UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
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(Mark One) [ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended
[X] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from October 1, 1995 to March 31, 1996.
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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
__________________
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
9%/7% CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE
WARRANTS EXPIRING MARCH 14, 2001
(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. [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of June 17, 1996, there were 27,208,225 outstanding shares (with an
aggregate market value of $35,914,857) of Registrant's $.01 par value common
stock, and the aggregate market value of shares held by non-affiliates of the
Registrant was $26,541,957 based on the average of the high and low sale price
and 20,107,543 shares held by non-affiliates).
PART I
ITEM 1. BUSINESS
OVERVIEW OF THE COMPANY.
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 and management of used
motor vehicle receivables purchased from franchise and independent automobile
and light truck dealers ("Dealers"). The Dealers originate these receivables
by financing the sale of vehicles to purchasers who do not qualify for credit
from traditional lending sources.
The automobile finance industry is the second largest consumer finance
market in the United States totaling $353 billion as of December, 1995,
according to the Federal Reserve Board. Automobile financing is usually
provided by finance companies affiliated with manufacturers and banks, credit
unions and independent finance companies. The financings are generally
segmented according to the type of car sold (new or used) and the credit
characteristics of the borrower (generally, prime or non-prime). Non-prime
borrowers are individuals who, due to either incomplete or imperfect credit
histories, are unable to obtain traditional financing through a bank or one of
the finance companies affiliated with manufacturers. The Company specializes
in financing used cars and trucks to these non-prime borrowers through its
wholly-owned operating subsidiary, Automobile Credit Acceptance Corp.
DESCRIPTION OF HISTORICAL OPERATIONS AND REORGANIZATION OF FUND SUBSIDIARIES.
Prior to November 1994, the Company primarily financed the purchase of
used motor vehicle receivables through the private and public sale of
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. 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 held by these Fund Subsidiaries, the Company,
directed by then existing management, abandoned its Note offering activities
and sharply reduced all receivables purchasing activities while attempting to
evaluate and, where necessary, modify or remedy purchasing and collection
procedures. At the same time, the Company's directors began searching for new
management which could further identify problems, stabilize operations, and
develop a financial plan and strategy for turnaround and future growth. On
January 20, 1995, George C. Evans joined the Company as President, Chief
Executive officer, and a director of the Company. Mr. Evans was appointed
Chairman of the Board of Directors on May 5, 1995. Mr. Evans has over 30
years of experience in the consumer lending and financial services industry,
including having served as President and Chief Operating Officer of Associates
Financial Services, Vice Chairman of Associates Corporation of North America
and Chairman and Chief Executive Officer of Associates International and its
subsidiaries. During 1995 and 1996, four other managers who previously held
senior positions in finance, operations, and marketing at Associates
Corporation of North America or its subsidiaries joined Search. For a detailed
description of current management, see "Item 10, Directors and Executive
Officers of the Company."
From late 1994, shortly before Mr. Evans joined the Company, until March
1996, the Company operated under financial constraints and limited ability to
raise new operating capital. The purchasing of receivables for the Fund
Subsidiaries was governed by trust indentures (the "Trust Indentures") which
restricted management's ability to alter its receivables purchasing criteria
in accordance with stricter standards developed by new management. In
addition, the Company's inability to access credit sources due to the
historical losses on the Company's receivables portfolio and limitations on
investment of funds repaid on existing portfolios dramatically reduced the
Company's ability to finance the purchase of new receivables. At the same
time, to improve the quality of the Company's portfolio of receivables
purchasing procedures were tightened and management significantly reduced the
number of Dealers from whom the Company would purchase receivables.
At Search's annual meeting of shareholders, held May 10, 1995, Search
announced a preliminary outline of a plan to convert the approximately $69
million debt owed by the Fund Subsidiaries into equity of Search. On August
14, 1995, in order to consummate the debt-to-equity conversion plan, it was
necessary for each of the Fund Subsidiaries to file for reorganization under
Chapter 11 of the U. S. Bankruptcy Code. 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 during the bankruptcy
proceedings. On December 19, 1995, Search, the Fund Subsidiaries and the
Committee agreed to a consensual plan of reorganization. On March 4, 1996,
the Court entered an order (the "Confirmation Order") confirming the Third
Amended Joint Plan of Reorganization (the "Joint Plan") for all of the Fund
Subsidiaries, after sufficient affirmative votes for confirmation of the Joint
Plan were obtained from the holders ("Noteholders") of the outstanding Notes
issued by the Fund Subsidiaries. The Notes and the Noteholders constituted
essentially all of the indebtedness and creditors, respectively, of the Fund
Subsidiaries. The effective date of the Joint Plan was March 15, 1996 (the
"Effective Date").
As a consequence of effectiveness of Joint Plan, on the Effective Date,
the assets of the Fund Subsidiaries (less funding of a litigation trust and
professional fees) were transferred to Search by operation of law in exchange
for Search Common Stock, 9%/7% Convertible Preferred Stock, five year warrants
to purchase Common Stock and cash to be distributed to the former Noteholders
of the Fund Subsidiaries. Under the Joint Plan, the Notes and the
indebtedness represented by the Notes, together with their related Trust
Indentures, were deemed, canceled upon the Effective Date.
OPERATIONS SINCE REORGANIZATION OF THE FUND SUBSIDIARIES.
Except for the historical information contained herein, this Form 10-K
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed in the section entitled "Risk Factors."
Since confirmation of the Joint Plan, the Company has implemented new
programs intended to expand its receivables purchasing operations into higher
credit quality receivables. Although these new programs target the Company's
historical market of purchasers with non-standard credit histories, the
Company intends to focus more on purchasers with job and residence stability,
higher income, and re-established positive credit. Receivables purchased
under the new programs typically carry interest rates ranging from
approximately 18% to 26%. The receivables purchased under the new programs
are generally secured by automobiles up to 6 years in age, having been driven
(i) no more than an average of 25,000 miles per year and (ii) having fewer
than 80,000 total miles. For each receivable purchased pursuant to the new
programs, the Company generally receives an acquisition fee and purchases the
receivables at a discount, ranging from 8% to 12%, depending upon the value
and the term of the receivable which range from 24 to 60 months.
The Company purchases receivables from a network of automobile and light
truck Dealers ("Dealer Network") that originates motor vehicle receivables
through the sale of used automobiles and light trucks. During the
reorganization process, because the Company had abandoned its Note offering
activities and sharply reduced all receivables purchasing activities, it also
experienced a significant reduction in the size of the Dealer Network. The
Company is currently marketing its new programs to Dealers through the efforts
of employees and marketing representatives. The marketing representatives
include both individuals and organizations specializing in the marketing of
financing programs to Dealers.
The Dealers are unaffiliated with the Company. Each Dealer enters into
an agreement with the Company and agrees to use Company-approved contract
forms. Under the dealer agreements, the Company is under no obligation to
purchase any receivables from the Dealer.
It is the Company's goal to market the new programs primarily to
franchise Dealers and qualified independent Dealers. The Company has set
standards for Dealers to qualify as members of the Dealer Network. In most
cases, to qualify for membership in the Dealer Network, each Dealer must have
been in business at least two years, be in good standing with regulatory and
auto-association authorities and meet certain credit standards. The Company
generally verifies that a Dealer meets these standards through credit bureau
reporting services. Franchise Dealers normally qualify for membership in the
Dealer Network.
Membership in the Dealer Network can be terminated at the Company's
discretion. The Company personnel review the receivables submitted by and
purchased from each Dealer. Decisions to terminate a Dealer from the Dealer
Network are made on a case-by-case basis depending on the past performance of
the Dealer and performance of the receivables purchased from such Dealer.
Dealers communicate and initiate receivable sales transactions directly
with the Company's centralized purchasing personnel by faxing a consumer
application to the Company. The Company's decision to purchase a receivable
is typically communicated to the Dealer in approximately one hour, and if the
application is approved, documentation 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.
Historically, the Company's principal market focus has been in the
southern and southwestern states 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." However, the Company is currently expanding the market focus of
its new programs in states with laws similar to those states in which the
Company currently operates.
Historically, the Company's receivables purchasing criteria were governed
by the terms of the Trust Indentures governing the Notes. The Trust
Indentures were canceled as of the Effective Date of the Joint Plan, and no
longer govern the criteria the Company uses to evaluate the quality of a
receivable. As of May 31, 1996, 93.2% of the receivables owned by the Company
were purchased using the criteria set forth in the Trust Indentures. The
Trust Indentures established specific criteria with respect to the price,
purchase discount, term, downpayment, installments and interest rate for the
receivables the Company 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 were as follows:
- The average purchase price of receivables could not exceed 53% of the
total remaining unpaid installments of the receivables;
- The average purchase price for a receivable could not significantly
exceed the approximate average wholesale value and/or the Dealer's actual
cost for the underlying financed vehicle;
- The receivable generally had to have an original term of 36 months or less;
- The age of each financed vehicle could not generally exceed eight years for
automobiles or nine years for trucks;
- The obligor on the receivable was 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;
The new programs also target used vehicle motor vehicle receivables whose
obligors have non-prime credit histories, but place more emphasis on job,
income and residence stability and re-established positive credit of the
obligor. Receivables purchased under the new programs typically carry imputed
interest rates ranging from approximately 18% to 26%. The receivables
purchased under the new programs are generally secured by automobiles up to 6
years in age, having been driven (i) no more than an average of 25,000 miles
per year and (ii) having fewer than 80,000 total miles. In connection with
the new programs, the Company has established criteria to evaluate the quality
of receivables. The Company believes that the most significant of these
criteria are as follows:
- The obligor must show one year verifiable residence and three
years traceable residence;
- The Company must be able to verify 1 year of employment
for each obligor;
- Obligor must show a positive pay history within the previous two years;
- Obligor must show gross income of at least $1200 per month;
- The maximum payment for the purchased vehicle cannot exceed
20% of the obligor's gross income;
- The debt to income ratio of the obligor cannot exceed 50% of gross income;
- Downpayment must be 10% of the retail selling price of the vehicle.
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 receivable evaluation 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 monitors its turnaround time through its
ANMS.
The Company's underwriting strategy differs from many of its competitors.
Many of the Company's competitors make only bulk purchases of receivables
and/or retain recourse against the selling Dealer for non-payment of the
receivable through quasi-loan arrangements, dealer holdbacks or reserve
accounts or other collection collateral or guaranties. The purchase and
credit criteria and verification procedures also differ from competitor to
competitor. 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.
In addition to the purchases of individually selected receivables, the
Company is currently seeking the acquisition of pools of non-prime credit
automobile receivables ("Bulk Purchases") from Dealers or other finance
companies. The Company expects to use the acquisition of Bulk Purchases as a
means of increasing the number of receivables in its portfolio of receivables.
The receivables forming a potential Bulk Purchase are analyzed on both an
individual and a pooled basis using criteria similar to the criteria used to
evaluate loans purchased from Dealers. In addition, the historical
performance of receivables forming a potential Bulk Purchase are analyzed.
Individual receivables that do not meet the Company's credit criteria will be
excluded from the Bulk Purchase, or if a large number of the receivables
forming the potential Bulk Purchase do not meet the Company's credit criteria,
the entire Bulk Purchase may be rejected.
Following the purchase of each receivable, the Company mails a statement
to each obligor a minimum of 5 days before each payment becomes due. These
statements instruct each obligor to remit payments directly to the Company's
post office box. Payments may also be made in person at the Company's offices
or via Western Union Quick Collect service or through Ace Cash Express . The
Company's collections operations are currently based in Dallas, Texas and, the
Company operates branch collections offices in the following cities: Garland,
Texas; Arlington, Texas; Houston, Texas; and Memphis, Tennessee.
The Company has a staff of collection personnel that monitor payments of
the receivables and that contact 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 the receivable shows any
indication of default, 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 firm 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. Company policy does not currently allow an account's payments to be
deferred except in very rare instances and only with senior management
approval.
The Company's collection and repossession activities are administered
with use of the ANMS. The Company's ability through the ANMS to relationally
cross-reference receivable collection statistics to a vehicle, Dealers,
customers and geographic locations assists the Company in monitoring
receivables and adjusting purchase procedures and prices.
Following repossession of a vehicle, the Company generally sells the
vehicle on a wholesale basis at the highest available bid at an unaffiliated
motor vehicle auction. During the period from October 1994 until December
1995, the Company sold many of its repossessed vehicles directly to consumers
at three used car lots operated by the Company. The sale of the vehicles in
this manner, rather than on a wholesale basis, created a new undiscounted
receivable with associated risks of default and payment delays. The Company
closed all three lots by December 31, 1995.
The Company's current ANMS and related systems are connected with outside
databases, such as national credit bureaus and wholesale vehicle valuation
guides. 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. During August 1996, the Company
will begin combining the receivable processing capabilities of its ANMS with a
data processing and communications system developed by Norwest Financial
Information Services Group (the "Norwest System"). The Company believes that
the Norwest System will allow the Company more efficiently to expand its
operations into new regions of the United States, as well as provide the
Company with flexibility to expand its operations into other areas of consumer
lending.
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 March 31, 1996 and September 30, 1995.
AVERAGE RECEIVABLE CHARACTERISTICS
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AS OF AS OF
MARCH 31, 1996 SEPTEMBER 30, 1995
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Purchase price to customer of underlying vehicle $ 8,020 $ 8,026
Dealer's profit on receivable sale $ 963 $ 959
Age of vehicle 5.2 Years 5.9 Years
Wholesale value of vehicle $ 4,613 $ 4,640
Down payment (including net trade-in credit) $ 1,593 $ 1,588
Receivable term 31 Months 31.6 Months
Annual Percentage Rate 23.9% 24.2%
Semi-monthly payment $ 150 $ 150
Original receivable balance (principal and unearned interest) $ 9,569 $ 9,549
Purchase price for receivable $ 4,870 $ 4,969
Receivable cost as % of receivable balance 51% 52%
Receivable discount as % of receivable balance 49% 48%
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At March 31, 1996, the Company had an aggregate of 7,996 motor vehicle
receivables in its portfolio with an aggregate total unpaid balance of
$37,086,000, including $6,435,000 in unearned interest and $13,353,000 in
credit loss allowance. Additionally, the Company had a total of 333 vehicles
held for resale having an estimated value of approximately $566,000.
Seasonality. The Company's operations are seasonably impacted by higher
delinquency rates during certain holiday periods.
Delinquency. The following table sets forth certain information
regarding the Company's motor vehicle receivables, as of March 31, 1996.
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MOTOR VEHICLE RECEIVABLES - AGING AND DELINQUENCIES
(Dollars in thousands)
AS OF MARCH 31, 1996 AS OF SEPTEMBER 30,1995
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Number of Total (1) % of Total Number of Total (1) % of Total
Active Unpaid Unpaid Active Unpaid Unpaid
Contractual Delinquency Receivables Installments Installments Receivables Installments Installments
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Current to 60 days past due 7,575 $ 34,995 94.4% 9,805 $ 53,758 80.6%
61-180 days past due 420 2,091 5.6% 1,696 9,182 13.8%
181+ days past due 1 - - 627 3,737 5.6%
All Active Receivables (2) 7,996 $ 37,086 100.0% 12,128 $ 66,677 100.0%
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(1) Includes unearned income.
(2) Active receivables exclude 333 and 599 accounts that have been
reclassified to vehicles held for resale at March 31, 1996 and September
30, 1995, respectively.
The percentage of contractually delinquent accounts has decreased from
September 30, 1995 to March 31, 1996. At the end of September 30, 1995, 19.4%
of the Company's active contracts were at least 61 days contractually
delinquent compared to 5.6% at March 31, 1996. The decrease in accounts at
least 61 days contractually delinquent is due to increased collection efforts
and tightened credit criteria and the Company's charge-off policy implemented
in June 1995.
FINANCING
Sale of Asset-Backed Notes by Fund Subsidiaries. Until November 1994,
the Company financed its receivables purchasing activities through public and
private sale of unrated, automobile receivables-backed Notes issued by its
Fund Subsidiaries. Generally, the sale of automobile receivables-backed
securities requires a rating by a rating agency. The Company did not seek
such a rating for its Notes. From 1992 until 1994, the Company sold a total
principal amount of approximately $72,000,000 of Notes through its Fund
Subsidiaries. After November 1994, due primarily to higher than expected
losses in the collection of its receivables held by these Fund Subsidiaries,
the Company abandoned its Note offering activities. See Item 1. Business.
"Description of Historical Operations and Reorganization of Fund Subsidiaries"
above.
Financing with Hall Financial Group, Inc. and Affiliates. In November
1995, Hall Financial Group, Inc. ("HFG") provided interim financing of
approximately $2.3 million pending confirmation of the Fund Subsidiaries'
Joint Plan. After the Joint Plan's confirmation, in April 1996, HFG assigned
its rights to its affiliate, Hall Phoenix/Inwood, Ltd. ("HPIL"), which
exercised a right to convert a portion of the debt into 2,500,000 shares of
Search's Common Stock. Search repaid the remaining $567,000 of debt. In
addition, HPIL purchased from Search 1,638,378 shares of Common Stock,
2,032,812 shares of 9%/7% Convertible Preferred Stock and five-year warrants
to purchase, at $2.00 per share (increasing $0.25 per year), 676,178 shares of
Common Stock in consideration for a total cash payment of $4,346,000 to
Search.
GECC Line of Credit. Upon confirmation of the Joint Plan, in March 1996,
the Company retired the remaining debt of $173,000 owing on its line of credit
from General Electric Credit Corporation.
Effect of Joint Plan. As a result of the confirmation and effectiveness
of the Joint Plan, approximately $69,300,000 of debt owed by the Fund
Subsidiaries to Noteholders was canceled. The assets of the Fund Subsidiaries
(net of a $350,000 deposit to a litigation trust and $2,000,000 escrowed for
payment for professional fees), consisting primarily of approximately
$29,000,000 of net receivables and $16,345,000 of cash, were deemed
transferred to Search. Following the effectiveness of the Joint Plan,
consummation of the transactions with HPIL in April 1996 and repayment of the
GECC line of credit, the Company had no borrowed debt, approximately
$31,000,000 in net receivables and approximately $21,600,000 in cash. See
"Item 8. Financial Statements and Supplementary Data" and "Liquidity and
Capital Resources."
Future Financings. The Company presently intends to continue purchasing
receivables and expand its operations into other consumer lending areas, both
of which will require future financing. The Company is currently pursuing
several alternatives to meet its needs for liquidity. These financing
alternatives include subordinated debt financing, securitizations and bank
lines of credit.
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 risk
individuals who purchased medium-priced, used motor vehicles in the Company's
then primary geographic markets consisting generally of the metropolitan areas
of Arizona, Georgia, Florida, South Carolina, Oklahoma, Tennessee and Texas.
The Company's new programs target receivables whose obligors have somewhat
lower credit risk than obligors of receivables previously purchased by the
Company. Though the Company expects to market the new programs in a more
diverse geographic region, the Company expects to encounter more competition
in the purchase of such lower risk receivables. 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 (purchaser) of such contract liable to the
obligor thereon for any violations committed by the assignor (seller). 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 various laws and regulations or the seller violated such law or
regulation.
In the event of default by an obligor on a receivable, the Company has
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 independent third-party repossession entity 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.
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.
EMPLOYEES
As of April 30, 1996 the Company had 98 employees, of which 64 were
engaged in receivables purchasing and collections, 6 dealing with the
repossession and resale of repossessed vehicles, 22 in administration and 6 in
senior management.
RISK FACTORS
The Company faces certain risks associated with the operation of it
business that in some cases have affected, and in the future could affect, the
Company's actual results from operations. These risk factor include, but are
not limited to, the following:
Availability of Funding. The purchase of contracts requires the Company
and/or its subsidiaries to raise significant amounts of funds from various
sources, including banks, finance companies, and other lenders. There can be
no assurance that lenders will provide sufficient credit on terms the Company
will find acceptable. One of the Company's planned financing sources is
expected to be securitizations. There can be no assurance that the Company's
future securitization activities will increase its profitability. Further,
there can be no assurance that funding will be available to the Company
through the issuance of automobile receivables-backed securities or, if
available, that it will be on terms acceptable to the Company.
Defaults on Automobile Receivables/Shift to New Credit Market. The
Company has no historical information related to the quality of receivables it
is currently purchasing under its new receivables purchasing programs. A
significant increase in delinquencies, repossessions, charge-offs or related
receivables could have a material adverse effect on the Company's financial
performance.
Leverage. The ratio of debt to the sum of net worth of the Company may
from time to time be from 5 to 1 to as much as 7 to 1. This degree of
leverage will increase the Company's vulnerability to adverse general economic
conditions and to increased competitive pressures.
Qualified Personnel. The Company plans to commence a consumer finance
business and to expand its automobile receivables purchasing business. The
success of this strategy is dependent upon the Company's ability to hire and
retain qualified managers and other personnel.
Dealers. The Company plans to expand its receivables purchasing
activities by re-establishing relationships and establishing new relationships
with dealers. Dealers often already have favorable secondary financing
sources, which may restrict the Company's ability to develop dealer
relationships and delay the Company's growth. Competitive conditions in the
Company's markets may result in a reduction in the price discounts available
from or fees paid by dealers and a lack of available contracts, which could
adversely effect the Company's profitability and its growth plans.
Key Officers. The Company's future success depends in some measure upon
its Chief Executive Officer who has significant experience in the consumer
financing business. An unexpected loss of services of this officer could have
a material adverse effect upon the Company. The Company does not currently
maintain key person life insurance on the Chief Executive Officer but intends
to obtain such coverage.
Reliance on Information Processing Systems. The Company's Business
depends upon its ability to store, retrieve, process and manage significant
amounts of information. The Company's management information systems,
including servers, networks, databases, backup and other systems essential for
receivable management, are located and maintained in the Company's Dallas,
Texas headquarters. Interruption, impairment of data integrity, loss of
stored data, breakdown or malfunction of the Company's information processing
systems caused by telecommunications failure, conversion difficulties,
undetected data input and transfer errors, unauthorized access, viruses,
natural disasters, electrical power outage or disruption, or other events
could have a material adverse effect on the Company's business financial
condition and results of operations.
Increases in Interest Rates. While the automobile receivables purchased
by the Company in most cases bear interest at a fixed rate near the maximum
rates permitted by law, the Company will finance its purchases of a
substantial portion of such contracts by incurring indebtedness with floating
interest rates. As a result, the Company's interest costs could increase
during periods of rising interest rates, which may decrease net interest
margins and thereby adversely affect the Company's profitability.
Competition. The Company has numerous competitors engaged in the
business of buying new and used motor vehicle receivables at a discount. The
new programs target receivables whose obligors have somewhat lower credit risk
than obligors of receivables previously purchased by the Company. Though the
Company expects to market the new programs in a more diverse geographic
region, the Company expects to encounter more competition in the purchase of
such lower risk receivables. 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.
These federal laws and regulations include, among others, the Truth-in-Lending
Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the
Fair Credit Reporting Act, the Fair Indebtedness Collection Practices Act, the
Magnuson-Moss Warranty Act and the Federal Reserve Board's Regulation Z. The
Company believes that it maintains all licenses and permits required for its
current operations and is in substantial compliance with all applicable
federal, state and local laws. There can be no assurance, however, that the
Company will be able to maintain all requisite licenses and permits. The
failure to satisfy those and other legal requirements could have a material
adverse effect in the operation of the Company. Further, the adoption of
additional, or the revision of existing, laws and regulations could have a
material adverse effect on the Company's business.
The Federal Trade Commission ("FTC") has adopted the holder-in-due-course
rule which has the effect of subjecting persons who finance consumer credit
transactions (and certain related lenders and their assignees) to all claims
and defenses which the purchase could assert against the seller of the goods
and services. Failure of the Dealers to comply with state and federal credit
and trade practice laws and regulations could result in consumers having
rights of rescission and other remedies that could have an adverse effect on
the Company. The FTC's Rule of Sale of Used Vehicles requires that all
sellers of used vehicles prepare, complete and display a "Buyer's Guide" which
explains the warranty coverage (if any) for such vehicles.
State laws regulate, among other things, the interest rate and terms and
conditions of motor vehicle retail installment loans. These laws also impose
restrictions on consumer transactions and require loan disclosures in addition
to those required under federal law. These requirements impose specific
statutory liabilities upon creditors who fail to comply with their provisions.
As a consumer finance company, the Company is subject to various consumer
claims and litigation seeking damages and statutory penalties based upon,
among other theories of liability, usury, wrongful repossession, fraud and
discriminatory treatment of credit applicants.
ITEM 2. PROPERTIES
Search does not hold any real property as an investment nor does it hold
a security interest in any real property. All of the real property utilized
by Search is held under lease. Generally, office space is on a two to five
year lease with an option for renewal for a like term. Most of these leases
provide for cancellation rights after a prescribed period of time. Search
believes that such properties are in good condition and are adequate to meet
its current and reasonably anticipated needs. Information as to minimum
rental commitments on leased property and periods of expiration is contained
in Note 12 of Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
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 was 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
"O'Shea Class Action Suit").
The O'Shea 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 O'Shea Class Action Suit contended
that Search made misstatements in its registration statements concerning the
Company's computerized system, accounting methodologies used by the Company,
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
deemed just and proper.
On April 26, 1996, the court entered a Final Judgment and Order of
Dismissal approving a settlement (the "Settlement") entered into between
Search and counsel for the plaintiffs. 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. The Settlement provided for a cash payment by
Search of $287,000 and the issuance by Search of its common stock with a value
of $2,613,000. As a result of the settlement, Search issued 1,848,000 shares
of its common stock.
In December 1993, Automobile Credit Acceptance Corp., a wholly-owned
subsidiary of Search ("ACAC"), 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 Corp., 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 the plaintiff. 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, $750,000.
ACAC believes that these allegations are without merit. Discovery in the case
is still ongoing, and no opinion can be given as to the final outcome of the
lawsuit.
On August 14, 1995, the Fund Subsidiaries filed a petition in the U.S.
Bankruptcy Court in the Northern District of Texas, Dallas Division, seeking
protection under Chapter 11 of the U.S. Bankruptcy Code. These cases were
consolidated for joint administration under Case No. 395-34981-RCM-11. On
March 4, 1996, the Court entered the Confirmation Order confirming the Joint
Plan for all of the Fund Subsidiaries. The Joint Plan was effective March
15, 1996. See "Item 1, Business, Description of Historical Operations and
Reorganization of Fund Subsidiaries," and Note 2 to the Notes to Consolidated
Financial Statements in Item 8 for a description of the Joint Plan.
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 case was
reassigned under Cause No 1:95CSV649BR upon recusal of the judge originally
assigned to this case because of his relationship with certain defendants.
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.
While the Company believes the suit is without merit and intends to vigorously
defend itself, the Company has accrued as of March 31, 1996, an estimated
amount to cover the costs associated with the settlement of this matter.
There are presently no other legal proceedings, threatened or pending,
relating to the Company which would, in the opinion of management, have a
material impact on earnings or the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Special Meeting of Shareholders. On March 1, 1996, the Company held a
special meeting of its shareholders (the "Special Meeting") at which the
following proposals were approved:
1. Amendment ("Amendment One") of the Company's Certificate of
Incorporation to increase the authorized number of shares of Common Stock from
20 million to 130 million and of Preferred Stock from 10 million to 60
million, and, accordingly, increase the aggregate number of authorized shares
of all stock from 30 million to 190 million; and
2. Amendment ("Amendment Two") of the Company's Certificate of
Incorporation to prohibit the Company from issuing any shares of non-voting
capital stock to the extent required by Section 1123(a)(6) of the U.S.
Bankruptcy Code.
At the Special Meeting, there were (i) 6,502,055.3 shares of Common Stock
represented in person or by proxy, and (ii) 273,400 shares of 12% Senior
Convertible Preferred Stock (the "12% Preferred Stock") represented in person
or by proxy.
The total number of shares of 12% Preferred Stock voting to approve both
Amendment One and Amendment Two were 273,400. No shares of 12% Preferred
Stock abstained from voting on or voted against Amendment One.
The total shares of Common Stock voting to approve Amendment One and
Amendment Two were 6,433,807 and 6,480,807, respectively. The total shares of
Common Stock voted against Amendment One and Amendment Two were 55,888 and
9,203, respectively. The total shares of Common Stock that either abstained
from voting or did not vote on Amendment One and Amendment Two were 15,940 and
12,045, respectively.
Annual Meeting of Shareholders. On March 27, 1996, the Company held its
annual meeting of shareholders (the "Annual Meeting") at which the following
actions were taken:
1. Election of Richard F. Bonini and Luther H. Hodges, Jr., to serve as
directors of the Company until the annual shareholders meeting of 1999 or
until their successors shall be elected and qualified or until their earlier
resignation or removal; and
2. Ratification and approval of the selection of the independent
accounting firm of BDO Seidman, LLP to serve as auditor of the Company's
consolidated financial statements for the fiscal year ending September 30,
1996.
At the Annual Meeting, there were (i) 6,455,578 shares of Common Stock
represented in person or by proxy, and (ii) 240,500 shares of 12% Preferred
Stock represented in person or by proxy.
