein by reference from Exhibit 4.1 to the
Form 8-K Current Report dated November 30, 1995).
10.1 Employee Stock Ownership Plan for Employees of Search
Natural Resources, Inc. (incorporated by reference from
Exhibit 10.27 to Search Capital Group, Inc.'s Annual
Report on Form
28
<PAGE> 52
Exhibit Number Description
-------------- -----------
10-K for the year ended December 31, 1988 (the "1988
Annual Report")).
10.2 Employee Stock Ownership Trust for Employees of Search
Natural Resources, Inc. (incorporated by reference
from Exhibit 10.28 to the 1988 Annual report).
10.3 ESOP Stock Exchange Agreement dated as of June 30, 1993
between Search Capital Group, Inc., and the Employee
Stock Ownership Plan for Employees of Search Natural
Resources, Inc. and Trust (incorporated by reference from
Exhibit 10.1 to Search Capital Group, Inc.'s Current
Report on Form 8-K dated June 30, 1993 (the "1993 Form
8-K")).
10.4 Amended and Restated Security Agreement dated effective
as of June 30, 1993 between Search Capital Group, Inc.
and the Employee Stock Ownership Plan for Employees of
Search Natural Resources, Inc. and Trust (incorporated by
reference to Exhibit 10.2 to the 1993 Form 8- K).
10.5 Amendment to Search Capital Group, Inc. Employee Stock
Ownership Plan.
10.6 Form of Director's Warrant to purchase shares of Common
Stock of Search Capital Group, Inc. (incorporated by
reference from Exhibit 10.16 of Search Capital Group,
Inc.'s Annual Report on Form 10-K for the nine-month
transition period ended September 30, 1993)
10.7 Form of Warrant for Officers and Employees to purchase
shares of Common Stock of Search Capital Group, Inc.
(incorporated by reference from Exhibit 10.17 of Search
Capital Group, Inc.'s Annual Report on Form 10-K for the
nine-month transition period ended September 30, 1993)
10.8 1994 Employee Stock Option Plan of Search Capital Group,
Inc. (incorporated by reference from Exhibit 10.18 of
Search Capital Group, Inc. Annual Report on Form 10-K for
the fiscal year ended September 31, 1994).
10.9 Stock Purchase Agreement between Search Capital Group,
Inc. and Louis Dorfman, Trustee of the SBM Trust.
10.10 Funding Agreement dated November 30, 1995 among Search
Capital Group, Inc., Search Funding Corp., Automobile
Credit Acceptance Corp., Automobile Credit Holdings,
Inc., Newsearch, Inc. and Hall Financial Group, Inc.
(incorporated herein by reference from Exhibit 99.1 to
the Form 8-K Current Report of Search Capital Group, Inc.
dated November 30, 1995 (the 11/95 8-K")).
10.11 Convertible Promissory Note dated November 30, 1995 from
Search Capital Group, Inc. and Search Funding Corp.
payable to the order of Hall Financial Group, Inc. in the
principal amount of $1,284,487.28. I(incorporated herein
by reference from Exhibit 99.2 to the 11/95 8- to the
11/95 8-K).
10.12 Promissory Note dated November 30, 1995 from Search
Capital Group, Inc. and Search Funding Corp. payable to
the order of Hall Financial Group, Inc. in the principal
amount of $715,512.72. (incorporated herein by reference
from Exhibit 99.3 to the 11/95 8-K).
10.13 Convertible Note dated November 30, 1995 from Search
Capital Group, Inc. and Search Funding Corp. payable to
the order of Hall Financial Group, Inc. in the principal
amount of $1,000,000.00. (incorporated herein by
reference from Exhibit 99.4 to the 11/95 8-K).
10.14 Newsearch Pledge Agreement dated as of November 30, 1995
between Newsearch, Inc. and
29
<PAGE> 53
Exhibit Number Description
-------------- -----------
Hall Financial Group, Inc. (incorporated herein by
reference from Exhibit 99.5 to the 11/95 8-K).
10.15 Search Pledge Agreement dated as of November 30, 1995
between Search Capital Group, Inc. and Hall Financial
Group, Inc. (incorporated herein by reference from
Exhibit 99.6 to the 11/95 8-K).
10.16 ACHI Pledge Agreement dated as of November 30, 1995
between Automobile Credit Holdings, Inc. and Hall
Financial Group, Inc. (incorporated herein by reference
from Exhibit 99.7 to the 11/95 8-K).
10.17 Search Security Agreement dated as of November 30, 1995
between Search Capital Group, Inc. and Hall Financial
Group, Inc. (incorporated herein by reference from
Exhibit 99.7 to the 11/95 8-K).
10.18 SFC Security Agreement dated as of November 30, 1995
between Search Funding Corp. and Hall Financial Group,
Inc. I(incorporated herein by reference from Exhibit
99.9 to the 11/95 8-K).
10.19 ACAC Security Agreement dated as of November 30, 1995
between Automobile Credit Acceptance Corp. and Hall
Financial Group, Inc. (incorporated herein by reference
from Exhibit 99.10 to the 11/95 8-K).
10.20 Letter Agreement between Search and Alex. Brown & Sons,
Inc. dated May 24, 1995.
10.21 Employment Letter Agreement between George C. Evans and
Search dated January 20, 1995
10.22 Amendment to Employment Agreement of George C. Evans
dated May 10, 1995.
21.1 List of Subsidiaries (incorporated by reference from
annual report on Form 10-K for the fiscal year ended
September 31, 1994).
27 Financial Data Schedule
(d) Financial Statements Excluded by Rule 14a-3(b).
None of the Registrant's financial statements are excluded from the
annual report to shareholders by Rule 14a- 3(b).
(e) Long-term Debt Instruments Excluded by Item 601 of Regulation S-K.
Pursuant to Item 601(b)(4) of Regulation S-K, there have been excluded
from the exhibits filed pursuant to this report instruments defining
the rights of holders of long-term debt of the Company where the
total amount of the securities authorized under each such instrument
does not exceed 10% of the total assets of the Company. The Company
hereby agrees to furnish a copy of any such instruments to the
Commission upon request.
30
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacity and on the dates indicated.
SEARCH CAPITAL GROUP, INC.
By: /s/ GEORGE C. EVANS
------------------------------------
George C. Evans, President and Chief
Executive Officer.
Date: January 12, 1996
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacity and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ George C. Evans
- ---------------------------------
George C. Evans Chairman of the Board, President, January 12, 1996
Chief Executive Officer, Chief
Operating Officer and Director
/s/ Robert D. Idzi
- ---------------------------------
Robert D. Idzi Senior Vice President, Chief January 12, 1996
Financial Officer and Treasurer
/s/ Andrew D. Plagens
- ---------------------------------
Andrew D. Plagens Controller and Chief Accounting January 12, 1996
Officer
/s/ A. Brean Murray
- ---------------------------------
A. Brean Murray Director January 12, 1996
/s/ Richard F. Bonini
- ---------------------------------
Richard F. Bonini Director January 12, 1996
/s/ James F. Leary
- ---------------------------------
James F. Leary Director January 12, 1996
</TABLE>
31
<PAGE> 55
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation, as amended
(incorporated by reference from Exhibit 3.1 to the Form
S-1 Registration Statement of Search Capital Group, Inc.