At the Annual Meeting, 240,500 shares of 12% Preferred Stock voted to
elect each of Richard F. Bonini and Luther H. Hodges, Jr. to the Board of
Directors and for approval of BDO Seidman, LLP as the Company's auditors. No
shares of 12% Preferred Stock abstained from voting on or voted against such
proposals.
The total number of shares of Common Stock voting to elect Richard F.
Bonini and Luther H. Hodges, Jr. to the Board of Directors was 6,449,308 and
6,449,188, respectively. The total shares of Common Stock voted against
electing Richard F. Bonini and Luther H. Hodges, Jr. to the Board of Directors
was 6,270 and 6,390, respectively. No shares of Common Stock abstained from
voting.
A total of 6,439,490 shares of Common Stock were voted for approval of
the selection of BDO Seidman, LLP as the Company's auditor for the fiscal year
ending September 30, 1996. A total number of 16,088 shares of Common Stock
were voted against. No shares of Common Stock abstained from voting.
<PAGE>
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
timely 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.
On May 23, 1996, the Company's new issue of 9%/7% Convertible Preferred
Stock began trading in the over-the-counter market under the symbol SPGHP.
The shares of 9%/7% Convertible Preferred Stock are convertible at any time
into Common Stock in the ratio of two shares of Common Stock for each share of
the 9%/7% Convertible Preferred Stock. For a description of this 9%/7%
Convertible Preferred Stock, see Note 8 to the Notes to the Consolidated
Financial Statements in Item 7.
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, trading of the Company's Common Stock in
the over-the-counter market was sporadic and limited. Prior to December 10,
1993, and after March 22, 1995, the quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
BID PRICES ASK PRICES NASDAQ (1)
------------ ------------- -------------
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
Second Quarter 1.625 1.000 1.813 1.063
</TABLE>
As of June 17, 1996, there were approximately 3,898 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.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is a table of selected consolidated financial data for
the fiscal year ended December 31, 1992; the nine month period ending
September 30, 1993; the fiscal years ended September 30, 1994 and September
30, 1995 and the six month period ended March 31, 1996:
<TABLE>
<CAPTION>
6 MONTHS YEAR YEAR 9 MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED
(In thousands, except per share data) 3/31/96 9/30/95 9/30/94 9/30/93 12/31/92
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Interest revenue $ 3,541 $ 13,472 $ 14,054 $ 7,096 $ 2,739
Interest expense (1) (1,306) (11,205) (9,968) (4,173) (1,909)
Provision for credit losses (2) (4,982) (3,128) (20,180) - -
---------- --------- --------- ---------- ----------
Net interest income (loss) after provision for credit losses (2,747) (861) (16,094) 2,923 830
Operating and Other expenses 8,098 15,881 9,296 3,051 1,470
Settlement expense 535 2,837 560 - -
Reorganization expense - 315 - - -
---------- --------- --------- ---------- ----------
(Loss) from continuing operations (11,380) (19,894) (25,950) (128) (640)
Extraordinary gain on debt discharge 8,709 - - - -
---------- --------- --------- ---------- ----------
Net (loss) (2,671) (19,894) (25,950) (128) (640)
Preferred stock dividends 327 240 240 263 206
(Loss) available to common stockholders $ (2,998) $(20,134) $(26,190) $ (391) $ (846)
========== ========= ========= ========== ==========
Loss per share of common stock from continuing operations $ (1.12) $ (2.25) $ (2.33) $ (0.06) $ (0.22)
Gain per share on extraordinary item .83 - - - -
Net loss per share of common stock $ (.29) $ (2.25) $ (2.33) $ (0.06) $ (0.22)
Weighted average number of common shares outstanding (4) 10,447 8,967 11,258 6,131 3,851
Operating Data:
Number of active Dealers at period end (3) 22 125 206 126 68
Number of receivables at period end 7,996 12,128 18,995 6,991 2,962
Number of receivables purchased during period 1,169 5,328 18,377 6,331 3,452
(In thousands) 3/31/96 9/30/95 9/30/94 9/30/93 12/31/92
---------- --------- --------- ---------- ----------
Balance Sheet Data:
Contract receivables, net $ 17,298 $ 34,948 $ 61,823 $ 29,396 $ 11,009
Total assets 37,346 49,922 75,126 44,223 19,912
Notes payable (prepetition subject to compromise) - 69,320 - - -
Notes payable - - 70,768 40,562 18,000
Total liabilities 10,342 75,557 79,502 42,013 18,838
Shareholders' equity (deficit) 27,004 (25,635) (4,376) 2,210 1,074
</TABLE>
______________________
(1) Includes amortization of offering expenses incurred in connection with
Note offerings of $1,221,000, $2,840,000, $2,158,000, $762,000, and
$306,000, 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) Active Dealers are those Dealers who sold receivables to the Company
during the last 30 days of the current period, and the last 60 days of
the fiscal year ended September 31, 1995.
(4) The weighted average common shares outstanding are significantly less
than the outstanding common shares shown on F-5 due to the effective date
of the Joint Plan beginning on March 15, 1996.
<PAGE>
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.
Interest Income and Provision for Credit Losses
Through the third quarter of fiscal 1994, the Company aggregated pools of
loans and recorded interest revenue and allowance for credit losses for the
pools based on AICPA Practice Bulletin 6, Amortization of Discounts on Certain
Acquired Loans ("PB6"). Under PB6 no credit loss was recognized on a
portfolio of retail installment sales contracts unless the aggregate of the
undiscounted expected future cash flows for that portfolio of loans was less
than the carrying amount of the respective portfolio. Each of the Fund
Subsidiaries aggregated its loan portfolio into a separate and distinct pool
for collective evaluation under PB6. Each portfolio of loans held by each of
the Fund Subsidiaries was considered a separate and distinct pool for
treatment under PB6
Under PB6, the Company recorded an allowance for credit losses upon
acquisition of the retail installment sales contracts in an amount equal to
the difference between the total future contractual payments 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 receivables 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 receivable. When a concern exists as to the collectibility of
an account, interest income ceases to be recognized. The receivables, once
impaired, are collateral dependent; that is, once a receivable is in default,
Search looks to the underlying collateral for repayment of the receivable.
Therefore, at impairment, Search records an allowance for credit losses to
record the receivable at the fair value of the collateral. If the measure of
the impaired receivable is less than the net recorded investment in the
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 receivable and its net carrying value.
Search continues to record receivable 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.
The following table, containing estimates that the Company believes are
reasonably accurate, compares on an unaudited basis how much the provision for
credit losses would have been charged, net of the effect of increased income,
if the Company had accounted for the impairment of loans under PB6 on a
loan-by-loan basis versus the pooled methodology used by the Company. The
amount shown for PB6 on a pooled methodology used by the Company for 1994 is
the amount that the Company would have charged against the provision for
credit losses and the reduction in interest income had the Company reported
its results under that method for fiscal year 1994.
<TABLE>
<CAPTION>
(Dollars in thousands) FOR THE YEARS ENDING
-------------------------------------------------------------------------
(Unaudited) DECEMBER 31, 1992 SEPTEMBER 30, 1993 SEPTEMBER 30, 1994 CUMULATIVE
------------------ ------------------- ------------------- -----------
<S> <C> <C> <C> <C>
PB6 on a net loan-by-loan basis $ 135 $ 45 $ 5,668 $ 5,848
PB6 on a pooled basis - - 5,259 5,259
------------------ ------------------- ------------------- -----------
Increase (Decrease) in Credit Losses $ 135 $ 45 $ 409 $ 589
================== =================== =================== ===========
</TABLE>
Calculating the provision for credit losses under PB6 on a loan-by-loan
basis and PB6 on a pooled basis would have resulted in a difference in
earnings for those years due to the way that individual amounts are separated
from pooled amounts.
The Company reported its results by applying PB6 using a pooled
methodology for fiscal years 1992 and 1993. Differing interpretations of PB6
are that it permits the evaluation of impaired loans using either a pooled or
a loan-by-loan methodology.
When PB6 is applied on a pooled basis, the excess loan impairment
reserve, arising when the net investment is greater than the amount probable
of collection on individual loans, is netted against the excess unearned
interest and discount of the other loans in the same pool of loans. If there
are not adequate available unearned interest and discount balances in the pool
of loans, the excess over those collective balances would be charged directly
to the provision for credit losses.
When PB6 is applied on a loan-by-loan basis, the excess loan impairment
reserve, arising when the net investment is greater than the amounts probable
of collection on individual loans, is charged directly to the provision for
credit losses and is not netted against unearned interest and discount for
other loans in the pool, thus resulting in a larger direct charge to the
provision for credit losses than would arise on a pooled basis. In addition,
when PB6 is applied on a loan-by-loan basis, the expected future cash
collections on non-impaired loans is greater than the average expected future
cash collections of the pool of loans. This excess of future cash collections
results in an increased unearned discount for non-impaired loans, which is
amortized to interest income on a prospective basis.
Prior to adoption of SFAS 114, the Company, as more fully explained
below, only recorded credit losses when the aggregate of undiscounted expected
future cash flows of a pool of loans did not exceed the carrying amount of the
respective pool. In 1994, credit losses of $5,259,000, which represented the
excess of the carrying amount of the respective pools over the undiscounted
expected future cash flows of the respective pools, would have been recorded
notwithstanding the adoption of SFAS 114.
In accordance with the adoption of SFAS 114, the portion of the increase
in allowance for credit losses (applicable to the $14,921,000 recorded to
reduce individually impaired loans to the fair value of their underlying
collateral), some of which, if any, is attributable to prior years, was
included in current operations of the year of adoption (fiscal 1994), and no
cumulative effect is shown on the statement of operations. The Company is
evaluating impairment of its contract receivables on a loan-by-loan basis
since the adoption of SFAS 114.
The following table, containing unaudited PB6 estimates that the Company
believes are reasonably accurate, compares the provision for credit losses and
reduction in interest income under PB6 and under SFAS 114 for fiscal year
1994:
<TABLE>
<CAPTION>
(Dollars in thousands) YEAR ENDED SEPTEMBER 30, 1994
------------------------------
<S> <C> <C>
Provision for Credit Losses $ 20,180
PB6 :
Interest Revenue Reduction 4,413
Provision for Credit Losses 846 5,259
----- ------------------------------
Increases in Losses due to Adoption of SFAS 114 $ 14,921
==============================
</TABLE>
Under SFAS 114, the impairment on a loan in excess of any existing
reserve is charged to the provision for credit losses in the current period.
Therefore, when measuring the provision for credit losses, the primary
difference is the prospective treatment of impairment under PB6 as compared to
the current treatment under SFAS 114. SFAS 114 recognizes all of the
impairment into the current period instead of adjusting the amortization of
the remaining unearned interest and discount over the remaining life of the
loan.
Under PB6, when the total probable collections for a loan is greater than
the net investment, any adjustment to the estimated undiscounted collections
is recorded as a reduction to unearned interest and discount, with the
remaining unearned interest and discount being amortized over the remaining
life of the loan, reducing the future yield of the loan. Therefore, under
PB6, credit losses are only recorded when the future expected yield of the
loan portfolio has been reduced to zero and the net investment is greater than
the undiscounted probable collection.
Management elected early adoption of SFAS 114 in fiscal 1994 because the
measurement of credit losses provided by this statement is considered
preferable.
During 1994, the Company expanded its business rapidly purchasing 18,377
contracts compared to 6,331 in 1993. The deterioration in contract performance
in 1994 due to the increase in first payment default rates and lower
repossession proceeds caused the need for a higher loss provision. Under PB6,
some of the impairment would have reduced future interest income over the life
of the remaining loans. Under SFAS 114, the loss was recognized during the
last quarter of 1994 upon conversion to SFAS 114.
RESULTS OF OPERATIONS
Contract Purchasing Activity. Contract purchases increased rapidly
during the nine months ended September 1993 and the fiscal year ended
September 1994. Due to the inadequate collections on contract receivables,
the Company tightened purchasing 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.
<TABLE>
<CAPTION>
FIRST PAYMENT DEFAULTS AS PERCENTAGE OF TOTAL CONTRACTS BOOKED BY QUARTER
CONTRACTS WERE BOOKED
DEFAULT PERCENT OF 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 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 3.70% 1,222
First Quarter of Fiscal Year 1996 2.30% 760
Second Quarter of Fiscal Year 1996 3.70% 352
</TABLE>
First Payment Default. The changes in first payment defaults suggest
that when contract purchasing volume increased in 1994, the quality of the
contracts being purchased 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 and (ii) Dealers overstating the value of the
automobile securing the receivables. 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 than 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.
Comparison of the Period Ended March 31, 1996 to the Six Months Ended March
31, 1995
The Company changed its fiscal year from September 30 to March 31 in
order to start a new fiscal year rendering the reorganization effective March
15, 1995. Therefore, the comparison below compares the six months ended March
31, 1996 to the comparable six months ended March 31, 1995.
The Company purchased 1,169 contracts, at a cost of $5,471,000, during
the six months ending March 31, 1996 compared to 2,417 contracts, at a cost of
$10,670,000, during the six months ending March 31, 1995. The decrease in
contracts purchased of 1,248, or 52%, is a result of a decrease in the amount
of funds available for reinvestment in contracts due to more Fund Subsidiaries
being restricted from purchasing contracts in 1996 than during the six month
period in 1995. Virtually all of the contracts purchased during both periods
were purchased under the criteria contained in the Trust Indenture for each
Fund Subsidiary. Effective March 15, 1996, the Trust Indentures were canceled
and all new originations are now under the Company's new purchasing criteria.
See Item 1. Business. "Operations Since Reorganization of the Fund
Subsidiaries" for a discussion of the Company's new underwriting standards.
For the six months ended March 31, 1996, the Company had interest revenue
of $3,541,000 compared to $8,694,000 for the six months ended March 31, 1995.
The decrease in interest revenue of $5,153,000, or 59%, is due to a decrease
in average net interest earning receivables from $61,100,000, for the six
months ended March 31, 1995, to $34,790,000, for the six months ended March
31, 1996.
Interest expense decreased $5,131,000, or 80%, from $6,437,000 for the
six months ended March 31, 1995 to $1,306,000 for the six months ended March
31, 1996. The decrease in interest expense is due primarily to termination of
interest accrual on the debt of the Fund Subsidiaries as of the date of filing
for Bankruptcy, August 15, 1995, or the fund's maturity date, whichever
occurred first. See Note 5 to the Consolidated Financial Statements. The
decrease in interest expense was partially offset by the increase in interest
expense associated with outstanding lines of credit.
The provision for credit losses decreased $355,000, or 7%, from
$5,337,000 for the six months ended March 31, 1995, to $4,982,000 for the six
months ended March 31, 1996. The decrease in the provision for loan losses
is due to adequate provisions for loan losses being provided in prior
periods.
General and administrative expenses increased $877,000 or 12% from
$7,221,000 to $8,098,000. The increase in general and administrative expense
is due to higher cost associated with repossessing vehicles and legal and
administrative costs.
Net loss for the six months ended March 31, 1996 was $2,998,000 compared
to $10,421,000 for the six months ended March 31, 1995. The decrease in net
loss is due primarily to $8,709,000 of gain on extraordinary items related to
extinguishment of debt on Fund Subsidiaries. See Note 5 to the Notes to
Consolidated Financial Statements.
Comparison of Twelve Month Periods Ended September 30, 1995 and the Twelve
Month Period ending September 30, 1994
The Company purchased 5,328 contracts, at a cost of $24,830,000, during
the twelve months ending September 30, 1995 compared to 18,377, contracts at a
cost of $88,124,000, 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 for the Note debts of the Fund Subsidiaries as a result of the
bankruptcy petitions or maturity dates (whichever event occurred first). See
Note 5 in Notes to 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 $9,296,000 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 vehicles 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 vehicles compared to 6,449
during the year ended September 30, 1994.
The net loss before dividends 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.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's business will have an ongoing requirement to raise
substantial amounts of cash to support its activities. The principal cash
requirements include amounts to purchase receivables, cover operating expenses
and to pay preferred stock dividends. The Company has a significant amount of
cash on hand as of March 31, 1996 which it considers adequate to meet its
reasonably anticipated needs. The Company intends to invest a portion of this
cash into finance receivables. In the future, additional liquidity will be
necessary to support growth of the Company's load portfolio and operations.
The Company intends to leverage its net equity and subordinated debt in the
future.
Search has obtained a commitment for a line of credit to purchase
receivables which would then be assigned to special purpose entities for
future securitization. Search has also received a commitment for a line of
credit to purchase receivables which would remain on Search's balance sheet.
These commitments are subject to completion of definitive documentation.
Search is also pursuing additional banking lines of credit. These financings
would be utilized for the purchase of contract receivables. Search believes
the financings as contemplated would be adequate to fund anticipated future
operations of Search.
The Company's annual dividend requirements on the outstanding shares of
its 12% Preferred Stock and 9%/7% Preferred Convertible Stock, as of May 31,
1996, were $240,000 and $5,375,000, respectively. The annual dividend
requirement on the Company's 9%/7% Convertible Preferred Stock will remain at
the 9% level, or $5,375,000, for the first three years and then decrease to
the 7% level, or $4,181,000, for the remaining four-year term. Any conversion
to Common Stock would reduce these dividend requirements.
See "Item 1, Financing" for a discussion of subsequent financing activity
which occurred after March 31, 1996. See Note 3 to the Notes to Consolidated
Financial Statements.
Operating Activities
During the six months ended March 31, 1996, the Company utilized cash of
$4,141,000 in its operations as compared to cash of $10,741,000 used in during
the twelve months ended September 30, 1995. The net loss for the six months
ended March 31, 1996 decreased from a net loss of $19,894,000 for the year
ended September 30, 1995 to a net loss of $2,671,000 for the six months ended
March 31, 1996. A significant portion of the decrease in loss from 1995 to
1996 resulted from an extraordinary gain on debt extinguishment of $8,709,000.
General and administrative expenses decreased from $15,881,000 to $8,098,000,
while settlements and reorganization expenses decreased by $2,617,000 from
$3,152,000 to $535,000. The decrease in general and administrative
expenditures is due to there being only six monthly periods included in 1996
compared to twelve monthly periods included in 1995.
Investing Activities
During the twelve months ended September 30, 1995, the Company's
investing activities provided cash of $17,592,000 as compared to cash of
$20,423,000 provided by investing activities during the six months ended March
31, 1996. This change resulted primarily from reduced contract purchases of
$19,359,000 and an increase in unrestricted cash of $12,624,000, partially
offset by decreased collection proceeds of $29,731,000.
Financing Activities
During the twelve months ended September 30, 1995, the Company utilized
cash of $7,348,000 in its financing activities as compared to cash of
$1,093,000 provided by financing activities during the six months ended March
31, 1996. In 1995, the Company raised only $1,779,000 through Note offerings
and repaid $2,429,000 on its line of credit and repaid $5,077,000 of the Notes
payable. During the six months ended March 31, 1996, the Company had net
borrowings of $1,225,000 under lines of credit, did not pay any funds through
Note offerings and did not raise any of the Notes payable. Because of the
Bankruptcy, no payments were made on the Fund Subsidiaries' Notes Payable and
GECC was settled in full.
Recent Accounting Pronouncement
Information as to recent accounting pronouncements is contained in Note 8
of the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index at page F-1.
<PAGE>
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Certified Public Accountants' Report F-2
Consolidating Balance Sheets as of March 31, 1996 and September 30, 1995 F-3
Consolidating Statements of Operations for the six months ended March 31, F-4
1996, the years ended September 30, 1995 and 1994.
Consolidated Statement of Changes in Stockholders' Equity (Capital Deficit) F-5
for the period from October 1, 1993 through March 31, 1996.
Consolidated Statements of Cash Flows for the six months ended March 31, F-6
1996, the years ended September 30, 1995 and 1994.
Notes to Consolidated Financial Statements F-7
</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 or the notes thereto.
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To The Board of Directors and Stockholders
Search Capital Group, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Search
Capital Group, Inc. and its subsidiaries ("the Company") as of March 31, 1996,
and September 30, 1995, and the related consolidated statements of operations,
changes in stockholders' equity (capital deficit), and cash flows for the six
months ended March 31, 1996, and the years ended September 30, 1995 and 1994.
These 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Search
Capital Group, Inc. and Subsidiaries as of March 31, 1996, and September 30,
1995, and the results of its operations and its cash flows for the six months
ended March 31, 1996, and the years ended September 30, 1995 and 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated 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.
Certified Public Accountants
Dallas, Texas
May 10, 1996
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995
---------------------------------- --------------------
ASSETS Historical Pro forma (Note 3)
- ------------------------------------------------ ------------- -------------------
<S> <C> <C> <C>
Gross contracts receivable (Note 4) $ 37,086,000 $ 37,086,000 $ 66,677,000
Unearned interest (6,435,000) (6,435,000) (13,106,000)
------------- ------------------- --------------------
Net contracts receivable 30,651,000 30,651,000 53,571,000
Allowance for credit losses (13,353,000) (13,353,000) (18,623,000)
Loan origination costs 3,984,000 3,984,000 3,754,000
Amortization of loan origination costs (3,578,000) (3,578,000) (2,937,000)
Net contract receivables - after allowance
for credit losses & other costs 17,704,000 17,704,000 35,765,000
------------- ------------------- --------------------
Cash and cash equivalents 17,817,000 21,582,000 442,000
Restricted cash (Note 2) - - 8,105,000
Vehicles held for resale 566,000 566,000 601,000
Deferred note offering cost, net (Note 1) - - 3,062,000
Property and equipment, net 1,062,000 1,062,000 1,306,000
Other assets, net 197,000 197,000 641,000
------------- ------------------- --------------------
Total assets $ 37,346,000 $ 41,111,000 $ 49,922,000
============= =================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
- ------------------------------------------------------
Lines of credit (Notes 3 & 6) $ 2,283,000 $ - $ 1,058,000
Accrued settlements (Notes 14 & 15) 688,000 688,000 2,912,000
Accrued restructuring (Note 2) - - 214,000
Accounts payable and other liabilities 7,356,000 7,356,000 2,051,000
Accrued interest 15,000 - 2,000
------------- ------------------- --------------------
Liabilities 10,342,000 8,044,000 6,237,000
------------- ------------------- --------------------
Prepetition notes payable and accrued
interest - subject to compromise (Notes 2,5) - - 69,320,000
------------- ------------------- --------------------
Stockholders' Equity (Capital Deficit)
- ------------------------------------------------
Preferred stock (Note 8) 154,000 174,000 4,000
Common stock (Note 8) 259,000 300,000 117,000
Additional paid-in capital 81,784,000 87,786,000 26,766,000
Accumulated deficit (54,043,000) (54,043,000) (51,372,000)
Treasury stock (1,150,000) (1,150,000) (1,150,000)
------------- ------------------- --------------------
Total stockholders' equity (capital deficit) 27,004,000 33,067,000 (25,635,000)
------------- ------------------- --------------------
Total liabilities and stockholders' equity
(capital deficit) $ 37,346,000 $ 41,111,000 $ 49,922,000
============= =================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1996 Year Ended Year Ended
(Note 1) September 30, 1995 September 30, 1994
------------------ -------------------- --------------------
<S> <C> <C> <C>
Interest revenue $ 3,541,000 $ 13,472,000 $ 14,054,000
Interest expense 1,306,000 11,205,000 9,968,000
------------------ -------------------- --------------------
Net interest income (loss) 2,235,000 2,267,000 4,086,000
Provision for credit losses 4,982,000 3,128,000 20,180,000
------------------ -------------------- --------------------
Net interest income (loss) after
provision for credit losses (2,747,000) (861,000) (16,094,000)
------------------ -------------------- --------------------
General and administrative expense 8,098,000 15,881,000 9,296,000
Settlement expense 535,000 2,837,000 560,000
Reorganization expense (Notes 2 & 10) - 315,000 -
Operating and other expense 8,633,000 19,033,000 9,856,000
Loss before extraordinary item (11,380,000) (19,894,000) (25,950,000)
Extraordinary gain on discharge of
debt (Notes 2 & 5) 8,709,000 - -
------------------ -------------------- --------------------
Net loss (2,671,000) (19,894,000) (25,950,000)
Preferred stock dividends (327,000) (240,000) (240,000)
Net loss attributable to common
stockholders $ (2,998,000) $ (20,134,000) $ (26,190,000)
================== ==================== ====================
Loss per common share before
extraordinary item $ (1.12) $ (2.25) $ (2.33)
Gain on extraordinary item 0.83 - -
Loss per common share $ (0.29) $ (2.25) $ (2.33)
================== ==================== ====================
Weighted average number of
common shares outstanding 10,447,000 8,967,000 11,258,000
================== ==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Statement of Changes in Stockholders' Equity (Capital Deficit) (Note 8)
For the period from October 1, 1993 through March 31, 1996
Preferred Stock -12% Preferred Stock - 9%/7% Common stock Treasury Stock
---------------- -------------------- ---------------------- -----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ------- ---------- -------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1993 400,000 $ 4,000 - - 12,165,670 $122,000 2,526,389 $ (25,000)
Issuance of common shares for cash - - - - 2,785,000 28,000 - -
ESOP termination, net of expenses - - - - (306,152) (3,000) - -
Stock cancellation - - - - (2,946,988) (30,000) - -
12% preferred stock dividends - - - - - - - -
Net loss - - - - - - - -
Balance, September 30, 1994 400,000 4,000 - - 11,697,530 117,000 2,526,389 (25,000)
Stock purchase at May 5, 1995 - - - - - - 500,000 (1,125,000)
12% preferred stock dividends - - - - - - - -
Net loss - - - - - - - -
Balance, September 30, 1995 400,000 4,000 - - 11,697,530 117,000 3,026,389 (1,150,000)
Exercise of options - - - - 35,840 1,000 - -
Class action suit settlement (Note 14) - - - - 1,848,000 18,000 - -
ESOP shares distribution - - - - 178,848 2,000 - -
Reorganization (Note 2) - - 15,031,648 150,000 12,115,001 121,000 - -
12% preferred stock dividends - - - - - - - -
9% preferred stock dividends - - - - - - - -
Net loss - - - - - - -
Historical balance at March 31, 1996 400,000 4,000 15,031,648 150,000 25,875,219 259,000 3,026,389 (1,150,000)
PRO FORMA INFORMATION (NOTE 3)
Debt conversion - - - - 2,500,000 25,000 - -
Additional investment - - 2,032,800 20,000 1,638,400 16,000 - -
Pro forma balance at March 31, 1996 400,000 $ 4,000 17,064,448 $170,000 30,013,619 $300,000 3,026,389 $(1,150,000)
Additional ESOP Notes Accumulated Stockholders' Equity
----------------- ------------ ------------- ------------------
Paid-In Capital Receivable Deficit (Capital Deficit)
----------------- ------------ ------------- ------------------
<S> <C> <C> <C> <C>
Balance, October 1, 1993 $ 8,711,000 $(1,073,000) $ (5,528,000) $ 2,211,000
Issuance of common shares for cash 19,379,000 - - 19,407,000
ESOP termination, net of expenses (874,000) 1,073,000 - 196,000
Stock cancellation 30,000 - - -
12% preferred stock dividends (240,000) - - (240,000)
Net loss - - (25,950,000) (25,950,000)
Balance, September 30, 1994 27,006,000 - (31,478,000) (4,376,000)
Stock purchase at May 5, 1995 - - - (1,125,000)
12% preferred stock dividends (240,000) - - (240,000)
Net loss - - (19,894,000) (19,894,000)
Balance, September 30, 1995 26,766,000 - (51,372,000) (25,635,000)
Exercise of options 10,000 - - 11,000
Class action suit settlement (Note 14) 2,595,000 - - 2,613,000
ESOP shares distribution (2,000) - - -
Reorganization (Note 2) 52,742,000 - - 53,013,000
12% preferred stock dividends (120,000) - - (120,000)
9% preferred stock dividends (207,000) - - (207,000)
Net loss - - (2,671,000) (2,671,000)
Historical balance at March 31, 1996 81,784,000 - (54,043,000) 27,004,000
PRO FORMA INFORMATION (NOTE 3)
Debt conversion 1,692,000 - - 1,717,000
Additional investment 4,310,000 - - 4,346,000
Pro forma balance at March 31, 1996 $ 87,786,000 - $(54,043,000) $ 33,067,000
</TABLE>
See accompanying notes to consolidated financial statements
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended
March 31, 1996 September 30, 1995 September 30, 1994
------------------- -------------------- --------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (2,671,000) $ (19,894,000) $ (25,950,000)
Adjustments to reconcile net loss to
cash provided by (used in) operations:
Provision for credit losses 4,982,000 3,128,000 20,180,000
Amortization of deferred offering costs 1,221,000 2,840,000 2,158,000
Amortization of loan origination costs 641,000 1,047,000 1,728,000
Depreciation and amortization 262,000 384,000 217,000
Extraordinary gain on discharge of debt (8,709,000) - -
Loss on disposition of fixed assets 112,000 - -
Changes in assets and liabilities:
Decreases (increases) in other assets, net 470,000 (86,000) 60,000
Increases (decreases) in accounts payable
and accrued expense (449,000) 1,840,000 3,488,000
Cash provided by (used in) operations (4,141,000) (10,741,000) 1,881,000
------------------- -------------------- --------------------
INVESTING ACTIVITIES:
Purchase of contract receivables including
origination fees (5,471,000) (24,830,000) (88,124,000)
Principal payments on contract receivables
including proceeds from sales of vehicles 17,921,000 47,652,000 33,912,000
Purchases of property and equipment (132,000) (711,000) (957,000)
(Increases) decreases in restricted cash 8,105,000 (4,519,000) 3,416,000
Decrease in notes receivable, related party - - 167,000
Cash provided by (used in) investing 20,423,000 17,592,000 (51,586,000)
------------------- -------------------- --------------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit 1,225,000 (2,429,000) 3,487,000
Notes payable proceeds - 1,779,000 31,206,000
Notes payable repayments - (5,077,000) (1,000,000)
Capital lease (repayments) financing (24,000) (58,000) 308,000
Notes payable offering costs - (198,000) (3,455,000)
Proceeds from sale of stock, net of expense - - 19,407,000
Proceeds from exercise of options 12,000 - -
Purchase of treasury stock - (1,125,000) -
Change in ESOP Note Receivable - - 196,000
Payment of dividends (120,000) (240,000) (240,000)
Cash provided by (used in) financing activities 1,093,000 (7,348,000) 49,909,000
------------------- -------------------- --------------------
CHANGE IN CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents 17,375,000 (497,000) 204,000
Cash and cash equivalents - beginning 442,000 939,000 735,000
Cash and cash equivalents - ending $ 17,817,000 $ 442,000 $ 939,000
=================== ==================== ====================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 71,000 $ 9,272,000 $ 7,426,000
=================== ==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES
General. The accompanying consolidated financial statements include the
accounts of Search Capital Group, Inc. ("Search") including its subsidiaries
("the Company") as follows:
<TABLE>
<CAPTION>
Ownership
Subsidiary Percentage
- -------------------------------------------------------------------- -----------
<S> <C>
Automobile Credit Holdings, Inc. ("ACHI") 100%
Automobile Credit Acceptance Corp. ("ACAC") (100% owned by ACHI) 100%
Consumer Dealer Autocredit Corporation ("CDAC") (100% owned by ACHI) 100% *
Eight Fund Subsidiaries and two previous Fund Subsidiaries 100%
Newsearch, Inc. 100% *
Search Funding Corp. ("SFC") 100%
Automobile Wholesaling, Inc. 100% *
Search Automobile Leasing Corporation 100% *
* Currently inactive.
</TABLE>
The Fund Subsidiaries are special purpose subsidiaries of Search which
raised money through the issuance of interest bearing notes for the purchase
of contract receivables. The Fund Subsidiaries (see Note 2 for discussion of
bankruptcy proceedings) have accounted for all transactions, where applicable,
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 ("AICPA") in November 1990.
ACAC raised 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 serviced the contracts on
behalf of the Fund Subsidiaries and will continue to service the contracts for
the Company.
In 1996, the Company changed its fiscal year end to March 31. The prior
year consolidated statements have been formatted to conform with the 1996
presentation.
Basis of Consolidation. The consolidated financial statements include
the accounts of the Company, after elimination of all significant intercompany
accounts and transactions, and have been prepared in accordance with generally
accepted accounting principles.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Contracts Receivable, Allowance for Credit Losses, and Interest Income.
The Company's contracts receivable, allowance for credit losses and interest
income are discussed in Note 4.
Loan Origination Costs. The Company performs substantially all of the
functions associated with origination of the contracts and capitalizes the
related costs. The portion capitalized is amortized by the interest method
against income as an adjustment of yield.
Deferred Notes Payable Offering Costs. Costs directly related to notes
payable offerings were capitalized and amortized to expense by the interest
method over the contractual terms of the notes. Deferred offering costs were
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 the Company'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 shares of Search common stock outstanding during
each period and after deducting preferred stock dividends declared. Common
stock equivalents are included in the calculations except when their effect
would be antidilutive.
Income Taxes. The Company files a consolidated federal income tax
return. The Company uses the asset and liability method to provide for income
taxes under which deferred tax assets and liabilities are recognized for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
Statement of Cash Flows. For purposes of reporting cash flows, the
Company considers short term cash investments with original maturities of
three months or less to be cash equivalents. Cash held in a Fund Subsidiary
was restricted to payment of allowable expenses and investment in contract
receivables until the note balance of the Fund Subsidiary was satisfied.
2. CHAPTER 11 BANKRUPTCY FILING OF THE FUND SUBSIDIARIES AND CONFIRMATION
OF THE JOINT PLAN OF REORGANIZATION
As of March 31, 1996, the Fund Subsidiaries consisted of six public and
two private corporations as follows:
Automobile Credit Fund 1991-III, Inc. ("ACF 91-III") - Private
Automobile Credit Finance, Inc. ("ACF") - Public
Automobile Credit Partners, Inc. ("ACP") - Private
Automobile Credit Finance 1992-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
At September 30, 1995, Fund Subsidiaries' cash balances of $8,105,000
were restricted for reinvestment use or held in sinking funds to be applied to
the repayment of the Fund Subsidiaries Notes.
On August 14, 1995, only the Fund Subsidiaries filed for reorganization
under Chapter 11 of the U. S. Bankruptcy Code. Search and its unrestricted
subsidiaries did not seek protection under the Code but Search was a
co-proponent of a joint plan of reorganization for the Fund Subsidiaries. On
March 4, 1996, the Court entered an order ("Confirmation Order") confirming
the Third Amended Plan of Reorganization ("Joint Plan") for all of the Fund
Subsidiaries, effective on March 15, 1996 ("Effective Date").
Total secured claims of all noteholders under the Joint Plan were
$53,240,000, and total unsecured claims were $16,080,000, for total claims of
$69,320,000, which comprised the total of notes payable and accrued interest
due the Noteholders (Note 5). The Joint Plan allowed noteholders to choose
one of two options. Under one of the options ("Equity Option"), noteholders
would receive with respect to the secured portion of their claims shares of
Search common stock, shares of a new series of 9%/7% convertible preferred
stock and a cash payment equal in amount as if dividends had been calculated
on the preferred stock from July 1, 1995 to the Effective Date. Under the
other option ("Collateral Option"), 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. According to the Joint Plan, the number of shares of common
stock to be issued would be calculated as of the Effective Date so that
noteholders would receive preferred stock and common stock equal, on a fully
diluted basis, to 75% of the value of all shares of new 9%/7% preferred stock,
common stock, existing 12% preferred stock, warrants, stock options and rights
then outstanding, or agreed to be issued by Search (with certain exceptions,
including any shares issued to Hall Phoenix Inwood Limited, (HPIL) under the
Funding Agreement, see Note 3). At a special shareholders meeting on March
1, 1996, shareholders of Search approved two amendments to Search's
Certificate of Incorporation, increasing Search's authorized capital stock to
130,000,000 shares of common stock and 60,000,000 shares of new preferred
stock. The Certificate of Incorporation also was amended to prohibit Search
from issuing any non-voting capital stock.
Before the Effective Date, Value Partners, Ltd. ("VPL") purchased all of
the secured claims of noteholders who had elected the Collateral Option
(approximately $12,800,000 of original Note principal amount) and changed the
election for such secured claims to the Equity Option. The selling
noteholders retained their unsecured claims. As a consequence of this
transaction, 100% of the secured claims of noteholders received treatment
under the Equity Option.
With respect to the unsecured portion of noteholders' claims, the
noteholders and any other holders of unsecured claims, will receive from
Search a pro rata share of warrants to purchase an aggregate of 5,000,000
shares of common stock (the "Warrants"). The Warrants will be issued after
the unsecured claims of non-noteholders have been finally determined by the
Court. (See Note 8).
The Joint Plan required that a trust ("Litigation Trust") be established
for the benefit of the holders of unsecured claims, including the Noteholders,
with a total funding of $350,000. The Litigation Trust is authorized to
pursue claims and causes of action of the Fund Subsidiaries and of certain
participating Noteholders. Proceeds will be distributed pro rata to unsecured
claim holders. The Litigation Trust cannot pursue any causes of action during
the first year following the Effective Date where tolling agreements have been
executed. The Litigation Trust will automatically terminate if Search's
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.
On the Effective Date, the net assets of the Fund Subsidiaries were
transferred to Search, and the Fund Subsidiaries are to be liquidated and
dissolved as soon as possible thereafter. The Notes and the indebtedness
represented by the Notes were deemed canceled when the Confirmation Order
became final. The trust indentures for the Notes, and all related
restrictions, were also deemed canceled. As a result of the implementation
of the Joint Plan and the cancellation of the Notes, a net extraordinary gain
from the extinguishment of debt was reported in the amount of $8,709,000 (See
Note 5).
The Joint Plan provided that the Board of Directors of Search select two
additional directors from qualified director nominees submitted by the
official Creditors Committee for the Debtors. These new directors have been
selected by the Board, but pursuant to their request, will not be appointed as
directors until Search obtains directors and officers liability insurance
coverage, which Search is pursuing. The duration of the term of one of the
new directors will be three years, and the duration of the term of the other
new director will be two years. These two new members will also be appointed
to membership on the Compensation Committee of the Board for the one year
period immediately following the Effective Date.
3. PRO FORMA INFORMATION AND TRANSACTIONS WITH HALL AND AFFILIATES
The consolidated pro forma balance sheet as of March 31,1996, contains
the accounts of the Company, after elimination of all significant intercompany
accounts and transactions after giving effect to the following significant
events. Subsequent to March 31, 1996, Search consummated certain of the Hall
Financial Group (HFG) transactions as described below. The transactions are
included in the pro forma balance sheet of the Company as if the transactions
were effective March 31, 1996.
On November 30, 1995, Search entered into a Funding Agreement ("Funding
Agreement") with HFG. Pursuant to the Funding Agreement, HFG made loans
totaling $2,283,000 ("HFG Notes") to Search. The HFG Notes could, at the
election of HFG or its assigns, be converted into a maximum 2,500,000 shares
of Search common stock. Effective April 2, 1996, HPIL, as assignee from HFG
of the HFG Notes, fully exercised the rights of the holder of the HFG Notes to
convert the Notes into 2,500,000 shares of Search common stock. Because the
conversion price specified in the HFG Notes for these shares was less than the
full amount due HFG, Search paid to HPIL the remaining portion of the debt
evidenced by the HFG Notes ($567,000) in cash.
The Funding Agreement also provided to HFG the option to purchase common
stock, 9%/7% preferred stock, and warrants Effective April 2, 1996, HPIL, as
assignee of HFG, fully exercised this purchase option by paying $4,346,000
cash to Search for which Search issued 1,638,400 shares of common stock and
2,032,800 shares of 9%/7% preferred stock, and warrants to purchase 676,000
shares of common stock to HPIL.
Pursuant to the Funding Agreement, HFG was entitled to elect one director
to Search's Board if HFG converted the HFG Notes into common stock and to
elect another director if HFG purchased at least $1,000,000 Present Value of
securities from Search. These new directors, pursuant to their request, will
be appointed as directors when Search obtains directors and officers liability
insurance, which Search is pursuing. As a result of satisfaction of these
conditions, HFG has designated two HFG officers as its representatives for
appointment to Search's Board.
4. CONTRACTS RECEIVABLE, ALLOWANCE FOR CREDIT LOSSES AND INTEREST INCOME
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 ("receivables") 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 receivables was amortized to interest
revenue over the period in which payments on the receivables 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 receivables. Accordingly, changes in
estimates of future cash collections were recognized through prospective yield
adjustments.
In the fourth quarter of fiscal 1994, the Company 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, receivables
are analyzed on a loan-by-loan basis. The Company evaluates the impairment of
receivables based on contractual delinquency, as well as other factors
specific to the receivables. When a concern exists as to the collectibility
of a receivable, interest income ceases to be recognized. Receivables, once
impaired, are collateral dependent; that is, once a receivable is in default,
the Company looks to the underlying collateral for repayment of the
receivable. Therefore, at impairment the Company records an allowance for
credit losses to record the receivable at its estimated fair value of the
collateral. If the measure of the impaired receivable is less than the net
recorded investment in the receivable, the Company 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 receivable and its net carrying
value. Subsequent recovery on a previously charged off account is recorded
as a recovery to the allowance for credit losses. Generally, the Company
considers receivables contractually delinquent 60 days or more to be impaired.
The Company records receivable 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 receivable equal to the unearned discount, which is 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>
(Dollars in thousands) Number of Total
Active Unpaid Unearned Net
As of March 31, 1996 Receivables Installments Interest Receivables
- --------------------------------------------------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Impaired receivables 421 $ 2,091 $ 380 $ 1,711
Unimpaired receivables 7,575 34,995 6,055 28,940
Total 7,996 $ 37,086 $ 6,435 $ 30,651
=========== ============= =========
Allowance for credit losses (13,353)
Receivables, net of allowance for credit losses $ 17,298
=============
As of September 30, 1995
- ---------------------------------------------------
Impaired receivables 2,323 $ 12,919 $ 1,644 $ 11,275
Unimpaired receivables 9,805 53,758 11,462 42,296
Total 12,128 $ 66,677 $ 13,106 $ 53,571
=========== ============= =========
Allowance for credit losses (18,623)
Receivables, net of allowance for credit losses $ 34,948
=============
</TABLE>
The change in the allowance for credit losses is summarized as follows on
a consolidated basis:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1996 September 30, 1995
---------------- --------------------
<S> <C> <C>
Balance, beginning of period $ 18,623 $ 44,633
Allowance recorded upon purchase of receivables 2,194 9,613
Increase in allowance for credit losses 4,982 3,169
Receivables charged off against allowance (14,742) (38,792)
Recovery of prior credit losses 2,296 -
---------------- --------------------
Balance, end of period $ 13,353 $ 18,623
================ ====================
</TABLE>
At March 31, 1996, contractual maturities of receivables were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1998 1999 Total
------- ------- ------ -------
<S> <C> <C> <C> <C>
Future payments receivable $23,445 $11,507 $2,134 $37,086
Less unearned interest 4,886 1,450 99 6,435
Net contracts receivable $18,559 $10,057 $2,035 $30,651
======= ------- ------ -------
</TABLE>
In the opinion of management, a portion of the receivables will be repaid
or extended either before or past the contractual maturity date. In addition,
some receivables will default before maturity. The above tabulation,
therefore, is not to be regarded as a forecast of future cash collections.
Through the use of its Auto Notes Management System, management is able
to evaluate the loan impairment of the receivables on a loan-by-loan basis.
Prior to adoption of SFAS 114, the Company, as more fully explained
below, only recognized credit losses when the aggregate of undiscounted
expected future cash flows of a pool of receivables did not exceed the
carrying amount of the respective pool. In 1994, credit losses of $5,259,000,
which represented the excess of the carrying amount of the respective pools
over the undiscounted expected future cash flows of the respective pools,
would have been recorded notwithstanding the adoption of SFAS 114.
In accordance with the adoption of SFAS 114, the portion of the increase
in allowance for credit losses (applicable to the $14,921,000 recorded to
reduce impaired receivables to the fair value of their underlying collateral),
some of which, if any, is attributable to prior years, was included in current
operations of the year of adoption (fiscal 1994) and no cumulative effect is
shown on the statement of operations.
The following table, containing unaudited PB6 estimates that the Company
believes to be reasonably accurate, compares the provision for credit losses
and reduction in interest income under PB6 and under SFAS 114 for fiscal year
1994:
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended
September 30, 1994
-------------------
<S> <C> <C>
Provision for credit losses $ 20,180
PB6 :
Interest revenue reduction $4,413
Provision for credit losses 846 5,259
------ -------------------
Increases in losses due to adoption of SFAS 114 $ 14,921
===================
</TABLE>
Under SFAS 114, the impairment of a receivable in excess of any existing
reserve is charged to the provision for credit losses in the current period.
Therefore, when measuring the provision for credit losses, the primary
difference is the prospective treatment of impairment under PB6 as compared to
the current treatment under SFAS 114. SFAS 114 recognizes all of the
impairment in the current period instead of adjusting the amortization of the
remaining unearned interest and discount over the remaining life of the
receivable.
Under PB6, when the total probable collections for a receivable is
greater than the net investment, any adjustment to the estimated undiscounted
collections is a reduction to unearned interest and discount, with the
remaining unearned interest and discount being amortized over the remaining
life of the receivable, reducing the future yield of the loan. Therefore,
under PB6 credit losses are only recorded when the future expected yield of
the receivable portfolio has been reduced to zero and the net investment is
greater than the undiscounted probable collection.
Management elected early adoption of SFAS 114 in fiscal 1994 because the
measurement of credit losses provided by this statement is considered
preferable.
Most of the Company's receivables are due from individuals located in
large metropolitan areas of Texas and other southern and western states. To
some extent, realization of the receivables will be dependent on local
economic conditions. The Company holds vehicle titles as collateral for all
receivables until such receivables are paid in full.
5. NOTES PAYABLE AND ACCRUED INTEREST
Notes payable of the Fund Subsidiaries at September 30, 1995 and prior
to the final confirmation of the Joint Plan of Reorganization, March 15, 1996
(see Note 2), consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Notes payable by ACF 91-III, bearing interest at 21%, required 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
maturity date. $ 590,000
Notes payable by ACP, bearing interest at 21%, required 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 maturity
date. 610,000
Notes payable by ACF, bearing interest at 18%, required 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
maturity date. 1,506,000
Notes payable by ACF 92-II, bearing interest at 15% due monthly, required payment of principal in full on
December 31, 1995. 10,000,000
Notes payable by ACF III, bearing interest at 15% due monthly, required payment of principal in full on April 30,
1996. 15,000,000
Notes payable by ACF IV, bearing interest at 3% until October 15, 1993 and 14% thereafter due monthly,
required payment of principal quarterly from September 30, 1995 to December 31, 1996. 10,000,000
Notes payable by ACF V, bearing interest at 12% due monthly, required payment of principal quarterly from
October 1, 1996 to December 31, 1997. 19,872,000
Notes payable by ACF VI, bearing interest at 12% due monthly, required payment of principal quarterly from July
1, 1997 to June 30, 1998. 10,675,000
Total notes payable 68,253,000
Accrued Interest - prepetition 1,067,000
Total notes payable and accrued interest $69,320,000
===========
</TABLE>
As a result of the confirmation of the Joint Plan, the above debt and
accrued interest was ultimately extinguished in exchange for common stock,
9%/7% preferred stock, warrants and other provisions of the Joint Plan. The
extinguishment of debt resulted in a net extraordinary gain of $8,677,000.
The following table shows the components of the gain:
Calculation of net extraordinary gain on debt extinguishment
<TABLE>
<CAPTION>
<S> <C>
Total Notes and accrued interest $ 69,320,000
Value of exchange (56,367,000)
Administrative claims (2,400,000)
Unamortized debt offering costs (1,844,000)
Net gain of debt extinguishment $ 8,709,000
=============
</TABLE>
As of their maturity ACF, ACF 91-III and ACP stopped accruing interest on
the remaining unpaid principal. As these Fund Subsidiaries defaulted, it was
management's position that the accrual of interest was not warranted since
each Fund Subsidiary did 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 each of the Fund Subsidiaries under the terms of
their respective 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; therefore, no interest expense
was recorded for the six months ended March 31, 1996. For the year ended
September 30, 1995, contractual interest on the above obligations amounted to
$12,453,000 which was $1,500,000 in excess of reported interest expense. See
Note 2.
6. LINE 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 was secured
by all SFC assets and was 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 required a minimum payment of $500,000 per quarter. As of
September 30, 1995, the line had a balance of $1,058,000.
The Joint Plan called for Search to fully satisfy its obligation to GECC.
As a result, on March 18, 1996, Search paid GECC $173,000 which included all
principal and interest owing as of that date. This payment fully satisfied
Search's obligation to GECC.
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 Search common 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, and the remaining 178,848 shares were allocated to participating
employees. The distribution of these shares is reflected in the fiscal 1996
statement of changes in stockholders' equity.
8. STOCKHOLDERS' EQUITY
12% Senior Convertible Preferred Stock. As of March 31, 1996, Search had
issued 400,000 shares of its 12% preferred stock. The 12% preferred shares
have a $.01 par value and have voting rights and a liquidation preference of
$5.00 per share plus accrued and unpaid dividends. The 12% preferred shares
are convertible into one share of Search's $.01 common stock for each share of
12% preferred at the option of the shareholder. 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 12% preferred
Certificate of Designation.
9%/7% Convertible Preferred Stock. On March 1, 1996, the Board of
Directors established a new series of preferred stock, 9%/7% preferred stock,
for the purpose of effecting the Joint Plan. As of March 31, 1996, Search had
issued in connection with the Joint Plan, or committed to issue, 15,031,648
shares of its 9%/7% preferred. During April 1996, Search issued an additional
2,032,800 shares of 9%/7% preferred stock in connection with the HFG
transaction, reflected in the pro forma consolidated balance sheet as of March
31, 1996. See Note 3. The 9%/7% preferred shares, which are essentially
pari passu to the existing 12% preferred stock, have a $.01 par value and have
voting rights and a liquidation preference of $3.50 per share plus all accrued
and unpaid dividends. The shares carry a non-cumulative dividend rate of $.315
per share until the end of the twelfth full calendar quarter following payment
of the first dividend (9% End Date) and $.245 per share after the 9% End Date.
The 9%/7% preferred shares are convertible at any time into common stock in
the ratio of two shares of common stock for each share of 9%/7% preferred.
Conversion may occur upon the occurrence of certain events as defined in the
Certificate of Designation (see Note 2).
Common stock. On March 1, 1996, the stockholders approved an amendment
to Search's Certificate of Incorporation to increase the number of authorized
shares of $.01 par value common stock to 130,000,000 for the purpose of
effecting the Joint Plan. As of March 31, 1996, Search had issued or
committed to issue a total of 25,875,219 shares of its common stock. Of this
amount, 12,115,001 shares were issued in connection with the Joint Plan (see
Note 2), 2,500,000 in connection with the HFG conversion, 1,638,400 shares in
connection with the HFG purchase (see Note 3) and 1,848,000 shares for the
settlement of the class action lawsuit (see Note 14).
Warrants. During the six months ended March 31, 1996, 35,840 warrants
were exercised at an average price of $0.335 per share. In February 1994,
25,000 warrants were exercised at a price of $0.375 per share.
On March 1, 1996, the Board of Directors authorized Search to issue a new
class of warrants to purchase up to 5,676,178 shares of Common Stock, for the
purpose of effecting the Joint Plan. These warrants are governed by a warrant
agreement dated as of March 22, 1996. Warrants to purchase 5,000,000 shares
are to be issued to noteholders and other unsecured claim holders under the
Joint Plan, and warrants to purchase 676,178 shares of Common Stock have been
issued to HPIL, as assignee of HFG, pursuant to the Funding Agreement (see
Note 3).
The exercise price per share of these warrants is initially $2.00 and
increases by $.25 on March 15 of each successive year. These warrants will
expire on March 14, 2001, at which time Search must redeem all remaining
unexercised warrants at a redemption price of $0.25 per warrant.
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 "Plan"). The Plan was approved by Search's
stockholders at their annual meeting held in May 1995. Employees of the
Company or directors of subsidiaries are eligible to participate in the Plan.
As of March 31, 1996, approximately 100 persons were eligible to participate.
The 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 Plan is administered by the Compensation Committee of the
Board. Options granted under the Plan are not otherwise transferable other
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. A total of 1,750,000 shares of common
stock has been reserved for sale upon exercise of options granted under the
Plan. As of March 31, 1996, there were 2,581,500 outstanding options and/or
warrants of which 1,500,000 can be exercised as either options or warrants at
the employee's election. Certain options issued during the year ended
September 30, 1995, were repriced to reflect the current market prices at
that time.
During the six months ended March 31, 1996, Search issued 253,000 options
to employees and 436,000 warrants under the plan. All were issued at the
market price existing at that time.
In October 1994, 100,000 options were issued to an officer of Search and
in January 1995, 500,000 and 25,000 were issued respectively to two officers
of Search. In January 1995, an additional 285,500 options were issued to
employees. In August and September 1994, an additional 29,000 options were
issued to employees. All were issued at the market price existing at that
time.
In August 1994, 2 officers and 5 employees agreed, subject to shareholder
approval of the Plan, to the cancellation of their warrants in exchange for
options under the 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.
Recent Accounting Pronouncement. The Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("FAS 123") was issued in October
1995 to establish accounting and reporting standards for stock-based employee
compensation plans such as stock option and restricted stock plans. FAS 123
defines a fair value based method of accounting for measuring compensation
expense for stock-based plans and encourages all entities to adopt that method
of accounting. However, FAS 123 also permits entities to continue to measure
compensation expense for stock-based plans using the intrinsic value based
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the intrinsic value based method
must make pro forma disclosures of net income and earnings per share as if the
fair value based method defined by FAS 123 was applied.
Under the fair value based method, compensation expense would be measured
as the value of an award under a stock-based plan on the date the award is
granted and would be recognized over the vesting period of the award. Under
the intrinsic value based method, compensation expense is measured as the
excess, if any, of the market price of the stock underlying the award on the
date the award is granted, over the exercise price. Under Search's Plan,
awards have no intrinsic value on the date of the grant as the exercise price
equals the market price on that date. Currently, the Company does not expect
to adopt the FAS 123 fair value based method of accounting for its plan, but
intends to provide the required pro forma disclosures in the March 31, 1997
financial statements.
9. STOCK CANCELLATION AND 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 with the purchase, the director resigned from the Board.
Search was also given an irrevocable proxy expiring May 5, 1997 to vote the
remaining 800,000 shares of stock held by a trust formed by the former
director.
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 shares.
10. RELATED PARTY TRANSACTIONS
During the six months ended March 31, 1996 and the year ended September
30, 1994, the Company paid or accrued approximately $25,000 and $156,000,
respectively for fees related to the Note offerings described in Notes 4 and 5
and the class action settlement noted in Note 14 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.
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. Search 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.
On March 25, 1996, subsequent to confirmation of the Joint Plan discussed in
Note 2, BMFS received a $200,000 success fee from Search.
Additional related party transactions are described in Notes 7, 8 and 9.
11. INCOME TAXES
The Company files a consolidated income tax return. The components of
the Company's net deferred tax asset as of March 31, 1996 and September 30,
1995 are as follows:
<TABLE>
<CAPTION>
March 31, September 30, September 30,
1996 1995 1994
------------- --------------- ---------------
<S> <C> <C> <C>
Deferred tax asset:
- ---------------------------------
Allowance for credit losses & $ 1,260,000 $ 800,000 $ 1,500,000
inventory reserve
Net operating loss carry-forwards 13,000,000 15,400,000 8,900,000
Other tax credit carry-forwards 90,000 90,000 90,000
Accrued settlement costs 170,000
Valuation allowance (14,520,000) (16,290,000) (10,490,000)
--------------- ---------------
Total deferred tax asset -- -- --
------------- --------------- ---------------
</TABLE>
At March 31, 1996, the Company's consolidated tax return group has a net
operating loss carryforward for Federal income tax purposes of approximately
$44,100,000 which will expire, if unused, in the following years:
<TABLE>
<CAPTION>
Years of Expiration Amount
- ------------------- -----------
<S> <C>
1998 to 2008 $ 4,400,000
2009 27,200,000
2010 12,500,000
-----------
Total $44,100,000
===========
</TABLE>
Following the acquisition of the minority interest in ACHI on June 30,
1993 (see Note 3), the Company's 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 debt to equity conversion as outlined in the Joint Plan of
Reorganization resulted in approximately $8,709,000 of debt discharge income.
Additionally, this debt to equity conversion resulted in an ownership change
as defined under Section 382 of the Internal Revenue Code. This will result
in a limitation on the utilization of the net operating losses incurred prior
to the debt-to-equity conversion.
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. Rental expense for the six months ended March 31, 1996
and the years ended September 30, 1995, and 1994, was approximately $132,000,
$265,000 and $212,000, respectively.
The Company opened four remote collection facilities during fiscal 1995.
These leases expire through 1999. Lease expense for the six months ended
March 31, 1996 and fiscal 1995 was $34,000 and $20,000, respectively.
On April 1, 1996, the Company signed a lease for an additional 6,000
square feet of office space located in Dallas, Texas. The Company plans to
move a portion of its existing operations into the facility on July 1, 1996,
the lease commitment date. The lease has a term of sixty six months and an
approximate monthly rental of $5,300. The lease commitments for this lease
are included below in the operating lease commitment schedule.
Operating lease commitments by the Company are as follows:
<TABLE>
<CAPTION>
Year Ending March 31,
--------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Office leases $377,000 $300,000 $ 96,000 $82,000 $73,000
Office equipment leases 62,000 31,000 7,000 -- --
Total operating leases $439,000 $331,000 $103,000 $82,000 $73,000
======== ======== ======== ======= =======
</TABLE>
In addition to the operating leases, the Company has one capitalized
lease with payments of $81,000 per year through 1998 and $67,000 in 1999.
14. SETTLEMENT OF O'SHEA 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 was 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
"O'Shea Class Action Suit").