(File No. 33- 68524) (the "Search Registration
Statement")).
3.2 Bylaws, as amended (incorporated by reference from
Exhibit 3.2 to the Search Registration Statement).
4.1 Indenture dated as of October 1, 1991 between Automobile
Credit Finance, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the 18% Automobile Contract Notes
due December 31, 1994 of Automobile Credit Finance, Inc.
(incorporated by reference to Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance, Inc.
(File No. 33-41872)).
4.2 Indenture dated as of August 1, 1992 between Automobile
Credit Finance 1992-II, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the 15% Automobile Contract Notes
due December 31, 1995 of Automobile Credit Finance
1992-II, Inc. (incorporated by reference from Exhibit 4.1
to Form S-1 Registration Statement of Automobile Credit
Finance 1992-II, Inc. (File No. 33-48300)).
4.3 Indenture dated as of December 1, 1992 between Automobile
Credit Finance III, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the 15% Secured Notes due April
30, 1996 of Automobile Credit Finance III, Inc.
(incorporated by reference from Exhibit 4.1 to the Form
S-1 Registration Statement of Automobile Credit Finance
III, Inc. (File No. 33-55070)).
4.4 Indenture dated as of July 1, 1993 between Automobile
Credit Finance IV, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the Secured Notes due December 31,
1996 of Automobile Credit Finance IV, Inc. (incorporated
by reference from Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance IV,
Inc. (File No. 33-62980)).
4.5 Indenture dated as of February 1, 1994 between Automobile
Credit Finance V, Inc., Texas Commerce Bank National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the Secured Notes due December 31,
1997 of Automobile Credit Finance V, Inc. (incorporated
by reference from Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance V,
Inc. (File No. 33-73768)).
4.6 Indenture dated as of May 1, 1994 between Automobile
Credit Finance VI, Inc., and Texas Commerce Bank National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the Secured Notes due June 30,
1998 of Automobile Credit Finance VI, Inc. (incorporated
by reference from Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance VI,
Inc. (File No. 33-77932)).
4.7 Warrant to purchase 3,000,000 shares of common stock of
Search Capital Group, Inc. dated as of November 30, 1995
(incorporated herein by reference from Exhibit 4.1 to the
Form 8-K Current Report dated November 30, 1995).
10.1 Employee Stock Ownership Plan for Employees of Search
Natural Resources, Inc. (incorporated by reference from
Exhibit 10.27 to Search Capital Group, Inc.'s Annual
Report on Form
<PAGE> 56
Exhibit Number Description
-------------- -----------
10-K for the year ended December 31, 1988 (the "1988
Annual Report")).
10.2 Employee Stock Ownership Trust for Employees of Search
Natural Resources, Inc. (incorporated by reference
from Exhibit 10.28 to the 1988 Annual report).
10.3 ESOP Stock Exchange Agreement dated as of June 30, 1993
between Search Capital Group, Inc., and the Employee
Stock Ownership Plan for Employees of Search Natural
Resources, Inc. and Trust (incorporated by reference from
Exhibit 10.1 to Search Capital Group, Inc.'s Current
Report on Form 8-K dated June 30, 1993 (the "1993 Form
8-K")).
10.4 Amended and Restated Security Agreement dated effective
as of June 30, 1993 between Search Capital Group, Inc.
and the Employee Stock Ownership Plan for Employees of
Search Natural Resources, Inc. and Trust (incorporated by
reference to Exhibit 10.2 to the 1993 Form 8- K).
10.5 Amendment to Search Capital Group, Inc. Employee Stock
Ownership Plan.
10.6 Form of Director's Warrant to purchase shares of Common
Stock of Search Capital Group, Inc. (incorporated by
reference from Exhibit 10.16 of Search Capital Group,
Inc.'s Annual Report on Form 10-K for the nine-month
transition period ended September 30, 1993)
10.7 Form of Warrant for Officers and Employees to purchase
shares of Common Stock of Search Capital Group, Inc.
(incorporated by reference from Exhibit 10.17 of Search
Capital Group, Inc.'s Annual Report on Form 10-K for the
nine-month transition period ended September 30, 1993)
10.8 1994 Employee Stock Option Plan of Search Capital Group,
Inc. (incorporated by reference from Exhibit 10.18 of
Search Capital Group, Inc. Annual Report on Form 10-K for
the fiscal year ended September 31, 1994).
10.9 Stock Purchase Agreement between Search Capital Group,
Inc. and Louis Dorfman, Trustee of the SBM Trust.
10.10 Funding Agreement dated November 30, 1995 among Search
Capital Group, Inc., Search Funding Corp., Automobile
Credit Acceptance Corp., Automobile Credit Holdings,
Inc., Newsearch, Inc. and Hall Financial Group, Inc.
(incorporated herein by reference from Exhibit 99.1 to
the Form 8-K Current Report of Search Capital Group, Inc.
dated November 30, 1995 (the 11/95 8-K")).
10.11 Convertible Promissory Note dated November 30, 1995 from
Search Capital Group, Inc. and Search Funding Corp.
payable to the order of Hall Financial Group, Inc. in the
principal amount of $1,284,487.28. I(incorporated herein
by reference from Exhibit 99.2 to the 11/95 8- to the
11/95 8-K).
10.12 Promissory Note dated November 30, 1995 from Search
Capital Group, Inc. and Search Funding Corp. payable to
the order of Hall Financial Group, Inc. in the principal
amount of $715,512.72. (incorporated herein by reference
from Exhibit 99.3 to the 11/95 8-K).
10.13 Convertible Note dated November 30, 1995 from Search
Capital Group, Inc. and Search Funding Corp. payable to
the order of Hall Financial Group, Inc. in the principal
amount of $1,000,000.00. (incorporated herein by
reference from Exhibit 99.4 to the 11/95 8-K).
10.14 Newsearch Pledge Agreement dated as of November 30, 1995
between Newsearch, Inc. and
<PAGE> 57
Exhibit Number Description
-------------- -----------
Hall Financial Group, Inc. (incorporated herein by
reference from Exhibit 99.5 to the 11/95 8-K).
10.15 Search Pledge Agreement dated as of November 30, 1995
between Search Capital Group, Inc. and Hall Financial
Group, Inc. (incorporated herein by reference from
Exhibit 99.6 to the 11/95 8-K).
10.16 ACHI Pledge Agreement dated as of November 30, 1995
between Automobile Credit Holdings, Inc. and Hall
Financial Group, Inc. (incorporated herein by reference
from Exhibit 99.7 to the 11/95 8-K).