The O'Shea 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 O'Shea Class Action Suit contended
that Search made misstatements in its registration statements concerning the
Company's computerized system, accounting methodologies used by the Company,
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
deemed just and proper.
On April 26, 1996, the court entered a Final Judgment and Order of
Dismissal approving a settlement (the "Settlement") entered into between
Search and counsel for the plaintiffs. 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. The Settlement provided for a cash payment by
Search of $287,000 and the issuance by Search of its common stock with a value
of $2,613,000. As a result of the settlement Search issued 1,848,000 shares
of its common stock. The terms of the final settlement have been recorded in
the fiscal 1996 financial statements.
15. LEGAL PROCEEDINGS
In December 1993, ACAC 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 Corp., 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 the plaintiff. 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, $750,000.
ACAC believes that these allegations are without merit and has filed a general
denial and has a pending motion for partial summary judgment. Discovery in
the case is still ongoing and no opinion can be given as to the final outcome
of the lawsuit.
On August 14, 1995, the Fund Subsidiaries filed a petition in the U.S.
Bankruptcy Court in the Northern District of Texas, Dallas Division, seeking
protection under Chapter 11 of the U.S. Bankruptcy Code (see Note 2). These
cases were consolidated for joint administration under Case No.
395-34981-RCM-11. On March 4, 1996, the Court entered the Confirmation Order
confirming the Joint Plan for all of the Fund Subsidiaries. The Joint Plan
was effective March 15, 1996.
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.
While the Company believes the suit is without merit and intends to vigorously
defend itself, the Company has accrued as of March 31, 1996, an estimated
amount to cover the costs associated with the settlement of this matter.
There are presently no other legal proceedings, threatened or pending,
relating to the Company which would, in the opinion of management, have a
material impact on earnings or the financial condition of the Company.
<PAGE>
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.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name and age of the directors, the
year of the annual meeting of shareholders at which each director's term will
expire and the year of his initial election or appointment as a director.
<TABLE>
<CAPTION>
SHAREHOLDERS ANNUAL
POSITION DIRECTOR MEETING AT WHICH
NAME HELD AGE SINCE TERM WILL EXPIRE
- --------------------- --------------------------------------------------- --- -------- -------------------
<S> <C> <C> <C> <C>
Richard F. Bonini Director (1) 57 1995 1999
Luther H. Hodges, Jr. Director (2) 59 1995 1999
George C. Evans President, Chairman and Chief Executive Officer (3) 61 1995 1998
A. Brean Murray Director (4) 59 1993 1998
William H. T. Bush Director (5) 57 1995 1997
James F. Leary Director and Vice Chairman-Finance (6) 66 1995 1997
</TABLE>
(1) Serves as a member of the Executive and Compensation Committees of the
Board of Directors.
(2) Serves as Chairman of the Compensation Committee and a member of the
Audit Committee of the Board of Directors.
(3) Serves as Chairman of the Executive Committee of the Board of
Directors.
(4) Serves as a member of the Audit Committee of the Board of Directors.
(5) Serves as Chairman of the Audit Committee and a member of the
Compensation Committee of the Board of Directors.
(6) Serves as a member of the Executive Committee of the Board of
Directors.
Each of the directors of the Company is a United States citizen. During
the last five years, none of the directors (i) has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors), or
(ii) was a party to a civil proceeding of a judicial or an administrative body
of competent jurisdiction that resulted in a final judgment, decree, or final
order enjoining further violations of, or prohibiting activity subject to,
federal or state securities laws or finding any violations of such laws.
BUSINESS HISTORIES OF DIRECTORS
GEORGE C. EVANS, joined the Company as President, Chief Executive
Officer, and director on January 20, 1995. On May 5, 1995, Mr. Evans became
Chairman of the Board of Directors and Chairman of the Executive Committee of
the Board of Directors. Mr. Evans has over 30 years of experience in the
consumer lending and financial services industry. During 1992 and 1993, Mr.
Evans was President and CEO of Century Acceptance Corporation, a 32-state
operation engaged in consumer and automobile financing. Previously, he served
as President and Chief Operating Officer of Associates Financial Services,
Vice Chairman of Associates Corporation of North America and as Chairman and
CEO of Associates International subsidiaries, where his responsibilities
included 6,000 employees, $3.5 billion in receivables, with 1,100 branches and
annual earnings in the $100 million range. Prior to Associates, Mr. Evans was
employed by AVCO Financial Services where he rose from branch manager to
Senior Vice President.
A. BREAN MURRAY, was elected a director of the Company in December 1993.
Mr. Murray is Chairman of Brean Murray, Foster Securities, Inc., a
privately-held securities firm, and is also Chairman of its affiliate BMI
Capital Corporation, a registered investment advisor. He founded Brean
Murray, Foster Securities Inc. in 1973. Mr. Murray has been in the securities
industry since 1963 as a portfolio manager, director of institutional sales,
director of venture capital and corporate finance and chief executive officer.
He is a Director of First Caribbean Corporation, a mortgage banking company
in Puerto Rico. He is a co-founder and Chairman of JABRA Corporation, a
private company that sells hands-free auditory equipment.
LUTHER H. HODGES, JR., was appointed a director of the Company in May
1995. Mr. Hodges is currently president of the Caroline Co., an investment
partnership in Conway, South Carolina. Mr. Hodges has previously held
positions as Chairman and CEO of Washington Bancorporation and The National
Bank of Washington, chairman of North Carolina National Bank (now known as
NationsBank) and was formerly Under Secretary of the U.S. Department of
Commerce and Deputy Secretary of Commerce. Mr. Hodges currently serves on the
boards of numerous other organizations and corporations, including PhaseOut of
America. In 1978, he was a candidate for the United States Senate from North
Carolina.
JAMES F. LEARY, was appointed a director of the Company in May 1995 and
was named Vice Chairman-Finance of the Company in September 1995. Mr. Leary
has also been an employee of the Company since September 1995. Mr. Leary was
a founder and partner in the Sunwestern Investment Group, an investment
advisory and venture capital management firm. He previously served as
director, CFO and Senior Executive Vice President for Associates Corporation
of North America. From 1964 through 1973 he held various positions at CIT
Financial Corporation, including Assistant Treasurer. Currently, he serves on
the boards of several corporations, including PhaseOut of America, Associated
Materials, Inc., Maxserv, Inc., and certain mutual funds managed by Capstone
Asset Management.
RICHARD F. BONINI, was appointed a director of the Company in May 1995.
Mr. Bonini is currently a director, Senior Executive Vice President and
Secretary for First Financial Caribbean Corporation, a mortgage banking
company in Puerto Rico. He also serves as director for the Doral Federal
Savings Bank and the Doral Mortgage Corporation.
WILLIAM H.T. BUSH, was appointed a director of the Company in September
1995. He served as President of Boatman's National Bank of St. Louis and as a
member of its board of directors and the board of directors of its parent
holding company, Boatmen's Bancshares, Inc. until June 1986. In 1986, Mr.
Bush founded the financial advisory firm of Bush-O'Donnell & Company,
specializing in investment management and financial advisory services. He
also serves on the boards of directors of Mississippi Valley Bankshares, Inc.,
INTRAV, Inc., Rite Choice Managed Care, Inc., and Detroit Tool Industries,
Inc. and other civic organizations and served as a surrogate for his brother,
former President George Bush, during the 1988 and 1992 political campaigns.
Mr. Bush is also the uncle of George W. Bush, the current Governor of Texas.
BUSINESS HISTORIES OF EXECUTIVE OFFICERS
ANTHONY J. DELLAVECHIA, age 60, became associated with the Company in
August 1995 as an independent consultant and in January 1996, was named Senior
Executive Vice President, Operations Director. Mr. Dellavechia has over 30
years experience in the consumer lending and financial services industry. Mr.
Dellavechia served in several executive capacities including Senior Executive
Vice President, Operations Director with Associates Financial Services
Company, Inc., a division of the Associates Corporation of North America, from
1979 until his retirement in 1985. He was named President of U.S. Consumer
Operations in 1983. Prior to Associates, he worked for AVCO Financial
Services from 1957 until 1976 where he began his career as a financial
representative and progressed through the ranks to the position of Area Vice
President, in charge of that company's largest area.
ROBERT D. IDZI, age 51, joined the Company as Chief Financial Officer in
October 1994. In November 1994, he was elected Senior Vice President, in
December 1994, he was elected Treasurer and in February 1996, he was elected
Executive Vice President. Mr. Idzi served as Vice President, Treasurer, CFO
and Director of Unilease Computer Corporation, which engaged in the leasing of
mainframe computers and peripheral equipment, from 1986 until 1987. From
1987 until 1992, Mr. Idzi was Senior Vice President and Chief Financial
Officer of Equator Holdings, Ltd., a U.S. based merchant bank subsidiary of
the Hongkong Shanghai Banking Group. A Certified Public Accountant, Mr. Idzi
began his career at the public accounting firm of Price Waterhouse. He
received a B.S. degree in Accounting from Georgetown University and is a
member of the American Institute of Certified Public Accountants and the
Financial Executives Institute.
JOE B. DORMAN, age 51, joined the Company as General Counsel in February
1995. In March 1995, he was elected Senior Vice President. Previously, Mr.
Dorman served as counsel to Electronic Data Systems ("EDS") of Dallas, Texas
from 1990 to 1995. Prior to joining EDS, Mr. Dorman was associated with the
Dallas law firm of Graham, Bright & Smith and the Dallas firm of McKenzie &
Baer. Mr. Dorman has also served as principal and General Counsel for Lease
Investment Corporation and Intercap Corporation. Mr. Dorman is licensed to
practice law in the State of Texas. He is a Certified Public Accountant and a
Member of the Bar in the State of Texas.
ANDREW L. TENNEY, age 64, joined Search as Operations Director in January
1995. In March 1995 he was elected Executive Vice President. Mr. Tenney has
over 30 years experience in the consumer lending and financial services
industry. Prior to joining Search, he was Executive Vice President of Century
Acceptance Corporation. Mr. Tenney served as Executive Vice President at ABQ
Financial. Previously, he was employed at Associates Financial Services as
Senior Vice President, Marketing, and Executive Vice President in Consumer
Operations. Before joining Associates, Mr. Tenney was employed by AVCO
Financial Services for 16 years rising to the level of Vice President.
CAROLYN MALONE, age 53, was among the Company's original management
staff. As director of human resources, Ms. Malone was promoted to Vice
President in November 1994, and, in January 1995, she was elected Assistant
Secretary. Prior to her affiliation with the Company, she spent 15 years with
an oil and gas exploration entrepreneur and seven years with McCommons Oil
Company. For the past 30 years, her business career has involved human
resources, office management and administration. Ms. Malone attended Del Mar
Junior College and graduated from Corpus Christi School of Business in 1965.
Ms. Malone received her certification as human resource professional from the
University of Texas at Dallas in 1994.
ANDREW D. PLAGENS, age 28, joined the Company in May 1994 as Accounting
Manager. In March 1995, he was promoted to Assistant Controller and Analyst,
effective July 1, 1995, he became Controller of the Company and in January
1996 was promoted to Vice President. Prior to joining the Company, he was
employed by Hein + Associates and Baird, Kurtz & Dobson. Mr. Plagens is a
licensed CPA and a Member of The American Institute of CPA's and The Texas
Society of CPA's.
There are no family relationships between any of the directors or
executive officers of the Company. Except as already described, none of the
Company's directors hold directorships in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or pursuant
to the requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely on a review of the copies furnished to the Company and
written representations from the executive officers and directors, the Company
believes that all Section 16(a) filing requirements for the period ended March
31, 1996 applicable to its executive officers, directors and greater than ten
percent (10%) beneficial owners were satisfied, with the exception of the
following:
On January 16, 1996, Anthony J. Dellavechia, an executive officer of the
Company, was granted the option to purchase 50,000 shares of the Company's
Common Stock and warrants to purchase 50,000 shares of the Company's Common
Stock. Mr. Dellavechia reported these transactions along with his initial
statement of ownership with the filing of his Form 5 on April 15, 1996.
On March 27, 1996, Joe B. Dorman, an executive officer of the Company,
was granted the option to purchase 25,000 shares of the Company's Common Stock
and warrants to purchase 25,000 shares of the Company's Common Stock. Mr.
Dorman reported this transaction with the filing of his Form 5 on April 15,
1996.
On March 27, 1996, Robert D. Idzi, an executive officer of the Company,
was granted warrants to purchase 50,000 shares of the Company's Common Stock.
Mr. Idzi reported this transaction with the filing of his Form 5 on April 15,
1996.
On March 27, 1996, Carolyn Malone, a Vice President of the Company in
charge of human resources, was granted the option to purchase 25,000 shares of
the Company's Common Stock and warrants to purchase 5,000 shares of the
Company's Common Stock. Ms. Malone reported this transaction with the filing
of her Form 5 on April 15, 1996.
On January 16, 1996, Karman L. Wallace, an executive officer of the
Company, was granted the option to purchase 25,000 shares of the Company's
Common Stock and warrants to purchase 25,000 shares of the Company's Common
Stock. Mr. Wallace reported these transactions along with his initial
statement of ownership with the filing of his Form 5 on April 15, 1996.
On March 27, 1996, Richard F. Bonini, a director of the Company, was
granted warrants to purchase 50,000 shares of the Company's Common Stock.
Mr. Bonini reported this transaction with the filing of his Form 5 on April
15, 1996.
On March 27, 1996, William H.T. Bush, a director of the Company, was
granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr.
Bush reported this transaction with the filing of his Form 5 on April 15,
1996.
On March 27, 1996, Luther Hodges, Jr., a director of the Company, was
granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr.
Hodges reported this transaction with the filing of his Form 5 filed on April
15, 1996.
On March 27, 1996, James F. Leary, a director of the Company, was granted
warrants to purchase 50,000 shares of the Company's Common Stock and, on March
22, 1996, purchased 1,600 shares of the Company's Common Stock. Mr. Leary
reported these transactions with the filing of his Form 5 on April 15, 1996.
On March 27, 1996, William H.T. Bush, a director of the Company, was
granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr.
Bush reported this transaction with the filing of his Form 5 on April 15,
1996.
The Company believes that no other Forms 3, 4 or 5 for directors,
executive officers or greater than 10% beneficial owners were required to be
filed with the SEC for the six-month transition period ended March 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information for the fiscal years ended
September 30, 1994 and September 30, 1995 and the six-month transition period
ended March 31, 1996, regarding the compensation of each individual who served
as the Company's Chief Executive Officer during the six-month period ended
March 31, 1996, and each of the Company's four most highly compensated
executive officers (other than the Chief Executive Officer) who served as an
executive officer of the Company at the end of the six-month period ended
March 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
SECURITIES
OTHER ANNUAL UNDERLYING
COMPENSATION OPTIONS/SAR'S ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (#) COMPENSATION ($)
- ------------------------------- ---- ----------- ---------- ------------ -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
George C. Evans, 1996 (1) 150,000 185,000 -- -- --
Pres., CEO, COO 1995 162,734 112,500 -- 1,000,000 (3) --
(from 1/20/95) (2)(5) 1,000,000 (4)
Robert D. Idzi 1996 (1) 66,666 35,000 -- 50,000 (7) --
EVP, CFO and Treasurer.(2) 1995 117,308 5,000 -- 204,000 (3) 27,462 (8)
Anthony J. Dellavechia 1996 (1) 31,250 25,000 -- 50,000 (7) 26,500(9)
Sr. EVP, Operations Director(2) -- 50,000 (6)
Joe B. Dorman (2) 1996 (1) 55,833 25,000 -- 25,000 (7) --
SVP, General 25,000 (6)
Counsel and Secretary 1995 67,128 -- -- 50,000 (3) --
50,000 (4)
Andrew L. Tenney 1996 (1) 62,499 25,000 -- 25,000 (7) --
EVP and Operations Director (2) 25,000 (6)
1995 79,775 -- -- 50,000 (3) --
50,000 (4)
</TABLE>
__________________________________________
(1) The compensation shown for 1996 represents compensation for the six-month
transition period ended March 31, 1996.
(2) Mr. Evans was elected President, Chief Executive Officer and Chief
Operating Officer effective January 20, 1995. In May 1995, Mr. Evans was
also elected Chairman of the Board of Directors. Mr. Idzi was elected
Chief Financial Officer in October 1994, Treasurer in January 1995, and
Executive Vice President in February 1996. Mr. Dellavechia joined the
Company as Senior Executive Vice President and Operations Director in
January 1996. Mr. Dorman joined the Company as General Counsel in
February 1995, was elected Senior Vice President in March 1995 and was
elected Secretary in May 1995. Mr. Vandergrift joined the Company in May
1995 and was elected Senior Vice President in February 1996. Mr. Tenney
was elected Operations Director in January 1995, and in May 1995, was
elected Executive Vice President. On April 1, 1996, Mr. Tenney resigned
as an executive officer of the Company and worked as a consultant from
April 1, 1996 to June 30, 1996. On July 1, 1996, Mr. Tenney assumed the
position of Executive Vice President of Marketing.
(3) Includes newly granted options as well as replacement options granted in
exchange for the cancellation of previously granted options, as follows:
for Mr. Evans, 500,000 options granted on January 20, 1995, all
subsequently replaced on June 29, 1995 by the 500,000 options which he
currently holds; for Mr. Tenney, 25,000 options granted on January 23,
1995, all subsequently replaced on June 29, 1995 by the 25,000 options
which he currently holds; for Mr. Idzi, 102,000 options granted on
January 15, 1995, all subsequently replaced on June 29, 1995 by the
102,000 options which he currently holds; for Mr. Dorman, 25,000 options
granted on February 20, 1995 all subsequently replaced on June 29, 1995
by the 25,000 options which he currently holds.
(4) Includes newly granted warrants as well as replacement warrants granted
in exchange for the cancellation of previously granted warrants, as
follows: for Mr. Evans, 500,000 warrants granted on May 10, 1995, all
subsequently replaced on June 29, 1995 by the 500,000 warrants which he
currently holds; for Mr. Tenney, 25,000 warrants granted on May 10, 1995,
all subsequently replaced on June 29, 1995 by 25,000 warrants which he
currently holds; for Mr. Dorman, 25,000 warrants granted on May 10, 1995,
all subsequently replaced on June 29, 1995 by 25,000 warrants which he
currently holds.
(5) In June 1995, the Board determined to issue to Mr. Evans options or
warrants (to be determined at a later date) to purchase 1,500,000 shares
of Common Stock at a price of $1.375 per share. These warrants or options
will be issued to Mr. Evans in 500,000 share portions upon the occurrence
of the following conditions:
(a) 500,000 shares when the Company earns $1 million before taxes and
dividends by the fiscal year ending March 31, 1997;
(b) 500,000 shares when the market price of the Company's Common Stock
reaches $3.50 per share; and
(c) 500,000 shares when the market price of the Company's Common Stock
reaches $5.00 per share.
(6) Represents options granted on March 27, 1996.
(7) Represents warrants granted on March 27, 1996.
(8) Relocation reimbursements.
(9) Represents consulting fees paid to Mr. Dellavechia during the transition
period.
The foregoing executive officers receive health and disability insurance
benefits which do not exceed 10% of their respective salaries. These benefits
are also provided to all other employees of the Company.
The Company has no long-term incentive plans, pension plans, or stock
appreciation rights plans. The Company adopted, as of August 1, 1994, its
1994 Employee Stock Option Plan, which was approved at its annual meeting of
stockholders in May 1995.
Certain 1994 Employee Stock Options and warrants to purchase Common
Stock, as summarized in the following table, were granted to executive
officers in the six-month period ended March 31, 1996.
<TABLE>
<CAPTION>
OPTION AND WARRANT GRANTS TO EXECUTIVE OFFICERS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL WARRANTS APPRECIATION FOR
UNDERLYING AND OPTIONS GRANTED EXERCISE OR OPTION OR WARRANT
WARRANTS AN TO EMPLOYEES DURING BASE PRICEEXPIRATION TERM
NAME OPTIONS GRANTED # THE FISCAL YEAR ($PER SHARE)DATE (8) 5% 10%
- ---------------------- ----------------- ------------------- --------------------- --------
<S> <C> <C> <C> <C> <C> <C>
George C. Evans -- -- ----
Robert D. Idzi 50,000 (1) 10.2 1.263/27/06 $39,620 $100,406
Anthony J. Dellavechia 50,000 (1) 10.2 1.251/16/06 39,306 99,609
50,000 (3) 10.2 1.251/16/06 39,306 99,609
Joe B. Dorman 25,000 (1) 5.1 1.263/27/06 19,810 50,202
25,000 (2) 5.1 1.263/27/06 19,810 50,202
Andrew L. Tenney 25,000 (1) 5.1 1.263/27/06 19,810 50,202
25,000 (2) 5.1 1.263/27/06 19,810 50,202
</TABLE>
(1) Represents warrants to purchase Common Stock.
(2) Represents 1994 Employee Stock Options which vest in 1/3 yearly
increments following the date of their grant.
(3) Represents stock options granted before the Fund Subsidiaries'
reorganization which, as a result of the change in control following the
reorganization, are now fully vested.
The following unexpired stock options to purchase Common Stock were held
by the executives officers of the Company listed below at March 31, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION AND WARRANT VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN THE MONEY OPTIONS AND WARRANTS
AND WARRANTS AT MARCH 31, 1996 AT MARCH 31, 1996 (1)
---------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
George C. Evans 1,000,000 -- $ 290,000 --
Robert D. Idzi 152,000 -- 35,580 --
Anthony J. Dellavechia 100,000 -- 13,000 --
Joe B. Dorman 75,000 25,000 9,000 $ 3,000
Andrew L. Tenney 75,000 25,000 9,000 3,000
</TABLE>
(1) Calculated using the fair market value of the Common Stock underlying the
options and warrants as of the end of the transition period ($1.38) and
the exercise price of the options or warrants.
COMPENSATION OF DIRECTORS
The Company pays to each director a fee of $750 per month and $1,500 per
meeting attended, plus reimbursement of expenses in connection with attending
each meeting. In addition, the Company has granted each director warrants to
purchase Common Stock. See "Principal Holders of Capital Stock." Messrs.
Evans and Leary, who are employees of the Company, do not receive separate
compensation for their services as directors, although Mr. Leary, who is an
employee of Search was paid salary and bonus totaling $57,999 during the
transition period.
OTHER AGREEMENTS WITH EXECUTIVE OFFICERS
Effective January 20, 1995, George C. Evans joined the Company as
President, Chief Executive Officer, Chief Operating Officer and a member of
the Board of Directors by executing a three-year employment agreement at an
annual compensation of $250,000 minimum per year. Mr. Evans is also to
receive a bonus ranging from 25% to 100%, as determined by the Board, of
annual salary. See "Report of the Compensation Committee on Executive
Compensation." In June 1995, the Board determined to issue to Mr. Evans
options or warrants (to be determined at a later date) to purchase 1,500,000
shares of Common Stock at a price of $1.375 per share. These warrants or
options will be issued to Mr. Evans in 500,000 share portions upon the
occurrence of the following conditions:
(a) 500,000 shares when the Company earns $1 million before taxes and
dividends before fiscal year ending March 31, 1997;
(b) 500,000 shares when the market price of the Company's Common Stock
reaches $3.50 per share; and
(c) 500,000 shares when the market price of the Company's Common Stock
reaches $5.00 per share.
On May 1, 1996, Mr. James F. Leary entered into a two-year employment
agreement with the Company. During the term of this agreement, Mr. Leary will
be paid a salary of $160,000 per year.
As of March 31, 1996, no other employee of the Company or its
subsidiaries was covered by an employment agreement.
EMPLOYEE STOCK OPTION PLAN
On August 1, 1994, the Board of Directors adopted, subject to stockholder
approval, the 1994 Employee Stock Option Plan (the "Plan"). The Plan was
approved by the stockholders on May 10, 1995. The purpose of the Plan is to
advance the interest of the Company by providing additional incentives to
attract and retain qualified and competent employees, upon whose efforts and
judgment the success of the Company (including its subsidiaries) is largely
dependent, through the encouragement of stock ownership in the Company by such
persons. A total of 1,750,000 shares of Common Stock (subject to adjustment
to compensate for the issuance of stock dividends or any recapitalization
resulting in a stock split-up, combination or exchange of shares of Common
Stock) have been reserved for sale upon exercise of options granted under the
Plan. Options covering 1,122,000 shares had been granted under the Plan as of
March 31, 1996.
CASHLESS WARRANTS
The Company also compensates its directors, key employees and some
consultants through grants of cashless warrants. The purposes of these
warrant grants are similar to those of the Employee Stock Option Plan. The
exercise price of these warrants may be paid by the holder either (i) in cash
or (ii) by surrender of warrants equal to the cash value of the exercise
price. As of March 31, 1996, the Company had outstanding a total of 1,585,000
cashless warrants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
In September 1993, the Board of Directors established a compensation
committee (the "Compensation Committee"). The Compensation Committee
currently consists of the following directors: A. Brean Murray, Richard F.
Bonini and James F. Leary. Mr. Leary also serves as an employee of the
Company in his capacity as Vice-Chairman of Finance. In addition, during the
six-month period ended March 31, 1996, the Company paid Brean Murray, Foster
Securities Inc. ("BMFS") $200,000 for services rendered by it related to the
success of the Joint Plan of Reorganization. Mr. Murray is the chairman of
BMFS. See "Certain Relationships and Related Transactions."
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is now comprised of three
non-employee directors: Luther H. Hodges, Jr., Chairman, Richard F. Bonini and
William H. T. Bush. The Committee regularly reviews the executive
compensation policies and practices of the Company and establishes or approves
the compensation for executive officers. The Committee also administers the
Company's 1994 Stock Option Plan.
The Company's primary objective is to maximize stockholder value. To aid
in accomplishing this goal, the Committee is guided by two principles in
determining executive compensation policies: first, to attract, develop,
reward and retain highly talented individuals; and second, to motivate
executive officers to perform to the best of their abilities and to achieve
both short-term and long-term Company objectives that will contribute to the
overall goal of enhancing stockholder value.
The Company's executive compensation program consists of two main
elements:
- Annual compensation, which is comprised of base salary and bonus, and
- Long-term incentives that provide a financial opportunity to executive
officers through grants of stock options and warrants. The compensation
that may be realized by executives through these incentives is tied
directly to the value of the Company's Common Stock in the future.
The Committee believes that the Company's executive compensation program
reflects the fundamental principles described above and provides strong
incentives to executives to maximize Company performance.
The base salary for Mr. George Evans, Chief Executive Officer, was
determined by direct negotiations with Mr. Evans at the time of his employment
in January 1995. The Employment Agreement for Mr. Evans specified his salary
and the range for his bonus. Of the current Board of Directors, only A. Brean
Murray was a member at that time. One of the Committee's members, A. Brean
Murray, was a member of the Board at that time. The other members of the
Board who participated in the negotiations are no longer members of the Board.
During August 1995, the Committee, then composed of Messrs. A. Brean
Murray, Richard F. Bonini and James F. Leary, met informally to discuss Mr.
Evans' performance and compensation. In September 1995, the deliberations
of the Committee were presented to the Board of Directors, who approved
changes to Mr. Evans' compensation. Prior to this approval, Mr. Leary who had
been elected Vice Chairman, resigned from the Compensation Committee.
The Committee and the Board of Directors considered the following
matters: his (i) knowledge of the consumer finance industry; (ii) reputation
and acquaintances with other persons in the finance industry; (iii)
performance in improving Company operations and employee confidence; (iv)
performance in hiring competent and experienced executives which could assist
in the "turnaround" of the Company; (v) performance in formulating and
implementing plans to convert the Company's debt to equity; (vi) performance
iin dealing with shareholder and Noteholders who, at the time of his initial
employment, were hostile toward the Company's former management; (vii)
performance in settling the O'Shea shareholder class action litigation; and
(viii) performance in assembling a Board of Directors with experience and
knowledge in the finance industry.
Based on the foregoing evaluation, the Board of Directors, acting on the
recommendation of the Committee, approved an increase in Mr. Evans' salary
from $250,000 to $300,000 and a bonus of $250,000. Mr. Evans received the
bonus in two payments, the first portion of which, consisting of $65,000, was
paid at the end of the fiscal year ended September 30, 1995. The remaining
$185,000 was to be paid subsequent to and conditioned upon confirmation of the
Joint Plan. The Board also promised to grant to Mr. Evans the right to
receive warrants or options, at his election, to purchase 1,500,000 shares of
Common Stock, based on the future performance of the Company and its Common
Stock per share price.
The Committee approves the salary of the other executive officers of the
Company, including the executive officers named in the Summary Compensation
Table. The Committee at the end of each fiscal year reviews incentive bonus
awards proposed by Mr. Evans for all of the executive officers other than Mr.
Evans. The Committee and Mr. Evans jointly reviewed the individual
performances of each executive officer other than Mr. Evans, and the Committee
gave significant consideration of Mr. Evans' views on the performance of each
such executive officer. The Committee also awards all warrants and 1994
Employee Stock Options to executive officers. Again, such awards are
generally proposed by Mr. Evans, and the Committee and Mr. Evans jointly
review the individual performances of each executive officer other than Mr.
Evans in making the awards.
The size of the bonus, option and warrant awards to executive officers
were based on subjective factors, including primarily the perceived importance
of the individual's contribution to the success of the Company and upon the
amount of and value of options and warrants currently held by the individual.
The Committee also takes into consideration in granting options and warrants
to executive officers the relationship of the number of options and warrants
held by each of the executive officers to a subjective rating of the degree of
responsibility of the position held by each officer compared to that of the
other executive officers. While not having a target ownership level of Common
Stock by executive officers, the Committee has endeavored to motivate
executives by granting options and warrants at levels that present executives
with an opportunity for significant gains that are commensurate to gains in
stockholder value.
During the transition period ended March 31, 1996, bonus, option and
warrant awards granted to executive employees were tied to the success of the
Fund Subsidiaries' reorganization. Executive officers were granted a number
of options and warrants prior to and during the transition period due to the
Company's need to conserve cash in order to complete the reorganization of its
Fund Subsidiaries, while continuing to attract qualified executive employees
notwithstanding the troubled circumstances of the Company.
Stock options and warrants are designed to align the interests of the
recipients with those of the stockholders of the Company. Stock options and
warrants are typically granted by the Company with an exercise price equal to
the market price of the Company's Common Stock on the date of grant. The
options generally vest over three years, and the warrants immediately vest.
In the six-month transition period ended March 1996, the 1994 Employee Stock
Options that were granted prior to the effectiveness of the Joint Plan became
fully vested as a result of the substantial number of shares of stock that
were issued by the Company pursuant to the Joint Plan and the resulting deemed
change in control of the Company.
In summary, the Committee's executive compensation decisions are
generally intended to link a significant portion of the compensation of the
Company's executive officers to individual performance and to corporate
performance and stock price appreciation. The Committee intends to continue
the policy of linking executive compensation to corporate performance and
improvement in stockholder value, recognizing that economic factors beyond
management's control may result in imbalances for a particular period but that
consistent improvement in corporate performance over the long-term will enure
to the mutual benefit of the Company's executives and its stockholders.
THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS:
Luther H. Hodges, Jr. - (member from September 6, 1995 to present)
Richard F. Bonini - (member from June 29, 1995 to present)
William H.T. Bush - (member from January 25, 1995 to present)
James F. Leary - (member from June 29, 1995 to September 6, 1995)
PERFORMANCE GRAPH
The following graph presents cumulative shareholder return on the
Company's Common Stock for the two and one half-year period ended March 31,
1996. The Company is compared to the S&P 500 Index and the S&P Financial
Index. The graph assumes that $100 was invested in the Company's Common Stock
and in each index at the beginning of the measurement period.
The data source for all graphs is Bloomberg data service and National
Quotation Bureau.
<TABLE>
<CAPTION>
COMPARISON OF CUMULATIVE TOTAL RETURN 1993-1995*
SEPTEMBER 30, 1993 SEPTEMBER 30, 1994 SEPTEMBER 30, 1995 MARCH 31, 1996
------------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Search Common Stock $ 100.00 $ 76.17 $ 18.89 $ 34.12
S&P 500 $ 100.00 $ 100.82 $ 127.34 $ 153.96
S&P Financials $ 100.00 $ 89.91 $ 123.71 $ 154.82
<FN>
* Assumes the reinvestment of any dividends. Due to the sporadic and
limited trading of the Company's Common Stock before September 30, 1993,
only two and one-half years are shown.
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 17, 1996,
relating to the beneficial ownership of the Common Stock, 12% Preferred Stock
(the "12% Preferred Stock") and 9%/7% Preferred Stock (i) by any person or
"group," as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended, known to the Company to own beneficially 5% or more
of the outstanding Common Stock or shares of Preferred Stock, and (ii) by each
current director and executive officer of the Company and by all current
directors and executive officers of the Company as a group. Except as
otherwise indicated, each of the persons named below is believed by the
Company to possess sole voting and investment power with respect to the shares
of Common Stock, 12% Preferred Stock or 9%/7% Preferred Stock beneficially
owned by such person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1) PERCENTAGE
OF CLASS
OUTSTANDING
----------------------------------------------------------------
NAME OF DIRECTOR OR
EXECUTIVE OFFICER OR NAME NUMBER OF NUMBER OF 9%/7% NUMBER OF
AND COMMON PREFERRED 12% PREFERRED COMMON
ADDRESS OF BENEFICIAL OWNER STOCK SHARES STOCK SHARES STOCK SHARES STOCK
- ----------------------------------------------------------- ------------ --------------- ------------- -------
<S> <C> <C> <C> <C> <C>
Hall Phoenix/Inwood, Ltd. 7,814,556 (2) 2,032,812 28.7%
750 N. St. Paul, Suite 200
Dallas, Texas 75201-3247
Value Partners, Ltd. 2,150,174 2,667,819 7.9%
2200 Ross Ave.
Suite 4660 W
Dallas, TX 75201
Greg Muns, M.D. -- 20,000 --
1319 Shores Circle
Rockwall, Texas 75087
Sam Coker Retirement Trust -- 20,000 --
Rt. 2, Box 50
Millsap, Texas 76066
A. Brean Murray 483,558 (3) 1.7 %
Luther H. Hodges, Jr. 111,000 (4) *
James F. Leary 102,500 (4) *
William H.T. Bush 100,000 (5) *
Richard F. Bonini 122,862 (4) 12,236 *
George C. Evans 1,000,000 (6) 3.5
George C. Evans, as holder of 812,127 (7) 2.9
the SBM Trust irrevocable
proxy
Joe B. Dorman 75,000 (8) *
Robert D. Idzi 152,000 (9) *
Anthony J. Dellavechia 100,000 (10) *
Andrew L. Tenney 100,000 (11) *
Carolyn Malone 63,960 (12)
All directors and executive officers as a group (9 persons)
3,277,007 12,236 8.5%
Percentage of Class Outstanding
--------------------------------
NAME OF DIRECTOR OR
EXECUTIVE OFFICER OR NAME
AND 9%/7% PREFERRED 12% PREFERRED
ADDRESS OF BENEFICIAL OWNER STOCK STOCK
- ----------------------------------------------------------- ---------------- --------------
<S> <C> <C>
Hall Phoenix/Inwood, Ltd. 11.9%
750 N. St. Paul, Suite 200
Dallas, Texas 75201-3247
Value Partners, Ltd. 15.6%
2200 Ross Ave.
Suite 4660 W
Dallas, TX 75201
Greg Muns, M.D. 5%
1319 Shores Circle
Rockwall, Texas 75087
Sam Coker Retirement Trust 5%
Rt. 2, Box 50
Millsap, Texas 76066
A. Brean Murray
Luther H. Hodges, Jr.
James F. Leary
William H.T. Bush
Richard F. Bonini *
George C. Evans
George C. Evans, as holder of
the SBM Trust, irrevocable
proxy
Joe B. Dorman
Robert D. Idzi --
Anthony J. Dellavechia
Andrew L. Tenney
All directors and executive officers as a group (9 persons)
*
</TABLE>
* Less than 1%
The policy of the Company with respect to transactions with officers,
(1) The information as to beneficial ownership of Common Stock, 12% Preferred
Stock and 9%/7% Preferred Stock has been furnished by the Company's
transfer agent and the respective shareholders, directors and officers of
the Company. Each named person or group is deemed to be the beneficial
owner of securities which may be acquired by such person or group within
60 days through the exercise of options, warrants and rights, if any, and
such securities are deemed to be outstanding for the purpose of computing
the percentage of stock beneficially owned by such person or group.
Such securities are not deemed to be outstanding for the purpose of
computing the percentage of stock beneficially owned by any other person
or group.
(2) Includes (i) warrants to purchase 3,000,000 shares of Common Stock at
$2.00 per share on or before November 30, 2000, and (ii) warrants to
purchase 676,178 shares of Common Stock at 2.00 per share (increasing
$0.25 each year) on or before March 31, 2001.
(3) Includes (i) warrants to purchase 10,000 shares, at $8.75 per share, on
or before December 20, 1998, (ii) warrants to purchase 113,558 shares at
$9.60 per share on or before December 10, 1998, (iii) warrants to
purchase 250,000 shares at $1.09 per share on or before June 29, 2005,
and (iv) warrants to purchase 50,000 shares at $1.16 per share on or
before March 27, 2006.
(4) Includes warrants to purchase 50,000 shares at $1.09 per share on or
before June 29, 2005 and warrants to purchase 50,000 shares at $1.16 per
share on or before March 27, 2006.
(5) Represents warrants to purchase 50,000 shares at $1.375 per share on or
before August 4, 2005 and warrants to purchase 50,000 shares at $1.16 per
share on or before March 27, 2006.
(6) Represents (i) warrants to purchase 500,000 shares at $1.09 per share on
or before June 29, 2005 and (ii) options issued under the 1994 Employee
Stock Option Plan to purchase 500,000 shares of Common Stock at $1.09 per
share on or before January 20, 2005, which vested in Mr. Evans following
the Fund Subsidiaries' reorganization.
(7) Represents 812,127 shares owned of record by the SBM Trust for which Mr.
Evans holds an irrevocable proxy to vote. Mr. Evans has no other
relationship with the SBM Trust.
(8) Represents (i) warrants to purchase 25,000 shares at $1.09 per share on
or before June 29, 2005, (ii) options issued under the 1994 Employee
Stock Option Plan to purchase 25,000 shares of Common Stock at $1.09 per
share on or before February 20, 2005, which vested in Mr. Dorman
following the Fund Subsidiaries' reorganization and (iii) warrants to
purchase 25,000 shares at $1.26 per share on or before March 27, 2006.
(9) Represents options issued under the 1994 Employee Stock Option Plan to
purchase 102,000 shares at $1.09 per share on or before January 15, 2005,
which vested in Mr. Idzi following the Fund Subsidiaries' reorganization,
and warrants to purchase 50,000 shares at $1.26 per share on or before
March 27, 2006.
(10) Represents warrants to purchase 50,000 shares at $1.25 per share on or
before January 16, 2006 and options issued under the 1994 Employee Stock
Option Plan to purchase 50,000 shares at $1.25 per share on or before
January 16, 2006, which vested in Mr. Dellavechia following the Fund
Subsidiaries' reorganization.
(11) Represents warrants to purchase 25,000 shares at $1.25 per share on or
before January 16, 2006 and options issued under the 1994 Employee Stock
Option Plan to purchase 25,000 shares at $1.26 per share on or before
March 27, 2007, which vested in Mr. Tenney following the Fund
Subsidiaries' reorganization.
(12) Represents options issued under the 1994 Employee Stock Option Plan to
purchase (i) 5,000 shares $1.09 per share on or before August 1, 2004
(ii) 2,400 shares at $1.09 per share on or before January 15, 2005 and
(iii) 5,000 shares at $1.26 per share on or before March 27, 2006. Also
represents warrants to purchase 10,000 shares at $1.09 per share on or
before June 29, 2005 and warrants to purchase 10,000 shares at $1.375 per
share on or about August 4, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The policy of the Company with respect to transactions with officers,
directors and affiliates is to require that such transactions be (i) on terms
no less favorable to the Company than could be obtained from unrelated third
parties and (ii) approved by a majority of the disinterested directors of the
Company. The following transactions were approved by the Board of Directors
of the Company in accordance with such policy.
Mr. A. Brean Murray is a director of the Company and Chairman of Brean
Murray, Foster Securities Inc. ("BMFS"). In March 1996, the Company paid a
$200,000 cash fee to BMFS for its services related to the success of the Joint
Plan. These services included research and advice to the Company regarding
the feasibility, terms and marketability of securities issued under the Joint
Plan, the advantages and disadvantages of a reverse stock split, the
feasibility of the Company's plans to re-focus its receivables purchasing
activities, and the potential trading markets and values of the Company's
stock following the completion of the Joint Plan. These fees are subject to
approval by the Court pursuant to11 U.S.C. Section 1129(a)(4).
Pursuant to the Joint Plan, Mr. Frederick S. Hammer will become a member
of the Board of Directors. Mr. Hammer is a principal in Inter-Atlantic
Securities Corp., which will receive a fee for its services to be rendered in
connection with obtaining potential subordinated debt financing for the
Company. Inter-Atlantic will receive the following compensation:
A marketing fee in the amount of $50,000 after Inter-Atlantic has
produced an offering memorandum to be given to potential investors.
If subordinated debt financing is obtained, a private placement fee equal
to 4.5% of the gross par amount of subordinated debt. One-half of the private
placement fee will be paid in cash and one-half in subordinated debt, which
will be valued at par and issued on the same terms as provided to the
investors.
Pursuant to the Funding Agreement ("Funding Agreement") entered into on
November 30, 1995 between the Company and Hall Financial Group, Inc. ("HFG"),
HFG made loans totaling $2,283,000 ("HFG Notes") to Search. The Funding
Agreement gave HFG the right to convert the HFG Notes into 2,500,000 shares
of the Company's common stock. Further, in connection with the Funding
Agreement, the Company granted to HFG warrants to purchase 3,000,000 shares of
the Company's Common Stock. The grants of these warrants and conversion
rights gave HFG beneficial ownership of approximately 38.7% of Company's
common stock, making HFG an affiliate of the Company.
Effective April 2, 1996, HPIL, as assignee from HFG of the HFG Notes,
fully exercised the rights of the holder of the HFG Notes to convert the Notes
into 2,500,000 shares of Search common stock.
The Funding Agreement also provided to HFG the option to purchase Common
Stock, 9%/7% Preferred Stock, and warrants. Effective April 2, 1996, HPIL, as
assignee of HFG, fully exercised this purchase option by paying $4,346,000
cash to the Company for which the Company issued 1,638,400 shares of Common
Stock and 2,032,800 shares of 9%/7% Preferred Stock, and warrants to purchase
676,000 shares of Common Stock to HPIL.
Pursuant to the Funding Agreement, HFG was entitled to elect one director
to the Company's Board if HFG converted the HFG notes into Common Stock and to
elect another if HFG purchased at least $1,000,000 present value of securities
from the Company. As a result of satisfaction of these conditions, HFG has
designated two HFG officers as its representatives for appointment to the
Company's Board. These new directors, Messrs. Craig Hall and Larry E. Levey,
pursuant to their request, will appointed as directors when the Company
obtains directors and officers liability insurance, which the Company is
pursuing.
<PAGE>
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
During the quarter ended March 31, 1996 the following reports on Form 8-K
were filed by the Company:
On April 3, 1996, the Company filed a report on Form 8-K announcing a
change in its fiscal year end from September 30 to March 31.
On April 18, 1996, the Company filed a report on Form 8-K announcing the
Effective Date of the Joint Plan.
On May 14, 1996, the Company filed a report on Form 8-K announcing the
approval of the shareholders class action suit settlement by U.S. District
Court, Northern District of Texas, Dallas Division.
<PAGE>
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ----------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Third Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.1 to the April 17,
1996 Form 8-K Current Report).
2.2 Modification to Third Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.2
to the April 17, 1996 Form 8-K Current Report).
2.3 Order Confirming Third Amended and Supplemented Joint Plan, Pursuant to 11 U.S.C. 1129
(incorporated by reference to Exhibit 2.3 to the April 17, 1996 Form 8-K Current Report).
2.4 Chapter 11 Post-Confirmation Order (incorporated by reference to Exhibit 2.4 to the April 17, 1996
Form 8-K Current Report).
2.5 Order Regarding Entry Date of Order Confirming Third Amended and Supplemented Joint Plan
Pursuant to 11 U.S.C. 1129 (incorporated by reference to Exhibit 2.5 to the April 17, 1996 Form 8-K
Current Report).
2.6 Order Granting Second Motion for Technical, Non-Material Modification to the Third Amended and
Supplemented Joint Plan of Reorganization (incorporated by reference to Exhibit 2.6 to the April 17,
1996 Form 8-K Current Report).
3.1 Restated Certificate of Incorporation.
3.2 Bylaws, as amended.
4.1 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).
4.2 Certificate of Designation 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit
4.1 to the April 17, 1996 Form 8-K).
4.3 Warrant Agreement dated as of March 27, 1996 between Search Capital Group, Inc. and American
Securities Transfer, Inc., as Warrant Agent (incorporated by reference to Exhibit 4.2 to the April 17,
1996 Form 8-K).
10.1 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)
10.2 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)
10.3 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).
10.4 Stock Purchase Agreement between Search Capital Group, Inc. and Louis Dorfman, Trustee of the SBM
Trust (incorporated by reference from Exhibit 10.9 to Search Capital Group, Inc.'s originally filed
Annual Report on Form 10-K for the year ended September 30, 1995).
10.5 Funding Agreement dated November 30, 1995 (the "Funding Agreement") 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")).
10.6 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 (incorporated herein by reference from Exhibit 99.2 to the 11/95 8-K).
10.7 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).
10.8 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).
10.9 Newsearch Pledge Agreement dated as of November 30, 1995 between Newsearch, Inc. and Hall
Financial Group, Inc. (incorporated herein by reference from Exhibit 99.5 to the 11/95 8-K).
10.10 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).
10.11 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).
10.12 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).
10.13 SFC Security Agreement dated as of November 30, 1995 between Search Funding Corp. and Hall
Financial Group, Inc. (incorporated herein by reference from Exhibit 99.9 to the 11/95 8-K).
10.14 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).
10.15 First Amendment to the Funding Agreement dated December 31, 1995
10.16 Second Amendment to the Funding Agreement dated March 25, 1996
10.17 Third Amendment to the Funding Agreement dated April 1, 1996.
10.18 Letter Agreement between Search Capital Group and Alex. Brown & Sons, Inc. dated May 24, 1995
(incorporated by reference from Exhibit 10.20 to Search Capital Group, Inc.'s Annual Report on Form 10-K
for the year ended September 30, 1995).
10.19 Employment Letter Agreement between George C. Evans and Search Capital Group dated January 20, 1995
(incorporated by reference from Exhibit 10.21 to Search Capital Group, Inc.'s Annual Report on Form
10-K for the year ended September 30, 1995).
10.20 Amendment to Employment Agreement of George C. Evans dated May 10, 1995 (incorporated by
reference from Exhibit 10.22 to Search Capital Group, Inc.'s Annual Report on Form 10-K for the year
ended September 30, 1995).
10.21 Employment Agreement between Search Capital Group, Inc. and James F. Leary dated May 1, 1996.
10.22 Letter agreement between the Company and Inter-Atlantic Securities dated May 13, 1996.
22.1 List of Subsidiaries (incorporated by reference from Search Capital Group, Inc.'s Annual Report on
Form 10-K for the fiscal year ended September 31, 1994).
</TABLE>
<PAGE>
(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).
<PAGE>
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.
SEARCH CAPITAL GROUP, INC.
By: /s/ George C. Evans
--------------------------
George C. Evans, President and Chief
Executive Officer.
Dated: July 1, 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 July 1, 1996
- ---------------------- ------------
George C. Evans Chairman of the Board, President, Chief
Executive Officer, Chief Operating Officer and
Director
/s/ Robert D. Idzi July 1, 1996
- ---------------------- ------------
Robert D. Idzi Executive Vice President, Chief Financial
Officer and Treasurer
/s/ Andrew D. Plagens July 1, 1996
- ---------------------- ------------
Andrew D. Plagens Vice President, Controller and Chief Accounting
Officer
/s/ A. Brean Murray July 1, 1996
- ---------------------- ------------
A. Brean Murray Director
/s/ Richard F. Bonini July 1, 1996
- ---------------------- ------------
Richard F. Bonini Director
/s/ Luther H. Hodges July 1, 1996
- ---------------------- ------------
Luther H. Hodges Director
/s/ James F. Leary July 1, 1996
- ---------------------- ------------
James F. Leary Vice Chairman of Finance and Director
/s/ William H. T. Bush July 1, 1996
- ---------------------- ------------
William H. T. Bush Director
</TABLE>
EXHIBIT 3.1
THIS FORM OF RESTATEMENT WILL BE FILED WITH THE STATE OF DELAWARE SUBSEQUENT
TO THE FILING OF THIS FORM 10-K.
RESTATED CERTIFICATE OF INCORPORATION
OF
SEARCH CAPITAL GROUP, INC.
The undersigned, Search Capital Group, Inc. (the "Corporation"), for the
purpose of restating and integrating into a single instrument all of the
provisions of its Certificate of Incorporation, as presently in effect, does
hereby make and execute this Restated Certificate of Incorporation (the
"Restatement") and does hereby certify that:
1. The name of the Corporation is Search Capital Group, Inc., and the
name under which the Corporation was originally incorporated was Search
Natural Resources, Inc. The original Certificate of Incorporation was filed
with the Secretary of State of Delaware on July 19, 1988.
2. This Restatement only restates and integrates, and does not
further amend the provisions of the Corporation's Certificate of Incorporation
as theretofore amended and supplemented and there is no discrepancy between
these provisions and the provisions of this Restatement.
3. The Certificate of Incorporation of the Corporation, as heretofore
amended or supplemented, is hereby restated to read in its entirety, as
follows:
FIRST. The name of the Corporation is Search Capital Group, Inc.
SECOND. The name of its registered agent and the address of its
registered office in the State of Delaware are The Corporation Trust Company,
1209 Orange Street, Wilmington, New Castle, Delaware 19801.
THIRD. The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the Delaware
General Corporation Law.
FOURTH. The aggregate number of shares of all classes of stock which
the Corporation shall have the authority to issue is One Hundred Ninety
Million (190,000,000), of which One Hundred Thirty Million (130,000,000)
shares shall be Common Stock, of the par value of $.01 per share, and Sixty
Million (60,000,000) shares shall be Preferred Stock, of the par value of $.01
per share.
The holders of Common Stock shall be entitled to one vote for each share
upon all questions presented to the stockholders. Authority is hereby
expressly granted to the Board of Directors from time to time to issue any
authorized but unissued shares of Common Stock for such consideration, and on
such terms, as it may determine.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby expressly authorized from time to
time to issue the shares of Preferred Stock, in such series, for such
consideration and on such terms as it may determine and by adopting a
resolution or resolutions providing for the issuance of shares of any
particular series, to fix the series, to increase or decrease such number (but
not below the number of shares of such series then outstanding), and the
designation, relative powers, preferences and rights of the shares of such
series, and the qualifications, limitations, and/or restrictions thereof, to
the fullest extent now or hereafter permitted by law.
To the extent required by 11 U.S.C. 1123(a)(6), the Corporation shall
be prohibited from issuing any non-voting capital stock.
Pursuant to the powers granted in the foregoing Paragraph FOURTH, the
Corporation's Board of Directors has established and designated the following
series of Preferred Stock:
I.
CERTIFICATE OF DESIGNATIONS
12% SENIOR CONVERTIBLE PREFERRED STOCK
Pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation of Search Natural Resources, Inc., a Delaware
corporation (the "Corporation") and the provisions of Section 151 of the
Delaware General Corporation Law, the following resolution creating a series
of 500,000 shares of preferred stock designated as 12% Senior Convertible
Preferred Stock, was duly adopted as of June 15, 1992 by all necessary action
on the part of the Corporation:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of its Certificate of
Incorporation, a series of preferred stock of the Corporation be, and it
hereby is, created, and that the designation and amount thereof and the voting
powers, preferences and relative, participating, optional and other special
rights of shares of such series, and the qualifications, limitations or
restrictions thereof are as follows:
SECTION 1. Designation of Series. The series shall be designated "12%
----------------------
Senior Convertible Preferred Stock" (hereinafter called "12% Preferred
Stock").
SECTION 2. Number of Shares. The number of shares of 12% Preferred
-----------------
Stock is 400,000 of the par value of $0.01 per share with a liquidation
preference of $5.00 per share which number of shares the Board of Directors
may increase or decrease but may not decrease below the number of shares of
the series then outstanding.
SECTION 3. Dividends. The holders of 12% Preferred Stock shall be
----------
entitled to receive out of any funds legally available, if, as and when
declared by the Board of Directors, cumulative dividends in cash at the rate
of $0.60 per share per annum payable quarterly but no more. If a dividend
upon any shares of 12% Preferred Stock, or any other outstanding stock of the
Corporation ranking on a parity with the 12% Preferred Stock as to dividends,
is in arrears, no stock of the Corporation ranking on a parity with the 12%
Preferred Stock as to dividends may be (a) redeemed pursuant to a sinking fund
or otherwise, except by means of a redemption pursuant to which all
outstanding shares of the 12% Preferred Stock and all stock of the Corporation
ranking on a parity with the 12% Preferred Stock as to dividends are redeemed
or pursuant to which a pro rata redemption is made from all holders of the 12%
Preferred Stock and all stock of the Corporation ranking on a parity with the
12% Preferred Stock as to dividends, the amount allocable to each series of
such stock being redeemed to be a pro rata portion of each such series
determined on the basis of the aggregate liquidation preference of the
outstanding shares of each such series, or (b) purchased or otherwise acquired
for any consideration by the Corporation except pursuant to an acquisition
made pursuant to the terms of one or more offers to purchase all of the
outstanding shares of the 12% Preferred Stock and all stock of the Corporation
ranking on a parity with the 12% Preferred Stock as to dividends (which offers
shall describe such proposed acquisition of all such parity stock). The
Corporation shall not permit any subsidiary of the Corporation to purchase or
otherwise acquire for consideration any outstanding shares of stock of the
Corporation unless the Corporation could, under this Section 3, purchase or
otherwise acquire such shares at such time and in such manner. Unless
otherwise declared by the Board of Directors or required by this Certificate
of Designation, no dividends shall accrue or cumulate for any calendar quarter
(or portion thereof) during which such shares are converted or a liquidation,
dissolution or winding-up of the Corporation occurs.
SECTION 4. Dividend Payments Dates; Cumulation Date. The dates at
-----------------------------------------
which dividends on the 12% Preferred Stock shall be payable are January 1,
April 1, July 1 and October 1 of each year. Dividends on 12% Preferred Stock
shall accrue and be cumulative from the date of issuance and shall be payable
to holders of record as of a date fixed by the Board of Directors of the
Corporation which is not more than sixty (60) days prior to the date such
dividend is paid or, if no such date is fixed, as of the date on which the
resolution declaring such dividends is adopted.
SECTION 5. Redemption.
-----------
(a) Redemption by Corporation. The 12% Preferred Stock shall not
be redeemable at the option of the Corporation prior to September 30, 1994
(the "Initial Redemption Date"). The Corporation may at any time redeem all
or any part of the 12% Preferred Stock at the option of the Corpora-tion if
for any ninety (90) day period commencing after the Initial Redemption Date
the average of the following prices exceeds $6.00 per share: (i) the average
of the high bid and low asked prices of the Corporation's Common Stock if the
Common Stock is traded over-the-counter, (ii) the closing trading price for
the Common Stock if traded on NASDAQ or (iii) the reported closing price for
the Common Stock if traded on any national or regional stock exchange (the
"Triggering Event"). The redemption price will be $5.00 per share plus an
amount equal to all accrued and unpaid dividends on such shares.
(b) Notice of every such redemption shall be mailed, postage prepaid,
to the holders of record of the 12% Preferred Stock to be redeemed at their
respective addresses then appearing on the share transfer records of the
Corporation, not less than thirty (30) days nor more than sixty (60) days
prior to the date fixed for such redemption which shall be specified therein.
At any time after notice has been given as above provided, the Corporation may
deposit the aggregate redemption price of the shares of 12% Preferred Stock to
be redeemed with any bank or trust company, having capital and surplus of more
than Five Million Dollars ($5,000,000), named in such notice, directed to be
paid to the respective holders of the shares of 12% Preferred Stock so to be
redeemed, in amounts equal to the redemption price of all shares of 12%
Preferred Stock so to be redeemed, on surrender of the stock certificate or
certificates held by such holders, and upon the making of such deposit such
holders shall cease to be stockholders with respect to such shares, and after
such notice shall have been given and such deposit shall have been made such
holders shall have no interest in or claim against the Corporation with
respect to such shares except only (i) the right to receive such money from
such bank or trust company without interest, or (ii) the right to exercise,
before the redemption date, any unexpired privileges of conversion. In case
less than all of the outstanding shares of 12% Preferred Stock are to be
redeemed, the Corporation may choose the shares to be redeemed at the election
of the Corporation, either by lot based on the stock certificates held of
record or pro rata based on the respective number of shares held by each
holder of the 12% Preferred Stock. If the holders of shares of 12% Preferred
Stock which shall have been called for redemption shall not, within one year
after such deposit, claim the amount deposited for the redemption thereof, any
such bank or trust company shall, upon demand, pay over to the Corporation
such unclaimed amounts and thereupon such bank or trust company and the
Corporation shall be relieved of all respon-sibility in respect thereof and to
such holders.