10.17 Search Security Agreement dated as of November 30, 1995
between Search Capital Group, Inc. and Hall Financial
Group, Inc. (incorporated herein by reference from
Exhibit 99.7 to the 11/95 8-K).
10.18 SFC Security Agreement dated as of November 30, 1995
between Search Funding Corp. and Hall Financial Group,
Inc. I(incorporated herein by reference from Exhibit
99.9 to the 11/95 8-K).
10.19 ACAC Security Agreement dated as of November 30, 1995
between Automobile Credit Acceptance Corp. and Hall
Financial Group, Inc. (incorporated herein by reference
from Exhibit 99.10 to the 11/95 8-K).
10.20 Letter Agreement between Search and Alex. Brown & Sons,
Inc. dated May 24, 1995.
10.21 Employment Letter Agreement between George C. Evans and
Search dated January 20, 1995
10.22 Amendment to Employment Agreement of George C. Evans
dated May 10, 1995.
21.1 List of Subsidiaries (incorporated by reference from
annual report on Form 10-K for the fiscal year ended
September 31, 1994).
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.5
AMENDMENT TO
SEARCH CAPITAL GROUP, INC.
EMPLOYEE STOCK OWNERSHIP PLAN (THE "PLAN")
Effective January 1, 1989, the Plan shall be amended as follows:
1. Section 1.15 shall be amended to read as follows:
Effective Date. January 1, 1989.
2. Section 1.31 of the Plan shall be amended to read as follows:
Plan. This Search Capital Group, Inc. Employee Stock Ownership
Plan (As Amended and Restated Effective January 1, 1989).
3. Section 15.01(f) of the Plan shall be amended to read as follows:
(f) "Employer Security" means common stock issued by the
Employer (or by a corporation which is a member of the same controlled
group) which is readily tradable on an established securities market.
If there is no common stock which is readily tradable on an
established securities market, the term "Employer Securities" means
common stock issued by the Employer (or by a corporation which is a
member of the same controlled group) having a combination of voting
power and dividend rights equal to or in excess of -
(a) that class of common stock of the Employer
(or of any controlled group member) having the greatest voting
power, and
(b) that class of common stock of the Employer
(or of any controlled group member) having the greatest
dividend rights.
Noncallable preferred stock shall also be treated as Employer
Securities if such stock is convertible at any time into stock which
meets the above requirements and if such conversion is at a conversion
price which (as of the date of the acquisition by the Plan) is
reasonable. For purposes of the preceding sentence, preferred stock
shall be treated as noncallable if after the call there will be a
reasonable opportunity for a conversion which meets the requirements
of the preceding sentence.
4. Section, 15.05 of the Plan shall be amended to read as follows:
15.05 Payment of Purchase Price. If the Employer (or the
Trustee) exercises an option to purchase a Participant's Employer
Securities pursuant to an offer given under Section 15.04, the
purchaser(s) shall make payment in lump sum or, if the Employer
Securities were distributed in a total distribution (defined below),
in substantially equal installments over a period not exceeding five
(5) years. The purchaser(s) shall evidence the obligation to pay the
balance, if any,
<PAGE> 2
of the purchase price by executing a promissory note, delivered to the
selling Participant at the Closing. The note delivered at Closing
shall bear interest at one percent (1%) above the prime interest rate
of a bank, selected by the Plan Administrator, in effect at the
Closing Date and in effect on each subsequent principal payment date.
The note shall provide for equal annual installments with interest
payable with each installment, the first installment being due and
payable one (1) year after the Closing Date. The note further shall
provide for acceleration in the event of thirty (30) days' default of
the payment of interest or principal and in whole or in part at any
time or times without penalty; provided, however, the purchaser(s)
shall not have the right to make any prepayment during the calendar
year or fiscal year of the Participant (Beneficiary) in which the
Closing Date occurs. In the event of a total distribution, the
Employer must provide adequate security when the put option is paid
over time. For purposes of this Section 15.05 "total distribution"
shall mean a distribution within one taxable year to the recipient of
the balance to the credit of the recipient's Account).
/s/ CAROLYN J. MALONE
----------------------------------
Name: /s/ CAROLYN J. MALONE
----------------------------------
Title
of Officer: Vice President
----------------------------
-2-
<PAGE> 1
EXHIBIT 10.9
AGREEMENT
This agreement ("Agreement) dated as of May 5, 1995 is entered into by
and between Search Capital Group, Inc. ("Search"), and Louis Dorfman, Trustee
("Trustee") of The SBM Trust ("Trust") not in his individual capacity but as
Trustee of The SBM Trust.
RECITALS
WHEREAS, the Trust is the owner of 1,312,127 shares of Search's common
stock, $0.01 par value per share (the "Shares"); and
WHEREAS, Search determined that it is in its best interest to purchase
500,000 of the Shares, and to obtain a proxy and a right of first refusal on
the remainder of the Shares; and
WHEREAS, following such determination, Search made corresponding
requests of the Trust; and
WHEREAS, the Trust is willing to sell 500,000 of the Shares and to
grant a proxy and right of first refusal to Search on the remainder of the
Shares provided that Search agrees to give to the Trust the right to put such
remaining Shares to Search;
NOW, THEREFORE, for the mutual promises recited herein and Ten Dollars
($10.00) and other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged by the parties hereto, and with the intent to be
legally bound hereby, the parties hereto agree as follows:
1. PURCHASE OF COMMON STOCK. Contemporaneously with the execution of this
Agreement, Search shall purchase from the Trust Five Hundred Thousand
(500,000) of the Shares. The purchase price shall be Two Dollars and
Twenty-Five Cents ($2.25) per Share, or a total of One Million, One
Hundred Twenty Five Thousand Dollars ($1,125,000.00). Such purchase
price shall be paid in U.S. dollars in good funds and may be made
either by Federal wire transfer or certified check.
2. RIGHT OF FIRST REFUSAL. The Trust hereby grants to Search the priority
right to purchase all or any portion of the remaining Shares owned by
the Trust which may be from time to time offered for sale by the Trust
upon the following terms:
a. The right of first refusal shall continue for two years.
b. The right of first refusal shall not apply in the case of an
open market sale of the Shares.
c. Upon receipt of an arms-length offer from an unrelated party
to purchase any or all of the Shares, the Trustee shall
promptly give Search notice of such offer (the "Notice").
<PAGE> 2
d. The Notice shall specify the name of the offeror, the number
of Shares to be purchased, the purchase price, and any other
relevant terms or conditions applicable to the proposed sale
to the offeror identified in the Notice.
e. If Search does not notify the Trustee by 6:00 p.m. the
following business day that Search will purchase the Shares
then being offered for sale on the terms and conditions stated
in the Notice, the Trust shall be free to sell the Shares to
the third-party.
f. If Search elects to purchase the Shares offered, Search shall
tender a certified check in the appropriate amount at a
closing to be held in Search's offices at 5:00 p.m. the
business day following its election to purchase. At closing
the Trustee shall tender, free or any liens or encumbrances,
duly endorsed stock certificates evidencing the number of
Shares specified in the Notice.
g. Should Search fail to timely tender the purchase price, Search
shall be deemed to have waived its right of first refusal.
h. The right of first refusal shall cease as to any portion of
the Shares sold by the Trust to a third party in conformity
with this Section 2.
3. IRREVOCABLE PROXY. The Trust shall, upon closing of this Agreement,
execute an irrevocable proxy in form and substance similar to that
contained on Exhibit A hereof (the "Irrevocable Proxy"). Such
irrevocable proxy shall be a proxy coupled with an interest binding
all remaining Shares owned by the Trust. The Irrevocable Proxy shall
terminate as to Shares retained by the Trust two years from the date
of this Agreement. The Irrevocable Proxy shall terminate:
a. as to Shares sold on the open market, upon transfer to a
third party; and
b. as to Shares not sold on the open market, upon compliance by
the Trustee with the first refusal rights of Search under
Section 2.
4. PUT OPTION. Search grants Trustee the right (the "Put Option") to
cause Search to purchase from the Trustee all, but not less than all,
of the Shares unsold (the "Remaining Shares") upon the following
terms:
a. PURCHASE PRICE. The purchase price of the Remaining Shares
shall be Two Dollars and Twenty-Five Cents ($2.25) per share.
b. CLOSING. At closing the Remaining Shares shall be tendered
free and clear of any liens or encumbrances. Upon such
tender, the purchase price shall be paid in U.S. dollars in
good funds by means of cashier's check or Federal wire
transfer.
2
<PAGE> 3
c. TIME FOR EXERCISE. The Trustee shall notify Search at least
thirty (30) days prior to the expiration of twenty four months
following the execution of this Agreement that Trustee intends
to exercise the Put Option. If so exercised, closing shall
take place within five (5) business days following the
expiration of such twenty four month period.
d. ANTI-DILUTION PROVISIONS. In the event that Search issues
additional shares of its common stock as a stock dividend or
as part of a stock split, or if Search reduces the number of
its issued and outstanding shares of common stock as a result
of a reverse stock split, the number of the remaining Shares
subject to the right of first refusal and the Put Option, and
the purchase prices herein specified shall all be
appropriately adjusted.
5. CONTINUING OWNERSHIP INTEREST. Subject to the terms of this Agreement,
the Trust shall be entitled to all rights of ownership of the Shares,
including, without limitation, the right to receive cash or stock
dividends.
6. MISCELLANEOUS PROVISIONS.
a. PIGGY-BACK REGISTRATION. Should Search register its common
stock under the Securities Act of 1933, as amended, upon
request and without cost to the Trust, Search shall at the
same time register all Shares owned by the Trust.
b. PROFESSIONAL FEES. Search shall be responsible and pay for the
reasonable attorney's fees and accountant's fees incurred by
each party hereto in relation to the negotiation and
consummation of this Agreement. Each party hereto shall be
responsible for its own professional fees in relation to the
interpretation, enforcement or adjudication, if any, of this
Agreement.
c. REPRESENTATIONS AND WARRANTIES OF SEARCH. Search represents
and warrants that the execution, delivery and performance of
this Agreement has been duly authorized by all necessary
corporate action and that this Agreement is a valid and
binding obligation of Search enforceable according to its
terms.
d. REPRESENTATIONS AND WARRANTIES OF TRUSTEE. The Trustee
represents and warrants that he is currently serving as the
sole Trustee of The SBM Trust, that he has authority under the
Trust Agreement of The SBM Trust to enter into this Agreement,
and that this Agreement is a valid and binding obligation of
the Trust enforceable according to its terms.
e. INDEMNITY OF SEARCH. Search agrees to indemnify, save and hold
Trustee and the Trust harmless from and against costs,
expenses or disbursements (including attorneys' fees)
liabilities, obligations, losses, damages, penalties, actions,
judgments, or suits of any kind or nature whatsoever
(collectively, the "Losses") INSOFAR ONLY as the Losses relate
to a breach or alleged breach of a representation or warranty
of Search under Section 6.c. On any action for which indemnity
is provided under the foregoing sentence, Search agrees, if
3
<PAGE> 4
requested, to advance from time to time attorneys fees and
costs incurred by the Trustee or Trust.
f. INDEMNITY OF TRUST. The Trust agrees to indemnify, save and
hold Search harmless from and against costs, expenses or
disbursements (including attorneys' fees) liabilities,
obligations, losses, damages, penalties, actions, judgments,
or suits of any kind or nature whatsoever (collectively, the
"Losses) INSOFAR ONLY as the Losses relate to a breach or
alleged breach of a representation or warranty of Trustee
under Section 6.d. On any action for which indemnity is
provided under the foregoing sentence, the Trust agrees to
advance from time to time attorneys fees and costs incurred by
Search.
g. AMENDMENTS, ETC. This Agreement may be amended, terminated or
superseded only by an instrument signed by the party against
whom such amendment, termination or supersession is sought to
be enforced.
h. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties and their
respective heirs, legal representatives, successors, and
assigns.
i. ENTIRE AGREEMENT. This Agreement evidences the entire
agreement between the parties hereto with respect to the
subject matter hereof and supersedes any prior agreements or
undertakings with respect thereto.
j. FURTHER ASSURANCES. The parties hereto agree to cooperate with
each other and execute any and all documents and to do any and
all things necessary to effectuate this Agreement.
k. GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE
GOVERNED UNDER THE LAWS OF THE STATE OF TEXAS AND VENUE FOR
ANY MATTER BROUGHT BY ONE PARTY AGAINST THE OTHER CONCERNING
THIS AGREEMENT SHALL BE ANY COURT OF COMPETENT JURISDICTION IN
DALLAS COUNTY, TEXAS.
l. SEVERABILITY. If any part of this Agreement is found invalid
or unenforceable, that part will be amended to achieve as
nearly as possible the same economic effect as the original
provision and the remainder of this Agreement will remain in
full force.
4
<PAGE> 5
m. NOTICES. All notices, requests, demands, and other
communications provided for or permitted hereunder shall be in
writing and shall be sent by mail, telex, telecopier or hand
delivery as follows:
Search Capital Group, Inc. With a copy to (not constituting
700 N. Pearl Street notice):
Suite 400, L.B. 401
Dallas, Texas 75201-2809 Search Capital Group, Inc.
Attn: President 700 N. Pearl Street
214 965 6000 Suite 400, L.B. 401
214 965 6098 (fax) Dallas, Texas 75201-2809
Attn: General Counsel
214 965 6000
214 965 6098 (fax)
Louis Dorfman, Trustee
The SBM Trust
13101 Preston Road
Suite 409
Dallas, Texas 75240
214 661 1869
214 661 1871 (fax)
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date first written above.
SEARCH CAPITAL GROUP, INC.