SECTION 6. Liquidation Rights. The holders of 12% Preferred Stock
------------------
shall, in case of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs (a "Liquidation") of the Corpora-tion, be entitled
to receive in full out of the net assets of the Corporation before any amount
shall be paid or distributed among the holders of the Common Stock or any
other shares ranking junior to the 12% Preferred Stock, an amount equal to
$5.00 per share plus in each case an amount equal to all accrued and unpaid
dividends. If upon any Liquidation of the Corporation, the assets available
for distribution to the holders of 12% Preferred Stock and any other stock of
the Corporation which shall then be outstanding and which shall be on a parity
with the 12% Preferred Stock upon Liquidation (hereinafter in this para-graph
called the "Total Amount Available") shall be insuffi-cient to pay the holders
of all outstanding shares of 12% Preferred Stock and all other such parity
stock the full amounts (including all dividends accrued and unpaid) to which
they shall be entitled by reason of such Liquidation of the Corporation, then
there shall be paid to the holders of the 12% Preferred Stock in connection
with such Liquidation of the Corporation, an amount equal to the product
derived by multiplying the Total Amount Available times a fraction, the
numerator of which shall equal the number of outstanding shares of 12%
Preferred Stock multiplied by $5.00 plus any accrued and unpaid dividends
thereon and a denominator of which shall be the total amount which would have
been distributed by reason of such Liquidation of the Corporation with respect
to the 12% Preferred Stock and all other stock ranking on a parity with the
12% Preferred Stock upon Liquidation then outstanding had the Corporation
possessed sufficient assets to pay the full amount which the holders of all
such stock would be entitled to receive in connection with such Liquida-tion
of the Corporation.
The merger or consolidation of the Corporation into or with any other
corporation, or the merger of any other corporation into it, or the sale,
lease or conveyance of all or substantially all the property or business of
the Corpora-tion, shall not be deemed to be a dissolution, liquidation or
winding up, voluntary or involuntary, for the purposes of this Section 6.
SECTION 7. Ranking. The 12% Preferred Stock shall rank, in right of
--------
payment of dividends and as to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, senior and superior to the Corporation's currently authorized
Common Stock or any other capital stock ranking junior to the 12% Preferred
Stock (collectively, the "Junior Capital Stock"). Accordingly, so long as any
shares of 12% Preferred Stock are outstanding, the Corporation shall not pay
or declare any dividends whatsoever, or make any distribution in connection
with a Liquidation of the Corporation, on any of the Junior Capital Stock or
any other class or series of capital stock ranking junior to the 12% Preferred
Stock, unless all cumulative cash dividends on the 12% Preferred Stock for all
prior quarterly dividend periods, or all amounts payable on the 12% Preferred
Stock upon a Liquidation of the Corpora-tion, as the case may be, have been
declared or authorized and paid or an amount sufficient for the payment
thereof set apart for that purpose.
(a) Whenever reference is made to shares "ranking prior to the 12%
Preferred Stock" or "on a parity with the 12% Preferred Stock," such reference
shall mean and include all shares of the Corporation in respect of which the
rights of the holders thereof as to the payment of dividends or as to
distributions in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation are given
preference over, or rank on an equality with (as the case may be), the rights
of the holders of 12% Preferred Stock; and whenever reference is made to
shares "ranking junior to the 12% Preferred Stock," such reference shall mean
and include all shares of the Corporation in respect of which the rights of
the holders thereof as to the payment of dividends and as to distributions in
the event of a voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation are junior and subordinate to the rights of
the holders of 12% Preferred Stock.
SECTION 8 Dividends on Junior Stock. In no event so long as any
-------------------------
12% Preferred Stock shall be outstanding shall any dividends, except a
dividend payable in Common Stock or other shares ranking junior to the 12%
Preferred Stock, be paid or declared or any distribution be made on any Junior
Capital Stock, nor shall any Junior Capital Stock be purchased, retired or
otherwise acquired by the Corporation (except out of the proceeds of the sale
of Junior Capital Stock) unless all accrued and unpaid dividends on 12%
Preferred Stock shall have been declared and paid or a sum sufficient for
payment thereof set apart.
SECTION 9 Voting Rights. Holders of 12% Preferred Stock shall
-------------
have one vote for each share of 12% Preferred Stock so held, and shall vote
along with the holders of shares of Common Stock and not as a separate class
(except as expressly provided herein or as otherwise provided by law) upon
each and any matter submitted to a vote of the stockholders of the
Corporation. If, and so often as, the Corporation shall be in default in the
payment of six (6) full quarterly dividends (whether or not consecutive) on
12% Preferred Stock, whether or not earned or declared, the holders of 12%
Preferred Stock, voting separately as a class, shall be entitled to elect, as
herein provided, two (2) members of the Board of Directors of the Corporation
who shall be in addition to the regular members of the Board of Direc-tors
elected by the common stockholders pursuant to the Corporation's Bylaws;
provided that the special class voting rights provided for herein when the
same shall have become vested shall remain so vested until all accrued and
unpaid dividends on the 12% Preferred Stock shall have been paid or a sum
sufficient for payment thereof has been set apart, whereupon the number of
persons constituting the Board of Directors shall be reduced by the number of
Directors then in office elected pursuant to this Section 9, the term of
office of said Directors so elected shall end, and the holders of 12%
Preferred Stock shall be divested of their special class voting rights in
respect of subsequent elections of Directors, subject to the revesting of such
special class voting rights in the event hereinabove specified in this
paragraph. A vacancy in the class of Directors elected pursuant to this
Section 9 shall be filled by the remaining Director of the class. In the
event of default entitling the holders of 12% Preferred Stock to elect two (2)
Directors as above specified, a special meeting of all shareholders of the
Corporation, including the holders of the Series C Preferred Shares, for the
purpose of electing such Directors shall be called by the Secretary of the
Corporation upon written request of, or may be called by, the holders of
record of at least ten percent (10%) of the shares of 12% Preferred Stock at
the time outstanding, and notice thereof shall be given in the same manner as
that required for the annual meeting of stockholders; provided, however, that
the Corpora-tion shall not be required to call such special meeting if the
annual meeting of the Corporation's shareholders shall be held within ninety
(90) days after the date of receipt of the foregoing written request from the
holders of 12% Preferred Stock. At any meeting at which the holders of 12%
Preferred Stock shall be entitled to elect Directors, the holders of fifty
percent (50%) of the then outstanding shares of 12% Preferred Stock, present
in person or by proxy, shall be sufficient to constitute a quorum, and the
vote of the holders of a majority of such shares so present at any such
meeting at which there shall be such a quorum shall be sufficient to elect the
members of the Board of Directors which the holders of 12% Preferred Stock are
entitled to elect as herein-above provided.
SECTION 10 Conversion Rights.
-------------------
(a) Optional Conversion. Shares of 12% Preferred Stock shall be
--------------------
convertible, at the option of the holder thereof, at any time or from time to
time at the office of this Corporation or of any transfer agent of the 12%
Preferred Stock, into fully paid and nonassessable shares of Common Stock at
the rate of one share of Common Stock for each share of 12% Preferred Stock.
(b) Mechanics of Conversion. Before any holder of 12% Preferred
------------------------
Stock shall be entitled to convert the same into Common Stock pursuant to this
Section 10, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of the transfer agent for the
12% Preferred Stock, and shall give written notice by mail, postage prepaid,
to the Corporation, at its principal corporate office, of the election to
convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at
such office to such holder of the 12% Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled as aforesaid
together with a check for any declared and unpaid dividends on such converted
12% Preferred Stock. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of
the 12% Preferred Stock to be converted, and the person or persons entitled to
receive this Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of Common Stock on such date.
Any holder of 12% Preferred Stock who elects to convert his shares to Common
Stock waives any and all rights to any accrued and cumulated, but undeclared,
dividends with respect to the 12% Preferred Stock, but shall retain the right
to any dividends declared and accrued during the time such holder was a holder
of record of the 12% Preferred Stock.
(c) Adjustments to Conversion Ratio. In the event of any stock
--------------------------------
dividend on the Common Stock, any stock split, reverse stock split, stock
combination or reclassification of the Common Stock or any merger,
consolidation or combination of the Corporation with any other corporation or
corporations, the conversion rate shall be proportionately adjusted so that
the holders of the 12% Preferred Stock after such event shall be entitled to
receive upon conversion the number and kind of shares which such holders would
have owned or been entitled to receive had such 12% Preferred Stock been
converted immediately prior to such event. Such adjustment shall be made
successively upon the occurrence of the events listed in this paragraph.
(d) No Fractional Shares. No fractional shares shall be issuable
---------------------
upon conversion; and the number of shares of Common Stock to be issued shall
be rounded down to the nearest whole share, and the Corporation shall, at its
option, issue script representing such fractional share or pay cash in lieu of
such fractional share based upon the market price (if traded over-the-counter,
the average of the bid and asked prices) of the Common Stock as reported at
the close of business on the day such conversion is effected or, if there is
no established market for the Common Stock, the fair value of the Common Stock
as determined by the good faith judgment of the Board of Directors.
(e) Reservation of Common Stock Issuable Upon Conversion. The
-----------------------------------------------------
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of 12% Preferred Stock, such number of
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of 12% Preferred Stock, and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of 12%
Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as will be sufficient
for such purpose.
(f) Status of Converted Stock. In case any shares of 12%
--------------------------
Preferred Stock shall be converted into Common Stock, the shares so converted
shall, after any filings required by law, assume the status of authorized by
unissued shares of 12% Preferred Stock.
(g) Mandatory Conversion. At any time after the occurrence of a
---------------------
Triggering Event, the Corporation, through action of its Board of Directors,
may elect to cause all then outstanding shares of 12% Preferred Stock to be
automatically and mandatorily converted into Common Stock. The Corporation
shall cause a notice of such mandatory conversion to be mailed, postage
prepaid, to the holders of record of the 12% Preferred Stock at their
respective addresses appearing on the share transfer records of the
Corporation. The Board of Directors may elect to specify an effective date
for such conversion, which date may be no later than sixty (60) days after the
Board meeting or consent at which the Corporation's election to convert was
duly adopted. If no effective date is specified by the Board of Directors,
the effective date shall be the date of the initial mailing of the required
notice. Such notice shall set forth a statement that all outstanding shares
of 12% Preferred Stock shall be automatically and mandatorily converted as of
the effective date (the "Conversion Date") and the address of the place where
such shares of 12% Preferred Stock shall be exchanged, upon presentation and
surrender of the certificates representing such shares, and the certificates
representing the shares of Common Stock shall be delivered. The dividends on
such shares shall cease to accrue on the Conversion Date. Any notice which is
mailed in the manner herein provided shall be conclusively presumed to have
been duly given, whether or not the holder of the shares of 12% Preferred
Stock receives such notice, and failure duly to give such notice by mail, or
any defect in such notice, to any holder of shares of the 12% Preferred Stock
shall not affect the validity of the conversion thereof into Common Stock.
Consequently, all issued shares of Series B Preferred Stock, as of the
Conversion Date, regardless of whether notice of conversion is actually
received by the holder, shall automatically be deemed to be the shares of
Common Stock into which such shares could have been voluntarily converted by
the holders thereof. As of the close of business on the Conversion Date, the
12% Preferred Stock shall be deemed to cease to be outstanding or to accrue
dividends, the persons entitled to receive the Common Stock issuable upon
conversion shall be treated for all purposes as the registered holders of such
Common Stock and all rights of any holders of 12% Preferred Stock shall
thereupon be extinguished except the right to receive the Common Stock in
exchange therefor. Holders of 12% Preferred Stock must surrender such stock
in order to receive the Common Stock for which such 12% Preferred Stock has
been converted. As a condition to the effectiveness of the foregoing
mandatory conversion, the Corporation shall be required to declare and pay all
cumulated unpaid dividends that accrue through the Conversion Date as soon as
practicable following the Conversion Date.
After the conversion of all issued shares of 12% Preferred Stock, all
shares of 12% Preferred Stock shall be cancelled, the 12% Preferred Stock
shall not be reissued and shall be deemed cancelled and shall revert to
authorized but unissued preferred stock of the Corporation, undesignated as to
series, and the number of shares of preferred stock which the Corporation
shall have authority to issue shall not be decreased by such conversion.
SECTION 11. Effects of Conversion on Capital and Surplus. Upon
---------------------------------------------
conversion of 12% Preferred Stock the stated capital of the Common Stock
issued upon such conversion shall be the aggregate par value thereof, and the
stated capital and capital surplus (capital in excess of par or stated value)
of the Corporation shall be correspondingly increased or reduced to reflect
the difference between the stated capital of the 12% Preferred Stock so
converted and the par or stated value of the Common Stock issued upon
conversion.
II.
CERTIFICATE OF DESIGNATION
9%/7% CONVERTIBLE PREFERRED STOCK
A series of preferred stock of the Corporation be is hereby created and
the designation and amount thereof and the voting powers, preferences and
relative, participating, optional and other special rights of shares of such
series, and the qualifications, limitations, or restrictions thereof are as
follows:
SECTION 1. Designation of Series. The series shall be designated
as "9%/7% Convertible Preferred Stock" (hereinafter called "Convertible
Preferred Stock").
SECTION 2. Number of Shares. The number of shares of Convertible
Preferred Stock is 17,500,000 with the par value of $0.01 per share and a
liquidation preference of $3.50 per share plus any declared but unpaid
dividends, after payment of all debts of the Company, which number of shares
the Board of Directors may increase or decrease but may not decrease below the
number of shares of the series then outstanding.
SECTION 3. Dividends. The holders of the Convertible Preferred
Stock shall be entitled to receive, out of any funds legally available,
non-cumulative dividends at the annual rate of $0.315 (9%) per share per annum
payable from July 1, 1995, to the end of the 12th full calendar quarter
following payment of the first dividend ("End Date") and thereafter, at the
rate of $0.245 per share (7%) per annum from the day following the End Date
until conversion pursuant to Section 10(g) of this Certificate of Designation
(the "Conversion Date"), but no later than the seventh anniversary of the End
Date.
Convertible Preferred Stock dividends will begin to accrue from July 1,
1995. The first payment of Convertible Preferred Stock dividends will be made
in conjunction with the initial distribution of the Convertible Preferred
Stock as soon as practicable thereafter, and will be based on the accrual
period of July 1, 1995 to the date the confirmation order is finalized. This
dividend payment will be made in cash. Thereafter, quarterly dividends will
be paid in cash (the first quarter's payment being based on the accrual period
beginning the day the confirmation order is finalized and ending on the last
day of the quarter) to the holders of record on or about the 15th day of the
month following the end of each quarter, until one full years dividends have
been paid in cash by the Corporation following the Effective Date. After one
full year of Cash dividends have been paid by the Corporation, dividends will
continue to be paid entirely in cash unless the Corporation is prohibited from
paying the dividends entirely in cash by Delaware law (the state of its
incorporation ) or by the terms of any loan agreement of $5,000,000 or more.
If the Corporation is prevented from paying a dividend entirely in cash, it
will pay a dividend in the form of a mixture of cash and common stock of the
Corporation ("Common Stock") to the extent possible under Delaware law and any
applicable loan agreement, or if necessary, entirely in Common Stock, provided
the average closing price of the Common Stock is $.50 or greater for the 20
trading day period ending 5 days prior to the date of payment of the Common
Stock dividend.
If a dividend upon any shares of the Convertible Preferred Stock, or any
other outstanding stock of the Corporation ranking on a parity with the
Convertible Preferred Stock, or any other outstanding stock of the Corporation
ranking on a parity with the Convertible Preferred Stock as to dividends, is
in arrears, no stock of the Corporation standing on a parity with the
Convertible Preferred Stock as to dividends may be purchased or otherwise
acquired for any consideration by the Corporation except pursuant to an
acquisition made pursuant to the terms of one or more offers to purchase all
of the outstanding shares of the Convertible Preferred Stock and all stock of
the Corporation ranking on a parity with the Convertible Preferred Stock as to
dividends (which offers shall describe such proposed acquisition of all such
parity stock). Unless otherwise declared by the Board of Directors or
required by this Certificate of Designation, no dividends shall accrue or
cumulate for any calendar quarter (or portion thereof) during which a
liquidation, dissolution or winding up of the Corporation occurs.
SECTION 4. Dividend Payment Dates; Cumulation Date. Dividends on
the Convertible Preferred Stock will accrue from July 1, 1995 to the date the
confirmation order is becomes a final order. Thereafter, quarterly
Convertible Preferred Stock dividends will accrue beginning on the first day
of each quarter and ending on the last day of each quarter. Quarterly
dividends will be paid (the first quarter's payment being based on the accrual
period beginning the first day following Effective Date and ending with the
last day of the quarter) to the holders of record on or about the 15th day of
the month following the end of each quarter.
SECTION 5. Redemption. The Convertible Preferred Stock shall not
be subject to redemption by the Corporation or at the election of the holders
thereof.
SECTION 6. Liquidation Rights. If Search is liquidated, the
Convertible Preferred Stock will have a preference as to liquidation proceeds
(proceeds from the disposition of assets less payment of all debts) in the
amount of $3.50 per share plus all accrued and unpaid dividends, if any, after
payment of all debts of the Company. If upon any liquidation of the
Corporation, the assets available for distribution to the holders of the
Convertible Preferred Stock and any other stock of the Corporation which shall
then be outstanding and which shall be on a parity with the Convertible
Preferred Stock upon liquidation (hereinafter in this paragraph called the
"Total Amount Available") shall be insufficient to pay the holders of all
outstanding shares of the Convertible Preferred Stock and all other such
parity stock the full amounts (including all dividends accrued and unpaid) to
which they shall be entitled by reason of such liquidation of the Corporation,
then there shall be paid to the holders of the Convertible Preferred Stock in
connection with such liquidation of the Corporation, an amount equal to the
product derived by multiplying the Total Amount Available times a fraction,
the numerator of which shall equal the number of outstanding shares of the
Convertible Preferred Stock multiplied by $3.50 plus any accrued and unpaid
dividends thereon and a denominator of which shall be the total amount which
would have been distributed by reason of such liquidation of the Corporation
with respect to the Convertible Preferred Stock and all other stock ranking on
a parity with the Convertible Preferred Stock upon liquidation then
outstanding had the Corporation possessed sufficient assets to pay the full
amount which the holders of all such stock would be entitled to receive in
connection with such liquidation of the Corporation.
The merger or consolidation of the Corporation into or with any other
corporation, or the merger of any other corporation into it, or the sale,
lease or conveyance of all or substantially all the property or business of
the Corporation, shall not be deemed to be a dissolution or winding up,
voluntary or involuntary, for the purposes of this Section 6.
SECTION 7. Ranking. The Convertible Preferred Stock shall rank, in
right of payment of dividends and as to distributions in the event of a
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, senior and superior to the Corporation's currently
authorized Common Stock (collectively, the "Junior Capital Stock").
The Convertible Preferred Stock may be, at the Corporation's sole
discretion, either superior or pari passu (i.e. the two classes of preferred
stock will share proportionately as to their respective interest in any
liquidation proceeds or dividends) in dividend rights and liquidation
preferences to all other subsequently issued preferred stock. However, no
other preferred stock, whether or not convertible, may be issued in the future
that will be pari passu with the Convertible Preferred Stock unless at the
time of such issuance all dividends due the Convertible preferred Stockholders
have been paid in full. In no event shall convertible preferred stock be
issued which is senior in rights to that of the Convertible Preferred Stock,
other than that such pari passu convertible preferred stock may carry the
then-current market interest rate, which may be higher or lower than that of
the Convertible Preferred Stock.
The Convertible Preferred Stock will be pari passu with the existing 12%
Preferred Stock, and pari passu or senior in rights to future issues of
straight, convertible and all other forms of preferred stock with the
exception of the rate of interest for such future issues of preferred stock,
which shall be no greater than the prevailing market rate for similar such
issues.
Whenever reference is made to shares "ranking on a parity with the
Convertible Preferred Stock," such reference shall mean and include all shares
of the Corporation in respect of which the rights of the holders thereof as to
the payment of dividends or as to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation rank on an equality with the rights of the holders of the
Convertible Preferred Stock. Whenever reference is made to shares "ranking
junior to the Convertible Preferred Stock," such reference shall mean and
include all shares of the Corporation in respect of which the rights of the
holders thereof as to the payment of dividends and as to distributions in the
event of a voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation are junior and subordinate to the rights of the
holders of the Convertible Preferred Stock.
The rights of the Convertible Preferred Stock will be subordinate to the
rights of all existing and future holders of the Corporation's debt.
SECTION 8. Dividends on Junior Stock. In no event so long as any
Convertible Preferred Stock shall be outstanding shall any dividends, except a
dividend payable in Common Stock or other shares ranking Junior to the
Convertible Preferred Stock, be paid or declared or any distribution be made
on any junior Capital Stock, nor shall any Junior Capital Stock be purchased,
retired or otherwise acquired by the Corporation (except out of the proceeds
of the sale of Junior Capital Stock) unless all accrued and unpaid dividends
on the Convertible Preferred Stock shall have been declared and paid or a sum
sufficient for payment thereof set apart.
SECTION 9. Voting Rights. Each share of the Convertible
Preferred Stock shall be entitled to exercise the same voting rights as
holders of the Corporation's Common Stock and shall have one vote per share.
If the Corporation fails to pay a Convertible Preferred Stock dividend (i) in
cash for either of the first two quarterly dividends following the Effective
Date or (ii) in cash or Common Stock for any four consecutive quarters, the
Convertible Preferred Stock shall automatically be vested with an additional
one vote per share, and the holders of the Convertible Preferred Stock will be
given the right to elect immediately at an emergency meeting of the
shareholders which the Corporation shall hold within thirty (30) days after
any such failure, such additional members as equals two-thirds (2/3) of
Search's Board of Directors determined after such election.
At any meeting at which the holders of the Convertible Preferred Stock
shall be entitled to elect a Director, the holders of fifty percent (50%) of
the then outstanding shares of the Convertible Preferred Stock, present in
person or by proxy, shall be sufficient to constitute a quorum, and the vote
of the holders of a majority of such shares so present at any such meeting at
which there shall be such a quorum shall be sufficient to elect the members of
the Board of Directors which the holders of the Convertible Preferred Stock
are entitled to elect as hereinabove provided.
Upon the Conversion Date, the number of persons constituting the Board of
Directors shall be reduced by the number of Directors then in office elected
pursuant to this Section 9, the term of office of said Directors so elected
shall end, and the holders of the Convertible Preferred Stock shall be
divested of their special class voting rights in respect of subsequent
elections of Directors.
Prior to the seventh anniversary of the Effective Date, the Corporation
will not, without the affirmative vote or consent of the holders of at least
66 2/3% of all outstanding shares of Convertible Preferred Stock, voting as a
single class, (i) amend, alter or repeal any provision of this Certificate of
Designation to adversely affect the relative rights, preferences,
qualifications, limitations or restrictions of the Convertible Preferred Stock
or (ii) effect any reclassification of the Convertible Preferred Stock (other
than by virtue of the mandatory conversion set forth herein).
Prior to the seventh anniversary of the Effective Date, the Corporation
will not, without the affirmative vote or consent of holders of at least 50%
of all outstanding shares of Convertible Preferred Stock, voting as a single
class (i) merge with another company when thereafter the Corporation is not
the controlling entity, and (ii) sell more that 50% of the Corporation's
assets.
Other than those set forth in this Section 9, the holders of the
Preferred Shares shall have no further voting rights.
SECTION 10. Conversion Rights.
(a) Optional Conversion. Shares of the Convertible Preferred Stock
shall be convertible, at the option of the holder thereof, at any time or from
time to time at the office of this Corporation or of any transfer agent of the
Convertible Preferred Stock, into fully paid and nonassessable shares of
Common Stock at the rate of two shares of Common Stock for each share of
Convertible Preferred Stock.
(b) Mechanics of Conversion. Before any holder of the Convertible
Preferred Stock shall be entitled to convert the same into Common Stock
pursuant to this Section 10, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of
the transfer agent for the Convertible Preferred Stock, and shall give written
notice by mail, postage prepaid, to the Corporation, at its principal
corporate office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of the Convertible
Preferred Stock, or to the nominee or nominees of such holder, a certificate
or certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid together with a check for any declared and
unpaid dividends on such Convertible Preferred Stock. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of such surrender of the Convertible Preferred Stock to be converted, and
the person or persons entitled to receive this Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders
of Common Stock on such date. Any holder of the Convertible Preferred Stock
who elects to convert his shares to Common stock waives any and all rights to
any accrued and cumulated, but undeclared, dividends with respect to the
Convertible Preferred Stock, but shall retain the right to any dividends
declared and accrued during the time such holder was a holder of record of the
Convertible Preferred Stock.
(c) Adjustments to Conversion Ratio. In the event of any stock
dividend (except a Common Stock dividend that may be paid pursuant to Section
3 of this Certificate of Designation) on the Common Stock, any stock split,
reverse stock split, stock combination or reclassification of the Common Stock
or any merger, consolidation or combination of the Corporation with any other
entity or entities, the conversion rate shall be proportionately adjusted so
that the holders of the Convertible Preferred Stock after such event shall be
entitled to receive upon conversion the number and kind of shares which such
holders would have owned or been entitled to receive had such Convertible
Preferred Stock been converted immediately prior to such event. Such
adjustment shall be made successively upon the occurrence of the events listed
in this paragraph. Any adjustments shall be determined by the Board of
Directors.
(d) No Fractional Shares. No fractional shares shall be issuable
upon conversion; and the number of shares of Common Stock to be issued shall
be rounded down to the nearest whole share, and the Corporation shall, at its
option, issue script representing such fractional share or pay cash in lieu of
such fractional share based upon the market price (if traded over-the-counter,
the average of the bid and asked prices) of the Common Stock as reported at
the close of business on the day such conversion is effected or, if there is
no established market for the Common Stock, the fair value of the Common Stock
as determined by the good faith judgment of the board of Directors.
(e) Reservation of Common Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Convertible Preferred Stock,
such number of shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Convertible
Preferred Stock, and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Convertible Preferred Stock, the Corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common stock to
such number of shares as will be sufficient for such purpose.
(f) Status of Converted Stock. In case any shares of Convertible
Preferred Stock shall be converted into Common Stock, the shares so converted
shall, after any filings required by law, assume the statues of authorized but
unissued shares of Convertible Preferred Stock.
(g) Mandatory Conversion. The Corporation may, at its option, call
for the conversion, in whole or in part, of up to one-half (50%) of the number
of shares of Convertible Preferred Stock issued as of the Effective Date under
the following conditions: (i) the Corporation's Common Stock trades at $4.25
or higher on each of any 20 trading days in a period of 30 consecutive trading
days, beginning with the first day following the second anniversary of the
Effective Date and ending on the third anniversary of the Effective Date, or
(ii) the Corporation's Common Stock trades at $3.50 per share on each of any
20 trading days in a period of 30 consecutive trading days, beginning with the
first day following the third anniversary of the Effective Date and ending on
the day immediately preceding the Conversion Date. For purposes of this
section , price of the Corporation's Common Stock shall be determined by using
the closing bid price as reported by NASDAQ or comparable national exchange.
The conversion prices shall be subject to adjustment in the same manner as the
conversion rate is adjusted, as discussed herein.
Any previously unconverted Convertible Preferred Stock (which shall be a
minimum of fifty percent (50%) of the Convertible Preferred Stock ) shall be
convertible by Search on the seventh anniversary of the Effective Date. The
Convertible Preferred Stock shall be convertible into Common stock at a
fraction which has as its denominator the market price of the Common Stock at
the time of conversion, and which has as its numerator the $3.50 liquidation
value of the convertible Preferred Stock; provided, however, that in no event
shall the ratio so expressed be higher than 3 to1.
The Corporation would be obligated to pay, thirty days after the
Conversion Date, any accrued and unpaid dividends, to the holders who, on the
Conversion Date, held Convertible Preferred Stock.
The Corporation shall cause a notice of such mandatory conversation to be
mailed, postage prepaid, to the holders of record of the Convertible Preferred
Stock at their respective addresses appearing on the share transfer records of
the Corporation. The Board of Directors may elect to specify an effective
date for such conversion, which date may be no later than sixty (60) days
after the Board meeting or consent at which the Corporation's election to
convert was duly adopted. If no effective date is specified by the Board of
Directors, the effective date shall be the date of the initial mailing of the
required notice. Such notice shall set forth a statement that all outstanding
shares of the Convertible Preferred Stock shall be automatically and
mandatorily converted as of the Conversion Date and the address of the place
where such shares of the Convertible Preferred Stock shall be exchanged, upon
presentation and surrender of the certificates representing such shares, and
the certificates representing the shares of Common Stock shall be delivered.
The dividends on such shares shall cease to accrue on the Conversion Date.
Any notice which is mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder of the shares of
the Convertible Preferred Stock receives such notice, and failure to duly give
such notice by mail, or any defect in such notice, to any holder of shares of
the Convertible Preferred Stock shall not affect the validity of the
conversion thereof into Common Stock. Consequently, all issued shares of the
Convertible Preferred Stock, as of the Conversion Date, regardless of whether
notice of conversion is actually received by the holder, shall automatically
be deemed to be the shares of Common Stock into which such shares could have
been voluntarily converted by the holders thereof. As of the close of
business on the Conversion Date, the Convertible Preferred Stock shall be
deemed to cease to be outstanding or to accrue dividends, the persons entitled
to receive the Common Stock issuable upon conversion shall be treated for all
purposes as the registered holders of such Common Stock and all rights of any
holders of the Convertible Preferred Stock shall thereupon be extinguished
except the right to receive the Common Stock in exchange therefor. Holders of
the Convertible Preferred Stock must surrender such stock in order to receive
the Common Stock for which such Convertible Preferred Stock has been
converted. As a condition to the effectiveness of the foregoing mandatory
conversion, the Corporation shall be required to declare and pay all cumulated
unpaid dividends that accrue through the Conversion Date as soon as
practicable following the Conversion Date.