By: /s/ ILLEGIBLE
------------------------------------
Its: President and CEO
-----------------------------------
/s/ LOUIS DORFMAN
----------------------------------------
Louis Dorfman, not individually, but
as Trustee of The SBM Trust
5
<PAGE> 6
EXHIBIT "A"
IRREVOCABLE PROXY
The undersigned, in his capacity as Trustee of The SBM Trust and not
in his individual capacity (the "Trustee), hereby appoints A. Brean Murray (or
such other individual as may be designated the Board of Directors of Search
Capital Group, Inc. from time to time) as his proxy and appoints him to
represent and vote as he sees fit all, of the shares of common stock ("Shares")
of Search Capital Group, Inc. ("Search"), as from time to time held in The SBM
Trust. This irrevocable proxy, pursuant to the provisions of that certain
agreement between Trustee and Search of even date herewith, is coupled with an
interest in the Shares and shall continue until terminated pursuant to such
agreement.
Dated: May 5, 1995
--------------------------------------------------
Louis Dorfman, not individually, but as Trustee of
The SBM Trust
Subscribed and Sworn to before me on _______________________, 199__.
----------------------------------------
Notary Public in and for
(SEAL) The State of Texas
My commission expires:
-----------------
<PAGE> 7
SECRETARY'S CERTIFICATE
I, Joe B. Dorman, Secretary of Search Capital Group, Inc. ("Search")
do hereby certify that the following resolution was adopted and approved by the
Board of Directors of Search on the 5th day of May 1995.
WHEREAS, Search has determined that it is in the best interest of
Search to purchase Five Hundred Thousand (500,000) shares of Search's $.0l par
value common stock from the SBM Trust, and
WHEREAS, the agreement between the SBM Trust and Search requires
approval of Search's Board of Directors prior to the execution of such
agreement.
NOW, THEREFORE, BE IT RESOLVED, that the Agreement between Search and
The SBM Trust is hereby approved, and once executed by George C. Evans, will
constitute a valid and binding agreement upon Search.
FURTHER RESOLVED, that George C. Evans is authorized and empowered to
execute the aforementioned agreement in a form that is substantially similar to
the Agreement considered this day by the Board of Directors and hereby placed
in the Minutes of Search.
WHEREAS, Search has requested that Sam Myers resign from the Board of
Directors, and resign as an officer of Search and its subsidiaries, and Search
and Myers have entered into an agreement WITH respect to his resignation, and
WHEREAS, the agreement between Sam B. Myers, Jr. and Search requires
approval of Search's Board of Directors prior to the execution of such
agreement.
NOW, THEREFORE, BE IT RESOLVED, that the Agreement between Search and
Sam B. Myers, Jr. is hereby approved, and once executed by George C. Evans,
will constitute a valid and binding agreement upon Search.
FURTHER RESOLVED, that George C. Evans is authorized and empowered to
execute the aforementioned agreement in a form that is substantially similar to
the Agreement considered this day by the Board of Directors and hereby placed
in the Minutes of Search.
/s/
----------------------------------------
Joe B. Dorman, Secretary
<PAGE> 8
IRREVOCABLE PROXY
The undersigned, in his capacity as Trustee of The SBM Trust and not
in his individual capacity (the "Trustee), hereby appoints A. Brean Murray (or
such other individual as may be designated the Board of Directors of Search
Capital Group, Inc. from time to time) as his proxy and appoints him to
represent and vote as he sees fit all, of the shares of common stock ("Shares")
of Search Capital Group, Inc. ("Search"), as from time to time held in The SBM
Trust. This irrevocable proxy, pursuant to the provisions of that certain
agreement between Trustee and Search of even date herewith, is coupled with an
interest in the Shares and shall continue until terminated pursuant to such
agreement.
Dated: May 5, 1995
/s/ LOUIS DORFMAN
--------------------------------------------------
Louis Dorfman, not individually, but as Trustee of
The SBM Trust
Subscribed and Sworn to before me on May 5th, 1995.
/s/ CAROLYN J. MALONE
----------------------------------------
Notary Public in and for
(SEAL) The State of Texas
My commission expires: 11/26/96
-----------------
<PAGE> 9
SECRETARY'S CERTIFICATE
I, Joe B. Dorman, Secretary of Search Capital Group, Inc. ("Search")
do hereby certify that the following resolution was adopted and approved by the
Board of Directors of Search on the 5th day of May 1995.
WHEREAS, Search has determined that it is in the best interest of
Search to purchase Five Hundred Thousand (500,000) shares of Search's $.0l par
value common stock from the SBM Trust, and
WHEREAS, the agreement between the SBM Trust and Search requires
approval of Search's Board of Directors prior to the execution of such
agreement.
NOW, THEREFORE, BE IT RESOLVED, that the Agreement between Search and
The SBM Trust is hereby approved, and once executed by George C. Evans, will
constitute a valid and binding agreement upon Search.
FURTHER RESOLVED, that George C. Evans is authorized and empowered to
execute the aforementioned agreement in a form that is substantially similar to
the Agreement considered this day by the Board of Directors and hereby placed
in the Minutes of Search.
WHEREAS, Search has requested that Sam Myers resign from the Board of
Directors, and resign as an officer of Search and its subsidiaries, and Search
and Myers have entered into an agreement with respect to his resignation, and
WHEREAS, the agreement between Sam B. Myers, Jr. and Search requires
approval of Search's Board of Directors prior to the execution of such
agreement.
NOW, THEREFORE, BE IT RESOLVED, that the Agreement between Search and
Sam B. Myers, Jr. is hereby approved, and once executed by George C. Evans,
will constitute a valid and binding agreement upon Search.
FURTHER RESOLVED, that George C. Evans is authorized and empowered to
execute the aforementioned agreement in a form that is substantially similar to
the Agreement considered this day by the Board of Directors and hereby placed
in the Minutes of Search.
/s/
----------------------------------------
Joe B. Dorman, Secretary
<PAGE> 1
EXHIBIT 10.20
[SEARCH CAPITAL GROUP, INC. LETTERHEAD]
May 24, 1995
VIA FACSIMILE
Mr. Barry Ridings
Alex. Brown & Sons
1290 Avenue of the Americas
10th Floor
New York, NY 10104
Dear Barry:
Attached please find your letter agreement executed as of this date.
My compliments for your changes in a very timely fashion.
We also will mail a hard copy to follow. Attached also please find for
your information a prospective news release, subject to the finalization of the
written legal settlement today. We should be issuing this tomorrow, if not, at
the latest, next Tuesday.
Please confirm with me or Linda your clearance related to Alex. Brown's
portion. We will be talking with you next week.
Sincerely,
[ILLEGIBLE]
GCE:li
Attachments
cc: Joe Dorman
Robert Idzi
P.S. Please clear the news release as soon as possible today. Thanks.