After the conversion of all issued shares of the Convertible Preferred
Stock, all shares of the Convertible Preferred Stock shall be canceled, the
Convertible Preferred Stock shall not be reissued and shall be deemed canceled
and shall revert to authorized but unissued Convertible Preferred Stock of the
Corporation, undesignated as to series, and the number of shares of
Convertible Preferred Stock which the Corporation shall have authority to
issue shall not be decreased by such conversion.
SECTION 11. Other Rights. The Corporation will not be obligated to
redeem the Convertible Preferred Stock, thus will not be required to establish
a redemption or sinking fund.
SECTION 12. Effects of Conversion on Capital and Surplus. Upon
conversion of the Convertible Preferred Stock the stated capital of the Common
Stock issued upon such conversion shall be the aggregate par value thereof,
and the stated capital and capital surplus (capital in excess of par of stated
value) of the Corporation shall be correspondingly increased or reduced to
reflect the difference between stated capital of the Convertible Preferred
Stock so converted and the par or stated value of the Common Stock issued upon
conversion.
SECTION 13. Anti-Dilution. The Corporation shall be prohibited
from issuing preferred or common stock or warrants or any other form of
security to an affiliate for consideration that does not equal or exceed the
fair market value of such security (as determined by an independent third
party); provided, that Search may issue options or warrants to new or existing
directors or management, so long as such warrants or options are approved by
the Compensation Committee of the board of Directors. The Corporation may
also issue Common Stock upon the exercise of warrants or options presently
outstanding; provided, that such warrants or options are not amended or
modified without the approval of the Compensation Committee. In the event
that the corporation issues any security not expected above for consideration
that is less than the fair market value (as determined above) of such
security, the number of shares Convertible Preferred Stock shall be
immediately and appropriately adjusted (and the conversion price of the
Convertible Preferred Stock adjusted downward on a full ratchet basis) to take
into account the dilution in value of the securities holdings of the
Noteholders caused by such below-market issuance of the Corporation's
securities.
SECTION 14. Other Limits. In addition, the Corporation will not
(a) declare any cash or other form of dividend on or with respect to any issue
of common stock unless all dividends on the Convertible Preferred Stock have
been paid, nor (b) issue common stock that is convertible into convertible or
other preferred stock.
<PAGE>
FIFTH. No stockholder of the Corporation shall by reason of his
holding shares of any class have any preemptive or preferential right to
purchase or subscribe for any shares of any class of stock of the Corporation,
now or hereafter to be authorized, or any notes, debentures, bonds of other
securities convertible into or carrying warrants, rights or options to
purchase shares of any class, now or hereafter to be authorized, whether or
not the issuance of any such shares or such notes, debentures, bonds or other
securities would adversely affect the dividend, voting or any other rights of
such stockholder. The Board of Directors may issue shares of any class of the
Corporation or any notes, debentures, bonds or any class of the Corporation or
any notes, debentures, bonds or other securities convertible into or carrying
warrants, rights or options to purchase shares of any class, without offering
any such shares of any class, either in whole or in part, to the existing
holders of any class of stock of the Corporation.
SIXTH. Cumulative voting for the election of directors shall not be
permitted.
SEVENTH. The Corporation shall have perpetual existence.
EIGHTH. The Board of Directors is expressly authorized to alter,
amend or repeal the bylaws of the Corporation or to adopt new bylaws.
NINTH. [The names and addresses of the initial Board of
Directors have been omitted pursuant to Title 8, Section 245 of the Delaware
General Corporation Law.] The number and classification of directors of the
Corporation shall be fixed from time to time by or pursuant to the Bylaws.
TENTH. [The name and addresses of the sole incorporator of the
Corporation have been omitted pursuant to Title 8, Section 245 of the Delaware
General Corporation Law.]
ELEVENTH. The Corporation shall, to the fullest extent permitted
by Delaware General Corporation Law, as the same exists or may hereafter be
amended, indemnify any and all persons who it shall have the power to
indemnify under such law from and against any and all of the expenses,
liabilities or other matters referred to in or covered by such law, and, in
addition, to the extent permitted under any Bylaw, agreement, addition, vote
of stockholders or disinterested directors or otherwise, both as to action in
his director or officer capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
TWELTH. To the fullest extent permitted by Delaware General
Corporation Law as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
4. This Restatement has been adopted by the Corporation in accordance
with Title 8, Section 245 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, this Restatement has been executed by the Corporation
by its President and attested by its Secretary, and each of them does hereby
affirm and acknowledge, under penalties of perjury, that this Restatement is
the act and deed of the Corporation and that the facts stated herein are true.
DATED: _____________________, 1996
SEARCH CAPITAL GROUP, INC.
[CORPORATE SEAL] By: ___________________________
Name: _________________________
Title: ________________________
Attested to:
<PAGE>
BYLAWS
OF
SEARCH CAPITAL GROUP, INC.
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The initial registered office of Search
------------------
Capital Group, Inc. (the "Company") shall be at such place as is designated in
the Certificate of Incorporation (herein, as amended from time to time, so
called), or thereafter the registered office may be at such other place as the
Board of Directors may from time to time designate by resolution.
Section 2. OTHER OFFICES. The Company may also have offices at such
--------------
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Company may
require.
`
ARTICLE II
STOCKHOLDERS
Section 1. MEETINGS. All meetings of the stockholders for the
---------
election of Directors shall be held at the principal office of the Company, or
at such other place within or without the State of Delaware, as may be fixed
from time to time by the Board of Directors. Meetings of stockholders for any
other purpose may be held at such time and place, within or without the State
of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders
---------------
shall be held on such date in each fiscal year of the Company as the Board of
Directors shall select, if not a legal holiday, and if a legal holiday, then
on the next secular day following, at which meeting the stockholders shall
elect a Board of Directors, and transact such other business as may properly
be brought before the meeting.
Section 3. LIST OF STOCKHOLDERS. At least ten days before each
---------------------
meeting of stockholders, a complete list of the stockholders entitled to vote
at said meeting, arranged in alphabetical order, with the address of and the
number of voting shares registered in the name of each, shall be prepared by
the officer or agent having charge of the stock transfer books. Such list
shall be open to the examination of any stockholder, for any purpose germane
to the meeting during ordinary business hours for a period of at least ten
days prior to the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or
if not so specified at the place where the meeting is to be held. Such list
shall be produced and kept open at the time and place of the meeting during
the whole time thereof, and shall be subject to the inspection of any
stockholder who may be present. The Board of Directors may fix in advance a
record date for the purpose of determining stockholders entitled to notice of
or to vote at a meeting of stockholders, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which record date shall not be less than ten nor more
than sixty days prior to such meeting. In the absence of any action by the
Board of Directors, the close of business on the date next preceding the day
on which the notice is given shall be the record date, or, if notice is
waived, the close of business on the day next preceding the day on which the
meeting is held shall be the record date.
Section 4. SPECIAL MEETINGS. Special meetings of the stockholders,
-----------------
for any purpose or purposes, unless otherwise prescribed by the Act, or by the
Certificate of Incorporation, or by these Bylaws (herein, as each of them may
be amended from time to time), may be called by the Chairman of the Board, the
President or the Board of Directors, or shall be called by the Chairman of the
Board, the President or secretary at the request in writing of the holders of
not less than one-half of the votes which all stockholders are entitled to
cast at the particular meeting. Such request shall state the purpose or
purposes of the proposed meeting. Business transacted at all special meetings
shall be confined to the purposes stated in the notice of the meeting unless
all stockholders entitled to vote are present and consent.
Section 5. NOTICE. Written or printed notice stating the place, day
-------
and hour of any meeting of the stockholders and, in case of a special meeting,
the purpose or purposes for which the meeting is called, shall be delivered
not less than ten nor more than sixty days before the date of the meeting,
either personally or by mail, by or at the direction of the Chairman of the
Board, the President, the Secretary, or the officer or person calling the
meeting, to each stockholder or record entitled to vote at the meeting.
Section 6. QUORUM. At all meetings of the stockholders, the presence
-------
in person or by proxy of the holders of one-half of the shares issued and
outstanding and entitled to vote shall be necessary and sufficient to
constitute a quorum for the transaction of business; provided however that the
presence in person or by proxy of the holders of two-thirds of the shares
issued and outstanding and entitled to vote shall be necessary and sufficient
to constitute a quorum for the purposes of removal of one or more Directors or
revision of these Bylaws as otherwise provided by the Act, by the Certificate
of Incorporation or by these Bylaws. If, however such required quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which the required quorum shall
be present or represented, the business which was the item or items for which
the adjournment occurred may be considered and voted upon.
Section 7. VOTING. When a quorum is present at any meeting, the vote
-------
of the holders of a majority of the shares having voting power present in
person or represented by proxy at such meeting shall decide any questions
brought before such meeting, unless the question is one upon which, by express
provision of the Act or of the Certificate of Incorporation or by these
Bylaws, a different vote is required, in which case such express provision
shall govern and control the decision of such question. The stockholders
present in person or by proxy at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
Section 8. PROXY. Each outstanding share, regardless of class, shall
------
be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders, except to the extent that the voting rights of the shares of any
class or classes are limited or denied by the Certificate of Incorporation, as
amended from time to time. At any meeting of the stockholders, every
stockholder having the right to vote shall be entitled to vote in person, or
by proxy appointed by an instrument in writing subscribed by such stockholder,
or by his duly authorized attorney in fact, and bearing a date not more than
three years prior to said meeting, unless said instrument provides for a
longer period. Such proxy shall be filed with the Secretary of the Company
prior to or at the time of the meeting.
A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the Company generally.
Section 9. ACTION BY CONSENT. Any action required or permitted by the
------------------
Act, the Certificate of Incorporation or these Bylaws to be taken at a meeting
of the stockholders of the Company may be taken without such a meeting if (i)
a consent(s) in writing (the "Consent Form"), setting forth the action so
taken, shall have been signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon
were present and voted and (ii) such Consent Form(s) is delivered to the
Company at its registered office in Delaware or at its principal place of
business or to an officer or agent of the Company having custody of the minute
book. Provided however that for such consents to be binding the Company must
have received, no less than 120 days prior to the date the Consent Forms are
mailed, the proposing stockholder's description of the proposed item or items
for which written consent is solicited and the Board of Directors after such
respect established a record date to determine stockholders of record to vote
on the proposed item(s) by written consent.
Section 10. NOTICE OF STOCKHOLDER PROPOSAL. (a) At an Annual Meeting,
-------------------------------
only such business shall be conducted, and only such proposals shall be acted
upon, as shall have been brought before the Annual Meeting (i) by, or at the
direction of, the Board of Directors or (ii) by any stockholder of the Company
who complies with the notice procedures set forth in this Section of these
Bylaws. For a proposal to be properly brought before an Annual Meeting by a
stockholder, the stockholder must have given timely notice thereof in writing
to the Secretary of the Company. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of
the Company not less than sixty (60) days nor more than ninety (90) days prior
to the scheduled Annual Meeting, regardless of any postponements, deferrals of
adjournments of that meeting to a later date; provided, however, that if less
than seventy (70) days' notice or prior public disclosure of the data of the
scheduled Annual Meeting is given or made, notice by the stockholder to be
timely must be so delivered or received not later than the close of business
on the tenth (10th) day following the earlier of the day on which such notice
of the date of the scheduled Annual Meeting was mailed or the day on which
such public disclosure was made. A stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before
that Annual Meeting (i) a brief description of the proposal desired to be
brought before the Annual Meeting and the reasons for conducting such business
at the Annual Meeting, (ii) the name and address, as they appear on the
Company's books, of the stockholder proposing such business and any other
stockholders known by such stockholder to be supporting such proposal, (iii)
the class and number of shares of the Company's stock which are beneficially
owned by the stockholder on the date of such stockholder notice and by any
other stockholder known by such stockholder to be supporting such proposal on
the date of such stockholder notice, and (iv) any financial interest of the
stockholder in such proposal.
(b) If the presiding officer of the Annual Meeting determines that a
stockholder proposal was not made in accordance with the terms of this
Section, he shall so declare at the Annual Meeting and any such proposal shall
not be acted upon at the Annual Meeting.
(c) This provision shall not prevent the consideration and approval or
disapproval at the Annual Meeting of reports of officers, directors and
committees of the Board of Directors, but, in connection with such reports, no
business shall be acted upon at such Annual Meeting unless stated, filed and
resolved as herein provided.
ARTICLE III
BOARD OF DIRECTORS
Section 1. BOARD OF DIRECTORS. The business and affairs of the
-------------------
Company shall be managed by or under the direction of its Board of Directors
who may exercise all such powers of the Company and do all such lawful acts
and things as are not by the Act or by the Certificate of Incorporation or by
these Bylaws directed or required to be exercised or done by the stockholders.
Section 2. NUMBER OF DIRECTORS. The Board of Directors shall consist
--------------------
of not less than three (3) nor more than twelve (12) Directors, the exact
number of which shall be fixed by resolution of the Board of Directors from
time to time, none of whom need be stockholders or residents of the State of
Delaware. The Directors shall be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in
number as possible, one class to hold office initially for a term expiring at
the annual meeting of stockholders of the Company to be held in 1989, another
class to hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1990, and another class to hold office initially
for a term expiring at the annual meeting of stockholders to be held in 1991,
with members of each class to hold office until their successors are elected
and qualified. At each annual meeting of stockholders of the Company, the
successors to the class of Directors whose term expires at that meeting shall
be elected to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. The
Directors shall be elected at the annual meeting of stockholders, except as
hereinafter provided, and each Director elected shall hold office until his
successor shall be elected and shall qualify.
Section 3. VACANCIES. Newly created directorships resulting from any
----------
increase in the authorized directorships resulting from any increase in the
authorized number of directors and any vacancies occurring in the Board of
Directors caused by death, resignation, retirement, disqualification or
removal from office of any Directors or otherwise, may be filled by the vote
of a majority of the Directors then in office, though less than a quorum, and
each successor Director so chosen shall hold office until the next election of
the class for which such Directors shall have been chosen and until their
successors shall be elected and qualified.
Section 4. REMOVAL OF DIRECTORS. At any annual meeting of the
---------------------
stockholders of the Company, any one or more of the Directors elected by the
shareholders may be removed for cause by an affirmative vote of a majority in
number of shares of the stockholders present in person or by proxy and
entitled to vote at such meeting, provided notice of the intention to act upon
such matter shall have been given in the notice calling such meeting. The
term "cause" is defined as the conviction of a felony or the adjudication by a
court of gross negligence or gross misconduct in the performance of the
director's duties.
Section 5. NOMINATION OF DIRECTORS. Nominations of candidates for
------------------------
election as directors at any annual meeting of stockholders may be made by the
Board of Directors or by any stockholder entitled to vote at such annual
meeting. Only persons nominated in accordance with procedures set forth in
this Article shall be eligible for election as directors at an annual meeting.
Nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Company as set forth in this Article. To be timely a stockholder's
notice shall be delivered to, or mailed and received at, the principal
executive offices of the Company not later than 90 days prior to the date of
the scheduled annual meeting, regardless of postponements, deferrals or
adjournments of that meeting to a later date. Such stockholder's notice shall
set forth: (i) as to each person whom the stockholder proposes to nominate for
election as a director (a) the name, age, business address and residence
address of such person, (b) the principal occupation or employment of such
person, (c) the class and number of shares of the Company's stock which are
beneficially owned by such person on the date of such stockholder notice and
(d) any other information relating to such person that would be required to be
disclosed pursuant to Regulation 13D and 13G under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), in connection with the acquisition
of shares, and pursuant to Regulation 14A under the Exchange Act, in
connection with the solicitation of proxies with respect to nominees for
election as directors, regardless of whether such person is subject to the
provisions of such regulations; and (ii) as to the stockholder giving the
notice (a) the name and address, as they appear on the Company's books, of
such stockholder and any other stockholders known by such stockholder to be
supporting such nominees, and (b) the class and number of shares of the
Company's stock which are beneficially owned by such stockholder on the date
of such stockholder notice and beneficially owned by any other stockholders
known by such stockholder to be supporting such nominees on the date of such
stockholder notice.
No person shall be elected as a director of the Company unless nominated
in accordance with the procedures set forth in this Article. Ballots bearing
the names of all persons who have been nominated for election as directors at
an annual meeting in accordance with the procedures set for in this Article
shall be provided for use at the annual meeting.
The Board of Directors may reject any nomination by a stockholder not
timely made in accordance with the requirements of this Article. If the Board
of Directors determines that the information provided in a stockholder's
notice does not satisfy the informational requirements of this Article in any
material respect, the Secretary of the Company shall promptly notify such
stockholder of the deficiency of the notice. The stockholder shall have an
opportunity to cure the deficiency by providing additional information to the
Secretary within such period of time, not to exceed five days, from the date
such deficiency notice is given to the stockholder, as the Board of Directors
shall reasonably determine. If the deficiency is not cured within such
period, or if the Board of Directors reasonably determines that the additional
information provided by the stockholder, together with the information
previously provided, does not satisfy the requirements of this Article in any
material respect, then the Board of Directors may reject such stockholder's
nomination. The Secretary of the Company shall notify a stockholder in
writing whether his nomination has been made in accordance with the time and
informational requirements of this Article. Notwithstanding the procedures
set forth in this Article, if the Board of Directors does not make a
determination as to the validity of any nominations by a stockholder, the
presiding officer of the meeting to which the nominations relate shall
determine and declare at such meeting whether a nomination was made in
accordance with the terms of this Article. If the presiding officer
determines that a nomination was not made in accordance with the terms of this
Article, he shall so declare at the annual meeting and the defective
nomination shall be disregarded.
ARTICLE IV
MEETINGS OF THE BOARD
Section 1. MEETINGS. The Directors of the Company may hold their
---------
meetings, both regular and special, at such times and places as are fixed from
time to time by resolution of the Board of Directors.
Section 2. ANNUAL MEETING. The first meeting of each newly elected
---------------
Board of Directors shall be held without further notice immediately following
the annual meeting of stockholders, and at the same place, unless by unanimous
consent of the Directors then elected and servicing such time or place shall
be changed.
Section 3. REGULAR MEETINGS. Regular meetings of the Board of
-----------------
Directors may be held without notice at such time and place as shall from time
to time be determined by resolution of the Board.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of
-----------------
Directors may be called by the Chairman of the Board or the President on oral
or written notice to each Director, given personally, or by telephone, or by
telegram, or by mail; special meetings shall be called by the Chairman of the
Board or the President or Secretary in like manner and on like notice on the
written request of two Directors. The purpose of any special meeting shall be
specified in the notice or any waiver of notice.
Section 5. QUORUM. At all meetings of the Board of Directors the
-------
presence of a majority of the number of Directors then constituting the Board
of Directors shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the affirmative vote of at least a majority of
the Directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors, except as may be otherwise specifically
provided by the Act or by the Certificate of Incorporation or by these Bylaws.
If a quorum shall not be present at any meeting of directors, the Directors
present thereat may adjourn the meeting from time to time without notice other
than announcement at the meeting, until a quorum shall be present.
Section 6. EXECUTIVE COMMITTEE. The Board of Directors may, by
--------------------
resolution passed by a majority of the whole Board, designate an Executive
Committee, to consist of two (2) or more Directors of the Company, one of whom
shall be designated as chairman, who shall preside at all meetings of such
Committee. To the extent provided in the resolution of the Board of
Directors, the Executive Committee shall have and may exercise all of the
authority of the Board of Directors in the management of the business and
affairs of the Company, except where action of the Board of Directors as a
whole is expressly required by the Act or by the Certificate of Incorporation,
and shall have power to authorize the seal of the Company to be affixed to all
papers which may require it. The Executive Committee shall keep regular
minutes of its proceedings and report the same to the Board of Directors when
required. Any member of the Executive Committee may be removed, for or
without cause, by the affirmative vote of a majority of the entire Board of
Directors. If any vacancy or vacancies occur in the Executive Committee
caused by death, resignation, retirement, disqualification, removal from
office or otherwise, the vacancy shall be filled by the affirmative vote of a
majority of the whole Board of Directors.
Section 7. OTHER COMMITTEES. The Board of Directors may, by
-----------------
resolution passed by a majority of the entire Board, designate other
committees, each committee to consist of two (2) or more Directors of the
Company, which committees shall have such power and authority and shall
perform such functions as may be provided in such resolution. Such committee
or committees shall have such name or names as may be designated by the Board
and shall keep regular minutes of their proceedings and report the same to the
Board of Directors when required.
Section 8. ACTION BY CONSENT. Any action required or permitted to be
-----------------
taken at any meeting of the Board of Directors, the Executive Committee or any
other committee of the Board of Directors, may be taken without such a meeting
if a consent in writing, setting forth the action so taken, is signed by all
the members of the Board or the Executive Committee or such other committee,
as the case may be and the writing or writings are filed with the minutes of
proceedings of the Board or Committee.
Section 9. COMPENSATION OF DIRECTORS. Directors shall receive such
--------------------------
compensation for their services and reimbursement for their expenses as the
Board of Directors, by resolution, shall establish; provided that nothing
herein contained shall be construed to preclude any Director from serving the
Company in any other capacity and receiving compensation therefor.
ARTICLE V
NOTICE OF MEETINGS
Section 1. FORM OF NOTICE. Whenever under the provisions of the Act
---------------
or of the Certificate of Incorporation or of these Bylaws, written notice is
required to be given to any Director or stockholder, and no provision is made
as to how such written notice shall be given; such notice may be given in
writing, by mail, postage prepaid, addressed to such Director or stockholder
at such address as appears on the books of the Company. Any notice required
or permitted to be given by mail shall be deemed to be given at the time when
the same be thus deposited in the United States mails as aforesaid.
Section 2. WAIVER. Whenever any notice is required to be given to any
-------
stockholder or Director of the Company, under the provisions of the Act or of
the Certificate of Incorporation or of these Bylaws, a waiver thereof in
writing signed by the person or persons entitled to such notice, whether
before of after the time stated in such notice, shall be deemed equivalent to
the giving of such notice.
Section 3. TELEPHONE MEETINGS. Stockholders, members of the Board of
-------------------
Directors or members of any committee designated by the Board of Directors may
participate in and hold meetings of such stockholders, Board of Directors or
committee designated by the Board of Directors by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.
ARTICLE VI
OFFICERS
Section 1. IN GENERAL. The officers of the Company shall be elected
-----------
by the Board of Directors and shall be a President, a Vice President, a
Secretary and a Treasurer. The Board of Directors may also elect a Chairman
of the Board, additional Vice Presidents, Assistant Vice Presidents, a
Controller, and one or more Assistant Secretaries and Assistant Treasurers.
Any two or more offices may be held by the same person.
Section 2. THE BOARD OF DIRECTORS. At its first meeting after each
-----------------------
annual meeting of stockholders, shall elect a President from its members. At
such meeting, the Board of Directors shall also elect one or more Vice
Presidents, a Secretary and a Treasurer, none of whom need be a member of the
Board of Directors.
Section 3. OTHER OFFICERS AND AGENTS. The Board of Directors may also
--------------------------
elect and appoint such other officers and agents as it shall deem necessary,
who shall be elected and appointed for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors.
Section 4. SALARIES. The salaries of all officers agents of the
---------
Company shall be fixed by the Board of Directors or by the Executive
Committee, if so authorized by the Board.
Section 5. TERM OF OFFICE AND REMOVAL. Each officer of the Company
---------------------------
shall hold office until his death, or his resignation or removal from office,
or the election and qualification of his successor, whichever shall first
occur. Any officer or agent elected or appointed by the Board of Directors
may be removed at any time, for or without cause, by the affirmative vote of a
majority of the whole Board of Directors, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
Section 6. PRESIDENT. The President shall be the chief administrative
----------
officer of the Company and shall preside at all meetings of the stockholders.
In the absence of the Chairman of the Board, he shall also preside at all
meetings of the Board of Directors. He shall be ex officio a member of all
standing committees. Subject to the control of the Board of Directors, the
President shall, in general, supervise and control all of the business and
affairs of the Company, and shall have and may exercise such other powers as
are from time to time assigned to him by the Board of Directors. He shall
perform all duties incident to the office of President and such other duties
as may be prescribed by the Board of Directors from time to time.
Section 7. VICE PRESIDENTS. Each Vice President shall have such
----------------
powers and perform such powers and perform such duties as the Board of
Directors or the Executive Committee may from time to time prescribe, or as
the President may from time to time delegate to him. In the absence or
disability of the President, a Vice President designated by the Board of
Directors shall perform the duties and exercise the powers of President.
Section 8. SECRETARY. The Secretary shall attend all meetings of the
----------
stockholders and record all votes and the minutes of all proceedings in a book
to be kept for that purpose. The Secretary shall perform like duties for the
Board of Directors and the Executive Committee when required. He shall give,
or cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors and shall perform such other duties as may
be prescribed by the Board of Directors or the President, under whose
supervision he shall be. He shall keep in safe custody the seal of the
Company.
Section 9. ASSISTANT SECRETARIES. Each Assistant Secretary shall have
----------------------
such powers and perform such duties as the Board of Directors may from time to
time prescribe or as the President may from time to time delegate to him.
Section 10. TREASURER. The Treasurer shall have the custody of all
----------
corporate funds and securities, shall keep full and accurate accounts of
receipts and disbursements of the Company, and shall deposit all moneys and
other valuable effects in the name and to credit of the Company in such
depositories as may be designated by the Board of Directors. He shall
disburse the funds of the Company as may be ordered by the Board of Directors,
taking proper vouchers for such disbursements, shall render to the President
and Directors, at the regular meetings of the Board, or whenever they may
require it, an account of all his transactions as Treasurer and of the
financial condition of the Company, and shall perform such other duties as the
Board of Directors may prescribe.
Section 11. ASSISTANT TREASURERS. Each Assistant Treasurer shall have
--------------------
such powers and perform such duties as the Board of Directors may from time to
time prescribe.
Section 12. CONTROLLER. The Controller shall share with the Treasurer
-----------
responsibility for the financial and accounting books and records of the
Company, shall report to the Treasurer, and shall perform such other duties as
the Board of Directors or the Executive Committee of the President may from
time to time prescribe.
Section 13. BONDING. If required by the Board of Directors, all or
--------
certain of the officers shall give the Company a bond, in such form, in such
sum, and with such surety or sureties as shall be satisfactory to the Board,
for the faithful performance of the duties of their office and for the
restoration, retirement or removal from office, of all books, papers,
vouchers, money and other property whatever kind in their possession or under
their control belonging to the Company.
ARTICLE VII
CERTIFICATES OF SHARE
Section 1. FORM OF CERTIFICATES. Certificates, in such form as may be
---------------------
determined by the Board of Directors, representing shares to which
stockholders are entitled shall be delivered to each stockholder. Such
certificates shall be consecutively numbered and shall be entered in the stock
book of the Company as they are issued. Each certificate shall state on the
face thereof the holder's name, the number, class of shares, and the par value
of such shares or a statement that such shares are without par value. They
shall be signed by the President or a Vice President and the Secretary or an
Assistant Secretary, and may be sealed with the seal of the Company or a
facsimile thereof. If any certificate is countersigned by a transfer agent,
or an assistant transfer agent or registered by a registrar, either of which
is other than the Company or an employee of the Company, the signatures of the
Company's officers may be facsimiles. In case any officer or officers who
have signed, or whose facsimile signature or signatures have been issued on
such certificate or certificates, shall cease to be such officer or officers
of the Company, whether because of death, resignation or otherwise, before
such certificate or certificates have been delivered by the Company or its
agents, such certificate or certificates may nevertheless be adopted by the
Company and be issued and delivered as though the person or persons who signed
such certificate or certificates or whose facsimile signature or signatures
have been used thereof had not ceased to be such officer or officers of the
Company.
Section 2. LOST CERTIFICATES. The Board of Directors may direct that
------------------
a new certificate be issued in place of any certificate theretofore issued by
the Company alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate to be lost or
destroyed. When authorizing such issue of a new certificate, the Board of
Directors, in its discretion and as a condition precedent to the issuance
thereof, may require the owner of such lost or destroyed certificate, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the Company a bond, in such form, in such sum, and with such
surety or sureties as it may direct as indemnity against any claim that may be
made against the Company with respect to the certificate alleged to have been
lost or destroyed.
Section 3. TRANSFER OF SHARES. Upon surrender to the Company or a
-------------------
transfer agent of the Company of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, the Company shall issue a new certificate to the person entitled
thereat, cancel the old certificate and record the transaction upon its books.