<PAGE> 2
[ALEX. BROWN & SONS INCORPORATED LETTERHEAD]
May 23, 1995
Mr. George C. Evans
Chairman of the Board, President
and Chief Executive Officer
Search Capital Group, Inc.
700 N. Pearl Street - Suite 400
Dallas, TX 75201-7490
Dear George:
This letter agreement (the "Agreement") confirms the understanding and
agreement between Search Capital Group, Inc. ("Search" or the "Company"), and
Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Financial Advisor") as
follows:
1. The Company hereby retains Alex. Brown to render financial
advisory services to the Company, on the terms and subject to
the conditions set forth herein, in connection with the
restructuring of certain secured notes (the "Notes") of eight
Securitization Subsidiaries of the Company. The Notes
currently total approximately $70 million in aggregate
outstanding principal as detailed in Exhibit I. Such proposed
restructuring, whether by a solicitation of waivers and
consents with respect to the Notes or an exchange offer
involving new securities, or a settlement on the existing
securities, or other similar transactions is hereinafter
referred to as the "Restructuring".
2. Alex. Brown's services will include, as necessary:
(a) Evaluating from a financial point of view the
Company's business operations and projections;
(b) Determining the Company's and each of the
Securitization Subsidiaries' debt capacity in light
of its projected cash flows;
(c) Rendering financial advice to the Company and
participating in any meetings or negotiations with
the Noteholders and/or their representatives in
connection with any restructuring, modification or
refinancing of the Notes, including any solicitation
of waivers, consents or exchanges that may be
required as a part of the Restructuring;
<PAGE> 3
Search Capital Group, Inc.
May 23, 1995
Page 2
(d) Rendering financial advice to the Company and
participating in any meetings or negotiations with
GECC or any other prospective lender in connection
with any secured lending facility;
(e) Providing the Company with general capital
restructuring advice;
(f) Assisting the Company in the development of a
specific restructuring proposal to present to the
Noteholders;
(g) Advising the Company on specific tactics and strategy
for negotiating with the Noteholders;
(h) Assisting the Company with potential exchange offers;
(i) Advising the Company with respect to the timing, the
nature and the terms of securities or other
inducements to be offered pursuant to the
Restructuring;
(j) Assisting the Company in the preparation of any
documentation required in connection with the
restructuring of the Notes;
(k) Providing the Company with general restructuring
advice from a financial point of view, as required.
3. As consideration for Alex. Brown's services as set forth
herein, the Company agrees to pay Alex. Brown certain
restructuring fees as follows:
(a) Upon acceptance of this Agreement and on the 15th of
each succeeding month, the Company shall pay Alex.
Brown a monthly cash fee of $60,000.
(b) Upon the completion of the Restructuring, the Company
shall pay Alex. Brown a success fee, in the form of
cash, equal to 8/10ths of one percent (i.e. 0.8% of
the aggregate outstanding principal amount of any
Notes participating in such Restructuring. The
monthly fees described in 3(a) above will be
credited against the fee due, in 3(b). In the event
no Restructuring is undertaken, Alex. Brown will only
be paid the monthly cash fee, as provided for in 3(a)
above.
(c) Upon the completion of the Restructuring, the Company
shall pay Alex. Brown a success fee, in the form of
common stock of Search Capital Group, Inc., equal to
4/10th of one percent (i.e. 0.4%) of the aggregate
outstanding principal amount of any Notes
participating in such Restructuring. In calculating
the number of shares to be provided to Alex. Brown,
the success
<PAGE> 4
Search Capital Group, Inc.
May 23, 1995
Page 3
fee shall be divided by the average of the per share
closing bid price for the 30 consecutive trading days
beginning with the first trading day which is 60
calendar days after the completion of the
Restructuring. In the event that trading prices are
not available for any 10 or more of these 30
consecutive trading days, Alex. Brown shall have the
option to receive 50% of this fee in cash.
(d) In the event that the Restructuring is completed
under a pre-packaged bankruptcy filing, the Company
shall endeavor to retain Alex. Brown as its financial
advisor on terms consistent with this Agreement.
(e) Except as noted in paragraph 2 above, the advisory
services and compensation arrangements set forth
herein do not encompass other investment banking
services, such as raising new debt or equity capital,
the solicitation of a third party investor, specific
asset sales, of any other similar transaction which
might be undertaken by Alex. Brown, nor do they
include any expansion of the Financial Advisor role
beyond that outlined in this letter. To the extent
that the Company requires such additional services,
the Alex. Brown will be entitled to compensation
relating to such services as mutually agreed to by
Alex. Brown and the Company.
4. This Agreement may be terminated by the Company or the
Financial Advisor by written notice, with or without cause,
effective immediately upon receipt. Notwithstanding
termination of this Agreement, the Financial Advisor will be
entitled to receive: (i) reimbursement of all out-of-pocket
expenses through the effective date of termination, (ii) any
monthly restructuring fees that have been earned prior to such
termination, and (iii) the full benefit of the indemnity and
reimbursement provisions detailed in Addendum A which shall
remain in full force and effect. Furthermore, if within six
months after termination by the Company, the company completes
a restructuring substantially similar to such restructuring
recommended by the Financial Advisor, then the Financial
Advisor shall be entitled to the success fee in 3(b) and 3(c)
above.
5. In addition to any fees that may be payable to the Financial
Advisor, the Company shall reimburse the Financial Advisor for
all: (i) out-of-pocket expenses (including travel and lodging,
data processing and communications charges, courier and other
appropriate expenditures, and any expenses of counsel incurred
by the Financial Advisor with the Company's consent) and (ii)
fees and expenses (including expenses of counsel, if any) to
the extent described in Addendum A. Alex. Brown agrees to
promptly notify the Company if it retains counsel. Alex. Brown
will also provide the Company with a periodic summary of its
expenses and will notify the Company when its total expenses
have reached $25,000 and in increments of $10,000
<PAGE> 5
Search Capital Group, Inc.
May 23, 1995
Page 4
thereafter. Alex. Brown's expense policy is attached as
Addendum B.
6. In connection with the Financial Advisor's activities, the
Company will furnish the Financial Advisor with all
information concerning the Company which is necessary for the
Financial Advisor to perform its duties under this Agreement
and provide access to the Company's management, and its
outside attorneys and accountants (the "Information"). The
Company represents that to the best of its knowledge, unless
indicated otherwise, all Information will be complete and
correct in all material respects and will not contain any
materially untrue statement of a material fact. The Financial
Advisor will be using and relying on the Information without
independent verification thereof or independent appraisal of
any of the Company's assets and the Financial Advisor shall
bear no liability with respect to any services rendered by the
Financial Advisor pursuant to this Agreement, in which it used
or relied upon, directly or indirectly, any Information which
was incomplete or incorrect in any material respect or
contained any untrue statement of a material fact or omitted
to state a material fact necessary in order to make the
statements therein not misleading in light of the
circumstances in which they were made. The Company agrees that
it will provide all information necessary to the Financial
Advisor to perform its duties including but not limited to
adequate and sufficient information as to all material aspects
of the Restructuring.
7. The Company is signing this Agreement solely for the purpose
of inducing the Financial Advisor to act hereunder and
undertakes to provide all compensation, reimbursement, as well
as indemnification and contribution as provided herein.
Accordingly, the Company agrees to the indemnification and
contribution provisions (the "Indemnification Provisions")
attached to this Agreement as Addendum A and incorporated
herein in their entirety, as well as the compensation and
reimbursement provisions contained herein.
8. The benefits of this Agreement shall inure to the respective
successors and assigns of the parties hereto and of the
indemnified parties hereunder and their respective successors
and assigns and representatives, and the obligations and
liabilities assumed in this Agreement by the parties hereto
shall survive the termination of the Financial Advisor's
engagement and shall be binding upon their respective
successors and assigns. Alex. Brown agrees not to assign this
Agreement without the prior consent of the Company, which will
not be unreasonably withheld.
9. The Company will not make any written reference to the
Financial Advisor or this Agreement or any statements
contained herein in connection with any proposal made by the
Company or in any press release or other public disclosure
announcing any such proposal or the acceptance thereof or in
any public filing by the Company
<PAGE> 6
Search Capital Group, Inc.
May 23, 1995
Page 5
without the prior approval of the Financial Advisor, which
shall not be unreasonably withheld except to the extent that
such disclosure is required by law or requested by any
governmental or regulatory agency or body.
10. This Agreement and the indemnification letter, attached as
Addendum A, incorporate the entire understanding of the
parties with respect to the subject matter of this Agreement
and supersede all previous agreements should they exist.
11. This Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which shall constitute
one and the same instrument.
12. This Agreement may not be amended or modified except in
writing executed by the Company and the Financial Advisor, and
shall be governed by and construed in accordance with the laws
of the State of New York, without regard to principles of
conflicts of law.
If the foregoing letter is in accordance with your understanding of
the terms of our engagement, please sign and return to us the enclosed
duplicate hereof.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ BARRY W. RIDINGS
------------------------------------
Barry W. Ridings
Managing Director
Accepted and Agreed:
Search Capital Group, Inc.
By: /s/ GEORGE C. EVANS
-------------------------------------
George C. Evans
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 7
ADDENDUM A
In connection with the engagement of Alex. Brown & Sons Incorporated
("Alex. Brown") as a financial advisor, pursuant to a separate engagement
letter (the "Letter") between Alex. Brown and the Company (as defined in the
Letter), the Company agrees to indemnify and hold harmless Alex. Brown and each
of its directors, officers, agents, employees and controlling persons (within
the meaning of the Securities Act of 1933, as amended) against any losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
related to or rising out of Alex. Brown's engagement and will reimburse Alex.
Brown and each other person indemnified hereunder for all legal and other
expenses as such expenses are incurred in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding whether
or not in connection with pending or threatened litigation in which Alex. Brown
or any other indemnified person is a party; provided, however, that the Company
will not be liable in any such case (except cases arising out of the use of
information provided by the Company) for losses, claims, damages, liabilities
or expenses that a court of competent jurisdiction shall have found in a final
judgment to have arisen primarily from the gross negligence or willful
misconduct of the person seeking indemnification.
In case any proceeding shall be instituted involving any person in
respect of whom indemnity may be sought, such person (the "indemnified party")
shall promptly notify the Company, but failure to so notify the Company will
not relieve it from any liability which it may have hereunder or otherwise,
except to the extent such failure materially prejudices the Company's rights.
The Company, upon the request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the Company may designate in such proceeding and shall pay
as incurred the fees and expenses of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain
its own counsel at its own expense, except that the Company shall pay as they
are incurred the fees and expenses of counsel retained by the indemnified party
in the event that (i) the Company and the indemnified party shall have mutually
agreed to the retention of such counsel or, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the Company and the
indemnified party and representation of both parties by the same counsel would
be inappropriate, in the reasonable opinion of the indemnified party, due to
actual or potential differing interests between them. The Company will not be
liable, without its consent, for the fees and expenses of more than one counsel
in any proceeding.
The Company shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there is a final judgment for the plaintiff, the Company agrees to indemnify
the indemnified party to the extent set forth herein. In addition the Company
will not, without the prior written consent of Alex. Brown, which consent will
not be unreasonably withheld, settle or compromise or consent to the entry or
any judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not Alex.
Brown or any indemnified party is an actual or potential party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of Alex. Brown and each other indemnified
party hereunder from all liability arising out of such claim, action, suit or
proceeding.
<PAGE> 8
In the event a claim for indemnification hereunder is determined to be
unenforceable by a final judgment of a court of competent jurisdiction, then
the Company shall contribute to the aggregate losses, claims, damages or
liabilities to which Alex. Brown or its officers, directors, agents, employees
or controlling persons may be subject in such amount as is appropriate to
reflect the relative benefits received by each of the Company and the party
seeking contribution on the one hand and the relative faults of the Company and
the party seeking contribution on the other, as well as any other relevant
equitable considerations.
This indemnification shall apply to the engagement as set forth in the
Letter and any modification of the engagement and the indemnification provided
herein shall survive termination of Alex. Brown's engagement and shall be
binding upon any successors or assigns of the Company.
Acknowledged and Agreed:
Search Capital Group, Inc.
By: /s/ GEORGE C. EVANS
-------------------------------------
George C. Evans
Chairman of the Board, President
and Chief Executive Officer
Date: 5/24/95
-------
<PAGE> 9
EXHIBIT I
(AS OF MARCH 31, 1995)
<TABLE>
<CAPTION>
NOTE
FUND PAYABLE
<S> <C>
ACF $1,948,000
ACF 91-III 665,000
ACP 10,000,000
ACF 92-II 10,000,000
ACF III 15,000,000
ACF IV 10,000,000
ACF V 19,872,000
ACF VI 10,675,000
-----------
TOTAL $69,160,000
</TABLE>
<PAGE> 10
ADDENDUM B
ALEX. BROWN & SONS
EXPENSE POLICY GUIDELINES
Alex. Brown's charges for expenses to the client are determined
pursuant to Alex. Brown's Travel and Entertainment Policy. Out-of-pocket
expenses incurred by Alex. Brown are charged to a client if the expenses are
incurred in connection with services rendered for such particular client. In
particular, Alex. Brown's internal policies with respect to out-of-pocket
expenses billed to clients are set forth below:
(a) TRAVEL AND LODGING: All airfare charges billed to a client are based
on coach fare rates. Booking air travel first class is permitted only: (1) when
traveling with clients who are traveling first class, (2) and on domestic red
eye flights. Business class over and coach on the return flight is permitted on
international flights exceeding 7 hours. Business class round trip is
permitted for international flights exceeding 10 hours. Alex. Brown has only
traveled coach airfare on this assignment.