Section 4. REGISTERED STOCKHOLDERS. The Company shall be entitled to
------------------------
treat the holder of record of any share or shares of stock as the holder in
fact thereof and, accordingly shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except
as otherwise provided by law.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the outstanding shares of the
----------
Company, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting. Dividends may be declared and paid in cash, in property, or in
shares of the Company, subject to the provisions of the Act and the
Certificate of Incorporation. The Board of Directors may fix in advance a
record date for the purpose of determining stockholders entitled to receive
payment of any dividend, which record date shall not precede the date upon
which the date shall not be more than sixty days prior to the payment date of
such dividend. In the absence of any action by the Board of Directors, the
close of business on the date upon which the Board of Directors adopts the
resolution declaring such dividend shall be the record date.
Section 2. RESERVES. There may be created by resolution of the Board
---------
of Directors out of the earned surplus of the Company such reserve or reserves
as the Directors from time to time, in their discretion, think proper to
provide for contingencies, or to equalize dividends, or to repair or maintain
any property of the Company, or for such other purpose as the Directors shall
think beneficial to the Company, and the Directors may modify or abolish any
such reserve in the manner in which it was created.
Section 3. FISCAL YEAR. The fiscal year of the Company shall be fixed
------------
by resolution of the Board of Directors.
Section 4. SEAL. The Company shall have a seal, and said seal may be
-----
used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. Any officer of the Company shall have authority to
affix the seal to any document requiring it.
Section 5. ANNUAL STATEMENT. The Board of Directors shall present at
-----------------
each annual meeting, and when called for by vote of the stockholders at any
special meeting of the stockholders, a full and clear statement of the
business and condition of the Company.
Section 6. CHECKS. All checks or demands for money and notes of the
-------
Company shall be signed by such officer or officers or such other person or
persons at the Board of Directors may from time to time designate.
ARTICLE IX
INDEMNITY
Section 1. INDEMNIFICATION. The Company shall indemnify any person
----------------
who was or is a party, or threatened to be made a party, to any suit or
proceeding, by reason of the fact that he or she is or was an authorized
representative of the Company (the "Indemnified Party"), for the specified
liabilities and expenses as set forth in Section 2. of this Article, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the Company, and, with respect to any criminal
action or proceeding he or she had no reasonable cause to believe his or her
conduct was unlawful. The indemnification of a party, contained in the first
sentence of this Section, shall not apply if the Board of Directors, by a vote
of the majority of those present at any meeting of the Board of Directors,
elect to exclude such person from this indemnification provision.
Section 2. LIABILITIES AND EXPENSES COVERED BY INDEMNIFICATION.
----------------------------------------------------
Liabilities and expenses covered by indemnification shall include, but shall
not be limited to, legal fees and disbursements and amounts of judgments,
fines or penalties against, and amounts paid in settlement by the Indemnified
Party. Any reasonable expense incurred by the Indemnified Party with respect
to defending any claim, action, suit or proceeding may be advanced prior to
the final disposition thereof upon receipt of an undertaking by or on behalf
of the recipient to repay such amount if it shall ultimately be determined
that he is not entitled to indemnification under the provisions of this
Article IX and applicable Delaware Law.
Section 3. INDEMNIFICATION ADDITIONAL TO OTHER RIGHTS. The rights of
-------------------------------------------
indemnification provided for in this Article IX shall be in addition to any
rights to which any such Director, officer or employee may be entitled under
any agreement vote of stockholders, the Certificate of Incorporation, or as a
matter of law or otherwise.
EXHIBIT 3.2
ARTICLE X
BYLAWS
Section 1. AMENDMENTS. Except for this Article X, Section 1, these
-----------
Bylaws may be altered, amended, or repealed at any meeting of the Board of
Directors at which a quorum is present, by the a majority of the total number
of directors constituting the Board of Directors, provided notice of the
proposed alteration, amendment, or repeal be contained in the notice of such
meeting.
<PAGE>
FIRST AMENDMENT TO FUNDING AGREEMENT
1.0 DATE AND PARTIES
1.1 DATE. This First Amendment to Funding Agreement ("First
Amendment") is effective as of December 22, 1995.
1.2 PARTIES. The parties to this First Amendment are as follows:
A. Hall Financial Group, Inc. ("HFG")
750 N. St. Paul
Suite 200
Dallas, TX 75201-3247
B. Search Capital Group, Inc. ("Search")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
C. Search Funding Corp. ("SFC")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
D. Automobile Credit Acceptance Corp. ("ACAC")
700 N. Pearl
Suite 400, LB. 401
Dallas, TX 75201-2809
E. Newsearch, Inc. ("Newsearch")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
F. Automobile Credit Holdings, Inc. ("ACHI")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
2.0 PURPOSE, DEFINITIONS AND CONSIDERATION
2.1 PURPOSE: The purpose of this Agreement is to amend and supersede
certain provisions of the Funding Agreement dated November 30, 1995 ("Funding
Agreement") between the parties. The parties agree that, except as
specifically amended and superseded below, the Funding Agreement remains fully
enforceable.
EXHIBIT 10.15
FIRST AMENDMENT TO FUNDING AGREEMENT - PAGE 1
<PAGE>
2.2 DEFINITIONS: All terms defined in the Funding Agreement shall
have the same meanings herein as ascribed to them in the Funding Agreement.
2.3 CONSIDERATION: This First Amendment is entered into in
consideration of the mutual releases and covenants of the parties set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged.
3.0 RELEASE OF PLAN FUNDING COMMITMENT OBLIGATIONS
3.1 ACKNOWLEDGEMENTS: The Search Parties acknowledge that they have
excluded the terms of the Plan Funding Commitment from the Plan and Disclosure
Statement. The Search Parties further acknowledge that HFG has fully
performed all of its obligations to date under the Plan Funding Commitment and
agree that the commitment fee payable to HFG pursuant to 8.2 of the Funding
Agreement the conversion rights under Note I and Note III and the Warrant to
Purchase represented by Certificate No. 300 have all been fully earned by HFG.
3.2 MUTUAL RELEASE: The Search Parties hereby release HFG from all
further obligations arising under 8.1-8.7 of the Funding Agreement
including, without limitation, its obligation to fulfill the Plan Funding
Commitment. HFG hereby releases the Search Parties from all demands, claims
or liabilities arising as a result of the failure to include the Plan Funding
Commitment in the Plan and Disclosure Statement and further releases the
Search Parties from any further obligations arising under 8.1-8.7 of the
Funding Agreement.
4.0 AMENDMENTS
4.1 PRIMARY DEFINED TERMS: 3.1 of the Funding Agreement is hereby
amended by inserting the following definitions:
COMMISSION: the United States Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
SECURITIES ACT: the Securities Act of 1933, or any similar Federal statute,
and the rules and regulations of the Commission thereunder, all as the same
shall be in effect from time to time.
SEARCH OPTION SECURITIES: (i) Common Stock and Convertible Preferred Stock of
Search of the same class, and having the same rights, privileges and priority,
as that issuable under the Plan to Noteholders electing the Search Equity
Option in consideration for their Allowed Noteholder Secured Claims, and (ii)
Warrants of the same character and tenor as those to be distributed to Allowed
Unsecured Claimants under the Plan.
STOCK PURCHASE OPTION: HFG's right and option to purchase Search Option
Securities under the terms and conditions of 8.8.
FIRST AMENDMENT TO FUNDING AGREEMENT - PAGE 2
<PAGE>
WARRANT AGREEMENT: the Warrant to Purchase 3,000,000 Shares of Common Stock
of Search Capital Group, Inc. dated November 30, 1995, and identified as
Certificate No. 300.
4.2 OTHER DEFINED TERMS: 3.2 of the Funding Agreement is hereby
amended by inserting the following as the last sentence thereof:
When terms defined in the Plan are used in this agreement and not otherwise
defined herein, those terms have the meanings set forth in the Plan.
4.3 STOCK PURCHASE OPTION: Article 8 of the Funding Agreement is
hereby amended by the addition of 8.8 as follows:
8.8 STOCK PURCHASE OPTION
A. OPTION: Search hereby grants to HFG the right and option to
purchase Search Option Securities in amounts equal to the number of each type
of security that HFG would be entitled to receive if HFG were a Noteholder
with a $6,000,000 Present Value of the Notes who elected the Search Equity
Option under the Plan. HFG may exercise the Stock Purchase Option as to all
or any percentage of the Search Option Securities.
B. TERM OF OPTION: The Stock Purchase Option shall first become
exercisable upon the Effective Date of the Plan. If the Stock Purchase Option
has not become exercisable on or before February 27, 1996, Search shall pay to
HFG the sum of $100,000.00 as a fee for delaying the exercisability of the
Stock Purchase Option. The Stock Purchase Option shall remain exercisable by
HFG at any time or from time to time until ten (10) days following the
Effective Date of the Plan. The Stock Purchase Option shall terminate to the
extent not exercised by HFG before the 11th day after the Effective Date.
C. EXERCISE PRICE: The exercise price of the Stock Purchase Option
shall be an amount equal to (i) the product of (a) $4,800,000 times (b) the
percentage of Search Option Securities subject to the Stock Purchase Option
which is exercised by HFG, less (ii) an amount equal to the dividends
attributable to the Convertible Preferred Stock acquired by HFG accruing from
July 1, 1995, through the Confirmation Date.
D. MANNER OF EXERCISE: HFG may exercise the Stock Purchase
Option by timely delivery to Search of a written notice specifying the
percentage of the Stock Purchase Option to be exercised and accompanied by
payment of the exercise price of such Search Option Securities.
E. PLAN AND DISCLOSURE STATEMENT. The Search Parties agree that the Stock
Purchase Option will be included in the Plan and the Disclosure Statement in a
form satisfactory to HFG.
FIRST AMENDMENT TO FUNDING AGREEMENT - PAGE 3
<PAGE>
4.4 BOARD REPRESENTATION: 10.4 of the Funding Agreement is hereby
deleted in its entirety and a new 10.4 added which reads as follows:
10.4 BOARD REPRESENTATION. Search shall give timely notice to HFG of all
meetings of Search's board of directors, and shall permit HFG to have one
representative in attendance at all such meetings as an observer and guest.
If HFG exercises its option under Note III to convert debt to Search stock,
HFG shall have the right thereafter to elect one member of the Search board of
directors in lieu of HFG's observer representative. In addition, HFG shall be
entitled to elect a second member of the Search board of directors upon the
acquisition of not less than 1,000,000 shares of common stock of Search by
conversion of Note 1, exercise of the Warrant to Purchase represented by
Certificate No. 300 or exercise of the Stock Purchase Option. Search shall
amend its articles of incorporation and bylaws as necessary to provide that
HFG shall have the right to elect the members of the board of directors
provided in this 10.4.
4.5 REGISTRATION RIGHTS: Article 10 of the Funding Agreement is
hereby amended by adding thereto the following 10.6:
10.6 REGISTRATION RIGHTS. Upon the written request of HFG at any
time after the date hereof, Search will use its reasonable efforts to effect
the registration under the Securities Act of all or such portion as may be
specified by HFG of (a) the shares of the Common Stock of Search issued or
issuable to HFG upon the conversion of Note I or Note III, (b) the Search
Option Securities issued to HFG upon exercise of the Stock Purchase Option,
and (c) the shares of the Common Stock of Search issued or issuable to HFG
upon conversion of the Convertible Preferred Stock or exercise of the Warrants
included in the Search Option Securities (collectively, the "Covered
Securities"). The terms and conditions of such required registration of the
Covered Securities shall be as provided in Section 10 of the Warrant
Agreement; provided, however, that the terms and conditions contained in
Section 10 of the Warrant Agreement shall be varied in the following respects:
A. All references to "Holders" under Section 10 of the Warrant Agreement
shall be deemed to refer to HFG (or its assigns as permitted by Section 10).
B. All references to "Registrable Securities" in Section 10 of the Warrant
Agreement shall be deemed to refer to the Covered Securities.
C. All references to "Restricted Securities" in Section 10 of the Warrant
Agreement shall be deemed to refer to all shares of the Common Stock of Search
which are (i) issued upon the conversion of Note I or Note III, (ii) issued
upon the exercise of the Stock Purchase Option or the exercise of the Warrants
included in the Search Option Securities, or (iii) issued upon the exercise of
the Stock Purchase Option.
FIRST AMENDMENT TO FUNDING AGREEMENT - PAGE 4
<PAGE>
D. Search shall be obligated to effect one registration pursuant to this
10.6 of the Funding Agreement, which shall be in addition to any registrations
required under Section 10 of the Warrant Agreement.
E. Search shall bear all expenses incurred in connection with such
registration as provided in Section 10.1.5 of the Warrant Agreement.
F. If so requested by HFG, Search shall effect such registration in a
manner which will permit an "at the market offering: pursuant to Rule 415
promulgated by the Commission and shall maintain the registration statement
(and any registration or qualification under other securities or blue sky
laws) in effect for such period of time as would satisfy the holding period
requirements of Rule 144(k) promulgated by the Commission with respect to the
Covered Securities.
4.6 EXPENSES: 13.1 of the Funding Agreement is hereby deleted in
its entirety and a new 13.1 added which reads as follows:
13.1 REIMBURSEMENT OF EXPENSES. The Search Parties shall from time
to time pay on demand to HFG all reasonable costs and expenses (including
attorney's fees) incurred by HFG in preparing, negotiating, executing and
delivering this agreement and the Loan Documents, in filing, registering
recording and perfecting any security interest granted to secure any amount
advanced under this agreement, in auditing, inspecting, or appraising any of
the Collateral, and in appearing and participating in the Bankruptcy
Proceeding in connection with the Plan Funding Commitment and the Stock
Purchase Option.
HALL FINANCIAL GROUP, INC.
By ___/s/ Larry Levey
--------------------
Larry Levey,
Senior Vice President
SEARCH CAPITAL GROUP, INC.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
FIRST AMENDMENT TO FUNDING AGREEMENT - PAGE 5
<PAGE>
SEARCH FUNDING CORP.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
AUTOMOBILE CREDIT ACCEPTANCE CORP.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
NEWSEARCH, INC.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
AUTOMOBILE CREDIT HOLDINGS, INC.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
EXHIBIT 10.16
SECOND AMENDMENT TO FUNDING AGREEMENT
1.0 DATE AND PARTIES
1.1 DATE. This Second Amendment to Funding Agreement ("Agreement")
is dated and effective March 25, 1996.
1.2 PARTIES. The parties to this Agreement are as follows:
A. Hall Financial Group, Inc. ("HFG")
750 N. St. Paul
Suite 200
Dallas, TX 75201-3247
B. Search Capital Group, Inc. ("Search")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
C. Search Funding Corp. ("SFC")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
D. Automobile Credit Acceptance Corp. ("ACAC")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
E. Newsearch, Inc. ("Newsearch")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
F. Automobile Credit Holdings, Inc. ("ACHI")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
2.0 PURPOSE, DEFINITIONS AND CONSIDERATION
2.1 PURPOSE: The purpose of this Agreement is to amend and
supersede certain provisions of the Funding Agreement dated November 30, 1995
as amended by the First Amendment to Funding Agreement dated December 22, 1995
("Funding Agreement") between the parties. The parties agree that, except as
specifically amended and superseded below, the Funding Agreement remains fully
enforceable.
2.2 DEFINITIONS: All terms defined in the Funding Agreement shall
have the meanings ascribed to them in the Funding Agreement.
2.3 CONSIDERATION: Search has advised HFG that it is unable to
deliver to HFG the share certificates and warrants required under the Funding
Agreement within the time period in which HFG is to exercise its Stock
Purchase Option under the Funding Agreement. The parties have therefore
mutually agreed to an extension of the time period.
3.0 AMENDMENT
3.1 Section 8.8(b) of the Funding Agreement shall be amended as
follows:
B. TERM OF OPTION: The Stock Purchase Option shall first become
exercisable upon the Effective Date of the Plan. If the Stock Purchase Option
has not become exercisable on or before February 27, 1996, Search shall pay to
HFG the sum of $100,000.00 as a fee for delaying the exercisability of the
Stock Purchase Option. The Stock Purchase Option shall remain exercisable by
HFG at any time or from time to time until midnight on April 1, 1996. The
Stock Purchase Option shall terminate to the extent not exercised by HFG
before April 2, 1996 unless further extended by written agreement of the
parties.
HALL FINANCIAL GROUP, INC.
By ___/s/ Larry Levey
--------------------
Larry Levey,
Senior Vice President
SEARCH CAPITAL GROUP, INC.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
SEARCH FUNDING CORP.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
AUTOMOBILE CREDIT ACCEPTANCE CORP.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
NEWSEARCH, INC.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
AUTOMOBILE CREDIT HOLDINGS, INC.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
EXHIBIT 10.17
THIRD AMENDMENT TO FUNDING AGREEMENT
1.0 DATE AND PARTIES
1.1 DATE. This Third Amendment to Funding Agreement ("Agreement") is
dated and effective April 1, 1996.
1.2 PARTIES. The parties to this Agreement are as follows:
A. Hall Financial Group, Inc. ("HFG")
750 N. St. Paul
Suite 200
Dallas, TX 75201-3247
B. Search Capital Group, Inc. ("Search")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
C. Search Funding Corp. ("SFC")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
D. Automobile Credit Acceptance Corp. ("ACAC")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
E. Newsearch, Inc. ("Newsearch")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
F. Automobile Credit Holdings, Inc. ("ACHI")
700 N. Pearl
Suite 400, L.B. 401
Dallas, TX 75201-2809
2.0 PURPOSE, DEFINITIONS AND CONSIDERATION
2.1 PURPOSE: The purpose of this Agreement is to amend and
supersede certain provisions of the Funding Agreement dated November 30, 1995
as amended by the First Amendment to Funding Agreement dated December 22, 1995
and the Second Amendment to Funding Agreement dated March 25, 1996 ("Funding
Agreement") between the parties. The parties agree that, except as
specifically amended and superseded below, the Funding Agreement remains fully
enforceable.
2.2 DEFINITIONS: All terms defined in the Funding Agreement shall
have the meanings ascribed to them in the Funding Agreement.
2.3 CONSIDERATION: The Parties have been unable to complete the
documents necessary for closing within the time period in which HFG is to
exercise its Stock Purchase Option under the Funding Agreement. The parties
have therefore mutually agreed to an extension of the time period.
3.0 AMENDMENT
3.1 Section 8.8(b) of the Funding Agreement shall be amended as
follows:
B. TERM OF OPTION: The Stock Purchase Option shall first become
exercisable upon the Effective Date of the Plan. If the Stock Purchase Option
has not become exercisable on or before February 27, 1996, Search shall pay to
HFG the sum of $100,000.00 as a fee for delaying the exercisability of the
Stock Purchase Option. The Stock Purchase Option shall remain exercisable by
HFG at any time or from time to time until midnight on April 2, 1996. The
Stock Purchase Option shall terminate to the extent not exercised by HFG
before April 3, 1996 unless further extended by written agreement of the
parties.
HALL FINANCIAL GROUP, INC.
By: ___/s/ Robert D. Idzi
------------------------
Larry Levey,
Senior Vice President
SEARCH CAPITAL GROUP, INC.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
SEARCH FUNDING CORP.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
AUTOMOBILE CREDIT ACCEPTANCE CORP.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
NEWSEARCH, INC.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
AUTOMOBILE CREDIT HOLDINGS, INC.
By: ___/s/ Robert D. Idzi
------------------------
Robert D. Idzi,
Senior Vice President
EXHIBIT 10.21
George C. Evans
S E A R C H Chairman, President and
CAPITAL GROUP, INC. Chief Executive Officer
May 1, 1996
Mr. James F. Leary
Vice Chairman, Finance
Search Capital Group, Inc.
700 North Pearl Street, Suite 400
Dallas, TX 75201
Dear Jim:
This will confirm our agreement that you will join Search Capital
full-time effective May 1, 1996 with an annual increase in salary to
$160,000. As we agreed, this letter will serve as a two-year engagement
letter or contract for your protection, exclusive of gross negligence and/or
theft, the same terms, Jim, that correlate to my contract. Needless to say,
along with this comes all the benefits and bonus which hopefully, with our
results, will be very healthy in the next year, as well as the future.
As we both are aware, it is highly unusual to give these type contracts
to someone who is 66 years old. But, you look 10 years younger and you work
10 years younger and age is not a factor from my perspective. It is your
ability and your results. I am very pleased with the excellent contacts you
have generated, which I believe will help this company immensely. I am also
pleased to have you on Board full-time as Vice Chairman of Finance. Your
contribution is essential in making this company work.
Welcome aboard, full-time!
Sincerely,
By: ___/s/ George C. Evans
----------------------
George C. Evans
Chairman, President and
Chief Executive Officer
GCE/pm
Agreed to and accepted this 1st day of May, 1996.
By: ___/s/ James F. Leary
---------------------
Mr. James F. Leary
EXHIBIT 10.22
ROBERT M. LICHTEN
Partner
May 13, 1996
712 Fifth Avenue
New York, N. Y. 10019
Phone (212) 581-2135
Fax (212) 581-233
Search Capital Group, Inc.
700 North Pearl Street
Suite 400 L.B. 401
Dallas, Texas 75201-2809
Attention: Mr. James F. Leary
Vice Chairman - Finance
Gentlemen:
The purpose of this letter is to set forth the terms of the engagement by
Search Capital Group, Inc. (the Company") of Inter-Atlantic Securities Corp.
("Inter-Atlantic"). The Company is considering offering subordinated debt
with warrants exercisable into the common stock of the Company or a similar
security (the "Subordinated Debt"). It is currently contemplated that the
Subordinated Debt will be sold directly to sophisticated investors in a
private offering (a "Private Placement").
1. The Company hereby engages Inter-Atlantic to act as its exclusive
placement agent for all Private Placements or public offerings of Subordinated
Debt undertaken by the Company during the term of Inter-Atlantic's engagement
hereunder.
2. The term of this engagement shall extend until December 31, 1996 from
the date of execution of this letter, and may be extended by written mutual
agreement of the parties.
3. In undertaking this assignment, Inter-Atlantic will use its best
efforts to provide the following investment banking and financial advisory
services to the Company:
(a) Perform a due diligence investigation of the business, operations,
financial condition, forecasts, and prospects of the Company to the extent
needed;
(b) Advise the Company on market conditions and the likely reception
accorded a Private Placement of the Subordinated Debt:
(c) Assist the Company in preparing an offering memorandum and marketing
materials;
(d) Develop a marketing plan (including identifying and introducing
prospective investors) for use in the private placement market;
(e) Assist in implementation of the marketing plan for the Private
Placement;
(f) Assist in presentations to potential investors;
<PAGE>
Search Capital Group, Inc.
May 13, 1996
(g) Make recommendations to the Company during the course of the
engagement regarding any changes or modification of the financing program, if
necessary;
(h) Provide such other financial advisory and investment banking services
as may be mutually determined.
(i) Assist in the closing of the transaction; and
(j) Provide such other financial advisory and investment banking services
as may be mutually determined.
4. If during the term of Inter - Atlantic's engagement hereunder the
Company proposes to issue Subordinated Debt in the public market, the Company
will invite Inter - Atlantic to be engaged as its lead underwriter with
respect to such issuance on usual and customary terms and conditions, as shall
be agreed upon by the Company and Inter - Atlantic.
The Company hereby agrees to pay Inter - Atlantic, as compensation for
its services pursuant to any Private Placement, the following fees:
(a) Marketing Fee: The Company shall pay to Inter - Atlantic a Marketing
Fee in the amount of $50,000 after Inter - Atlantic has produced an offering
memorandum for potential investors. Any payments made under this paragraph 4
(a) shall be credited against any fee which becomes payable by the company to
Inter - Atlantic.
(b) Private Placement Fee: The Company shall pay to Inter - Atlantic a
Private Placement Fee, which fee shall be payable on the date of the closing.
The Private Placement Fee shall be equal to 4.5% of the gross par amount of
Subordinated Debt sold. One-half the Private Placement Fee will be paid in
cash and one half in Subordinated Debt, which will be valued at par and issued
on the same terms as provided to the investors. It is understood by all
parties that the Private Placement Fee is not payable on Subordinated Debt
provided by Pecks Management Partners, Ltd. or Kleinwort Benson, Ltd. or their
subsidiaries.
(c) Subsequent Events: If within 12 months of the termination of Inter -
Atlantic's engagement hereunder, the Company consummates a private placement
or public offering of Subordinated Debt involving an investor (a) with whom
negotiations or discussions had occurred and (b) who had been identified by
Inter - Atlantic, during the term of Inter - Atlantic's engagement hereunder,
then in each such case Inter - Atlantic shall be paid a Private Placement Fee,
in an amount and at the time provided in Section 4(b); provided that no fee
shall be payable under this Section 4(c) if Inter - Atlantic has previously
been paid a Private Placement Fee pursuant to Section 4(b) above following the
closing of the Private Placement or public offering of Subordinated Debt.
<PAGE>
Search Capital Group, Inc.
May 13, 1996
5. In addition to any fees that may be payable to Inter - Atlantic
hereunder and regardless of whether any proposed private placement is
consummated, the Company hereby agrees from time to time, upon request, to
reimburse Inter - Atlantic for all reasonable travel, legal and other
out-of-pocket expenses incurred in performing the services hereunder,
including fees and disbursements of Inter - Atlantic's counsel.
6. Inter - Atlantic agrees to keep confidential all non-public information
which it receives or develops concerning the Company and to disclose that
information only with the consent of the Company or as required by law or
legal process.
7. The Company agrees that except as required by applicable law, any
advise to be provided by Inter - Atlantic under this engagement letter shall
not be disclosed publicly or made available to third parties without the prior
approval of Inter -Atlantic, which approval shall not be unreasonably
withheld.
8. The Company and Inter - Atlantic acknowledge and agree that there are
no brokers, representatives or other persons which have an interest in
compensation due to Inter - Atlantic from any transaction contemplated herein.
9. It is understood that the confidentiality, compensation, and
indemnification provisions contained in this Agreement shall remain operative
and in full force and effect regardless of any termination of the Agreement.
10. The Company agrees to indemnify Inter - Atlantic in accordance with
the indemnification letter which is attached hereto as Exhibit A.
11. This engagement letter and the indemnification letter, attached as
Exhibit 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.
12. The Agreement may not be amended or modified except in writing and
shall be governed by and construed in accordance with the laws of the State of
New York.
13. This letter may be terminated on either party's written request with
30 day's notice, subject to the right of Inter - Atlantic to receive any fees
due and payable hereunder and receive reimbursement for its reasonable
out-of-pocket expenses incurred prior to such termination. Such a fee
obligation will not be incurred in the case of Inter-Atlantic's termination
for cause, in which case Inter - Atlantic may be terminated immediately and
shall only be entitled to receive reimbursement for its reasonable
out-of-pocket expenses. No termination, however, shall affect the
indemnification and contribution obligations of the Company attached as
Exhibit A
Frederick S. Hammer, A Director of the Company, is affiliated with
Inter-Atlantic and will not participate in this engagement.
<PAGE>
Search Capital Group, Inc.
May 13, 1996
Please confirm the foregoing is in accordance with our understandings and
agreements by signing and returning to Inter - Atlantic the duplicate of this
letter enclosed herewith.
Very truly yours,
INTER - ATLANTIC SECURITIES CORP.
By: _/s/ Robert M. Lichten
------------------------------
Name: Robert M. Lichten
Title: Partner
Accepted and Agreed to:
SEARCH CAPITAL GROUP, INC.
By: _/s/ James F. Leary
------------------------------
Name: James F. Leary
Title: Vice Chairman, Finance
<PAGE>
Search Capital Group, Inc.
May 13, 1996
EXHIBIT A
INDEMNIFICATION
Recognizing that transactions of the type contemplated in this engagement
sometimes result in litigation and that Inter - Atlantic's role is advisory,
the Company agrees to indemnify Inter - Atlantic (including its affiliated
entities and its officers, directors, agents, employees and controlling
persons) to the full extent lawful against claims, losses and reasonable
expenses as incurred (including expense of investigation and preparation and
reasonable fees and disbursements of Inter - Atlantic's engagement, and if
such indemnification were for any reason not to be available, to contribute to
the settlement, loss or expenses involved in the proportion that the Company's
interest bears to Inter - Atlantic's interest in the transaction. However,
such indemnification and contribution shall not apply to any claim, loss or
expense which arises from Inter - Atlantic's bad faith or gross negligence in
performing its services hereunder.
The indemnity and contribution provided herein shall remain operative and in
full force and effect regardless of (i) any withdrawal, termination or
consummation of or failure to initiate or consummate any transaction referred
to herewith, (ii) any investigation made by or on behalf of any party hereto
or any person controlling (within the meaning of Section 15 of the Securities
Act of 1933, as amended, or Section 20 (a) of the Securities Exchange Act of
1934, as amended) any party hereto or any other person entitled to
indemnification or contribution, or (iii) any termination or the completion or
expiration of this agreement of Inter - Atlantic's engagement as the Company's
financial advisor and (iv) whether or not Inter-Atlantic shall, or shall be
called upon to, render any formal or advise in the course of such engagement.
Very truly yours,
INTER - ATLANTIC SECURITIES CORP.
By: _/s/ Robert M. Lichten
------------------------------
Name: Robert M. Lichten
Title: Partner
Accepted and Agreed to:
SEARCH CAPITAL GROUP, INC.
By: _/s/ James F. Leary
------------------------------
Name: James F. Leary
Title: Vice Chairman, Finance