With respect to local travel, Alex. Brown's general policy enables
employees to travel by taxi or private car service to and from meetings while
rendering services to a client on a client related matter, for which the client
is charged. This policy is based on Alex. Brown's determination that travel by
taxi or private car service is the most efficient use of a professional's time.
Alex. Brown employees are not permitted to charge commutation expenses to a
client unless the employee is travelling after 8:00 p.m. or on a weekend.
<PAGE> 11
(b) MEALS: Alex. Brown's general policy permits its employees to bill
lunch or dinner meals to a client if the employee is required to render
services during such meal time to the client due to extreme time constraints.
Alex. Brown employees are also permitted to bill clients for meals while
travelling on behalf of clients and their related matters. Alex. Brown
employees are permitted to order meals in the office if the Alex, Brown
employee is required to work after 8:00 p.m. or on weekends,
(c) COMPUTER ACCESS: Alex. Brown bills its clients for time spent by its
employees on computer databases. Alex. Brown purchases or leases such
databases from third party sources typically for a monthly fee. Such databases
are used to retrieve market price data (ie. such as stock or bond prices) and
financial information. For example, information from Securities Data
Company, a capital markets database, is required in analyzing comparable
companies. Alex. Brown charges clients a fee of $250.00 a month for these
computer charges.
(d) POSTAGE AND MAILING: Messengers and couriers (including Federal
Express) are used by Alex. Brown to deliver hard copy documents relating to the
client matter which require receipt on an expedited basis; otherwise, Alex.
Brown uses the regular postal system. Any charges for either messengers and
couriers are billed to a client at cost.
(e) PRINTING EXPENSES: Alex. Brown's ability to produce color charts,
large volumes of reports and certain types of presentation slides is limited by
space and mechanical constraints. Outside production companies are used for
projects that can not be handled by Alex. Brown's in-house production
capabilities. Any charges for outside production are billed to a client at
cost.
<PAGE> 12
(f) DISCLOSURE INFORMATION SERVICES: Outside financial research consists
of charges from outside services, principally Disclosure Information Services,
which supply, for a fee, financial documents to Alex. Brown. Such outside
charges are billed to a client at cost. Financial research services generally
consist of the retail of financial documents filed with the Securities and
Exchange Commission or other governmental and regulatory agencies.
(g) REPRODUCTION COSTS: Alex. Brown bills photocopying charges at the rate
of $.25 per page.
(h) COMMUNICATIONS: Alex. Brown employees must stay in contact with their
office while they are travelling. These charges consist of phone cards and air
or rail phone.
<PAGE> 1
EXHIBIT 10.21
[SEARCH CAPITAL GROUP, INC. LETTERHEAD]
January 20, 1995
Mr. George C. Evans
1120 Desco Drive
Plano, TX 75075
Dear Mr. Evans:
I am writing this letter to confirm your employment by Search Capital
Group, Inc. (the "Company") as President, Chief Executive Officer and Member of
the Board of Directors. the principal terms of your employment are set forth
below:
Term: Three years commencing January 20, 1995.
Signing Bonus: $50,000 to be paid immediately.
Salary: $233,333.30 per year payable on the
Company's regular payroll payments dates
(semi-monthly or monthly).
Annual Increase: 10% annual increase every year commencing
on the first anniversary of the
commencement date of your employment.
Bonus Plan: You will be eligible to receive a bonus
consisting of either 25%, 50% or 100%
of your salary based upon bonus targets
established by the Board of Directors
of the Company at its next meeting. For
any year in which you receive a bonus
of 50% or more, you will receive no 10%
annual salary increase for the subsequent
year. For any year for which you receive
a bonus of less than 50%, you will
receive your scheduled 10% annual salary
increase for the next year.
Stock Options: You will receive a grant of stock options
under the Company's Stock Option Plan
to purchase 500,000 shares of Common
Stock. These options will vest ratably
over a three year period with one-third
vesting at the end
<PAGE> 2
Mr. George C. Evans
January 20, 1995
Page 2
of the first year of your employment; an
additional one-third vesting at the end of
your second year of your employment and
the final one-third vesting as of the end
of the third year of your employment.
These options will be incentive stock
options to the extent possible and non-
qualified options otherwise.
Termination: If your employment hereunder is terminated
by the Company for cause, you shall
receive your benefits hereunder which have
vested through the date of termination. If
your employment hereunder is terminated
without cause, you shall continue to
receive your then current salary for six
months and you shall receive six
additional months of vesting for your
stock options, but you shall not receive
a bonus. Cause for these purposes shall
be defined to mean being convicted of a
crime involving moral turpitude or
committing a dishonest act harmful to the
Company.
You will be entitled to the full indemnification of officers and
directors as provided for in the articles and bylaws of Search Capital Group,
Inc.
If the foregoing sets forth your understanding of the terms of your
employment, please sign in the space indicated below and return a copy to me.
When you have executed this letter agreement, this agreement shall constitute a
valid binding contract between the Company and you.
Sincerely yours,
/s/ SAM MYERS
----------------------------------------
Sam Myers,
Chairman of the Board
Agreed to and Accepted:
/s/ GEORGE C. EVANS
- ------------------------------------------
George C. Evans
<PAGE> 1
EXHIBIT 10.22
AMENDMENT TO EMPLOYMENT CONTRACT OF GEORGE C. EVANS
DATED JANUARY 20, 1995
This Amendment to the above Employment Agreement refers only to page two,
termination paragraph, which is deleted from the Employment Agreement of
January 20, 1995 and replaced with the following provisions:
Termination: If your employment hereunder is terminated by the Company for
cause, you shall receive your benefits hereunder which have vested through the
date of termination. If your employment hereunder is terminated without cause,
you shall continue to receive your then current salary for the remainder of the
contract and vested stock rights through the remainder of the contract, but you
shall not receive a bonus. Cause for these purposes shall be defined to mean
being convicted of a crime involving moral turpitude or committing a dishonest
act harmful to the Company.
----------------------------------------
Brean Murray
Director, Executive Committee
SEARCH CAPITAL GROUP, INC.
AGREED TO AND ACCEPTED THIS
DATE OF MAY 10, 1995.
- ------------------------------------
George C. Evans
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<CASH> 8,547
<SECURITIES> 0
<RECEIVABLES> 66,677
<ALLOWANCES> 18,623
<INVENTORY> 601
<CURRENT-ASSETS> 4,520
<PP&E> 2,126
<DEPRECIATION> 820
<TOTAL-ASSETS> 49,922
<CURRENT-LIABILITIES> 75,557
<BONDS> 0
<COMMON> 117
0
4
<OTHER-SE> (25,756)
<TOTAL-LIABILITY-AND-EQUITY> 49,922
<SALES> 0
<TOTAL-REVENUES> 13,472
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,152
<LOSS-PROVISION> (3,128)
<INTEREST-EXPENSE> (11,205)
<INCOME-PRETAX> (20,134)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,134)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
